A natural question that arises when selling a pest control business is one that requires careful consideration: “Should I tell my employees I’m selling the company?”
That question was addressed by Rand Hollon, of Preferred Business Brokers, at PCT’s Mergers & Acquisitions Virtual Conference in August 2012. Hollon, a veteran of the pest control industry himself, had several anecdotes that illustrate the importance of confidentiality in the acquisition process — deals that have been unraveled by news of the planned acquisition getting out through loose channels of miscommunication.
As well, Hollon advised that detailed, deliberate integration of the two companies — the culture, the paperwork, and everything in between — is essential to making a good deal realize its full potential.
“Sometimes buyers and sellers alike will backburner these issues in the face of real-deal valuation concerns, but these issues should always receive top-of-mind consideration,” he said.
Avoid ‘Broken Telephone.’ Hollon warned of the perils of misinformation by likening news of a planned acquisition spreading like the children’s game “broken telephone,” in which a classroom teacher whispers a phrase into the first child’s ear — each child whispers this message to his classmates, and by the end, the message is a muddled mess of how it began.
“The old game of broken telephone serves proof-positive that when rumors and gossip spread, so do the inaccuracies,” he said. “The message suffers. And in acquisitions, the message is the deal. Confidentiality and information management is a very significant part of this deal communication process. In the best case scenario, a deal can survive a breach of confidentiality, but in a worst-case scenario, the deal can tank.” Employees and their spouses get worried about job security when there are hints of management change, and it can be easy for those whispers to spread through the ranks.
As an example of the importance of maintaining confidentiality as a deal goes through, Hollon recalled a deal he had been involved with several years ago. His client, the seller of the business in question, had called Hollon in a frantic state. “Four of his senior employees, leaders of his 20-year-old company, had just tendered their resignations,” Hollon said.
All the other parts of the deal had gone smoothly, Hollon said. The company had met with no less than five prospective buyers, an offer had been accepted, the due diligence had been done, all of which had taken place without the knowledge of anyone who was not closely related to the deal, Hollon said. “Seventy-two hours prior to close, the business suffers what many would consider to be a drastic material change — a big whopping chunk of goodwill just walked out of my client’s office in the form of four ex-employees.”
Importance of Goodwill. That goodwill is of utmost importance to a deal being successful, Hollon said. It carries over through all parts of the deal.
As it turned out, in Hollon’s example, the source of the leaked news was his client’s wife. “It was amazing how fast the news traveled,” he said. “When confidentiality is compromised, you’ll find out quick just how small the world really is.”
The deal in Hollon’s example proceeded to close, but not without collateral damage — deal terms had to be reworked and revised to account for this new risk.
“When you think about it, [goodwill] is just about the biggest asset a pest control company has to sell — that’s what all buyers are looking to buy. It’s the major asset that changes hands when a company is sold, the one thing that makes customers want to continue service, and when leveraged, it’s what propels real transformative value in any acquisition,” Hollon said. Acquirers aren’t looking to purchase the physical equipment being offered by the seller — a dollar total that typically pales in comparison to a sales figure — but it’s goodwill of the acquired company’s customers to accept and pay for the services provided by that firm, he said. The tangible assets of an average $2 million business may not total more than $350,000 in “stuff,” Hollon said — the rest of that value is in the “goodwill.”
“I’ve been hip-deep in this industry since childhood,” he said. “If there’s one thing I’ve learned about this industry, it’s that we’re in the people business. In acquisitions, it’s the people that deliver the goodwill value of a business.”
Integration. In order to keep goodwill maintained, a successful integration process is necessary between the buyer and the seller. Hollon said this is another area that acquirers can overlook in the hustle and bustle of getting a deal done.
“As with company valuation, when it comes to integration, there just isn’t a one-size-fits-all approach,” Hollon said. After negotiations, interviews, valuation, financial considerations and more, it’s easy for the acquiring party to feel burned out and to “take their foot off the gas.” A messy integration example Hollon used stemmed from an acquisition that had the nuts and bolts of a good deal, but took a turn after closing. When it came time for the seller’s employees to file employment paperwork with the acquirer as part of the transition process, it turned out the administrator who handled new employee intake was on vacation. The employees were told to come back in a week. “Technically, at that point, all 14 of the seller’s employees had no jobs for at least a week,” Hollon said. “They had bills, and spouses, and many of those employees went home to wives and husbands who took a dim view of the ‘come by the office next week to fill out an application’ scenario.” Only three of the 14 employees showed up the following Monday.
A smooth integration process is essential to a good deal. “Proper integration management can’t turn a bad deal into a good deal, but time and again, history has proven that improper integration management can turn a good deal into a bad one,” Hollon said. Proper integration management can lead to unhappy customers, and unhappy customers result in a loss of business. Hollon outlined six principles he said are essential to a successful integration:
1. Create an Integration Leadership Team. Hollon said the acquiring company should set up a special team of employees responsible for ensuring a smooth integration process. The size of the team doesn’t matter — “whatever it takes to get the job done,” he said. The team is responsible for determining the roles and responsibilities for all after the deal closes — but be mindful of team burnout. “They have to balance their normal day to day activities with these new integration responsibilities.”
2. Identify Your Integration Strategy. An integration strategy will not be, as mentioned earlier, a “one-size-fits-all” approach, but it is beneficial to design a strategy prior to the deal closing, Hollon said. “You’re not buying the business for what it’s doing now, you’re buying it for what you’re going to do with it,” he said. “You need to communicate your strategic intent to everybody on the team.”
3. Learn the Business. Another key to successful integration is the buyer’s understanding of the company he is acquiring. Understand how its employees worked before the acquisition. The ability of the acquirer to speak a common language with the seller’s business will go a long way, Hollon said.
4. Establish Integration Priorities. Hollon said a good deal is not necessarily about how compatible the two companies involved are, but how the companies deal with incompatibilities. “You need to create a platform for integration,” he said. “Technical training, cultural alignment. You need to be ready to do those things.”
5. Create Supporting Alliances. Members of the aforementioned integration team should use their knowledge of the acquired business to figure out who has influence, Hollon said. “We all know that in the pest control business, everything doesn’t always follow the organizational chart,” he said. “There’s always going to be ‘that guy,’ that people informally look to for direction.” It is important to be mindful of these people and relationships, Hollon said.
6. Be Gradual and Deliberate. While it’s in some people’s nature to make changes quickly, Hollon said that in doing so it’s easy to lose focus on the creation of value. “Go after synergies selectively and deliberately,” he said. “Integrate the acquired business in phases and consider options all the time.”
Hollon said that buyers purchase a business to “move the needle.” They’re doing so to boost their own company’s performance, to make it more profitable. Depending on the acquisition, there can be many things that will benefit the acquirer, but it also means removing one of your competitors.
Confidentiality helps the integration process, Hollon said, and if you nail the integration, real value will follow. “Creation of real value in any acquisition can be a long-term phenomenon with long-term benefits,” he said. “You can make that happen.”
The author is associate editor of PCT magazine. He can be reached at email@example.com.