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M&A considerations

February 27, 2014 -  By

Transactions are on the rise. The economy is picking up. Now is a good time to buy or merge with a company to take advantage of growth prospects. There are many owners out there who are looking to sell their company and perhaps become part of your company. I have spent a lot of time lately helping business owners plan and execute successful mergers and acquisitions. Here are a few key pointers to consider:

Culture fit

Does the owner (who wants to sell) fit your company culture? The business opportunity may look great on paper, but does his/her personality match the personality of your firm? It is like a marriage, do you share the same goals, values and ethics? Even if you are looking at this from a high level perspective, you still want to interview these people as if they were prospective employees. Have a few of your trusted employees interview this person and see if there is a good culture match.

Fact-based evaluation

It is easy to “fall in love” with someone who shares your values. And so I also recommend performing a personality profile on this new potential partner or employee. I have used many over the years and finally found one that works particularly well at identifying “position fit” as well as “emotional intelligence” and “management style.” Shoot me an email and I will share my resource with you.

Financial fit

What will your budget look like if you subsume the new companies revenues and expenses? Plug the new company’s numbers into your budget, and see what your direct costs, equipment and overhead costs and profit margins look like (as a percent of sales). There should be a bump in aggregate sales and profits by making this transaction. Can you prove to yourself financially that the sum of the parts will be greater as a whole?

It goes without saying, but I will say it anyways: If you are buying a client base, you have to make sure the contracts are priced properly (go out and do an estimate on them), and you need to make sure the client type fits your company’s ideal client profile. I have seen acquisitions go bad when the new client profile was too high-end, or too low-end, compared to the profile of the existing client base.

Position fit

What job will the owner (selling their business to you) do in your firm? They are used to being their own boss and doing a variety of different tasks. What is their true strength, are they willing to do a more-focused job in your firm, and will it fit well with your organizational chart?

Motives

Why are they looking to sell? There is always a reason or two or three. Your job is to find out if they are good reasons or bad reasons, or both. Do they owe money or back taxes? Are they good at selling but not managing, or vice versa? Be willing to take your time to dig deep down to their underlying reasons.

Compensation

At some point in the conversation you need to find out “how” and “how much” this person wants to get paid—how much in base, how much in incentives.

You have to decide if you make a special case for this person, or ideally, if they can fit into your current approach to paying key managers and/or salespeople. This person will have some assumption about how much they want to earn, and how they want to earn it—find out before you go too far down the road, otherwise you may have wasted your and their precious time.

Buying assets

Do they want you to buy their hard assets? If so, look at their assets as a separate transaction. Don’t assume you “must” buy their trucks, equipment, etc.

Are you paying for their client base? Make sure you value it based on fair market value. Separate that transaction from the “hiring of the person.”

Don’t forget critical branding and intellectual property (IP). Are you taking over their website URL, phone number, Facebook page? Is it better to leave these online and active? Should you point them back to your company? Figure this out before you make the deal. You can make the purchase of these key assets part of their first year’s base.

Clean contracts

Don’t forget the non-compete. Even if this person is coming in as a full partner, there should be a non-compete in place. You may need to have this for both you and them.

Will this person be an equity partner? You must figure out the buy-sell criteria now, so that if either one of you wants to dissolve the partnership it can be done without emotions messing things up.

Even if the person is not going to be an equity partner, you still want an escape clause, in case it does not work out. You may buy their client base but they may turn out to not be a good fit in your company—now what? Have that discussion up front so there are no hard feelings or unnecessary quagmires.

Guiding the process

It is good to have a board of advisers to help you look at your deal and give you different perspectives to consider as well as to poke holes in a deal from different angles. I provide this as a “board experience” in my Leader’s Edge peer group. You need to find a trusted group of experts or peers to challenge and support you.

Photo: Petr Kratochvil/publicdomainpictures.net

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About the Author:

Jeffrey Scott, MBA, author, specializes in growth and profit maximization in the Green Industry. His expertise is rooted in his personal success, growing his own company into a $10 million enterprise. Now, he facilitates the Leader’s Edge peer group for landscape business owners—members achieve a 27 percent profit increase in their first year. To learn more visit www.GetTheLeadersEdge.com.

2 Comments on "M&A considerations"

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  1. Interesting article. Our sales in 2013 were $14,000,000 + at a high margin (for our industry). Most of that is in maintenance or extra work associated with the maintenance. We have a tree division as well and most of the tree business is done on those maintenance accounts. Long term, is it best to separate the tree service into a separate business or could that be done at the point of sale if we were to sell? On the other hand, if we were looking to buy a company that had a service line that we were not interested in, would it be difficult to unwind the unwanted portion from the portion that we did want to buy?

  2. Jeffrey Scott says:

    Martin,

    There are a lot of what-if’s. Here are a couple to consider.

    Do you plan to sell it to someone internally? They may want the synergy of ‘one’ brand?

    Do you want some options to sell pieces to different people? Then separate brands would help. It is hard to create separate brands last minute.

    But there is a cost to creating a separate brand – think about how big you expect the tree business to get – you can always sell ‘accounts’ at any point.

    I can give you some specifics ways to test the market now if you want, contact me off line to discuss further.