Prepare to merge
More small distributors actively seek out buyers in a bid to grow, cash out, or simply survive
By Ken Brack -- Industrial Distribution, 9/1/1998
Chuck Bush spurned the first offer from a fast-moving consolidator to buy his Denver, Colo. company in 1994.Bush ran a profitable distributorship that enjoyed well-established relations with its customers, including general contractors buying concrete accessories and supplies. For a couple of years he used those contacts and his relationships with some manufacturers to prevent the suitor, White Cap Industries, Inc., from carrying key product lines in the Denver market. He relished the competition.
But Bush, now 56, saw the writing on the wall a few years later. He figured that White Cap, a leading West Coast construction tools distributor and retailer, would eventually eat his lunch with its growing purchasing clout. His business had been very good, so Bush began to form an exit plan, attending a seminar and later contacting the prospective buyer through a third party. White Cap was still interested, and this April it bought CCS Supply, the company he started in 1975, for $5 million.
"I saw what was happening and thought, eventually, I won't be able to keep them out of here," Bush says. He says the sale price "came out exactly where I said it was worth. We negotiated and did due diligence and it came out exactly what I thought."
Many business owners' experiences with buyouts and mergers are not as idyllic as Bush's, however. For some owners of small distributorships, preparing and finalizing the sale of their business means treading a slippery slope. Corporate finances must be solid, as weaknesses in key areas such as receivables and debts will quickly be uncovered. A nagging lawsuit threat or an environmental hazard may bring trouble. And the acquiring company's culture and goals often become key, as some owners concerned about their firm's future won't sell unless the suitor is a decent match.
Negotiating the buyout of a family-owned company adds other burdens, owners and researchers say. Those transactions carry emotional, and often managerial baggage, which may become further complicated when an owner's private assets and interests are closely intertwined with company assets.
Despite the potential snags, the consolidation of small industrial distributors marches along at a rapid pace and many owners embrace it. A recent report by the Distribution Research & Education Foundation predicts consolidation will continue over the next decade, particularly in highly fragmented segments such as electrical suppliers, power transmission, safety equipment, hose and accessories and sanitary suppliers. In addition, one quarter of the 451 companies surveyed this year said they are looking to acquire another company, up from 15 percent in 1997, according to Industrial Distribution's 52nd Annual Survey of Distributor Operations. Nearly 60 percent of those distributors seeking to make an acquisition have sales between $5-$20 million.
Many distributors say they welcome acquisition offers because they believe it will bolster their market share and help improve their management skills. One quarter of the firms surveyed said they welcomed an offer. And among companies with sales under $10 million that either merged or have been acquired, many said consolidation benefited them by lowering costs and increasing their market share, ID's survey found.
"I don't think we should be afraid of it. I think we should go after it," says Tim Hise, president of Midwest Service & Supply Warehouse, Inc., a Rogers, Ark.-based general-line house that was acquired last winter. "The only thing you can do is throw your biggest and best worm out and say, 'I want to be part of it.'"
Once an owner, or controlling family members, decides that an acquisition would be beneficial, preparing a company for an offer is not often easy.
Cleaning up
Bush and others who have gone through successful buyouts say vital first steps for sellers are to prepare their company's financial statements and clean up internal operations such as accounting systems and inventory. Those things can't be done overnight, of course. Bush, for one, recommends that owners give themselves a year to clear up receivables, payables and generally "make sure your books are in order."
Bill Petty, a professor of finance at Baylor University's Institute for Family Business in Waco, Texas, advises sellers not to make dramatic changes such as switching accounting systems to make profits look better. "There's not a lot you can do to massage the data because buyers are smart," he says. Petty and other researchers recently completed a study of owners' exit strategies, which included interviews with 22 entrepreneurs who either sold a company or took it public.
Some experts also recommend having an accounting firm review corporate financial documents going back at least two years. In Bush's case, company staffers compiled financial statements, but they were never audited. "We just showed them our books," he recalls. "We had to answer questions on past lawsuits, potential ones. Apparently it stood the muster because I don't remember being asked anything to follow up on."
While seriously contemplating a merger or buyout offer, business owners should talk to others who have gone through the same thing. Petty, for one, recommends seeking out professionals not associated with the company. He suggests finding new advisers such as an attorney who specializes in corporate sales, rather than relying on the local lawyer who handled routine matters for years.
Once an owner determines the company's net worth, he or she should prepare to defend it and determine the bottom line, after-tax compensation they want. Whether the owner wants it all in cash or a mix with stock will be determined in part by his desire to either remain in the business or quickly exit.
Fastening company cultures
A key factor when weighing a buyout offer is the compatibility of two company cultures. Just ask Malcom Tallmon, who sold his fastener distributorship, Fortune Industries of Ft. Worth, Texas, even though he wasn't initially looking to do so.
When Florida-based Questron Technology Inc. approached him earlier this year with an offer, Tallmon considered the suitor's strengths, goals and its senior managers. An apparent fastening of company cultures was the key to his approval.
"Our biggest consideration was being purchased by a company that we felt would fit the corporate strategy and the people involved," Tallmon says. "I don't see any negatives. I didn't just sell because the money was right. All the other areas were important: the management, the potential for making it better for our people."
Fortune Industries, which sells fasteners and other components to commercial aerospace customers, expected to close the sale in July for $12.5 million in cash and common stock, plus another $2 million consideration based on future performance. Tallmon, who has a contract to continue managing the company for five years, says Questron brought strengths -- mainly its focus on tool bin stocking and management -- that his company didn't have.
Knowing the top executive of another company Questron bought several years ago also helped ease any of his concerns. He says the prospect of future competition from Questron was not a determining factor. "We've never had to worry so much about the competition as much as worry about what we do. If we do it right, the bin stocking should really open up some avenues," he says.
"The timing is good," Tallmon continues. "Someday I'm going to need to find a way out and in five years, who knows, it may be time."
Dan Kazmierczak, president of Binkelman Corp., in Toledo, Ohio, has seen a merger from the other side. The power transmission distributorship bought a $2.5 million conveyor belt and industrial rubber parts distributor 21/2 years ago, a union that brought a 32 percent increase in sales the following year. But the cash buyout and melding of two companies did not proceed without some bumps.
To start, Kazmierczak says business at Bauer Wenner, the acquired firm, was flat and its owner had not reinvested in inventory and equipment. The owner at first turned away his inquiries and said the company was not for sale. Kazmierczak was determined "to get into that business," especially to carry Goodyear's conveyor belt line, while Bauer Wenner also competed with Binkelman Corp. in some areas. As he looked closer, he found neglected welding and fabricating equipment and other upgrades that were needed, which would eventually cost about $100,000 to do. Despite frosty negotiations with the owner, who did not stay on, Kazmierczak finally bought the company's assets and building.
He says he paid more than it was worth on paper because of its potential value. "What is a company really worth? That's very hard to say. What it was worth to me, I can say it was a really good investment," Kazmierczak says.
Merging the two groups of employees generally went well. Both groups were trained in the new business areas and some responsibilities were shifted. While Binkelman Corp. hired nine of the 12 Bauer Wenner employees, not all of them made a successful transition to the new company culture. Two salesmen who did not adjust to Binkelman Corp.'s team sales approach and whom Kazmierczak did not consider proactive enough were let go or retired, for example.
"The others have fit in well and they're Binkelman people now," he says. To help unify staff, Kazmierczak reinstituted team-building fun activities like treating employees to golf and patio parties.
Bush believes his 17 former employees will adapt under new owners as well. He says he delegated considerable authority and decision making, and cross trained them to work in different areas of the company. "That's why we were successful," he says. But Bush also engendered a strong employee loyalty and work ethic by providing all medical, dental insurance, a 401K match and buying lunches once a week.
"We had freedom with responsibility," says Bush, who agreed to stay on for at least one year as a division manager.
Go-getters
Increasingly, other small distributorships actively court buyers to improve their business prospects with expanded territory and more efficient systems.
Hise, whose $4 million company was bought by Mitchell Tool & Gage, Inc. of Little Rock, Ark., sought out the deal as a first step to attract a large consolidator looking to move into the state. It took eight months to accomplish, six of those dominated by "legalism" details, he says.
For example, there were issues among Mitchell family members in the business to resolve. But by next spring, he and the other principals expect to gauge the new company's net worth and the effect of consolidated operations.
"We're committed to being involved in this phenomenon," he says. Hise says consolidation offers the best chance to improve his company while gains such as implementing new information technology often come at the buyer's expense.
"I've been in the industry 20 years and I'm 42 years old, and I want to stay in," he says. "If the trend means we're going into mergers and acquisitions, then great, let's get it on."
Regrets after 'cashing out'
Business owners who opt to "cash-out" family-owned enterprises should prepare their firms -- and themselves -- carefully for the change, a new study asserts.
Research conducted for the New Jersey-based Financial Executive Research Foundation, which represents 14,000 chief financial officers, found many former owners end up regretting the method of their exit.
"We noticed considerable sellers' remorse," says Bill Petty, a professor of finance at Baylor University's Institute for Family Business. Petty helped conduct extensive interviews with 22 entrepreneurs late last year. "Someone who spent 15 to 20 years building a company and then they exit, cash out and think, 'What have I done?' They've got a lot of money but they miss their connection, their identity with the company, so you'd better understand your motives and what is important.
"For entrepreneurs it's as much a last emotional event as it is a money event," he says.
Among the report's major findings:
* Owners who are most successful after cash-outs ran their companies with a "harvest" in mind from early on. They kept corporate and personal assets and activities separate, for example.
* Owners who remain on as managers after a buyout are frequently unhappy in the new company culture. Particularly when the new owner is a financial (investment) buyer, rather than a "strategic" industry competitor, the result may be a less personal business environment.
* In hindsight, more former owners prefer cash. Stock options in the acquiring firm are risky.
* Former owners advise sellers to talk to people who have been through the process first and find new advisors to help close the deal.
Talkback
Related Content
Related Content
Sponsored Links
View All Blogs
