2005 Winter/Spring Volume No. 5
Throughout the year I get a lot of questions from PolyJohn customers. I try to answer as many as possible based on my 20 years of
experience in the portable sanitation industry. However, when I don’t know the answer, I usually know who I can call to find out.
Here are answers to some questions I was asked recently about a very relevant consideration many businesses face - Acquisitions and Mergers.
When deciding to grow our business we’ve
had a lot of discussions around buying other companies and/or joining forces with a friendly competitor. What suggestions do you have for
us as we consider these ideas?
Growing a business the old fashioned way—one new customer at a time—is becoming more difficult as the portable sanitation industry becomes more competitive.
Many companies today are learning that the fastest growth strategy in a mature market comes through acquisitions or mergers. In an ideal situation, you may be able to buy great customers and excellent employees from your competitors by buying their company.
Is this an option for your business? First ask yourself, how long it would take to grow from scratch what you could go out and buy today. If the answer is many, many years, perhaps you should consider the alternatives.
Acquisitions aren’t just about the big fish gobbling up the little fish. Depending on your company’s management experience, business plan, cash position, and credit profile it may be possible to get financing or even venture capital to help you buy multiple companies or even companies much larger than your own. However, if you work with venture capital you must be prepared to give up a significant portion of ownership, in the form of company shares.
Mergers can be a little trickier especially if it requires bringing on new business partners, rather than just new employees. The ideal merger would be with a competitor in your area who you have known and respected for years. Sometimes, if a new partnership can be agreed upon, the resulting company becomes stronger than the sum of its parts making it more competitive and better able to fend off competition from other local companies.
What should I look for in an acquisition
or new partner?
There are several key factors to consider when looking to acquire another company, including:
Does the acquisition candidate work in an area that overlaps your own? Will there be savings by creating better route density and improved efficiencies? Or, is the acquisition intended to help you penetrate a new market? A company that helps you increase route density may be more profitable. However, if your company already has suitable route density, then it may be wiser to gain a toehold in a new market.
Market specialty and customer profiles
Would the acquisition target fit your company’s marketing strategy? Or, are you willing to change your marketing strategy to fit the new company? If you specialize in the construction market, do you have the expertise to merge with a company that specializes in large events? If you are seen as the “high quality choice,” do you want to merge with a company that is seen as the “cheap alternative?” The easiest acquisition is one that dovetails smoothly into your current operation. However, companies have also been successful by controlling different segments of a market by creating independent divisions. Don’t make the mistake of thinking you can convert the customer to your way of doing things. Ironically, customers are the most valuable part of your acquisition, and yet you have no legal claim to keep them.
Management and employee talent
Are there people who work for the target company that you would be excited to have on your team? Before you merge another company into yours, be sure the new employees you gain in the deal will fit into your way of doing things. Be sure that they have good clean work records with low turnover, and that they are well trained. Also, be sure that the new employees will not cause morale issues if they are unhappy with your pay and benefits structure. If a difference exists, expect that you’ll have to bring everyone, including your current employees, up to the higher level.
Is the owner of the target company planning to walk away, or stay on as management after selling? Will the former owner’s expertise be useful, or will you have too many “cooks in the kitchen?” In my experience, it has usually been the latter.
Business Property and Assets
Will you be using the real estate, if any, that comes with the new business? Does the new business have long-term lease agreements that you could be saddled with? Or is your current yard large enough to accommodate the merging of both company’s rental fleets and trucks? If you won’t be using the real estate, office furniture, or other assets, have they been independently appraised? Assess the market to be sure you will be able to sell or lease the assets without taking a loss. If you will need to run the company from two locations, how will this affect management effectiveness? Will it be necessary to sell both current properties to buy a single larger property?
Economies of scale
Will the merging of the two businesses save money by making operations more economical? Will it make larger contracts easier to win and service?
What will the acquisition or merger do to customer perception of your business in the market place? Is the company you are acquiring as well known and respected as your own? Will the merger make it more difficult or less difficult to win new customers going forward?
Equipment Fleet and Truck
How old is the equipment that comes with the deal? Are the trucks running on borrowed time, or are they relatively new and well maintained? Are the sinks, toilets, and tanks in good shape and of high quality? Will you be getting equipment that expands your capabilities to provide service?
Customer Records and Call Data
Will you be gaining high-quality customer information organized on computer records that will be easy to use for sales and billing purposes? Or is everything done on paper route cards that will be difficult to convert to your data management system?
If looking to grow through acquisi-tion, be sure to discuss your plans with a lawyer or accountant who specializes in this field. A professional can act as your agent to find target companies, review their suitability and negotiate terms, allowing you to do what you do best, which is to keep your own business running smoothly during the process.
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