Acquisitions, an introduction, Part One

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Acquisitions are the fastest way for a company to grow in our business, but it also can be the most expensive.  The immediate influx of revenue producing customers with equipment in place can be a real springboard to healthy growth.   The danger of valuing the purchase incorrectly can be a danger to the long-term profitability of the buyer, the appropriate return to the seller, and the experience of the employees and customers of both buyer and seller.

As I have stated before, I am not a CPA or an attorney.  I am a solid waste professional who has been a participant in a number of these transactions as both a buyer and a seller.  I have often said, a successful transaction may be defined as the buyer feels he paid more than he wanted, the seller did not get what he had hoped, but they both walked away shaking hands and content with the outcome.

 

There are no two acquisitions alike, just as there are no two companies alike.  Some of the variables involved in transactions such as these are:

  • Financial health of the buyer and seller,
  • What is the local competition?
  • What is the level of synergy between the buyer’s and seller’s work?
  • When was the last rate increase?
  • What is the local disposal situation, public or privately owned?
  • Is there any “flow control” in place?
  • Is there real estate involved?
  • Is equipment such as containers included?
  • Is there an adequate fleet of trucks to perform the work included?
  • What is the seller’s safety record and what safety plans are currently in place?
  • Is support infrastructure such as mechanics, a garage, shop tools, office, and equipment part of the deal?
  • Will sellers or other key employees be staying on to help run the expanded business?
  • Will rank and file employees be needed and offered jobs at the buyer’s company?
  • Is the customer base, residential, commercial, rolloff, municipal contracts?
  • What percentage of the customer base is secured by some kind of contract or agreement?

 

In negotiating the acquisition, there are two primary elements, Terms and Price.  Some variables that can affect Terms and Price are:

  • Is the seller willing to hold a note for the financing of the business, and if so, what terms?
  • What amount of down payment is expected?
  • How will the Accounts Receivable of the seller be adjusted, collected, and accounted for?
  • What provisions of a non-compete agreement will be negotiated?
  • Will there be a revenue guarantee made by the seller as a stop loss for the seller?
  • Who will assume the indebtedness on any equipment?
  • If only a portion of the seller’s business is for sale, what guidelines are in effect to assure fair competition between buyer and seller after the transaction?

 

Next time, we will look at some of the methods of valuation that are common in our industry.