An education in M&A

After meeting with a number of people with knowledge of the mergers and acquisitions world, Marty Grunder came out of those discussions with these tips.

February 10, 2014

Mergers and acquisitions. Well, that’s not something I really know that much about, to be honest. However, I’m interested in them and since I’m interested in them, I have been seeking out experts, people who have actually experience with them. I’ve had 10 meetings in the past two years with business people who have done them and I’ve learned a lot. I thought I’d share what I’ve found out with you. I also have one point at the end of this column you’re going to want to read whether you’re interested in a merger or an acquisition or not.

I spoke with my client, Dan. He’s done several acquisitions (no mergers) in the HVAC industry. In fact, one venture he did resulted in the company having combined revenue of $4 billion – that’s billion with a B! He also has done many acquisitions of HVAC companies. Sure, they aren’t landscaping companies, but they are service businesses, so there’s a lot in common. I learned from Dan to NOT have your attorney call a company you are interested in purchasing or merging with.

Dan said, “I would not let your attorney do it. Many attorneys are good for ‘papering’ deals but typically not ‘making’ deals. Some attorneys are very commercial minded and work to get deals done – but they are hard to find. I have gotten to work with some tremendous ‘commercial-minded’ attorneys – and when you find them, you keep them. At any rate – the size deals you are looking at will be more about the connection you make with the seller and how that individual plays into your go forward plans.”

That makes total sense to me. The connection. You’re trying to do business with someone who has most likely put everything they own into this business; it’s their “baby.” You need to proceed carefully and realize that it might not be a fit. In my mind, after listening to Dan, having your attorney call them gets things started in the wrong way. I’m not going to do that. I’m going to just be nice and blunt and to the point and see if there’s a fit for us. Look for a connection with the owner; that needs to be there.

After I met with Dan, I had lunch with my pal Michael. Michael is scary smart and he’s done a ton of acquisitions, no mergers. He always looks at the numbers. He wants to know what kind of clients are coming over in the deal and what type of people he is getting to add to his team. Michael doesn’t care “about buildings, computers, or trucks and equipment. That stuff means nothing to me. I don’t want it. And in many ways, I want smaller companies, ones that are owner operated that I can take an owner, remove some of the burdens from him or her, and let them run the business day to day.” And then he advised me to “look at what they’re doing. Are they as efficient as they could be? Would your systems help the company you are purchasing be more efficient and hence more profitable? Some more simple brilliance. Don’t get caught up in the equipment and the like, just look at the numbers. Is the company making money and if not, could you fix some things to make money. Take the emotion out of it. Buying three or four small companies might be a better idea than buying one bigger company. Maybe not. But just think about what you are doing.” Look closely at what you are doing, what are you really buying? Check.

Then I listened to a local successful entrepreneur Ed, who owns a very large trucking company. He said, “The two most important things to consider when buying a company are culture and cash flow. Their culture has to fit your culture and the company has to have good cash flow for it to make sense. The notion that you are going to change a culture and miraculously fix their cash flow is a dangerous proposition.” I marveled listening to him talk about a deal he spent a lot of money analyzing and putting through due diligence, only to walk away because he thought their culture would never fit with his was really eye opening.

Why? Because I think as a whole, we entrepreneurs are way too optimistic. We think things will be easier than they end up being. We think they will cost less than they end up costing. And we think things won’t take as long as they end up taking. I know I have been guilty on many occasions of being too confident of my ability to change someone’s behavior only to find out I could not. My friend Pete says it best, “I can make you more than what you are, but I can’t make you something you aren’t.” Amen. Culture and Cash Flow.

By chance I had a lunch with an entrepreneur in Dayton that I did not know did a lot of acquisitions but no mergers. Turns out her family has done a ton of them. In talking with her, she made some awesome, basic points that could be easily overlooked. She spoke at length about the business “make up.” There were many deals that came to her that were in the same industry, but had different clients. She said they always said no to those deals. She told me, many think, “Oh, I need diversification. But really what you need is a niche, you need a focus. We never bought companies that didn’t have the same clients as us. We knew what we were good at and stuck to that.” Since I saw the value of a focus on an ideal client, this lesson made a lot of sense to me. So, look at companies that have the same type of clients we have.

And then finally, the granddaddy lesson of them all came from my friend and mentor Les. Les was a long-time client that not only did a lot of business with me, but he spent hours with me through the years, still does actually. He retired a couple years ago and helps family businesses succeed to the next generation. And what he taught me is magical. Les says that whether you are selling your business or buying a business, the goal should be one thing. And that is to have that business set up in such a way it runs without you. Why? Les reasons that whether you have the intention of selling your business or growing it, you need to get it running like a well-oiled machine. A business that runs like a well-oiled machine, with the owner present or absent, is far more marketable and valuable than one that relies solely on you. Get the business running well without me, whether I plan on selling it, doing a merger or an acquisition.

Okay, if you’re sharp, you realize I didn’t mention anything about mergers. None of the experts I have sought out like mergers. I don’t like them either. The thought of me having a partner isn’t something I want to do. I’m not saying that partnerships/mergers can’t work. They can. I’m married and that’s one partnership that works for me. However, most of us got in the business to be our own boss, to do what we want to, when we want to do it. I had a very small partner many years ago, and it did not work out. I see way too many of them that don’t work out. So, I suggest you look at acquisitions or selling your firm and putting yourself in a position where you can enjoy life, not be in business with someone who has a decent chance of not looking so good in a couple years! Again, this is just my opinion, nothing more.

Finally, here’s what I would do if I were you and you’re considering a merger or an acquisition. I would seek out several folks who own businesses that have done them. Ask them what they liked and did not like; talk to them about what they would have done differently. Call PLANET, our national association, and ask them for some names of companies that have done them. Call those owners and go see them. Spend a few hours on the internet and see what information is out there on mergers and acquisitions. Ask around and find the attorney in your town that has the best reputation for handling mergers and acquisitions and go meet with them. Even if you have to pay them for an hour to talk, it will the best money you ever spend if your eyes are opened up to some things you know nothing about. And then, finally, read my words above again and make sure you can check off all those items too.

I’m looking at some acquisitions, not sure I’ll do one. My issue right now is this: Why pay for a company if I’m not getting some incredibly talented people to join my team or some great new clients? Wouldn’t I be better taking that money and investing it in training my people to sell and produce more work and growing my business that way? So much to think about, so much opportunity out there; look closely; you might just find something that works. It seems it’s the process that you need to follow that matters most. If you follow a process, you will greatly improve your chances for a successful acquisition! (Or merger! )