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    Growing Pains or Growing Gains?

    Dec. 1, 2007
    Most of us reach the point where we’d like to grow our businesses. Often, the first place many owners look to do this is from within, by adding new products and services to their business mix. A second strategy is to grow through acquisitions.

    Where we’d like to grow our businesses. Often, the first place many owners look to do this is from within, by adding new products and services to their business mix. A second strategy is to grow through acquisitions.

    There are many reasons for considering acquisitions, such as:

    • acquiring new customers
    • geographical growth and diversification
    • acquiring technical expertise
    • availability of franchise location
    • economies of scale.

    Growing your company by acquiring a competitor can also be done as a defensive tactic: you acquire a company just to keep a competitor from buying it. It can also be ego-driven, in that you just want to have the biggest, baddest company around.

    However, take it from someone who has acquired four companies over the years — with mixed success — there are many pitfalls to growing through acquisition. However, understanding and following a process can increase your chances that your planned acquisition will be a happy and successful one.

    Establish the Foundation
    What do you hope to accomplish with your acquisition? That’s the first question you must ask. Don’t only look at the desired “big picture” outcome, also look at how you’re going to get there. For example, define your timetable. How much time and effort are you willing to spend in negotiations? They can often drag on for months. Also define your price range, and set parameters on how much you’ll borrow. How much are you willing to spend? How much are your willing to risk?

    Next, conduct a reality check. Are you ready? Are you in good heath? Are you facing any difficult life issues? Do you have a good personal support system? Do you have enough time to spend on all the details that will be involved? These are all questions you need to ask yourself.

    Gauge if your organization is ready. Do you have a good management staff in place at your current organization? Does your current operation run smoothly, and have good standard operating procedures? Is your current company in good financial health? If you answered “no” to any of these, this may not be the right time to consider an acquisition. Take care of your current company first.

    Next, establish your team. In addition to a good management team, you may need the services of a personal advisor, a banker, an accountant, a lawyer, and a broker. If you do add any of these individuals to your team, be sure to clearly define their roles and establish a chain of command.

    Identify the Candidate
    Once you’re sure you’re ready to proceed with an acquisition, it’s time to find the right candidate. This might be a personal acquaintance, or you may hear of an owner who is thinking of selling through word-of-mouth. Some companies might run an ad to let buyers know their company is available, others may work through brokers.

    If you already have your eye on a company, you can work through a third party. It might be impossible to call a competitor and ask, “Would you like to sell me your company?” However, you can hire a lawyer and have him make the call, saying he represents an anonymous buyer.

    Once you have your target company identified, you’ll have to determine how to make the initial contact. I suggest always meeting on neutral ground (not at either your or your other company’s office), making sure it’s a place where competitors, wholesalers, and especially employees won’t see you. While all will know at some point, rumors at this stage could destabilize both companies.

    Establish a rapport with the other owner, determine what goals you have in common, and define what would constitute a win-win-win outcome (one win for the buyer, one for the seller, and one for the employees). Don’t waste time with this rapport building; be direct with your motives.

    Evaluate the candidate company in terms of profitability and assets. Keep in mind that the assets include the technical skill sets of the company’s people, tangible assets such as the company’s fleet and real estate, and intangible assets such as goodwill.

    Keep in mind that many sales don’t include a large amount of tangible assets. Truck fleets can be leased, and real estate can be rented. Also, make sure that the intangible asset of “goodwill” isn’t just a customer list that includes a large degree of “badwill” caused by poor experiences with the company.

    It’s also important to examine the culture at the prospect company. How much alike or dissimilar are they to your company?

    As part of this evaluation process, both parties should sign non-disclosure agreements, and establish ground rules, such as how you are going to communicate yet still remain private. Establish a timetable for the sale, and have at least an informal discussion of the method of valuation that will be used to determine how much the prospect company is worth.

    Determine the Value
    Various methods can be used to determine the value of a company, most of which deal — ultimately — with cash flow. One method of valuation is to look at a company’s EBITDA, which stands for earnings before interest, taxes, depreciation and amortization. When viewing a company through this lens, the value is usually a multiple of the cash flow.

    Another method of valuation is determining a price “per customer.” This is more commonly used in residential deals, because the value of commercial customers varies widely.

    At this point it’s time to structure an offer. Try for a win-win scenario. As the buyer, you may desire an asset-based purchase, whereas the seller may prefer a stock purchase. So, by necessity, there may be some need for give-and-take.

    One thing to be wary of is a cash up front approach, in which it’s easier for the seller to hide skeletons (read: huge liabilities) in the closet.

    When you’re negotiating, keep a journal, and always be willing to walk away from the deal if you don’t like the way it’s structured and the negotiations aren’t going anywhere. Be sure to discuss non-competition agreements for the existing owner and family, as well as the future roles and responsibilities of the prospect company’s people.

    No matter how the offer is structured and negotiated, keep in mind that the devil is always in the details, and that you understand the tax consequences of any deal. This is where you’ll be particularly glad that you have an accountant and a lawyer on your team.

    The Final Steps
    All that’s left now is performing the final due diligence. This consists of proving the financials, examining the work in progress and accounts receivables, and taking an inventory to prove the tangible assets. You must also examine the status of the fleet (owned or leased? good or poor condition?) as well as the real estate titles. This is also the time to interview the target management staff.

    Keep in mind that even if everything is good to this point, and you decide to go ahead and make the acquisition, your work is only half-done. There is still the long and often difficult process of integrating the new company into yours, and transforming it with your company’s culture and ways of doing things. But that’s an article for another day.

    If you’re truly ready and follow a sound process, acquisitions can be a great way to grow your business. Just be prepared to handle lots of details — lots and lots of details. Stay calm, be flexible, and keep the big picture in mind.