The Contractor's Best Friend / 12-21-2011 / Expanding your Company Through Acquisition

This topic is significant for two important indicators.    Indicator #1: In light of the recent economic woes for many construction-oriented companies the going has been rough, leading some to put their business up for sale. This could be a great time to buy another company...


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This topic is significant for two important indicators. 

 

Indicator #1: In light of the recent economic woes for many construction-oriented companies the going has been rough, leading some to put their business up for sale. This could be a great time to buy another company. 

 

Indicator #2: We’re getting older in this country. With a greater number of soon-to-retire “Baby Boomers” fast approaching, many owners, in this age group, might well be looking to sell their business if they have no children or interested employees to carry the company forward. Thus, we have an interesting chapter in the construction industry approaching.

 

Buying other companies to expand one’s marketplace is not new to contractors, suppliers, or equipment dealers. It’s just that with today’s two primary “indicators” the opportunity might be more easily accessed. But before we jump to too many assumptions, let’s first explore why you might want to consider buying another business.

 

Market Dominance – There’s no doubt that getting more of the market is every contractor’s goal.  Adding a broader presence of the same type of work performed might be all you need to do to shore up more work. So purchasing another “like” company could be your answer.

 

Geographical Expansion -- Wanting to take your company’s strengths to other towns and cities might be better attained by buying a similar company who already has a presence in the new town. They might also already have the needed equipment and “boots on the ground” to support fulfilling the work.

 

New Service or Product Application -- Wanting to expand into a service or the use of a specialized product might bring you a great return.  Thus, finding another company that provides such a service or product could easily add to your company’s resume of total services and products supporting the market.

 

Now that we have briefly highlighted a few reasons why you might want to expand, let’s now look at the Pros & Cons associated with making such a monumental decision.

 

The Pros of Acquisition

The company you are considering to purchase:

­          Already exists; you don’t have to draw up new company plans

­          Has a customer base (loyal customers are hard to buy)

­          Has relationships established with suppliers, dealers, associations etc.

­          Has vehicles, equipment, tools, and supplies

­          Has an owner who is motivated to exit (especially due to economy or lack of successors)

­          Might be purchased at a reduced price in today’s economy

­          Has an existing workforce and leaders who already know their workers

­          Can adapt to your marketing and business development strategies

­          Might provide us with some new trade “secrets” that we didn’t know before

 

As you can see already, there are a lot of good reasons that might work in your favor should you determine to buy another contractor, supplier, or dealer.  Just like purchasing a home in today’s market, you might be able to get more for your investment than a few years ago.  However, while there appear to be several very compelling reasons to consider expanding your company through making an acquisition, you must also consider the Cons that could be involved.

 

The Cons of Acquisition

The company you are considering to purchase might have:

- Corporate debt that you might have to support financially

- Equipment that is “shot” and needs to be replaced

- Key employees who will not stay with the new ownership

- Customers who were loyal to the present owner but not to new owners

- A company culture that is vastly different from yours

- An owner who will not work well with you in the transition

- An owner who will think you are “stealing” his company and refuse to provide all the company     “secrets”

 

The Cons listed above tend to put a wet blanket over the benefits of the Pros, right? But, hey, this is what’s needed when considering making an acquisition. You need some honest and tough reality checks as to “what could happen.” 

 

Now, that we’ve looked at some Pros & Cons, here are eight questions you had better ask yourself as you move into this process. The answers could strengthen your decision to make an acquisition -- or not.

 

  1. Do you have a strong and positive reputation in your market area and in the market area of the possible seller? If so you might not need to be concerned with how much or little the seller assists your efforts to welcome “new” clients.
  2. Do you have strong field leaders and enough laborers that you could mix in to help with the seller’s employees?  If you do, then losing a few of the seller’s employees -- even key employees -- might not be a concern.
  3. Can you keep the seller’s debt from becoming yours? If you can then the seller’s debt is his or her problem, not yours. In fact, it might be another reason why the seller might lower the purchase price just to make enough money to pay off her notes.
  4. Do you have a strategic plan developed that includes a marketing plan? Do you have a work plan on how to incorporate the seller’s company’s past work, its workers etc. into your operation?  If you do, then adding more potential firepower or more customers to your already existing customer base might make sense.
  5. Does the seller possess a particular specialty service and/or product that would make a significant impact to your existing business and that would cost too much to develop on your own? If YES then maybe this is a good company to consider buying.
  6. Will the seller agree to a strict buy-out contract and contractually commit to NOT compete with you in any form or fashion? Non-compete contracts are difficult to enforce but you will need to make this part of the purchase or the deal is off. This might not be an issue if the seller has no successor.  However, if the seller has children that might want to go into the same business and use “old dad or mom” as salesperson or to work to move former customers to the kid’s new start-up, you’d better be careful.
  7. Do you have the cash flow and financial strength to make the purchase and then “feed” it for a period of time?  “Cash is king” with the banks so you might work hard to find available financing without putting down a lot of money. Then, you’ll need to show the cash flow to pay your bills of the acquired company. However, some owners of business might be willing to carry a financial note until you can arrange for third-party financing. Lots of options to explore.
  8. Do you have good legal and financial support? You’ll need a good attorney who specializes in acquisitions. If you move forward in your pursuit of buying another company DO NOT try to construct all the needed documents. Buying another business, even from a good friend, can lead to some horrific “post purchase” experiences. Secure a good M&A (mergers & acquisitions) lawyer and a trusted financial expert who deals with acquisitions.

 

This current economic climate could be a great time to look at enlarging your market dominance through an acquisition. If you are confident about your firm’s strengths and have addressed the eight questions above, buying another construction company may make sense. 

 

As we all know the only two things for sure in life are taxes and death. (We have Ben Franklin to thank for that quip.) We can see what our politicians are trying to do about our taxes but more importantly, don’t allow all of this deciding to acquire or not lead to an early death! 

 

Stay in the hunt!

 

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