Mergers and Acquisitions: The Ins and Outs of Buying and Selling in a Consolidating Industry

Technology has changed the way we talk to each other. In the near future, married couples will tell their kids how they met: On a dating app where they each swiped in the same direction. The rest is history.

Aside from the technological aspect of it, though, dating hasn’t changed for most of history. You meet someone, you realize you have a lot in common, you get to know each other better, you decide to get married, and you ride off into the sunset together. To that same point, the way we do business has changed through the era of the internet, but if you ask Jim Anderson, founder and president of Corporate Development Associates, Scottsdale, Arizona, the way companies go about their mergers and acquisitions is just like the courting process.

“At the end of the day, not to oversimplify it, it’s like getting your first date,” he says. “That hasn’t changed in hundreds of years. It’s still the same. You’re going to meet her, you’re going to get engaged, and you’re going to get married. And the process of selling your business has those same components. You’re going to meet the people, and if you guys get along, you’re going to get a letter of intent to do a deal. And then after lawyers get done playing around with all the numbers and charging their enormous fees, you’re going to get ‘married.’ Then, you get your money.”

It’s still the same game, he says. If anything, it’s easier today thanks to the tools available to us like email and instant gratification through the web.

“Back in the early days of doing M&A for me, there was an awful lot of overnight parcels filled with paperwork that I had to wade through and look at,” Anderson says. “Somebody would say, ‘Hey, I’m going to send you a draft of a 40-page asset purchase agreement, and you’ll probably have it tomorrow or the next day.’ What I run into today is people send me their financials, and 15 minutes later they’re wanting to know if I’ve looked at them. … At least in years past I used to have at least a day until I got them, and then I would look at them.”

That ease and do-it-yourself mentality has also given confidence to business owners who think they can handle it all themselves, Anderson cautions. Often, that results in business owners biting off more than they can chew.

Consolidation is common in the print and promotional products industries. Supplier and distributor companies alike are absorbing smaller businesses and growing into larger entities. Knowing how to navigate this world is crucial for the modern business owner, whether you’re on the buying side or selling side.

And, as Anderson recommends, it’s a good idea to listen to some experts on the topic. He’s been a part of almost 300 transactions over 36 years in this industry, and he says each one has a unique story or lesson to learn.

“We call ourselves intermediaries, and that’s true because we are the bridge between the buyer and the seller for all kinds of issues that crop up during the acquisition process,” he says. “And there will be issues. I’ve rarely seen a deal that happens without issues.”

And he’s seen a lot of deals.

Selling

To shift away from the marriage metaphor into a different stage in the “Game of Life,” let’s venture into the home-buying world. The hypothetical married couple has been in their starter home for a few years now, but their family is growing and they want to upgrade.

If they were getting ready to buy their house, they wouldn’t simply list the price and invite people into their home as is, going at the whole thing blind beyond telling the potential buyers about how much they love the home and all of the good times they had in it. Those intangibles are nice, and hold their own value, but any informed home buyer is going to want documentation of things like comparable homes’ value, maintenance history, the works.

The same goes for a business.

“I would say the biggest thing if I had to pick one thing that is a real problem for sellers [is that] most sellers do not have their financial house in order,” Anderson says. “They just don’t have good levels of financial controls. They’re not getting the reporting from their accountant. And when you go and try to sell the business, that becomes a real problem, because buyers feel much more comfortable when they can look at a set of numbers that they can believe. That means they’re prepared by a CPA firm.”

Just like that naive home seller who wants to show someone the backyard where they played catch or the kitchen where they hosted family get-togethers as a way to push the deal, a business owner might try to focus on the wrong things about a business, such as facilities or company culture.

“At the end of the day, it all works down to the numbers,” Anderson affirms.

It really is funny how well the home-selling metaphor works, isn’t it? Anderson continues by saying that sometimes doing this kind of job without a professional like him can lead to deals collapsing, or never getting one going in the first place. For example, someone wants to sell their house for $1 million, but a real estate agent tells them it’s only worth $870,000. That’s not the response the seller wants, so they try to sell it by owner to get that million. However, they lack the expertise that comes with an experienced professional intermediary, so they might not have all of the right forms, and now the sale is dead before it even starts.

The numbers and process are crucial. They really can make or break the deal. But, from a buyer’s perspective, there needs to be balance between the black-and-white of financials and the more fluid world of emotion. Two sides of the acquisition brain, so to speak. A lot of that comes in from the buying perspective.

Buying

Steve Ehlert, national general manager for Arch Promo Group, St. Louis, has seen many an acquisition in his career. From the buying perspective, he says it’s paramount that the buying company really gets to know the company they’re buying. This is a group of people, not just a machine. These are people whose livelihoods are built by this company, whose way of life revolves around their work schedule and benefits. Those can’t be tossed aside without consideration.

“This is a very emotional deal for the sellers once they sell the business,” Ehlert says. “There’s the financial impact to any deal, but then there’s the emotional side, where caring for the employees, being fair to the people who have worked for them for years and years, making sure that the employees and the customers and the facilities are cared for in the way the previous owners did. Those are all parts of the negotiation and, in all honesty, it’s the emotional side that makes any of these deals.”

Ehlert says that when a company buys another, they should try to learn about any agreements employees have with management, and grandfather in those employees whenever possible.

“It’s knowing and understanding what motivates their employees, the ones that have been there, the tenured employees,” he adds. “What do we need to do to make sure they stay happy and satisfied employees? That is very important to us, that we don’t change the culture of a facility when we acquire that location.”

Too often, he says, larger companies can overlook these details, focusing instead on financial impacts than personal impacts. Some businesses are modeled on the basis of flipping. To continue the throughline metaphor yet again, this family selling their starter home meets a buyer who doesn’t care about any of the cherished memories that live there. They’re going to buy it, knock down the walls to create an open concept living space, put in a pool where the garden used to be, and try to sell it as soon as possible for a profit.

That’s not meant to knock that business model. But, Ehlert’s company doesn’t have that model or buying power, so it needs to make sure its proposed acquisitions go through. A lot of times, that depends on going the extra mile with the employees and making sure they know their lives as they know it will remain intact.

“A lot of companies that do that will go in, and they’ll find redundancies, and they’ll work to eliminate positions,” he says. “That’s not what we do. We take over certain aspects of payroll and the financial accounting and bill paying and accounts receivable and all that, but we always do our best to reallocate those employees into other positions. We never go into one of these deals saying our first objective is to reduce headcount. That’s just not what we do. We are in this for the long haul. So, any decisions that we make are with the long-term interest and successful growth of the business. We’re not going to make short-term decisions to make it financially appealing.”

Ask Yourself Why

In this world of consolidation and acquisitions in the industry, it could be easy for a businessperson to think they need to start buying up other businesses to stay afloat. Anderson recommends taking the time to consider your motivations. What is the end-goal here? How do acquisitions fit into your long-term business model?

The white whale, of course, is a business owner who’s close to retirement age and wants to sell the company to someone they know and trust. Those are rare, though. And when Anderson starts talking to potential clients who are looking to acquire other businesses, he always asks one question at the beginning of the conversation: How old are you?

“I give a different answer to someone who might be 45 than I would to somebody 65,” Anderson says. “Because unless you’re having problems at 45 with your business, maybe you’re worried you’re going to go bankrupt or something, I don’t think you should be selling your business. You probably need a consultant to help you spiff up your business and get it making money.”

Every business decision should be a way to move your company closer and closer to the goal you have in mind. Arbitrary decisions can be costly, or throw you off your desired path. Mergers and acquisitions can be extremely beneficial, if done right.

Think about the fact that just about every successful HBO show has been about a merger and acquisition in some way. “The Sopranos” demonstrated how the “family business” operated and worked with others. “Game of Thrones” was centered around strategically joining families to consolidate power and position certain people for success. Heck, “Succession,” which is arguably the biggest show on TV right now, is literally about mergers and acquisitions in the modern business space. It’s dramatic because it’s so consequential! A wrong move can tank a company (or two companies at once).

The moral of this story is that — whether you are on the buying side or the selling side — you should clearly know your intentions with both sides of the deal; you should have bulletproof financials in order so you are not leaving any interested party with guesswork or confusion; you should think about the other party as a group of people, rather than just an asset or a new investment to flip carelessly; and you should really consider talking to professionals.

As Anderson says, there are plenty of people in this industry ready to help.

“I think if you want to do it properly, and you want to keep the noise out of your company if you’re selling the business, there’s only one way to do it: You need to hire somebody like our firm,” he says. “And there’s literally thousands of them all over the country.”