039 – Learn How To Buy A Business – David Mariano

This is our first episode where we’re going to change our focus in the world of selling your business.  Today we’re going to focus on how to buy a business.  If it’s possible, buying a business is even harder to get right than selling a business.  Studies have shown that as many as 80% of business acquisitions never come close to reaching the goals the buyer had in mind before they did the acquisition.

David Mariano of Western Reserve Partners is going to help us understand why so many acquisitions just never work out.  Some of the things we’ll be covering in this episode of The Sustainable Business is:

• Why you might want to do an acquisition.
• Understanding what you want to accomplish before you start the process is crucial to success.
• Know that you need to understand both your culture and the target culture before you start serious negotiations.
• Why spending time understanding your culture before you start a purchase process is an important part of success.
• Learn how to look at the strengths and weaknesses in your company.

Transcript:

Narrator:         Welcome to the Sustainable Business Radio Show podcast where you’ll learn not only how to create a sustainable business but you’ll also learn the secrets of creating extraordinary value within your business and your life. In the Sustainable Business, we focus on what it’s going to take for you to take your successful business and make it economically and personally successful.

Your host, Josh Patrick, is going to help us through finding great thought leaders as well as providing insights he’s learned through his 40 years of owning, running, planning and thinking about what it takes to make a successful business sustainable.

Josh:                Hey, how are you today? My guest today is David Mariano. David in charge of the Buy-Side Practice at Western Reserve Partners, an investment bank located in Cleveland, Ohio. Now, a buy-side advisor is somebody who helps business owners identify and purchase acquisitions that will add value to the buyer’s company. One of the things that I’m going to talk with David about today is how to make an acquisition accretive and how investment bankers can help a private business owner in achieving their goals in doing that.

Now, the research shows that the vast majority of acquisitions aren’t accretive so we want to find out how David coaches his clients through to make them work. And by accretive, that means “add value to the company.” David likes to talk about how he doesn’t use jargon when talking about mergers and acquisition and we’ll see if he holds to that true. I’m hoping he does. Besides working in M&A world, David has tons of outside interest that lead me to believe he is a pretty well-rounded and interesting guy. In fact, he found me through Michael Port’s Book Yourself Solid Mentoring Group. We won’t get into that today but it’s an interesting way to be found. I think, what we’re going to talk about today is going to be something that’s going to help you take your successful business and make one that’s sustainable which is what our goal is here today. Let’s bring David in.

Hey, David. How are you today?

David:             Great, Josh. How are you doing today?

Josh:                Oh, I’m doing great. I’m really pleased to have you here. I’m glad to see that you’re a buy-side guy because most of the M&A people we end up talking with are all sell-side. Let’s start off with the first question. Why would anybody want by a business when the success rate is only around 20%?

David:             Well, a lot of business owners and management teams today are finding it harder and harder to grow organically. After the recession especially, they spent a lot of time cutting costs, right-sizing their business and be more efficient but they’re still having a hard time finding ways to grow. Acquisitions are usually thought of as a faster way to do that. Now, there are good and there are better ways to do that and a lot of it has to do with planning and the way you approach making an acquisition and the reasons for doing it. But there are ways to do it while making it successful.

Josh:                Give me your top two or three ways that we can do that.

David:             Sure. I think it starts with your overall business strategy. Where we find people getting into trouble is when they—they just want to make acquisitions because that’s what they think the next thing to do is or they feel that’s the only way to grow and they haven’t thought through what is the impact that this will have on my customers and the customers of the company that I’m buying? What’s the impact on my employees? What’s the benefit?

The best way to approach it is to come up with a strategy for your business. What do you want to accomplish? What’s your long-term vision? What do you want to mean to your customers and certain markets in terms of product, technology, geography? It will differ depending on the type of business you have whether it’s services or manufacturing or anything different.

But, once you have that big vision, that big strategy then I think it’s important to think why acquisitions might fit. And usually it comes down to a buy-or-build decision. The traditional thought process – does it make more sense to build this ourselves or is there something out there that fits strategically?

For example, we have clients sometimes in a certain region where they’re getting customer requests already on the opposite coast, to grow, and it’s expensive. It’s cost prohibitive to ship across the country. in that case, it makes sense. “Okay. We want to grow geographically. Does it make sense to throw up a building, find a bunch of people? Or could we possibly find a company that fits us – our culture, our strategy that can help us grow? So, I think thinking through those high-level things – the reasons why and then also, coming up with a plan of how to do it.

Even if you haven’t done this before, it makes sense to think through the process of it. What are the important factors to you to make it successful? Is it important to hold on to the customers or the know-how of the people, or the technology and then using either your internal team and helping them get educated on how to do this – and especially leaning on outside advisors. I don’t say that because I am one. I mean, your attorney is a huge player in this and that’s probably your first phone call to make and just how to actually make this happen. But there’s a whole lot of details involved in that and just thinking through all those pieces and just planning to make it work I think is one of the biggest things you can do.

Josh:                You know, a lot of times, when I see an acquisition done, I see that it falls apart with culture and the fact is that the buying company hasn’t really thought about the integration process. Would you recommend that a buyer engages an integration expert as part of the process? If so, how would they go about finding one?

David:             I would recommend that, in fact, especially if you haven’t done it before. What the best integration experts will help you do – most of them talk about a 100-day plan or a 90-day plan. “What is that first thing you’ll do in the first quarter?” If you haven’t built that plan for yourself already then absolutely, I would recommend hiring or finding an integration expert. There are individuals out there – solo firms that that’s all they focus on. But even the larger accounting firms and the smaller accounting firms – the regional players, not kind of your one-man office but a good-sized firm will have people that have been through integrations that can help you think through the financial pieces, the legal pieces, even the human—I don’t like calling it human resources but the people aspect of it, because I think that you have to plan around that and figure that out.

I also would say though, I feel that sometimes the culture piece gets in the way because the business owner doesn’t have a great—they haven’t been introspective enough on their own business sometimes, where they first identify where they’re really strong, where they’re weak, what their culture is like. So then, they can bring that and see how this other company fits within them.

I just have this one example. Your weaknesses as a company show up in a deal, for instance. I’ve been an advisor most of my career but I was with an operating company and we bought a few businesses. But one of them that we bought was a small company – a four- or five-person thing. It was an industrial technology for monitoring equipment. This is the first time I had been through that as an actual operator. But what really showed up for us is our weakness in IT and controls.

As a small company that we were buying, they had no controls. Everything was in a shoebox – just the shop we had to move. It was an interesting integration of physically moving pieces of equipment and inventory over. But what we found out is our weakness with IT and control showed up when we tried to integrate it. We weren’t prepared to integrate something even less organized than we were because we didn’t really have a plan for it. I think that happens in culture. That happens in IT integration. Just being prepared and understanding what you have and what you don’t and where you need to plug in outside advisors.

Josh:                You know, I’m glad you brought that up because my experience in doing my own acquisitions and coaching tons of businesses through the acquisition processes, 98% of the time the business I’m working with is not even close to being ready to do an acquisition because they have no clue what their values are, what their culture is and what it takes for people to successfully fit in. So, how the heck can they possibly get an acquisition when they don’t know themselves?

David:             Yeah. I agree. I think back to—I’m married now and it’s great. My wife’s my best friend. We have two great kids but early on in my dating career, I didn’t know myself enough, so how could I possibly be a good partner, a good husband or a boyfriend if I didn’t know myself enough. It took me years to get to that point where I really knew what I wanted, what I was good at, what my weaknesses – where I could work on those first. Some people won’t like that analogy but it’s very much a marriage of two businesses. I mean, we are talking about people, right? You’re bringing people together, no matter what type of business it is, to make something bigger happen, hopefully. You have to kind of know yourself as an organization, know yourself as a leader, as a business owner to be able to really combine successfully with someone else.

Josh:                Oh, actually I think the analogy about finding a good marriage partner is a perfect one because at the end of the day that’s what you’re doing, you’re doing a marriage. And the buyer’s culture has to be able to take over the culture of the seller, otherwise, it’s never going to work. You just have these fights going all the time.

David:             You’re right, in most cases. Or you have to be self-aware enough as the buyer to know “we’re buying that company specifically for its culture, in a certain way.” I’ve done a lot of research on this too but there’s an old case where I think UBS bought a different type of financial services firm called O’Connor. This was probably 15 years ago. The reason they bought it was for the culture – the sales and service culture that the target had. And so, what ended up happening is they were humble enough to admit that and say, “You know what? We’re really buying you for your culture so let’s assimilate us into you.” You don’t see that happen very often unfortunately because of egos probably. But that’s a scenario that could be in place for people as well.

Josh:                So, was UBS successful with that?

David:             They were. Yeah.

Josh:                Oh really?

David:             Not everyone like it. But yeah, that was one of the successful ones they made.

Josh:                Interesting. I wonder how many UBS people had to leave as a result of buying a company and then adopting their culture?

David:             I don’t know. You know what I’ll try do is I’ll try to send you that study that I found.

Josh:                I think it’s an interesting thing to do there. So, when you’re getting a business ready to go out and try to buy somebody, how do you help them look at their strengths and their weaknesses so they know what they’re buying and what to look for?

David:             We spend a lot of time upfront just asking questions. We will go around and tour their plant. Look at their facility. Our ideal scenario – and we can’t always do this, this is just based on our—based on our client and what they allow. But we usually insist on meeting multiple levels of their team. So, people in the Engineering Department, if it’s a manufacturer, and maybe the plant manager, the head of Human Resources, the CEO or CFO. If they do have a business development or kind of a strategic person, sometimes our clients have that, and we interview all of them and try to assess what’s important to each of them. After you have a few of those conversations and asking questions about where do you think they could grow, where do you think they could use help, why are they looking at acquisitions?

Ask them the question “why” a lot honestly and it will give you a lot. Hopefully, they’re aligned. I mean, some of our clients are more aligned than others but that’s what we really try to seek. In addition to that, why at an organizational level and why are they even pursuing this? It’s that senior level commitment and alignment is key because for us, we take the risk of going down the path, helping them find something. But if they’re not in alignment at the top, at the senior team, all of a sudden one person loves it, another person hates it and nothing happens.

So, we spend a lot of time upfront trying to—spend a full day or two with the business owners or their management team, depending on the structure, asking a lot of questions, getting to know their business, what they want and what they don’t. And then we’ll even come with examples. In fact, we’re getting ready to do this – a kickoff session after the New Year with a new client. They’ve already told us a couple of things. They’re looking at certain types of manufacturing capabilities that they don’t have – maybe stamping or some other metal process.

We’ll likely bring a few examples. And we’ll really dig into that example of what they see in it, what they don’t like about it. There’s always unknowns until you actually get in touch with the company but we try to paint that picture and get their reaction and then assess where to go next from there.

Josh:                What do you do when you find that the management’s not alignment about why they want to do an acquisition?

David:             That’s a great a question. We usually have a point of contact and try to talk through that. I mean, we can’t force them to do anything, I guess, but we insist as much as we can in a nice way that it makes sense for them to have an internal discussion, at least talk through it, air their differences. I don’t mean that these are personal significant differences but usually it’s just a matter of opinion. We at least get them to commit to “All right, let’s pursue this strategy now. Let’s go down this path and see what happens.” Let’s put a stake in the ground and see what comes from it. And then we can always adjust later. But we try to get them to commit to each other to at least pursue something for a period of time.

Josh:                Do you ever do an internal due diligence process with your buyer clients to find out where they’re good and where they’re weak? I would assume that you guys do that with people who are selling their company. But do you ever do it on the buy-side?

David:             I mean, we do through these discovery sessions where we’re talking to different members of the management team. It’s hard for us to do a really in-depth study. I mean, we know our capabilities. We’re great on the financial side. We can see strategic things. We have represented a lot of companies on both sides so we know what buyers and sellers look for.

I think you get a lot from just talking to people. But I don’t know if you’re asking about in-depth analysis of manufacturing or service or customer service. I think we just try to get in there, look and see, and touch as much as we can. But often times, where they want to get moving, we want to get moving, we try to do that efficiently so that we can go out and communicate to a candidate, a target – a company that might want to partner with them, why they should want to be a part of the buyer. That’s one of the things that we work really hard on is communicating that. I think we spend more time on that than really assessing the strengths and weaknesses of our buyer. We get the basic information obviously, to make sure they can pay for it, what they can do, what they can’t do, their approval process- those types of things.

Josh:                There’s a product out there that we use a lot called Core Value which actually takes us through their 18 value drivers in a company. One of the cool things I like about it is it tells me where I’m weak. Sometimes, buying that weakness is more effective than trying to fix it internally.

David:             Interesting.

Josh:                It’s something that we do. I find that, the more I know about myself, the easier it is for me to go out and find something of what I’m looking for.

David:             Absolutely.

Josh:                We also use the Why process a lot. I’m a big fan of Toyota’s Five Why’s that they use in their manufacturing process. I think it makes sense in the acquisition process also.

David:             Absolutely.

Josh:                Let me ask you a question. We have time for one more which is kind of a big question. We could spend 25 minutes on this one by itself. But what makes a business valuable especially to a buyer?

David:             You’re right. This could be a long question. Mostly because it’s highly dependent on the industry you’re in. I don’t know how much your listeners get involved in valuation and understanding. I think, culturally, people understanding this more but often companies are bought and sold on a multiple of cash flow or an in the cases of higher growth earlier stage business is possibly revenue. So, those multiples, those metrics that people use to apply to the numbers to get to a starting point very highly depending on what industry you’re in. Now, if you’re in a higher growth segment of an industry – you know, healthcare is an area that’s getting a lot of attention right now but if you’re in a healthcare service business that is attached to Medicare or Medicaid, people are afraid of that so things might not get done in that area.

The same thing with manufacturing, if you’re a commodity manufacturer you might get a lower multiple than if you have invented technology and you’re changing the way that things were made. For example, additive manufacturing or 3D printing right now is very hot. And that’s because it’s a disruptive technology. It’s sought after. There’s a lot of growth there. So, different industries carry different multiple inherently.

But then, kind of where I was just going there, your growth – your individual growth matters a lot too in terms of the multiple you get relative to your peers. But I would say that the multiple is always a starting point. I mean, when we’re working with a client on the buy or sell side, no matter what it’s negotiated and a lot of the intangible things end up being a bigger factor than people realize to.

Even if you’re selling to a private equity group, or a family office, or a strategic group, the management team has a huge impact, especially if you’re talking to a financial investor, they need that management team and it can’t just be the business owner. So, often, when we’re representing companies that might go to a financial group, it’s best that we have a strong leader that also has at least a second layer of leadership that someone can say, “I can see this company being successful with that team for the next 5, 10, or 15 years.” Now, I know you talk a lot about sustainability and you have to balance the short- and the long-term but I think businesses that are setup for long-term growth, long-term success where they have a strength of people, of technology, their facility looks great, their equipment’s well maintained – all that stuff that sets people up for the long-term also make it very salable.

Josh:                I’m going to just give a plug for what you guys do, David, is that anybody who is buying or selling a business and does not engage with an intermediary is not doing themselves a favor, and that’s being kind. I normally say that in much stronger language.

So, David, we’re out of time unfortunately but I’m probably going to have you back some day and were going to go down some other roads in this topic which is a really good and interesting one, I know, to our listeners. How would people find you, if they want more information from you?

David:             Sure. You can find me a couple of different ways but I have a personal web site, davidpmariano.com or my firm’s name is Western Reserve Partners. Unfortunately, we couldn’t get that long URL anyway but it’s Wesres Partners – W-E-S-R-E-S Partners – plural .com and you can find me there as well.

Josh:                David, thanks so much for your time today. This was really interesting and I hope somebody contacts you about helping them buy a business.

David:             Josh, thank you very much. It was a pleasure.

Narrator:         You’ve been listening to the Sustainable Business Podcast where we ask the question, “What would it take for your business to still be around 100 years from now?” If you like what you’ve heard and want more information, please contact Josh Patrick at 802‑846‑1264 ext 2 or visit us on our website at www.askjoshpatrick.com, or you can send Josh an e-mail at jpatrick@askjoshpatrick.com.

Thanks for listening. We hope to see you at The Sustainable Business in the near future.