“Patience, persistence and perspiration make an unbeatable combination for success.” – Napoleon Hill
by Max Friar
This article is directed primarily at strategic buyers – mid-to-large companies in a fragmented industry that are seeking to “roll up” smaller competitors via the creation of a long-term corporate acquisition strategy. These buyers could be owned by private equity, but I would advocate that the platform companies themselves be the “face” of the mission as the story is often more compelling, which helps to break down a prospective seller’s veil of skepticism. (Disclosure: Every buyer wants an established non-automotive manufacturer or distributor with $3MM EBITDA and a strong management team in place – that message is not going to differentiate you!). So, private equity firms, if you are seeking to acquire long term, make the message and the process originate from the platform company, not corporate headquarters in Manhattan or Chicago. While M&A advisors understand what you are trying to do, the “roll-up to divest in 3-5 years for a higher multiple” message often rings hollow to many business owners who have built their companies from scratch on the backs of loyal tenured employees. This is not to say that the ownership of the target cannot come to understand your financial goals, it’s just not advisable to disclose them in the introductory stages. Slow and soft. Heavy on the emotional intelligence.
Why Am I Writing About This?
For nearly eight years, I have worked on numerous corporate acquisition projects for companies in a wide variety of industries: fuel distribution, water treatment, IT service and staffing, to name a few. Some of my clients have been more successful than others in the acquisitions process, and I want to lay out corporate acquisition strategy success based on real-life lessons learned. To a certain extent, this topic has been bubbling up inside me for years, and now is the time to document exactly what works.
So, What Kind of Corporate Acquisition Strategy Works?
While I do not know the specifics of your individual company, the following is the most useful advice I have helped companies incorporate into their corporate acquisition strategy over the years.
Disclose Who You Are: Oh no! What if my competitors find out I’m acquiring? Or my employees? Might the world end? There might be a really good reason to keep your acquisition hunt confidential, but I doubt it. Chances are, if your competition finds our you’re acquiring, you will seem strong and sophisticated to them. After all, they probably don’t know how to acquire companies and even if they did, they don’t have the financial means. If your employees ask questions, tell them that you are seeking to acquire because the company is financially strong and you want to ensure a better future for the business by: diversifying, expanding, etc. So why keep it a secret? Being secretive means:
- potentially missing out on good opportunities
- creating seller skepticism when you reveal who you really are
- decreasing the likelihood that a seller will approach you
Believe me, owners get called by “buyers” all the time. So who are you? What do you do? Introduce yourself. Be real.
Representation: It goes without saying that if you hire a firm to represent your interests in the marketplace you convey seriousness. You also get a “leg up” as you acquire the M&A advisors’ experience and resources vis-a-vis locating and contacting prospects. This is not an advertisement to hire Calder Capital. We just want you to be successful. If you have an internal M&A team, then please use them!
Your story: You should have an honest and compelling story, and it must be written out for prospects to read. The first question a potential seller wants to know is who you are, and then, secondly, why are you interested in buying his/her company? If your M&A adviser is not equipped with a story or documentation to send to a prospective interested party, your campaign will be not be “optimized”. Consider that sellers get calls all the time from brokers. They usually go something like this:
Broker: “Good afternoon, Mr. Smith. I am Sam Broker and I have buyers interested in your business.”
Seller: “You have my attention.”
Broker: “Ok, great. Tell me, what does your company do again?”
Seller: “I manufacture Tinkles the Toilet Cat.” (Sadly, this is a real product – I’m trying to see whether you’re paying attention).
Broker: “Oh wonderful. My buyers would be very interested. And what is your EBITDA?”
Seller: *Hangs up*
Or worse yet, the seller’s fax machine blows up weekly with faxes from brokers inquiring about whether they would sell their company. Come on. Faxes? This isn’t 1986, and, even if it were, the fax machine is often located in a public place. Why would anyone legitimate or serious send a confidential communication there?
When contacting an owner, particularly of an attractive, well-established business, you have about 10 seconds to establish yourself via phone and about the same amount of time with an email introduction. You better weave a story that jives with the gut.
Be Honest: Buyers are often very curious about why you are contacting them specifically. Almost always, you have no idea what the insides of their business looks like. Don’t act like you know their business. You don’t. I have seen brokers that act like they know more about the company than its owner. They last about 6 months in the industry and make no money. Then they go back to being a consultant. Most of my acquisition searches start out with InfoUSA, move to a company website that has not been updated since 1998, and end up with a phone call to the owner. You need to start out by telling owners that you’ve done preliminary research, and, based on that, their company seems like a potential fit, however your client would need to understand much more about the business before making an offer. You are asking the prospect to engage in an exploratory discussion where trust is built over time via a dialogue among two parties with a common interest. You are not asking them to commit to a sale and neither are you committing your client to a purchase. Everyone courts before they get married (some not as long as they should!).
Patience: Buying a good company is like convincing the prom queen to marry you. She is flirted with incessantly, often to the point of annoyance, but rarely by a worthy candidate that will follow through with true synergies and a solid plan for the future. If you are to be the lucky suitor, then give the relationship time to garner a foundation of trust (yes, there are benefits to slowing down). And follow through. You will differentiate yourself because you are honest about who you are and what your intentions are. This message takes a soft, professional sell to be successful.
Commit to the process: Many great potential future sellers are simply not ready when you call. The owner may be 59 years old, making $400,000 a year, and not interested in selling for 2-3 years. There is nothing you can do about this unless you are willing to dramatically overpay (in that case, call me immediately). In situations like these it’s essential to establish a line of communication and follow up with that potential seller every 6-12 months. Your prospect must (and will) come to recognize that your company is serious buyer for the long term if you quietly, professionally check in with him from time to time, leaving your name and stated purpose.
Make an offer: Take action. Seriously. I have worked on retained searches for buyers that are unwilling to do anything with the prospects I’ve uncovered. Yes, what you are thinking is correct; they have paid me to find companies that fit their criteria and they have sat on their hands when I bring them one, two, five, etc. Why? Perhaps the prospect is not perfect, but what company is? So listen up buyers: make an offer! It’s not committing you to anything but getting serious about what you set out to do. And the things you will learn by doing so are invaluable: how to navigate the separation emotions, how to negotiate a business transaction, how to inspect a company, what tax and legal implications to be aware of, how to manage a new culture and new employees that consider their lives in your hands. Once you’re a buyer no one can take that away! And no school is going to teach you the hard knocks of small business acquisitions.
Furthermore, in my experience, less than 10% of buyers that “look” actually make an offer. Basically, it’s relatively easy to get to the top of the class. Just submit a non-binding proposal and watch what unfolds.
Make a fair offer. Listen up buyer. You called me! Don’t court me, cause me to spend my time and money turning over confidential financial statements, tax returns, employee and customer information, wasting my time on Saturday walkthroughs, only to low-ball me. If you are not interested in making a fair offer, then walk away. I am spending my time in good faith of a fair deal. You need to do the same.
Stating that you are prospectively interested in buying someone’s business is not a commitment. Your M&A advisor should make that clear to the prospect. However, the more time and effort that you cause the seller to spend, the more psychologically dis-attached he or she may become from the company and the more trust he or she will build up in your relationship. All of that goodwill evaporates the second you ask the seller to finance the entire deal or take an earn-out for 90%. (Disclaimer: If the target is distressed almost any offer is fair game. The assumption here is a stable, profitable, established target).
Innocent until proven guilty: You should trust the acquisition target until proven otherwise and particularly prior to due diligence. Too often buyers get buried in the minutiae of P&L line items. Note to buyer: your prospective target likely does not operate their business like you. Chances are they are less sophisticated and sloppier in their bookkeeping. This does not mean that you shouldn’t trust them. Too often I have been in analysis meetings where buyers become accusatory towards sellers; they act like the sellers are trying to cook the books when 99% of the time they are not. Your Letter of Intent (LOI) will be based on what the seller has disclosed in good faith and contingent upon thorough due diligence. So don’t worry! Let the facts speak for themselves. You can always walk from the deal if you find skeletons. Furthermore, you can make sure that your purchase agreement contains proper recourse for fraud or misrepresentation. Don’t condemn your suspect (prospect) without a proper trial (due diligence).
Market to your prospects: I prefer to use a 5-pronged approach: 1) Call your prospect directly and make an introduction; 2) Email your prospect directly/connect via LinkedIn with your prospect; 3) Mail a confidential letter to your prospect; 4) cold-call your prospect and drop off literature; 5) if you are acquiring for the long haul, then make sure to send press releases of successful acquisitions directly to your prospects! Rinse. Repeat. Don’t treat your acquisitions like your corporate Facebook page – started a year and a half ago with gusto and enthusiasm and then never updated . Your acquisition program needs to be compelling, nurturing and marked by persistence. Good things come to those that wait.
Keep yourself organized: Especially if you are reaching out to swathes of prospects, it is important that you maintain your prospects’ information close at hand. Think for a second if a prospect called me 8 months after our first conversation. If I’ve made 500 targeted prospect phone calls in the same industry since our first communication do you think I stand a chance of remembering who that person is or the details of their business? Of course not, but how many times do you think your prospect has talked about selling their closely held company with a relative stranger? Probably once. So you better be able to pull up your conversation notes in an instant if you stand a chance of maintaining the rapport you built 8 months prior.
An excel spreadsheet may work if your universe of prospects is 20-30 companies, however after that I highly suggest salesforce.com or another CRM. A CRM allows you to keep all of your prospect’s data – name, email, phone, call notes, email notes, financial statements, non-disclosure agreements – all in one place. Most modern CRM’s are cloud-based, highly encrypted, integrate or feature the ability store and share, and allow you to assign tasks and permissions to specific individuals. For example, salesforce.com integrates with Google Drive nicely. This means that as your prospect moves from courting to dating you can securely store, share and assign financial analysis to an analyst, contract analysis to an attorney, operational due diligence to the COO, employee documents/integration to HR, etc, while keeping management of the entire acquisition project under one umbrella. Please at the very least, do not email Microsoft Office documents back and forth; particularly during due diligence, you will quickly get overwhelmed and frustrated regarding who has which version of what. If you’re planning to acquire over a long time horizon it is essential to maintain tight control of the entire project.
The intent of this article is certainly not to make you fret about every detail. Be yourself, be intentional, be honest, be fair, be persistent and stay organized. As Henry Ford once wisely quipped, “Coming together is a beginning; keeping together is progress; working together is success.”
If you are interested in learning about Calder Capital’s proprietary acquisition program, please contact us directly.
Max Friar is Managing Partner of Calder Capital, LLC, a Grand Rapids, MI-based mergers and acquisitions firm. Max is passionate about helping to educate and guide business owners about and through the business-for-sale process. He specializes in transactions ranging in size from $500,000 to $5,000,000.