The right time to sell a distributorship is when someone desperately wants to buy the business, and it is a seller’s market, Brent Grover, of Evergreen Consulting, LLC, of Cleveland, OH, told audience members who attended his presentation titled “Mergers & Acquisitions for Distributors” at the recent ISSA/INTERCLEAN® North America trade show.
During his presentation, Grover outlined the ins and outs of buying and selling a distributorship, covering such subjects as target selection, target cultivation, assessing value, negotiation, due diligence, integration and more.
Grover said there are basically two categories of buyers — financial and strategic. A financial buyer is typically a long-term investor looking for a well-managed target company. Strategic buyers, who are many times distributorship owners, are those who have a specific reason to want to purchase another company. They look for companies that will have a synergy with their existing business.
“Financial buyers want companies that are growing and are profitable,” Grover said. “They want companies that have good management in place, and that are not overly concentrated on a small group of customers and suppliers.”
In discussing the early stages of the sale process, Grover explained the role of an investment banker in putting together a “book” about a company. The book would contain information to be presented to a prospective buyer.
“It will not tell everything the buyer would want to know, but it will have enough information to interest the buyer in signing a letter that says, ‘I’m interested in learning more about this company you sent this book about … I want to see more,’” Grover said. “At that point, the investment banker will go to the prospective seller and say, ‘I heard from XYZ company. Are you OK with me sending them information?’ Sometimes the seller says, ‘That will be nice.’ Some sellers might say, ‘No, that company is a direct competitor. They are just kicking the tires here and I don’t want you to share information.’
“Every piece of information that goes out, as they say in reading Miranda rights, can and will be used against you in the marketplace. Non-disclosure agreements don’t last forever, and they are very hard to enforce.
“Not being able to maintain secrecy is the enemy of all deals. When the rumor mill kicks in about a distributorship that is for sale, the sales people of that company, even if they are not looking for jobs, start to get approached. Therefore, there is some danger in having an auction-type scenario for a wholesale distributor.”
Target Selection Program
Another important part of the process for a buyer is to have a target selection program in place. Once a company decides to grow through acquisition, it is critical to have a strategic plan, or at least have a clear idea of its path forward, Grover said.
“A buyer does not want to even consider purchasing a company that doesn’t fit into his or her company’s strategy,” Grover said. “The strategy might be to grow the business. If I want to buy competitors to grow my business, I probably ought to start with a process. Usually, in distribution, it is the CEO who is the best person to talk to competitors who might want to sell their business. The CEO can get a meeting with a competitor and they can tell each other a lot, or tell each other a little. The goal is to establish a relationship.
“The CEO looking for a company to purchase might tell another CEO, ‘If, at some point, you want to sell your businesses, we would be very interested.’ Such a conversation might result in the other party saying, ‘We are probably not going to sell to you, but I would be interested in you selling to me.’ Anything can come out of that kind of conversation.”
With the buyer’s strategy in mind, an acquisition team should be able to have a good idea about what would be the best size of company to purchase. The team should also explore whether or not to purchase a turnaround type of business that can be bought “on the cheap.” In this case, the buyer should know it is likely he or she will have to place management and marketing talent in the new acquisition, Grover said.
Other factors to consider include whether or not to make an acquisition within the market the buyer services.
“An acquisition within the buyer’s market is a different kind of company to acquire, because, in most cases, the purchasing company might close that facility and move the operation into his or her operation. This is opposed to an adjacent market transaction that would expand the purchasing company’s footprint geographically. Or maybe the buyer is the adventuresome type and would be interested in buying a company that is farther away.”
Grover said acquisitions are a good way for a company to “jump start” growth. While the Great Recession is history, a distributorship’s growth under normal circumstances is typically slow in today’s economy.
“We are not in recession now, but you are not likely going to really grow very fast unless you take shares from a competitor or competitors,” Grover said. “We can takes shares by cutting prices and/or by trying to steal competitors’ best sales people. Another thing you could do is have a couple of targets out there in the marketplace for possible acquisitions.
“I don’t believe distributors need to hire an investment banker to introduce them to people they already know, or could know just by picking up the phone. Distributors know people from ISSA, from buying groups, and through the supplier network. You know a lot of people out there.
“If a CEO cultivates 10 or 12 relationships with other companies, that may grease the pipeline for the type of transaction he or she would really like.”
Assessing the value of a company is difficult because there is no method that is anything more than an educated guess. Nonetheless, large companies are selling today for a multiple of eight, Grover told the audience.
“Five years ago it was a multiple of five or six, and five years from now it may again be a multiple of five or six,” Grover said. “We are riding the crest of a wave right now. Like a surfer riding the crest of a wave, we don’t know how much longer that wave will last.”
Grover explained the high multiples are due to competition, as private equity funds are buying wholesale distributors, as are strategic buyers.
“One reason is that growth is so hard to come by. Buyers want to keep their growth numbers up,” Grover said. “The question is, what are you going to multiply that valuation multiple by? It is going to be multiplied times something. Is it last year’s earnings? It is the expectation of next year’s earnings? Is it an average of the last three years?
“Then there is the question of the projections the buyer makes and the assumptions behind the projections. Unfortunately, I have seen buyers who fall in love with buying a company. They look at the projections, but they can’t quite get to the number the seller wants, so the buyer adds another 1 percent to the assumption about future sales growth, or adds a percent or two to his or her assumption about margin percentages.”
Grover said buyers who are planning to combine an acquisition with their existing company must take into account any problems the new company might bring to the table.
For example, Grover said, the buyer must consider such topics as being able to get out of the acquisition’s building lease? If the new company has a union, what issues might arise in that case?
Grover also spoke of the issue of gross profit.
“It is not just the gross profit (GP) dollars, it is also the size of orders,” he said. “If the company has a high GP percentage, but also has a serious small order problem, that is not a good situation for the buyer. The problem may be the potential acquisition just sells to small customers with little upside potential and high margins. You may not want those customers.
“I suggest looking very closely at the (acquisition’s) sales, and look at the profit. Maybe there are only three sales people. If all the customers the buyer wants are in the hands of one sales person, that is the person he or she really wants.
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“It is also good to have new customers who don’t cost a lot to serve, meaning it doesn’t cost too much to get their orders, it doesn’t cost too much to get the product to them, and it doesn’t cost too much to get paid. These issues are all very important.”
Grover cautioned if the buying company’s accountant or lawyer is not familiar with handling distribution deals. In these cases, the buyer should hire someone who has experience in such transactions. In addition, hiring that person early in the process is critical.
“A buyer may or may not know the pros and cons of purchasing assets versus stock,” Grover said. “He or she may not recognize the terms of the deal.”
An expert in acquisition deals will also be able to guide the buyer through the complications of post-closing adjustments, warranties and representations, Grover said.
“There are two things that come into distribution deals all the time that are potentially messy,” Grover said. “One is real estate. Some sellers just want to sell because they want to get rid of the buildings on the property. There is also the question of employee agreements and consulting agreements regarding the company being acquired.”
Grover alluded to a survey conducted of more than 400 companies that made acquisitions. It showed many of them did not practice “due diligence” during the purchasing process. The companies surveyed did a good job in negotiating deals and finding targets, Grover said. However, in other areas they did not do so well.
“You have to take a close look at our potential new suppliers to see if you would be happy to have them, and if they want to have you,” Grover said. “Another issue that comes up is the seller’s employees who have non-competition agreements. Are those agreements transferable to you? These are some of the factors of due diligence, which history shows distributors tend to not do a good job handling.”
The process of integrating acquisitions with their existing companies was another issue problematic among the buyers surveyed.
“You can’t wait until the deal closes to try and integrate the companies together, because there are things that need to be done in advance,” Grover said.
Placing a person from the original company in the acquired company during the integration process is an important step, Grover said. That person should be someone who the buyer can trust to go into the new company and break the ice and help integrate the two organizations together.
“Buyers like to get involved in the companies they buy, which can scare off the good people,” Grover said. “You don’t want to come in like the ‘conqueror.’ People don’t like to be treated that way, so that is something to avoid.”
Grover also cautioned against the buyer making promises he or she cannot keep.
“You can’t promise to keep all the employees, if you are not going to. You can’t promise to keep the old company’s name on the door forever, if you are not going to,” Grover said.
Making A Company Attractive To Potential Buyers
Grover told the story of meeting with 29 CEOs of Japanese distributors from Tokyo. Some of the companies were in the 12th generation of family ownership, which translates into about 300 years.
Japan’s culture is such that throughout the history of a particular company, each member of the family who becomes the head of the business feels he (it is always a male) stands on the shoulders of his ancestors, Grover explained. For this reason, selling a company is out of the question.
“As a result, there are 29 companies in the Tokyo area that are all killing each other in the marketplace, because they will not buy and sell,” Grover said. “These companies are truly dynasties. We have companies in the United States, in our own industry, that think they are dynasties. They think their companies are going to last forever. Nonetheless, it is never too soon to start an estate plan.”
Grover suggested owners of distribution companies perpetually keep their businesses in top shape in case a prospective buyer comes along.
“Have your company well-tuned at all times,” Grover said. “Keep your receivables, inventory, the IT system, etc., in good shape. Have good employees in every key area of the business and a great sales team in place.
“If you have environmental problems, fix them. If you have real estate problems, clean them up. If you have estate planning issues, resolve them. If you have a troublesome shareholder, buy him or her out. It is very hard to sell a company when the shareholder group can’t make a decision.
“It is really sad when a good company that has some problems receives a phone call from a prospective buyer and the would-be seller has to say, ‘We are really not ready to sell right now. Why don’t you call us back in a couple of years.’ The inquiring company is not going to call in a couple of years. That prospective buyer want to do something now. The buyer, in this scenario, is basically saying, ‘Forget it, because you are not ready.’ Keep your company in good shape to be prepared for if and when you decide it’s time to sell.”
While Grover does not think buyers need to involve an investment banker when purchasing a small company, the opposite is true for sellers.
“When selling your company — you are only going to do it once — you should hire a good investment banker,” he said. “Also, I would make sure the lawyer I choose is experienced with distribution deals. Creating competition is what bankers do. You get more money if he or she can create competition.”
For those people selling to a financial buyer, the option of investing a percentage of the proceeds in the company could turn out to be a lucrative proposition in the long run.
“You are selling the whole company, but maybe you invest 20 percent of the proceeds into the company going forward, becoming a partner with the private equity fund making the purchase,” Grover said. “You may make more money on the second sale than you did on the first.”
Grover listed some things distributorship companies can begin to put in place immediately to prepare for the possibility of becoming a buyer or seller. They include:
■ Advisory board;
■ Strategic planning;
■ Acquisition filter;
■ Acquisition process;
■ Point person for acquisitions;
■ Deal attorney;
■ CPA with deal experience;
■ Investment banker with distributor deal experience;
■ Exit strategy; and,
■ Read a good book about distribution.
Contact: Brent Grover, Evergreen Consulting, LLC, 30100 Chagrin Blvd., Ste. 111, Cleveland, OH 44124.
Phone: 216-360-4600, ext. 101.
ISSA And BSCAI Look At Opportunities In China
"ISSA is partnering with the Building Service Contractors Association International (BSCAI) to strengthen ties with the Chinese cleaning industry," said ISSA Executive Director John Barrett.
Barrett and BSCAI President Paul Greenland, CBSE, recently met with several organizations in China to, “explore opportunities and forge stronger partnerships,” according to a press release.
Discussions were held with executives of the Beijing Cleaning Service Association and Modern Property Management magazine. Barrett was also the keynote speaker at the China Clean Forum 2015, held in November.
“ISSA is proud of its long history of doing business in China,” said Barrett. “With over 100 Chinese cleaning companies and manufacturers as members, ISSA is committed to the Value of Clean, and in particular, to distinguishing those member companies that represent the very best of what China has to offer.”
Greenland said, ”BSCAI is happy to have the opportunity to expand its international reach and forge new partnerships in an effort to offer world-class education, best practices, and a community of building service contractors that Chinese cleaning companies can turn to as an invaluable resource.”
ISSA has a membership that includes more than 7,000 distributor, manufacturer, manufacturer representative, building service contractor, in-house service provider, and associated service members.
The association is headquartered in Northbrook, IL, USA, with regional offices in Amsterdam, Netherlands; Leicester, United Kingdom; Mexico City, Mexico; and Shanghai.
ISSA Executive Director John Barrett
For more than 50 years, BSCAI has been the Business Resource for Contractors™. BSCAI represents a worldwide network of more than 1,000 member companies from across the United States and throughout the world that provide cleaning, facility maintenance, security, landscaping, and other related services to building owners and managers.
The association provides contractor-specific educational programs, individual certifications, publications, a members-only purchasing program, seminars, industry data and research, and networking opportunities, all developed specifically for leaders in the building service industry.