How to Approach Deal Targets

Picking the targets

Our business is very market-centric. The elements of any one market can be quite different from others. So we're generally looking at our company at a market or regional level and want to have a meaningful scale in each local market.

When we're looking at the target universe, we're focusing on markets where we don't have that one or two positions and determining which businesses, if any, are available to achieve that. If we don't have a full, what we consider a full, our representative product and service offering will look for businesses with the elements we're missing to try and round out our business.

Sometimes we're buying businesses that simply add new markets to us. For example, we've made acquisitions in the past, who help us establish a presence with the leading position. 

Prioritization

Management capability is the first one. One of our scarce resources as a company is just management time and attention. So understanding who is managing the businesses that may transact in the market.

Because from our perspective, what is ideal is to have a business that has a professional non-family manager, where the family can step away and the business doesn't break after we've bought it. 

Few industry publications often have profiles about companies. So for the larger targets, it will be public knowledge. The smaller ones are more about what our people have heard and know from the market. A lot of times, we don't know that much about a business before we reach out other than the general reputation. 

So we ask people straight up, we will ask what family members are in the business. And we can't find them all from last names, but we will look at the roster. So if we recognize any of the last names we'll ask and it can be a deal killer. 

The biggest problem is usually when the person selling the business runs the business because then you're just going to have an inevitable conflict after a sale where they've just monetized their business. Still, we're completely dependent on them to run it. So that's not a tenable go-forward arrangement.

One of the first things I do is sit there and look at ownership. Who's getting what, and based on what we do or don't know about people's lifestyles, does that seem like an amount of money where they're going to be unmotivated going forward?

How to approach deal targets

It's generally a simple exercise of sending an email or making a phone call. When I tell people who I'm with, they know exactly who we are, but sometimes depending on the outreach method, I may not tell. I like to see if it's a private conversation that I'm leaving a message on someone's cell phone or if I'm talking to them directly.

Regarding the order priorities, I'll generally talk to our regional managers and see if they know of anyone in their organization who has a relationship. Our industry can be fairly incestuous. So often, they're a sales rep or market sales manager who belongs to the same country club as someone or has some other point of contact.

If I get nothing there, I'll usually call the main office and ask the person if I can't get through that way and it's screened. Then I may see if I can find an email, or I may send someone a message on LinkedIn. I've had pretty good luck getting through to people that way.

It's certainly easiest if we have an internal contact within the company, then I'll let that person introduce us to our regional management and to me to kick off the dialogue. 

Calls, emails, even try LinkedIn outreach. If none works, I'd give it a week or two and try them again if I haven't heard back. If it appears that nothing's working, we'll talk to local management from our business.

I've found that sellers fall into one of two categories in our business. Either day would rather speak to someone from corporate because it avoids chit-chat in their local market. Or they're just not comfortable with the mothership. They would rather speak to someone they know or are at least familiar with from their local market w]ich has a local reputation of being a good guy or a decent operator. 

There is a percentage of people you can't get a hold of. It has declined over time, probably for two reasons:

1. The business cycle and building products have matured with everything going well, those COVID housing boomed and people wanting to sell.
2. The scale of my employers grew, so the number of potential acquirers has shrunk as well, and people probably have fewer options.

We've evaluated about 300 opportunities in the last, which doesn't even count teasers that don't get into serious evaluation. A significant number of them are attempting to direct outreach. So it's just hard to say, but the ratio is, as you can imagine, reasonably small.

There are many frogs. There are many people you never get in touch with or talk to and don't really like what you hear. And then there are a lot of people where you have a whole conversation. You make an offer and it's not mutually agreeable and you move on. 

You don't have to finish everything by day one if it's a stock deal. But if it's an asset deal, you have to do some preparation, get them on payrolls, and other things. So that helps determine that as well. 

Preparation 

I usually try to see if there are any articles in the industry. Google people's backgrounds to try and understand how long the business has been in the family, which family members are or not involved in the business, have some sense of where someone's coming from, see their philanthropic interests. 

For many owners, I'll dig news articles about organizations they're involved in. And I don't try to reference them directly. I just try to get a sense of the person with some business owners who will be all over local news because they're very involved in the community. Some people are very private, just trying to feel for the person, but I'm generally very forthright and it's not helpful to beat around the bush for the cold call.

Just tell them where I'm from and why I'm calling, that we're interested in learning more about their business and ask them if they ever thought about evaluating a sale. In general, I'll get a fairly straightforward answer.

When I know I'm talking to someone directly, I don't beat around the bush because we're not very interested in partnerships. There's a lot of web work and outreach. I want to have conversations with people who ultimately are willing to transact their entire business. So I don't see any point in being too indirect. 

Handling objections

If they say no upfront, I try to keep them talking. I try to understand their concerns so I know if it's addressable or not. 

One of the most common elements is that people aren't ready to retire. So then I will talk about our acquisition categories, either the owner wants to leave and has other plans in place or the owner isn't quite ready to leave.

We've had many companies where owners still work for us as employees. So that's not necessarily a problematic outcome, so I try to portray to people that is a potential option. A transaction does not necessarily mean they won't be involved in the business for a while. 

In our business, at least there are a lot of generational succession issues. Many people are reaching retirement age, the owners of these businesses. And at the end of the day, everyone knows they're going to need to sell their business or dispose it. They are going to sell so it's not a foreign concept. It's just helping people wrap their minds around something that they may not have actively considered until your conversation brings it up. 

I've had a couple of conversations where people say that the business works well for them. They get a good return and as long as they're still happy doing it, they're not interested in selling. People who really hold that view, I'm not successfully overcome it yet because I think it's fairly sound logic on their part. 

Assuming they're not 85 years old, usually the people telling me this are 50 or younger and have still have energy and interest. And if they're smart, they've they have non-family managers already there, which has created some flexibility in their lifestyle. And if it doesn't require an inordinate amount of their energy or oversight, then it is hard to overcome that argument. 

Setup Meeting

Signing an NDA and providing some preliminary information and that is usually when people say yes, and they're comfortable doing that. In cases where people aren't so positive or forthcoming, it's more of a visit. 

I'll do that with local management with one of our division presidents or regional VP and establish a dialogue with them from a corporate development perspective, but also with the person who oversees their region. 

Sometimes they want to see that after hours to avoid suspicions. Sometimes they'll march us through during the day because they'll have visitors and don't view it as anything unusual.

And then we usually just sit down, discuss the business, and do it over a meal. Just have time with them, get them to talk about their business. Usually, people are happy to talk about everything they've created. So it's just getting information.

Suppose we haven't had an NDA and haven't provided their request list before that meeting, and generally, the follow-up out of that meeting is that we say. In that case, the next step is to get enough information to give an indicative valuation. Very seldom are you said no if they've been willing to have you come visit. 

Initial diligence questions

Most of the qualitative discussions about business, and hopefully addressed during our visit, are.

• understanding the mix of their business
• how they're running it
• whether they have Salesforce
• who grows relationships with customers
• getting a sense of the efficiency of their operations
• understanding whether they have a fast keeper of expansion or not 
• who got some of the key customer relationships. 

Most of that qualitative info is what we hope to get with a visit at a dinner or other meeting. Then the more actual, tangible data requests tend to be around things like real estate, and any information on their property.

And who's in senior management trying to discover instances where management is maybe getting paid well above? What we would consider market? Identifying any nepotism issues. As you've mentioned earlier, understanding where owners have been taking out above-market comp. So we can try and understand what. The profitability will be under our structure. 

Businesses of different degrees of capital intensity, depending on what they're distributing. Depending on whether they have any fabrication or manufacturing operations. So trying to understand what the deferred capital is that we're about to step into if we buy them, we talk about it. 

We ask to see their rolling stock information to understand general age. Then, when we going through the facilities, we get a sense of manufacturing operations as to the age of the equipment, how tired it is or isn't, and whether it will need near-term replacement.

Negotiations

We get a number out of them. If they dodge that a few times, we will give an initial number, but it'll be on the low end, trying to take advantage of the anchoring effect. 

In our industry, there are three or four very common publications. They always have articles by people about valuation expectations. You always have to try and get people to give their number first because you don't want to throw more money at it than it's required.

You can get a sense of people's degree of sophistication. And if you really can't, the initial offer will start low and you'll work your way up if necessary. 

Everybody's got their anchor point. You're going to inch forward to each other. If they're way high, it depends on whether we're really interested in it or not. If we're not interested, then we may tell them that's not realistic.

If they are a very high priority, then we may be more willing just to give them a true number that we're ready to pay. You don't want to take people off, but you do have to manage their expectations. 

It's very rarely one meeting because you'll usually have a sequence of conversations and/or meetings. So there's more than one stakeholder and not all of them are part of the conversation. And even if it's two people in their part of the conversation, they want to go confirm. 

No one's ever taken the first offer. So you keep going back and forth, making little moves or not making moves. 

It's a dynamic of how badly we want it. There have been cases where we'll throw out a number and they come back with a much higher number and we say no. So we'll make a token move to show them that wherever we end up is going to be far closer to our first number than to their first number.

Building the business case for the deal 

We've already built the business case before we ever share a number. I try to think that no business is that extraordinary in the long term, and that it will reflect market-level growth. 

Any deviations from that have to be attributable to specifically identifiable factors. Sometimes you're just willing to pay more for something that is strategic. It's a number one or number two position, or there's a scarce, or if you're trying to fill out a product hole in your offering and there are not many options, you may value it more highly and be willing to pay more. 

Unless it's a very large business where we bring the CEO in generally it's the CFO, me, the operator overseeing the geography, and the person who will have P&L responsibility for the business after it's acquired.

The business case becomes part of talking points, especially when there's a recent sale example where we put out a number and sellers weren't pleased with it. You're just explaining the rationale behind your number. And that touches on the way we're looking at things. We'll be talking about why we think it is a great business, but it's somewhat restricted as it currently exists and all the work to grow is it going to be in the future. And that's not something we value and shouldn't have to value. All kinds of talking points come back from that.

Formal Diligence

If it's a small direct deal, that can take a while to pull all information together unless they have the foresight to get started already. In some cases, they may ask for that list so they can get started. 

We just create a data room and we have our normal points of contact across the departments. And once an opportunity becomes available, we give all of them access. So we'll probably spoon-feed them a little, just describe to them what's been provided and where they should start their review. 

And if there's anything salient we already know, we'll point that out to them. But generally, Corp Dev serves as the traffic cop in that information exchange, and we do depend on the departments to do their review. We know hot-button items that we're always on the lookout for. 

We don't want to invite people who haven't already hired some advisor to hire one because that complicates the whole process. 

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