Looking to Expand By Acquisition? Here’s How to Be a Better Buyer
M&A expert offers tips for processors looking to make a big buy.
Editorial Director/Associate Publisher, Plastics Technology
Editorial Director/Associate Publisher, Plastics Technology
In part one of this-three part blog series, we featured a Q&A with Deborah Douglas in which she offered tips on what plastics processors need to know to get more savvy on evaluating the worth of the their company. Her insights are both useful and timely in light of the spate of M&A activity in plastics processing of late.
Ms. Douglas is an expert on such matters. She is the managing principal of Douglas Group, a St. Louis-based M&A firm that specializes in selling plastics processing companies. Ms. Douglas is a published author of two books, her most recent: Ripe: Harvesting the Value of Your Business. She is frequently asked to speak at varied industry and trade events and often serves as luncheon speaker for general business forums. She has been published in numerous trade and business periodicals including Plastics News, ISHN, The Wall Street Journal, Fortune Magazine, and Profit Magazine to name a few.
In part two, she provides tips on how owners of processing businesses can get better at selling. Here, in the final installment, Ms. Douglas discusses how processors can better prepare themselves for an acquisition.
Plastics Technology: What recommendations would you make to a plastics processors looking to acquire another processing operation?
Ms. Douglas: Success in acquisitions begins with doing the right acquisition. Too often buyers don’t focus on what they really need to buy, to do a great transaction. The great purchase isn’t determined at the date of closing. The great purchase is the one you look back on five years from now, and say, “Boy, am I glad we did that!”
So the start of the process should be careful attention to what is the perfect seller to fit. What are we missing that the perfect seller might provide us? What talents or expertise or capabilities do we have that could be worth way more, if we acquired someone to give us new or special access to a market? This beginning step to the acquisition process is actually probably the most important of all to eventual success.
As you begin to approach the potential sellers you identify, begin with courtesy, and carefully guarded confidentiality in the process. There is no faster way to kill a possible deal than sloppiness about confidentiality. You may damage the seller company, and you’ll almost certainly damage your chances for successful acquisition!
Plastics Technology: So relationship building is important?
Ms. Douglas: Be cognizant of the seller’s background and situation, and work to establish a warm relationship from the start. We sold a company last year to an equity fund buyer who offered $32 million for the company. At the same time, we had another offer for $35 million from a strategic buyer. The strategic guys were from a large company and enjoyed telling our seller, “Your operation is interesting, but this is how we big guys do it.” For our seller client it was worth losing $3 million of selling price on the deal to not sell to them. He felt the equity guys would be better for his people, and better for his company long after he was gone.
We worked on a buy-side transaction for a plastics company based in Florida, who wanted a Midwestern operation with certain capabilities. We found the perfect fit in outstate Arkansas. The would-be seller was a Southern Baptist, who had told us as we talked that finding a “moral” buyer was important to him. Furthermore, he told us he did not believe in drinking, or even in card playing, as he felt those were outside of “good moral” behavior. Thus, we knew we were dealing with a very conservative guy, and we told our buyer client all we had learned.
The buyer’s son met us at the Arkansas plant to try to cement the deal. The son arrived wearing an “Elton John Aids Benefit” t-shirt, and came with a large mesh bag of beer-logo’d cups in tow as a gift. As I sat inside the plant with the seller owner and watched the young man approach, I knew the deal was dead before he ever got to the door. It’s worth the effort to try to establish the relationship with the seller. You must have his goodwill to have a chance at success.
Plastics Technology: How important is speed and decisiveness is closing the deal?
Ms. Douglas: If you’re moving in the process toward a possible purchase, I would always encourage buyers to move quickly and decisively. If you know your intended pricing, and you know you want to move, try to get a letter of intent in place as quickly as possible, with exclusivity if you can. If the seller is unwilling to commit firmly, do what you can to move forward quickly, even without a letter of intent. The buyer who can close in 30 days instead of 90 makes a powerful impression on the seller, and may secure the deal for that alone.
Also, as a buyer, keep in mind that price alone should not be the sole decision point. The right fit is far more critical to long term success than price. That of course does not mean that money is no object. If pushed too far, you may simply have to withdraw. But I would tell you paying 20% more for the company that’s the ideal fit should not stop you. In the end, the fit will make the far greater difference to your satisfaction with the deal.
When you think you have agreed on pricing for the deal, and start to move forward in due diligence, this is a time when you will have near maximum contact with the owner seller. It is a unique opportunity to establish relationships that will serve you especially well post sale. Be respectful of confidentiality worries. Be thorough in your due diligence, but do so without disrupting the seller operations. That 30-90 day period while all of this goes on makes it far more likely (or less) that you’ll come to successful close, and can jump-start your new business together tremendously, if done right.