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Lessons Learned: Be prepared if you’re a buyer

Although most readers of SP&T News are likely to end up being sellers rather than buyers, it may still be useful to both parties to identify some key tips for buyers.

Most of these tips come from experience in my own practice with Harding Security and some from working for 12 years with two of the larger Canadian alarm companies before that.

If you know what you are doing and do it well, buying another business is a great way to grow your business quickly. Growing organically can not only take a long time but, depending on the industry, is becoming more costly. “Buying” rather than “building” today is particularly attractive in the security alarm business because the cost to create new accounts organically has sky-rocketed. As a result there are very few small alarm dealers I talk to today who are growing their account base much organically.

But buying any business is always risky. Not only does it absorb a lot of capital that might have been deployed in another way but you cannot be assured of getting the returns you banked on. In fact, the stats in the M&A world suggest that at least 50 per cent of all deals do not return what they were supposed to.

So how do buyers go about making sure they are on the right side of that 50 per cent?

First, know what you are looking to buy and how the acquisition fits into your overall strategic plan. Surprisingly, many buyers don’t quantify what they expect to get from a deal and have not thought through what doing the particular deal will do to the original business. Will the business fit your existing company culture? How long will it take to integrate the new business?

Then, assuming that the deal makes sense strategically, have you calculated how much you should be prepared to spend on the deal? My father, who ran a successful national carpet manufacturer and distributor, always told me the golden rule is “never pay too much” for an acquisition. As a buyer, it pays to have an advisor to help you assess the acquisition target and determine the maximum price you should pay. But make sure those advisors are being paid to complete deals. My guess these days is that most buyers overpay when they buy. Be prepared to walk away.

Another point when buying anything today is to calculate what the purchase will do to your overall working capital needs and make sure you get the seller to turn over sufficient working capital as part of the deal. Even buying alarm accounts, which can be folded into your existing alarm account base, can draw on future working capital needs.

It goes without saying that every buyer needs a good mergers and acquisitions lawyer to draft the purchase and sale agreement to protect their interests down the road.

Most of the really successful deals that I have been part of over the last 12 years have seen the original owner stick around to provide good transition advice for at least three to six months after. Even a simple alarm accounts usually involves combing two different approaches to managing an account base.

After making sure that the deal is a good fit, a successful integration of the target company is next most critical step. Jack Welch, of GE fame, used to say that the integration process should start while you are doing your due diligence on the company. Sometimes it is better to completely fold the company into the mothership, including doing away with the target company name and market profile. Sometimes it is better to keep the target going as is separately for a few years after.

Even integrating something as simple as another alarm account base can be messed up badly because the buyer’s organization, for example, bills in different rotations, breaks out their monthly invoices differently, or has different practices about cancellations.

Some other tips I have picked up along the way:

• Most of the time, it pays to be prepared to spend a little more for a very good company.
• As a buyer, don’t focus too much attention on trying to pick the exact right time to buy. Good companies come on the market all the time, in good times and bad.
• What I read and hear is that, as a buyer, you should expect that the performance on both the mother company and the acquisition target to drop a little immediately after a deal is done. Plan for that.
• As a buyer, if you buy assets, most of the time you can write most of your purchase off against income over time. This should mean you can pay more than if you are buying shares.
• It pays to develop a small team inside your organization that can handle acquisitions — someone from finance, operations and even IT. This does not have to be their full time job, and establish accountability with those team members.
• Finally, like everything else in life, you should get better at buying the more you do it.

Buying can be a great way to grow your business. There’s no question about that. But, as with all things in business, you need to know what you are doing.

Victor Harding is the principal of Harding Security Services (victor@hardingsecurity.ca).