Forbes: The Good, The Bad and The Tragic- Stories of Acquisition for Growth
Alan Hall wrote earlier this week about the four guiding principles of successful acquisitions in An Acquisition Destroyed My Business. Why?
In that spirit, here are the inside stories from founders about recent acquisitions that were highly successful, and even more importantly, the details of their acquisitions that failed. Yes, I was able to find at least a few brave souls who were willing to talk about their failures as well. May we learn from their wisdom.
Carl Shepherd, Founder, HomeAway
First up is the Co-Founder of HomeAway, Carl Shepherd, who’s spearheaded 18 global acquisitions in the past eight years–an average of more than two acquisitions per year. Prior to joining HomeAway he was COO of Hoover’s Online and also oversaw multiple acquisitions there as well. In fact it’s fair to say he’s become a bona fide expert, to a level that he actually made a presentation on the topic this past week at SXSW.
In summary, Shepherd advises entrepreneurs to be clear and strategic about the type of company they’re seeking. He notes that HomeAway sought the market leaders in each country within a very tight range of business models to select the 18 acquisitions (so far) they’ve pursued. Here are his basic rules:
1. Court them. Become their friend to learn what’s important to them (e.g., the company’s legacy, their desire for their teams to live on, or just money) and gauge how willing they are to sell. This is especially important when acquiring small businesses.
2. Don’t rely on traditional valuations. Small businesses are immune to valuation discussions based on discounted cash flows or public multiples. Instead, they often have a number in mind and your task will be easier if you figure out if you can pay what they want instead of immediately resorting to charm and negotiating skills. Their reality is what they want to see in their checking account when the transaction closes.
3. Use the best advisors you can get. Having the best lawyers, accountants and auditors will make the process go much more smoothly.
4. Advise the seller to get the best advisors they can get, too. It’s far easier to work with an experienced M&A attorney than the seller’s brother-in-law who is a public defender, but wants to help.
5. Focus on integration from day one. Clearly define how you’ll integrate the business into your existing company, and do not underestimate the need for a cultural fit. Combining companies with different business models or whose workers have substantially different values might make integration and operations too complex.
6. Have a plan. Determine if you will retain the talent or the technology well in advance, and make sure the target understands the plan so they can help you identify weaknesses.
Shepherd was also willing to share the details of an acquisition that failed: “When I was COO of Hoover’s Online, we identified a target that had created a veritable traffic magnet, but they had not developed the advertising organization to profit from it. We focused too much on that inventory, banking on the fact that we had a cracker-jack ad sales team and were perpetually sold out at Hoovers.com. Just as we closed, the bottom dropped out of the ad sales market, cost per thousand impressions plunged (CPMs), and we had not created plans for developing other revenue streams fast enough.”
“The acquisition failed, not because we didn’t know what we were buying, and not because we were unsuccessful in integrating the culture (they were smart, great people), but because we had not laid out a longer term strategy for diversifying their revenue stream that we could tap into stemming from a macroeconomic challenge.”
Willan Johnson, CEO, VivoPools
Next up is VivoPools. This Los Angeles provider of pool maintenance and service was founded in 2009 has had 15 acquisitions to date, ranging from a one pool route to a pool business with 15 employees. Since opening its franchise business in 2012 the pool care franchise has made acquisitions in four states and has found acquisition to be a highly efficient and beneficial route to garnering clients in unexplored markets. The CEO, Willan Johnson, looks for small businesses that have strong client orientation, profitability, and that are well run. When looking for a brand to acquire, Johnson says, you should make sure the target business has strong financials and is culturally aligned your company.
Johnson also makes sure to address underlying questions such as the presence of lawsuits and what the company’s worker compensation history is like. Once these factors have been worked through, the integration process begins with a rollout of human resource processes and they begin the process of transitioning the brand to the Vivo model. Roughly 50% of the time the company will move to the Vivo name right away; however, if the pool company being acquired has a strong presence in the market, the company may opt to wait for as long as a year. For example, when Vivo acquired Crystal Tech in Tucson, Arizona, it opted to leave the existing brand in place for six months. Then they changed the company name to the Crystal Tech-Division of VivoPools for another six months. Finally, after a full year of transition, they altered the name to Crystal TechVivoPools. This is a function of every market being different, a factor you must handle carefully to ensure success, Johnson says.
Overall, Johnson advises others to be sure to have all employees on board with an acquisition first, and only then should you transition the customers. The internal team must fully understand why the change is better, and when they do, they will play a key role in enacting the change in an a positive way with the company’s customers.
Acquisition has been a critical strategy in Vivo’s expansion in just four years beyond California to Nevada, Arizona, and Florida as well. In all, the company currently serves 3,000 residential accounts and 250 commercial customers including W Hotels.
Jaime Brown, COO, Cellairis
Jaime Brown, COO, of Cellairis, which owns and operates a network of cell phone accessory stores, also counts acquisition as one of the key growth strategies that has allowed this 10-year-old brand that began franchising in 2005 to expand to 700 locations at the end of 2012.
“Acquisition can be a powerful growth model since it allows us to focus on businesses that already have knowledge of a segment of our industry, can provide an expansion of our products or services, and are based in desirable locations,” Brown says. “The obvious trick is always the process of converting the prior owner to our systems and model to ensure we provide customers with a similar experience regardless of the store or location.”
Robert Smith, Founder, Champion Media Worldwide
Next, words to the wise from Robert Smith, the founder of Champion Media Worldwide, a search engine marketing company in Rockton, Ill.
“Toward the end of 2012 I approached the company PC Guys to buy their assets (customers, buyers, etc.),” he said. “It took two months, but we got a deal done.”
“My goal was to integrate my high-end business for growth training products into their product list. But it didn’t work out. We found out too late that they were primarily a one-time product and service for home-based business owners without much money. Despite our due diligence, we came to find out their average client hired them only to remove virus from their computer and paid less than $60. Our products range from $500-$2500 in price, so the company was clearly not addressing our target audience. So we found out quickly, the deal didn’t produce.”
Thankfully, Smith recovered quickly and modified his due diligence efforts to assist in helping him target future acquisitions with greater success.
Anthony Mongeluzo, President, Pro Computer Service
Finally, I spoke with Anthony Mongeluzo, the president of Pro Computer Service of Philadelphia, a company he founded in 2000.
Mongeluzo has accomplished four successful acquisitions, but agreed to talk to me about a recent acquisition he entered that failed.
“I had scoped out a computer company that had been in the area for a number of years. I was aware of his business as I would drive past, and it seemed stable and successful enough as it had been around for six years. The prior owner ended up leaving town and approached me – ‘Do you want to buy my business?’ “
“Clearly I hold some of the responsibility for the failure of this project. I saw his marketing and I just kind of jumped in.”
“The acquisition turned out to be a complete disaster. He had lied about his revenue numbers. He had forged his QuickBooks reports. Thankfully we were in and out in a three week period. But we had to part ways.”
Mongeluzo still recalls the initial shock and pain of that period: “He was going out to clients and telling them he’d bought into Pro Computer and was an equal partner of mine. Then he walked in with bad solutions. Clearly, I gave him too much credit based on the initial conversations and the early references that were good.”
“Thankfully, the whole situation was quick in elapsed time, like ripping off a bandaid. But it was three weeks of horror—a period of time that felt like it lasted three years.”
Despite this terrible project, Mongeluzo is is still high on acquisition as an effective strategy for growth: “We do quite a bit of acquisition,” he told me “Maybe two or three every year. A lot of them are small companies, 1-2 man shops.”
“These days we’re a lot more formal. We ask for bank statements. We have our CPA set everything up.”
On the whole, it’s clear Mongeluzo’s strategy is working: “I started the business 12 years ago, and it’s been an Inc. 5000 company for 7 years running, growing from $2.1M to slightly over $6M in six years. Year to year we’ve grown 20-50 percent every year. Our successful acquisitions enabled a big part of that growth.”
I thank each of these founders for their candid stories, and I especially thank those who were courageous enough to talk to me on the record about their prior deals gone wrong.
Could acquisition be a winning strategy for your company in 2013? Perhaps so, if you can follow these executives’ guidance and strategy. I look forward to hearing your stories and thoughts.