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Mergers & Acquisitions Supplement - Mergers & Acquisitions Supplement

Acquisition opportunities abound for small- and mid-size pest control companies that have vision, tools, talent and targets.

January 13, 2016
Jordan Fox
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When Rand Hollon talks about pest control industry mergers and acquisitions, PCOs stop and listen — carefully. That’s because for almost 30 years, his company, Preferred Business Brokers, has enjoyed an impressive reputation throughout the pest control industry for M&A expertise. Hollon advises pest controllers on M&A details, acquisition process leadership, exit strategies and company sales processes. He imparted some of that expertise to participants of PCT’s M&A Virtual Conference in 2015.

Hollon said great acquirers, regardless of company size, can be found throughout the industry. Size doesn’t really matter.

SMALLER DEALS CAN BE DONE. “Let’s dispense with the idea that only big companies can make the best deals. That’s not true,” Hollon said. “There are about 1,000 pest control companies around the country with annual revenues over $1 million. There are about 20,000 companies with annual revenues less than $1 million. So it follows that there are more ‘local’ or smaller deals to be done. And they get done.”

So what can a small- to mid-sized company do to be a more effective player in their market when it comes to acquisitions? What can you do to secure your place in your local market? What do successful acquirers share regardless of company size?

“After almost 30 years we’ve dealt with a myriad of different buyer organizations of every size,” he said. “And, with all the differences, there are four main ideals that successful acquirers have in common: vision, tools, talent and targets.”

VISION. When it comes to successful acquirers, Hollon says the “vision thing” isn’t just garden-variety leadership talk, but a real commitment to growth. “It’s in the successful acquirers’ DNA. They want to be part of, and create something, bigger than themselves. Without a vision for growth it’s difficult to be committed to growing your business. And without true commitment there’s hesitancy to both initiate and create the growth needed to secure your place in the market, regardless of size,” he said.

“It’s not for everyone and that’s OK. Some businesses are ‘lifestyle’ businesses where the primary business aim, intentionally or unintentionally, is to provide for a particular level of income that is a foundation for a particular lifestyle.” He went on to say that, in conventional terms, “lifestyle” businesses have a limited need for the transformative, needle-moving growth acquisitions bring to the table.

Successful acquirers have the leadership and an aligned, company-wide vision for growth. “These folks know where they want to be and understand that acquiring competing businesses is one of the things they’re gonna do to get there,” Hollon said.

TOOLS. And to get there they’ll need tools. In the successful acquirers’ tool shed, cash and access to capital are necessities.

“Successful acquirers know acquisition opportunities can appear when you least expect them. It’s important to be prepared to take advantage of those opportunities when they arise. If you don’t, someone else will,” he cautioned.

Hollon used the term “war chest” as a metaphor for the reserve of funds and/or access to capital set aside to take advantage of the unexpected acquisition opportunity.

Seeing small- to mid-sized companies really secure their position within their local markets through acquisitions is incredibly satisfying.” — Rand Hollon

He pointed out some key differences between large and smaller acquirers. “By virtue of size, assets, financial documentation and business history, larger businesses have less perceived risk and can often secure a larger variety of financing options at a lower cost.”

In creating a “war chest,” Hollon said small- to mid-sized acquirers need to be aware that the financial crisis experienced in the United States created big changes when it comes to a bank’s lending criteria for smaller businesses, not the least of which is eligible collateral.

“For many small- to mid-sized businesses, 100 percent of the profits find their way only to the back pockets of the business owner. To fund a war chest for acquisitions you’ll have to reinvest at least some of the company’s profits back into the business.

“Additionally, the small- to mid-sized acquirer must do homework and understand all relevant acquisition funding mechanisms. These mechanisms can range from seller-financing, borrowing from equity positions, retirement savings or even loans from friends, relatives or associates. There are pros and cons to each and you’ll need help in making the right decisions regarding these moving parts that all work to bring about the transformative growth acquisition brings to a business.”

TEAM. And that’s where the right team comes in, he said. “Successful acquirers know that completing a transaction requires not just a team, but a skilled, experienced team of advisors who have pest control industry deal experience.

“Successfully creating an acquisition involves a lot of moving parts, many of them specific to the individual transaction…let alone the personalities, needs, wants and motivations of the buyer and seller.”

Hollon explained that the local acquirer is busy running a business. “It’s tough to buy a business and operate a business at the same time...you’ve got enough cake on your plate.

“That’s what makes it necessary for the local acquirer to create a team, specific to his business, to be there as specialists at the impact areas of the acquisition.”

These impact areas include:

Financial. Although accounting is largely black and white, the world of financial management when it comes to local pest control businesses isn’t. Ferreting out actual financial data from the small, closely held pest control business can sometimes be a challenge at best. It’s certainly a territory where accounting can move from a science to somewhat of an art form where having a real-world advisor can be a big help, Hollon said.

Legal. Legal documents need to be correct. Lawyers aren’t dealmakers; they’re the ones who make sure buyers and sellers don’t agree to something that could be inadvertently breached, or are illegal or are maybe even unenforceable in a court of law. Even deals that seem simple and “vanilla” at the onset can take a complex turn midstream — an attorney worth his salt can craft documents properly that recognize and provide for reasonable protections and deal execution.

Broker/Advisor. It’s necessary for a team member to have a universal understanding of the deal-making process. “The most important characteristic of any advisor is his specialty deal experience,” Hollon says. “Experience brings with it a level of confidence and the ability to recognize the good ideas and bad ones from each side of the fence. Local business owners take their business personally. And if you’re looking to buy a local business, you can bet the seller takes his business personally too. That fact alone can create a sometimes frustrating and contentious atmosphere where someone with experience can keep things professional, on-track and reasonable.”

Hollon explained: “Even if you’re not prepared to buy (or sell for that matter) this minute, it’s wise to reach out now to cultivate relationships and make discovery as to who will work best on your team. I’ve built a reputation on advising my clients correctly — so make no mistake about it, a good team helps you avoid bad risks.”

Targets. So how does the local, small- to mid-sized acquirer create actionable targets within their local market?

Hollon said the challenge of competing against large, serial acquirers for acquisition opportunities can seem daunting. “In today’s market, there’s a lot of noise and it’s tough to break through all of the ‘We’re different, we’ve got money, we want to buy your business’ messages bombarding the marketplace,” he said. However, the local acquirer has three competitive advantages when it comes to creating an acquisition target list:

  • He knows his neighborhood. He probably already knows his targets because he’s been competing against them in his own local market. His “local knowledge” gives him a slightly “better-than-market” idea as to whether or not a target would be a good acquisition fit.
  • The neighborhood knows the local acquirer. The local acquirer is probably less than one or two degrees of separation away from both the local target’s employees and customers. This gives the local acquirer a value edge when it comes to transitioning the acquired business. Hence, he may realize more acquisition value faster.
  • The local business would, for the most part, rather sell to another local business. All other deal items being equal, the small- to mid-sized business owner would rather sell to a known quantity — to someone like him or herself.

Hollon went on to say that, “Seeing small- to mid-sized companies really secure their position within their local markets through acquisitions is incredibly satisfying. Combined with an effective team, the right tools, and a clear, aligned company vision, transformative needle-moving growth can become a reality in no time. And it does!”