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.
In light of the recent economic woes for many construction-oriented companies the going has been rough, leading some to put their businesses up for sale. This could be a great time to buy another company.
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 businesses if they have no children or interested employees to carry the company forward.
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.
Let’s now look at the pros and 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 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.”
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.
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.
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.
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.
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.
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.
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 businesses might be willing to carry a financial note until you can arrange for third-party financing. Lots of options to explore.
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!
Waste that provides more services, effort or energy either before it is needed or in addition to what is needed.
Examples of overproduction could be putting extra laborers on a project, assigning extra tools or equipment that the budget doesn’t allow, or purchasing extra material because it is “better be safe than sorry!”
I’ve witnessed this many times with contractors who allow their crew leaders to determine how many men they need on a crew. For the foreman who always had a six-man crew, this same foreman will have a difficult time taking less crew members when sent to a job that needs only four workers.
Overproduction is also a tempting treat for the contractor who realizes that completing the project on time will be difficult to do. The solution used too many times is simply just putting more workers on the project to finish. Sadly, had the project had better planning, preparation and a lean approach to begin with the project would not have needed an overproduction solution.
Overproduction takes place in the office as well. In the pulling together of an estimate the number of hands that “touch” the estimate can be mind-boggling. The larger the contractor, the more hands are likely to touch the estimate if there is no sure process in place.
Even something as simple as the contractor calling his or her office asking for some information, the office administrative staff can all drop what they are doing to get the boss what they need. And if the request is viewed as important enough, all available leaders in the office during this call can stop what they are working on to contribute to the overproduction time and costs.
A real-life example: I was working with a contractor who called from his truck about making sure lunch was delivered to his office by the time he arrived. When I informed him that five individuals were all engaged with carrying out his request, he finally admitted that his leadership style contributed to such a wasteful response.
So, what are some solutions to prevent overproduction?
Make all employee roles and responsibilities clear and specific — Some overproduction efforts are not intended to be wasteful; in fact, many employees are very loyal and committed to help but tend to forget their roles and responsibilities.
Develop and maintain an inventory management system for your yard, shop, stock room and trucks — When there is no inventory system in place there is a tendency to pull more items from “stock” or storage because “I don’t want to look for it later.”
Install a “one check” process to clarify questions and ensure that estimates and other documents have one final look — Be careful but designate one person who has final authority to change the estimates before they leave…not three or more people.
Be honest, look at current process and simply ask the question, “Can we do this with less people, time, and steps?” —Come on contractors, there can be no “sacred elephants” when it comes to making your company better and lean.
Lead all leaders to reconsider how many peers need the same e-mail message before sending —Biggest waste of time for most people is the amount of company e-mails “cc’d” to everyone just to keep people in the loop.
Create improvement plans when eliminating wastes…don’t just delete — People will return to their old habits if you do not insert a better process and then hold people accountable to comply.
A contractor or construction leader who experiences overproduction as the norm is simply not organized. Whether you are leading your company, leading a project or leading a crew, look to eliminate “over-” anything that you do or cause others to do. Valuable labor is wasted as a result of poor planning, organizing or communicating.