If you’re trying to buy or thinking about buying another company in this business, here are a few things that may be helpful to you.
After 41 years of working in this business – including being an owner of multiple firms and advisor to so many others – I have been involved in one way or another with literally hundreds of A/E and environmental consulting firm acquisitions. I may not have quite as much experience as my old friend, George Christodoulo (Lawson & Weitzen) – the triple Harvard graduate Boston-based attorney I first met about 30 years ago – but it’s safe to say I have worked on more of these things than most.
If you are involved in trying to buy or thinking about buying another company (or companies) in this business, here are a few things I have learned that may be helpful to you:
- No one HAS to sell their business. Many more should want to sell than probably do, however. But back on my original statement. I have worked with sellers who were in desperate need to sell – their lines of credit were maxed out and out of compliance with their loan covenants, their lenders told them to find a new bank, their company-owned real estate loans were upside down and couldn’t be renewed, they were writing personal checks every week to meet payroll, and their business was completely falling apart, yet they still delayed and had inflated ideas about what someone would pay for their business. When it comes to your own business, too many owners (in my opinion) are willing to go down with the ship. It’s hard to give up that freedom that comes from your own business.
- A/E firms are fragile. What you bought could be lost overnight if you do the wrong things. What do I mean by that? When buying companies, the most important thing is figuring out what you have to change and what you have to keep in the company you are acquiring. It’s easy to screw things up by doing unnecessary things that alienate employees or annoy clients. For example, maybe it isn’t necessary to force compliance with an 8 a.m. work start time when the employees have all planned their lives around a 9 a.m. start. Maybe requiring the acquired company to get rid of their business development people and work with “corporate” BD in the parent company is a mistake. And maybe killing off that company name with a long history of serving a particular market doesn’t make any sense. Two examples: CH2M and Ellerbe Becket. Why any buyer would drop the names of companies that are dominant leaders in their fields and hurt their future opportunities is beyond me. Yet it happened in both of these cases after those firms were acquired.
- A short payback period for the buyer increases the odds of success. This is why I have always liked troubled companies with lower prices. Let me put it another way. The odds of a successful buyer in this business being able to fix a company that is losing money are pretty good. Conversely, the odds of a buyer paying an inflated price for a super-successful company and sustaining that success post-acquisition are very low. This is NOT the way most buyers think, in my experience. The tendency, especially for inexperienced buyers, is to look for “good” companies with few problems. They see that as lower risk. But why would the owners of those companies want to sell? They won’t unless they get way overpaid to do so. That then drags out the payback period for the buyer.
- There are many different ways buying a firm can pay off. Besides the contributions to covering the parent company’s overhead and making additional profits, the buyer may get a person or persons who can assume a critical role in the parent company. They may get a client that could turn out to be a huge client for the parent company or another company they own. They may be able to combine two troubled companies to make one good one – or use the company they are buying to help turn around a prior acquisition of theirs. They may find that the PR surrounding their acquisition leads to a new client relationship they wouldn’t have gotten otherwise. They may find having additional new locations could allow them to hire people they couldn’t get otherwise. I could go on here but you get the idea. Some of the benefits of buying aren’t as obvious to everyone who is considering trying to do it.
- Many people don’t understand the basic economics of acquisitions. This includes some of those who are actively involved with trying to buy companies right now. Here is what I mean. If a buyer purchases a company and buys the “book value” of that company as the down payment for their deal, it is like taking money out of one of your hands and putting it in another. “Book value“ is defined as assets minus liabilities. The bulk of those assets is usually cash and accounts receivable. So buying cash and AR for cash – even though the buyer has less liquidity going forward – could be a no-brainer. And then if the buyer structures a deal that allows them to pay off the rest of their purchase over time, the company they are buying is effectively paying for that IF the buyer can keep them/make them profitable. The idea that the buyer will need to write an enormous check just to get the possibility of future income may be a false assumption. And let’s not forget that the value of the overall business for the buyer is boosted by a higher revenue growth rate. The acquisition in and of itself contributes to that revenue base and resulting growth. That comes out in higher value for the enterprise. Why do you think publicly-traded firms keep buying?
- Troubled companies are the easiest to integrate. I have been saying this for years. When a selling company knows they don’t have “grandma’s recipe” for how to run one of these businesses (they aren’t profitable, aren’t growing, have high staff turnover, etc.), they are much, much more likely to accept the advice, input, and controls of a buyer than a firm that is currently doing really well. It just makes sense if you think about it.
- Inexperienced attorneys can create big problems for you. You need an attorney specialized in mergers and acquisitions, at a minimum, and one specialized in acquisitions of firms in this business is best. For example, I know someone who sold one of their locations but whose attorney did not catch a non-compete clause for a certain geographic radius around ALL of their existing operations (not just the one they are selling) that the buyer had inserted into the deal at the last minute and that wasn’t part of the LOI used to get agreement on the basic terms of the transaction. The seller was furious with their attorneys – inexperienced though they were – as you might expect!
Hopefully, I now have you thinking about this stuff differently than you may have in the past. Right now is a great time to buy. Because if you aren’t growing, you are dying.
Mark Zweig is Zweig Group’s chairman and founder. Contact him at firstname.lastname@example.org.Click here for this week's issue of The Zweig Letter.