Six questions to ask before making an acquisition
MISSISSAUGA, Ont. — A panel of M&A deal-makers was assembled at the Surface Transportation Summit earlier this week, to shed light on how to successfully acquire and integrate a company into an existing business.
The panel was moderated by Mike McCarron, a former partner in MSM Transportation, who sold that business and then went on to form Left Lane Associates, a new company geared towards helping trucking company and freight broker owners to monetize their businesses.
Here are six questions that were answered during the session:
Should I grow organically or by acquisition?
Douglas Davis, co-founder and partner of StakUp, who also has experience selling his own transportation business, said companies should not focus on acquisitions alone to grow their business.
“Every good company has an organic growth strategy and they may supplement that with acquisitions,” he said.
He noted acquisitions can contribute to faster growth, but they also bring greater risks than organic growth.
“Get the best of both worlds by supplementing an organic growth strategy with acquisitions,” he advised.
How do I learn about acquisition opportunities?
If you haven’t been identified by investment bankers as a potential buyer, then you may never hear about opportunities that may have been the perfect fit for your growth strategy.
Robert Hickey, managing director, RBC Mid-Market M&A, said companies looking for acquisition opportunities should work with an investment banker and let them know what they’re looking for.
“If we don’t know you, we’re not going to come and talk to you,” he said. “If you have enough touch points out there in the financial services community, you will start to see ideas coming your way.”
Prospective buyers, said Hickey, need to develop a pipeline, so they have exposure to opportunities that are out there.
Is the company I’m interested in the right fit for my business?
Just because you’ve identified a successful company that’s available for purchase, doesn’t mean you should rush to make a deal. Doug Nix, vice-chairman, Corporate Finance Associates, said you must first determine whether or not the prospective acquisition is a good fit for your business.
“One of the most overlooked steps is ensuring every deal supports your corporate strategy,” Nix said. “If it doesn’t support the strategy, you may as well be buying beauty salons and tucking them into your organization.”
Hickey said a buyer must first “know itself” before it sets out to make an acquisition.
Most deals that fail, do so because “the underlying assumptions behind the transaction were incorrect, because the company didn’t do Phase 1, which is know itself,” Hickey explained.
Are you capable of integrating the new business?
Once deal has been reached, the LOI signed and the champagne glasses clinked, Davis said that’s when the real work begins. It’s time to integrate the business and this is a step many buyers are unprepared for. Before setting out to make an acquisition, panelists said companies need to assess their ability to successfully integrate their purchase.
“You have to think about how you’re going to integrate it,” Hickey said. “If you don’t have good awareness of your own P&Ls, it’s very difficult to conceive how you can integrate another business.”
Davis said a company looking to grow by 50% through acquisition needs to determine whether or not its management team is strong enough to run the business that’s suddenly at 150% of its current level.
“You need to make sure your management team is appropriately set up as well,” he said.
How can you ensure customer retention?
Before pursuing a company, consider whether the current owner or the company itself owns the business relationships.
“Often it’s the owner of the company that owns those relationships,” said Davis. “If its top five customers are 73% of the business and the owner is best friends with them, then without him the business isn’t worth anything.”
Davis pointed out what you’re really buying is future revenue streams. One way to gain a comfort level regarding the nature of the customer relationships is to meet with the customers, an approach that could be met with some resistance by the seller.
Davis suggested to “Create a deal structure that has a fairly large earn-out based on customer retention. You would like to have the owners assist in the transition and they are much more motivated when they have some money hanging behind.”
Nix said once the letter of intent has been signed, it’s okay for sellers to disclose customer names and to arrange a meeting with key clients. Normally such meetings are brief and no issues arise. The customers generally just want to be assured of a consistent service level under the new ownership. But meetings with customers shouldn’t take place until the latter stages of a deal, Nix added.
“Do all the due diligence, negotiate the purchase agreement, then we can go talk to customers,” Nix said. “You don’t want to disrupt customers or employees in the event it doesn’t come to fruition.”
What multiple should I expect to pay?
Don’t obsess over the multiple commanded by recent deals, panelists agreed. Instead, focus on what the company is worth to you.
“No two businesses are the same,” said Hickey. “Two companies can be doing $5-million EBITDA, but one is asset-heavy and one is asset-light. EBITDA doesn’t capture that. One may be growing at 10% per year and the other at 2% per year. One may have three customers, one may have 300 customers. There are a whole bunch of factors that drive value in a company.”
Hickey added, “The multiple is a great guidepost that you back into. Don’t say ‘I’m going to pay 5x EBITDA for this business because that’s where they normally trade…the value of any business is unique and it’s arrived at by a fairly detailed negotiation.”
Nix pointed out, “It’s the buyer that sets the value of the business, not the seller. The right way to do it is to say, what is the business worth to me as the buyer?”
The trading multiple, however, could become a negotiating strategy, Nix added.
There’s also a considerable gap between the value of freight brokers versus asset-based trucking companies, so it’s important to differentiate between them when discussing multiples, Nix said. He said there’s a “huge appetite” for $8-million freight brokers, driven mostly due to the customer relationships they hold. But, “On the trucking side, it’s hard to see much more than asset value in the small guys,” Nix said.
Trucking companies that have a niche, or some differentiator in their market, however, could command more value, he added.
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