[Mergers & Acquisitions] Why Buyers Buy

Supplement - Mergers & Acquisitions Supplement

When, and if, the time comes to sell, understanding the marketplace for pest control businesses and those who populate it will help identify the best buyer that places the highest value on your business.

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January 27, 2015
Laura Straub

“Why do buyers buy?” asked Rand Hollon, a licensed broker at Preferred Business Brokers who works exclusively in the pest control market. “It’s certainly a question worth asking, unfortunately for many it’s a question only asked when a business owner is really ready to sell their business.”

According to Hollon, questions a business owner asks when establishing the qualities that make their business appealing to buyers resemble the same type questions they deal with while making everyday consumer-centric marketing and advertising decisions.

“When it comes to their customers, PCOs have always posed questions like why do they use pest control services, why did they choose their company, why do they continue to use this company. Answers to these questions drive PCOs to make changes and tweaks to their business operation to increase overall customer appeal. The same can be said for creating buyer appeal for your business,” said Hollon.
 

Be Appealing to Buyers.

“It’s really been part of a familiar gig that you’ve come to know when you’re the guy or girl that wears the ‘owner/business manager’ hat. But you also wear another hat and that’s the ‘owner/investor’ hat,” he said. “As the owner of a private pest business you really have two roles. One role you’re the business manager running the business and in the other role you must remove your ‘business manager’ hat and put on your ‘investor hat.’ As an owner/investor, it’s important to think about your business, not so much as a place you go to work every day, but as an asset that has value — an asset that you’re likely to sell at some point in the future.”

Anyone wearing an owner hat is likely to have a lot of personal wealth tied up in their business. That makes them the business’ largest value advocate. And when the time comes, it is that value advocate’s responsibility to not just find a buyer, but to create appeal within the marketplace of buyers to find the best buyer for the firm.

“When I say the best buyer, I mean the buyer that is going to recognize the highest and best use of your business as an asset and pay you for it,” said Hollon.
 

Meet Your Buyers.

To help create marketplace appeal for your business, it’s important to look at the characteristics of the buyer. Buyers can fall into a slew of classifications or hybrids, however, Hollon narrowed them down to three main categories.

He said the first group, individual buyers, often possess a strong desire, urgency, real world expectations and the all-important financial means and decision-making ability to close a deal quickly. Their motivators for buying a business are often aligned with the same ones a business owner had when he or she launched their own company.

“Many of these individuals are seasoned pest industry veterans that oftentimes have prior management experience or at least exposure to other entrepreneurial ventures,” he said.

According to Hollon, the success of a sale with an individual buyer comes down to decisive decision-making, funding and reasonable expectations regarding things like salary, debt and future business growth.

Hollon also described a group of buyers that he calls strategic buyers. “Strategic buyers come in all shapes and sizes, even though their expressed reasons for making an acquisition may differ, similarities exist,” he said.

Common motivation among strategic buyers comes down to moving the needle for their business. Hollon said their main goal is to increase the scope and scale of their business, all while growing the top line and improving the bottom line.

Specific motivators for a strategic purchase range from increasing route density in existing markets; entering a new geographic market; acquiring additional pest control service offerings; or capturing a competitor’s wealth of “village knowledge” by bringing on employee talent.

Hollon’s last buyer category, financial buyers, can sometimes seem a little less deliberate and calculated than strategic buyers. They are often private partnerships and corporations that are decisive, fast-paced, serial buyers and builders of businesses.

“Generally speaking, financial buyers come from outside the pest industry to invest in young companies that are really primed for expansion,” he said. They are also interested in mature companies that they can restructure with new management, or companies with great existing management that simply need support, said Hollon.

“They can sell the new larger business or enjoy the profits of their creation long term,” he said. Although it is important to investigate which of these buyers would be best suited for the future success of your business, it is also important to recognize one thing that motivates them all equally….cash flow.
 

Cash Flow is King.

“One common thing all buyers seek is the one thing you hopefully enjoy and that’s cash flow,” said Hollon. “From the guy that’s going to pull the trigger and go it on his own, to the competitor across town, to the venture capitalist who may be in another area, they’re all buyers using their money to buy shareholder value for themselves, and nothing creates value like cash flow.”

So how do you communicate cash flow to a potential buyer? Hollon suggests collecting and examining all of the business’ financial statements while thinking about what the business did to create the existing revenue and existing cash flow. “Buyers need to see this clear financial picture of what their world is going to look like post close,” said Hollon.

Buyers will also take things that aren’t always found on tax returns into consideration such as owner comp, excess family or employee compensation and personal expense items. Non-cash mechanisms such as depreciation and amortization as well as one-time expense items may also be considered.
 

Projecting the Future.

“The buyer is really buying the future and not the past,” said Hollon. “Some buyers seek the future by looking at the past.” He said past company performance will drive questions and start conversations about profits, contracts, customers and other items to help determine what the business will look like in the future.

A stable past also suggests a certain level of predictability, which is another driving factor for buyers, said Hollon.

“Predictability is a good thing. Predictability is comfort food to a buyer,” he said. Things like contracted recurring revenue acts as a guarantee that the money will keep flowing even after the deal is closed. According to Hollon, other sources of cash flow such as one-time or odd-job services, overall service mix, fleet and equipment condition, large customers and employee tenure are often viewed as either “gristle or gravy” in a transaction.

“The deal is going to be risk-adjusted based on some of these other items and a big one is culture,” he said. “Culture is a leadership thing, it’s created over a company’s lifetime. Cultural differences between a buyer and a seller are a deal killer.”

Culture is more than a mission statement. Cultural differences between a buyer and seller can appear in a company’s reputation, employee relationships and customer relationships.

“Culture is ‘must-see TV’ when you’re sizing up an acquisition because sometimes it’s just plain difficult for buyers and sellers of all types to work cooperatively through an integration,” he said. “Risk represents an element of surprise that no one wants, so the big key is to eliminate surprises or at least reduce the possibility of surprises.”

Nobody likes surprises, especially buyers, so sellers need to work with their representatives and selling team to resolve any issues that might be unearthed in the selling process, whether they be accounting, legal or even environmental.

Finally, once a business owner has all of his or her ducks in a row, they need to develop an effective way to communicate any future growth opportunities to the buyer, said Hollon.

“When you take your present cash flow and project out several years of growth you will have passed a very crucial test that will turn reasonable expectation into deal-creating reality,” he said.
 

Position Yourself for Success.

“There are business owners out there that have built great (or at least good) businesses that have provided well for their families, employees and have grown themselves into a good living and that’s not a bad place to be,” said Hollon. “It’s certainly not a bad place to be, but when it comes to your business’ value as an asset why not be in a better place?”

Although the possibility of selling may be just a far-off blip on the radar, it is important for business owners to have a working understanding of the marketplace and the buyers that populate it, so when the time to sell does come, the business will be handed off to the buyer that places the highest value on the business.


 

The author is a Cleveland-based freelancer.