Mergers and Acquisitions
The art of the deal
How John Long builds First Advantage Corp. through acquisitions
By Brian Horn
Smart Business Tampa Bay | February 2007
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Acquiring a company is so common at First Advantage Corp. that its 4,400 employees start to get restless if there isn’t talk of a deal.
“Sometimes, if we don’t announce a deal for a couple of months, I’ll be walking down the hall and someone will ask, ‘What’s happening? How come we haven’t done a deal? Are we out of money?’”
says John Long, CEO of First Advantage. “People just get used to it. Some CEOs want that culture. It’s a good way to accelerate the growth of your company.”
The risk mitigation and business solutions provider averages about 14 or 15 deals a year. In 2005, it posted $644 million in revenue and did 14 acquisitions, with 10 more in 2006. While revenue
has steadily climbed with the acquisitions, so, too has the company’s net income, rising from $16.4 million in 2001 to $58.4 million in 2005.
“As a general rule of thumb, we always have two or three deals we are working on,” Long says. “There’s a consistent hum here of activity related to transactions, even if, at the end of the day,
we end up killing it.”
He has completed more than 50 acquisitions since June 2003.
Here’s how Long successfully executes his acquisition strategy.
Identifying targets
Long says there is no tried-and-true formula for comparing the potential value of a purchase to its cost.
“We’ve got internal ways of measuring results of what we expect from transactions,” he says. “Some are done defensively. Sometimes you buy companies so someone else doesn’t get
it. The value may be less clear.”
Long says that for the most part, First Advantage acquires companies that will help it grow and add more products.
“When we add products into a segment, the idea is to add complementary products,” he says. “Our salespeople can then cross-sell to their existing customer base. The idea is to sell
more products to the same clients. That’s a lot easier than to try to go bang on doors and get someone who you don’t already have a relationship with.”
Diversification also factors in to which companies First Advantage wants to acquire.
“I don’t want any of my businesses to be tied too much into any one cycle,” he says. “I don’t want it to be tied too much into any one technology or one customer base. I like diversification because it allows me flexibility to grow. The more I can diversify at the end of the day, the more stable the earnings are.”
Diversification also allows for situations in which one aspect of the company may be doing poorly but is offset by another component succeeding.
“Our credit business does a lot of mortgage credit reports,” Long says. “When interest rates are high, as general rule of thumb, that means less value. It also means economic times
are high, and that’s better for employment. We have an employment segment that will benefit from that. You certainly don’t want to develop a business where the whole thing goes in
the toilet. We try to balance it as much as we can.”
Keep things consistent
A key component of any acquisition is integrating the newly acquired company with the First Advantage way of doing business.
For many deals, much of the process involves coordinating management and sales, along with making sure the rules of human resources are consistent and the department is filled
with seasoned workers.
“For the average employee, they don’t care who writes their checks,” says Long. “They just want to get it. So managing normal HR procedures is very important in a transaction.”
Many of First Advantage’s deals don’t involve that much integration. When there is a lot required, Long says it can be painful.
“You have to work through what your requirements are and what your goals are,” he says. “You have to work through customer needs and what they are used to. Sometimes, your customers have to make sacrifices when you make a deal.”
Since the customer is of the utmost importance, it is vital to keep good sales and customer service people while getting them accustomed to how the acquiring company does business.
“At the end of the day, those are the lifelines for the customers,” he says. “You are buying customers when you do a lot of these.”
Accounting and IT structure are also centralized for consistency, and occasionally, back-office work is, too.
“If one of my businesses needs 10 full-time programmers, they’ve got 10 full-time programmers, and they aren’t working on anything else,” he says. “This perception that you can just
bring all these people under one umbrella and all this work will disappear and you can cut all these people — that’s just not true. You still have to have dedicated resources to the individual businesses and products that you acquire. A lot of things don’t change.”
Sometimes, positions are consolidated for efficiency.
“If we have two businesses that each had a controller, we try to get one controller in a centralized environment to control two businesses,” says Long. “Right away, that might save
you $100,000 plus. That’s the simplest form. Then you get into the back office where you are maximizing productivity.
“Most of our deals we are looking to do that. You can save a lot of money reducing redundant technological platforms.”
As far as employee compatibility within the corporate culture, Long says if someone doesn’t fit in, he is more than likely to let him or her go.
“Sometimes it fits, sometimes it doesn’t,” he says. “I’ve never tried to tackle that head on. Pieces of the organization can be culturally different than other parts. Sometimes, people in
some groups just don’t fit in. They aren’t comfortable from Day One.”
Sometimes, you just walk away
While acquisitions are a major way to grow, Long says he needs to keep a watchful eye that he isn’t growing just for the sake of growth. While the company has closed about 50 deals
since going public in 2003, about 15 more approved by the board were never finalized.
“Just because it is approved doesn’t mean we do it in the end,” he says. “We go through a process of review, and sometimes we get in there and don’t like what we see. Sometimes it’s
management. Sometimes that stuff hits you with a baseball bat. You sit back and say, ‘I can’t work with this guy. I’m not going to do the deal.’ Experience helps you out.”
Long says that a couple of years ago, he would have been more likely to follow through on a bad deal and close it.
“Having made one or two of those bad deals, I think we’ve just gotten better at [it],” he says. “I think we are more willing to bite the bullet early and just kill it.”
Sometimes a deal is already done when Long realizes he was told a different story before the deal was finalized.
“During the courtship of a transaction, people will tell you they are on board with certain things,” he says. “Then the deal is done, and they have the check, and then you go and do exactly what you said you were going to do, and they put the brakes on it, and say, ‘You can’t do that.’
“Of course, that’s why you bought the company, so of course you are going to do it. You sometimes have an incompatibility that will immediately pop up because people don’t want
to give up what they are accustomed to, no matter what they said at the time. Usually, in cases like that, we agree to part ways, and they take their money and laugh at the beach.”
While acquisitions are a great way to grow a company, Long says it takes a lot of work, and people can get burned out.
“Folks just get tired,” he says. “You are constantly introducing new blood into the organization. Sometimes customers expect more out of you. Sometimes perception is not the reality. You’ve got to work through issues.”
According to Long, 90 percent of the company’s day is working through issues.
“That’s not a negative,” he says. “It’s just that strategy breeds more issues. If you are just a guy who sits there and is organically growing every day and signing a customer here
and there and watching the change meter, it’s a lot easier.”
Communicate from the beginning
As with any organization, communication is key to First Advantage’s success. Long says it’s important to communicate expectations and goals up front so that incoming employees
know what to expect.
“The better job you do at communicating up front, the better everyone is,” he says. “People should start work with reasonable expectations about what the job is and the environment
they’ll be working in. We certainly try. Sometimes we’re not successful, and sometimes people don’t always hear what you say.
“When you walk in our building with so much activity going on, there is always opportunity for advancement for sharp people. We try to get that message through the organization.
There is a price with that. You have to be able to work hard and deal with some of the uncertainty that a more inquisitive environment can bring.”
Communicating the message of the organization doesn’t have to come through some grand statement, either.
“I don’t think you have to stand up and make speeches,” Long says. “We do have meetings with key management and we do talk about what our objectives are and what our challenges
are in terms of how you get this through the organization. I think we just developed a culture that is a word-of-mouth culture.”
HOW TO REACH: First Advantage Corp., (727) 214-3411 or www.fadv.com
