In the big picture of acquisitions, the current economic time 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!
Learn more in today’s Learning While Listening podcast, “Expanding Your Company Through an Acquisition.”
[TRANSCRIPT]
Expanding Your Company Through an Acquisition
Eight Questions You Better Ask!
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, may 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 market place is not new to contractors, suppliers, and equipment dealers. It’s just that with today’s two primary “indicators” the opportunity may 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
No doubt, getting more of the market is every contractor’s goal. Adding a broader presence of the same type of work performed may be all that you need to do to shore up more work. Therefore, purchasing another “like” company could be your answer.
Geographical Expansion
Wanting to take your company’s strengths to other towns and cities might also 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 may bear you a great return. Thus, finding another company who 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)
- Have 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)
- May be purchased at a reduced price today
- Has an existing workforce and leaders who already know their workers
- Can adapt to our marketing and business development strategies
- May 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 may 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 may have:
- Corporate debt that you may 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” their 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? Hey, this is what is needed however when considering making an acquisition. You need some honest and tough reality checks as to “what could happen.”
Now, let’s consider a few additional things that could strengthen your decision to make an acquisition, or not.
- Do you have a strong and positive reputation in your market area and that of the possible seller? Then you may not need to be concerned with how much or little the seller assists your efforts to welcome the new clients.
- Do you have strong field leaders and enough laborers that could help mix in with the seller’s employees? If you do, then losing a few of the seller’s employees, even key employees may 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 may be another reason why the seller might lower the purchase price just to make enough money to pay off their 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 past work, their workers, etc.? 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 particularly specialty service 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 will contractually commit to NOT compete with you in any form or fashion? Non-competes contracts are difficult to enforce but you will need to make this part of the purchase or the deal is off. This may not be an issue if the seller has no successor. However, if the seller has children that may want to go into the same business and use “old dad or mom” as salesman or work to move old customers to the kid’s new start-up, you 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 may 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.
- 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” lawyer and a trusted financial expert who deals with acquisitions.
In the big picture of acquisitions I think that this current economic time 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!
Brad Humphrey, A Contractor’s Best Friend
