M&A Advice and Counsel
FOR INQUISITIVE ACQUISITIVES
In his book, entitled, “The Acquisitive Distributor: Acquisitions as a Growth Strategy for Distributors” author Brent Grover presents a wealth of information of interest to anyone who is contemplating either the sale of, or purchase of, a wholesale distribution company.
Brent is a featured speaker at the “Network '06” ASA convention program. His presentation, “Mergers & Acquisitions: What Everyone Should Know,” takes place on Wednesday, September 27, 3:30-5:00pm.
The “Acquisitive Distributor” book is published by NAW's Distribution Research & Education Foundation (DREF), and can be ordered by calling Vicky Walsh at 202-872-0885 or on the web at www.naw.org/acquisition/. ASA members are entitled to a discount on all NAW DREF publications.
Brent Grover is an NAW DREF Fellow, an author and consultant, calling upon his 20+ years' experience in a high-profit distribution business. For more information on his practice, visit www.evergreen-consulting.com. Following is the book's excerpted Introduction.
“The Acquisitive Distributor” Introduction Printed with permission of NAW.
I was conflicted as I pulled my car out of the driveway on the sunny October morning our deal was supposed to close. I didn't know if I should turn right, to the lawyers' office downtown, or left, toward the Metropark. After months of negotiating, analyzing, and agonizing, did I really want to sell the family distribution business? Or would it be best to just take a long drive and enjoy the colorful Ohio fall foliage?
The proposal for the sale of our distribution business had literally washed over the transom. The deal process had started with a phone call nearly a year prior: a late afternoon drink, a breakfast, and then a meeting at the accountants' office one Saturday a few weeks later. Slowly at first, then more forcefully, we were asked to consider letting the buyer use our 85-year-old business as the platform for a new, national supplier destined to become a major player in our line of trade.
Like the shareholders of so many owner-managed distribution companies, we were accustomed to eating well. Our business was strong, with growing sales and high profit levels. There were no signs of an economic reversal on the horizon in early 1999.
However, while we were eating well, we were no longer sleeping quite as well as we used to. We were increasingly aware that most of our operating profits were coming from a small number of very large customers. As many distributors do, we also felt pressure from the credit risk of very large receivables. Some of our major customers were having trouble paying their bills on time, and we had already experienced a million-dollar plus credit loss from a failed customer.
Should we cash in our chips or stay in the game? So many of the owner-managed distributors in our line of trade had already sold. Would we become the last of a dying breed or, as one of our board members suggested, the last girl at the dance? What would it be like to become an employee of a larger organization?
As the new company grew, would our team be part of the leadership team, or would we all go our separate ways? As I pondered which way to turn-downtown or to the park-the CEO of the buyer company was undoubtedly on a cell phone in his hotel room. The closing of our transaction had been delayed for two days due to last-minute problems. He'd had to juggle his travel schedule and deal with his fellow executives, bankers, lawyers, and a representative from a private-equity firm. Everyone on his team was under pressure to close the deal and move on to another transaction that was also well underway.
Would the deal finally close today? Due to other commitments, many of the people had to leave by late afternoon, no matter what. Would another delay cause the transaction to fall apart?
My brother, who was also my partner in selling the company, had been called away on business. He had already signed the documents, which were still awaiting my signature. Were the papers, requiring hundreds of signoffs, in order? We were still haggling over a large customer payment, promised but not yet received. The bank had an incorrect account number on a wire transfer. We needed a signature from an employee who was out of town. What else would go wrong?
As a seller, little did I know that this was just an ordinary day in the life of an acquisitive distributor.
Most acquisitions don't meet the buyer's expectations We resolved the remaining issues and the documents were finalized as the day wore on. The needed signatures were added and the wire transfers went through the banking system. The lawyers opened a bottle of champagne for the customary toasts and promises, and the out-of-towners headed for the airport.
The CEO of the company that bought our business was frazzled that day. He was under intense pressure, but not only from the myriad details needed to close our deal. He was in the midst of other transactions that needed his attention. Some were still in the exploratory stage, some were being negotiated, and still others were in due diligence. Our company was about to enter the integration process.
As distributor acquisitions go, our transaction had a high likelihood of meeting the buyer's expectations. The buyer had a well-defined strategy, the transaction was negotiated with care, and the due diligence was thorough. If the integration was handled right, we were likely to achieve our projected financial goals. Our company was a mature distribution business with a strong track record, capable and experienced employees, and a diverse list of attractive customers and suppliers.
Yet, more often than not, acquisitions fail to meet the buyers' expectations. After working at a national accounting firm and teaching at a business school, I spent over 20 years as a manager, and 10 years as CEO of National Paper and Packaging Co., a well-regarded and successful distributor of paper, packaging, and sanitary supplies and equipment.
Our sale of the 85-year old business to a private-equity firm was our first real experience in the high-stakes world of M&A.
I had a front-row seat to the consolidation in our corner of the distribution industry during my years at National. Many of our fellow National Paper Trade Association members sold their businesses to the major industry consolidators during my service to NPTA as a volunteer leader, including chairman (1993). After their sales, my friends left their companies (voluntarily or otherwise) in the hands of new management. All too often, the acquired company rapidly lost many of its top performing employees and most profitable customers.
Buyers sometimes found unpleasant surprises that might have been discovered before closing had the due diligence been performed properly. Others handled the integration of the acquired business so badly that even a casual observer could have detected the seeds of disaster.
Some distributors perform quite well after being sold, and there are examples of stellar results. Unrealistic buyer expectations (expressed in terms of inflated purchase prices and excessive debt loads) have resulted in disappointments even in some cases of good operating results. The balance sheets of many acquirers have included massive amounts of goodwill (prices paid in excess of book value of assets acquired), ultimately written off against the net worth of the buyers. The question often raised: Do acquisitions increase or destroy shareholder value?
My survey results and interviews with hundreds of acquisitive distributors (see Statement of Methodology) show that many buyers get good results from their acquisitions programs because they do it right. They buy the right companies for the right reasons. They pay the right price, structure the deal the right way, and take on the right amount of debt. They perform their due diligence the right way. Most important, they integrate their acquisitions into their organization the right way.
During the past three years, Evergreen Consulting has advised numerous clients in the acquisitions of distributors. We have also facilitated the sale of distribution businesses. These transactions were in several different distribution lines of trade, and each involved owner-managed companies. Our discipline applied in the four phases of deal making (strategy, negotiation, due diligence, and implementation) has yielded excellent results so far.