How Lincoln Electric picks its deals

Lincoln Electric does a lot of deals – it recently closed three in 30 days – but it won’t make just any acquisition.

“Our threshold is cost of capital,” says CFO Vince Petrella. “What kinds of returns can we deliver and what value can we create for our shareholders based on investments in either organic or inorganic activity?”

Last year, Lincoln earned a 20.7 percent return on invested capital  – up 4.5 points from 2017.

In this week’s Dealmaker Strategies, Petrella shares how Lincoln Electric approaches acquisitions to drive continued earnings growth.

Create alignment

Lincoln always tries to align its M&A activity with the company’s underlying business strategies.

“One of our core strategies is to continue to expand and grow our capabilities in the automation space,” Petrella says. “We’ve embarked on a multi-year strategy execution to accumulate skills and capabilities as well as end-market exposures in automation that can expose us to a greater growth trajectory for the business.”

When considering a property or acquisition opportunity, ask first, ‘What’s the fit?’

“How does this fit into the strategies our company has developed for growing the business and improving our returns?” he says. “We view automation as a high-growth opportunity for our business.”

Study opportunities

Lincoln’s corporate M&A team sources the deals, working closely with business unit and operating unit leaders.

“The team is looking to understand what their needs might be and to canvass them for ideas on attractive targets that would accelerate our strategies,” Petrella says. “If the target is suitable, that results in some investigative work to understand the markets that a target might serve, what kinds of capabilities they have or what technologies might be interesting to bring into the business.”

That leads into the due diligence process, when the company brings to bear “a broader array of functional and technical expertise across the company,” Petrella says. This is the time to determine the risks and opportunities a target might present, he adds.

Share your experiences

From December through January, Lincoln completed a string of three acquisitions in 30 days, including the purchase of the soldering business of Worthington Industries Inc. When you’re making a lot of acquisitions, you’ll probably earn a reputation. That works in Lincoln’s favor as the company pursues new targets.

“Encourage them to talk to management teams and companies that you’ve brought into the fold,” explains Petrella, who says that, “We will provide references and tell target company management teams to talk to the last couple management teams that we’ve acquired. Actions speak louder than words, so we encourage those targets to talk to those previously acquired companies.”

Focus on growth

Lincoln sees every new deal as an opportunity to add resources and capabilities.

“We’re not the kind of company that views acquisitions as a cost-cutting opportunity,” Petrella says. “We tend to leave the business running largely how it is running with the management team, and then add whatever value we might have that we can leverage through our existing relationships with customers and technologies.

“Lincoln views acquisitions as adding value and bringing new talents and managers into our organization. New technologies and new ways of doing business can enhance our existing portfolio of capabilities and relationships with customers.”

Prioritize integration

To ensure long-term satisfaction with a new acquisition, Lincoln selects the most talented leaders to fill the role of integration managers.

“It’s really important that you onboard the organization in the most effective way possible, to not be disruptive and detract from the value that you acquired,” Petrella says. “If anything, you need to overemphasize and overinvest in resources in the integration efforts, particularly early on in the acquisition process.”

 

Related post: Employees play an integral part in the growth at Lincoln Electric

 

The deal’s in the details

Dealmaking can become very personal, especially when a founder is involved.

“A founder is a salesman,” says R. Louis Schneeberger, who has guided more than 100 acquisitions to a close and more than 30 companies to a sale. “He’s not an engineer. He’s not an accountant. He’s a salesman. These are emotional people, and they’ll get worked up over issues that aren’t significant to others, but are to the lead sales guy of a company.”

A master negotiator and business adviser, Schneeberger specializes in diffusing situations like these. “I need to convert the issue to dollars and cents and have them understand it’s just money,” he says.

Here, Schneeberger and other top dealmakers share their advice for navigating negotiations to a successful outcome.

Know what you’re in for

When you’re negotiating an acquisition, take the due diligence process seriously — especially if you’re looking to buy a company from its founder.

“You really want to understand all that he’s gone through and the results he’s had in the past,” says Schneeberger, executive chairman at the SaaS-based technology platform Proformex. “How much does he care about the company? The other part is knowing what the issues are. It’s not good for you long term to do a lot of nice talking versus getting into the key issues.”

Keep in mind that the amount of work involved in making a deal is not relative to the size of the company. An acquisition won’t be easier to negotiate simply because you’re buying a smaller business.

“When you’re buying a $100 million company, the amount of work involved is not 10X what it is when you buy a $10 million company,” Schneeberger told Smart Business Dealmakers last year. “Does your team have the bandwidth and the bench strength to take on the additional workload that comes with working through and negotiating a deal? If it doesn’t, do you have a plan in place to bring in external support?”

When Park Place Technologies launched its acquisition strategy (one it’s currently executing), CEO Chris Adams realized the M&A process was putting a strain on employees. So he created a dedicated internal team to manage each transaction.

“If I have good, talented people over there executing, I’m going to let them do their thing and get out of the way,” Adams told Dealmakers in November 2017. “If it doesn’t go well, I’m accountable. But if you, as a leader, want to do everything, it’s going to fail. There are just too many variables associated with acquiring a company.”

Remember that time is money

It takes time to assess value and negotiate what you think is a fair purchase price for a target. But your costs are accruing as talks proceed.

“Every day, the clock is ticking and your dollars signs are rolling up,” Schneeberger says. “Your accountants, your lawyers — you’re doing all this work. Everybody is doing all this due diligence. It could be $5,000 or $10,000 a day you’re spending.”

If you wait too long to address key issues, you risk sinking a lot of money into a deal that never happens.

“There could be two issues in the deal that are so significant, it will make you not do the deal,” he says. “It’s best you address it. If you don’t address the big ugly elephant in the room, you’re just wasting money.”

Edward F. Crawford, a legend in Cleveland business circles, has made more than 90 acquisitions in his time leading ParkOhio Holdings Corp. But as he told Dealmakers, he’s not afraid to walk away from a deal when he senses something is off.

“When I’m sitting with someone and they’re selling the company, the first thing I want to know is why am I so lucky that you’re selling me your company?” Crawford says. “If they can’t make it clear why they are selling the company, there is something wrong. I’ve bought a lot of companies, but I’ve also walked out of a lot of rooms when I got the wrong answer.”

Don’t overshare

You may see value in offering the seller substantive ideas about what you would do with the company upon buying it. It’s not a bad idea, just don’t reveal too much.

“Everybody on the other side wants to know what’s your plan?” Schneeberger says. “What are you going to do? What’s changing? It may give you a leg up when they understand your plan and they like your plan. If they don’t like your plan, maybe it will hurt you.”

“You can go too far, though, if you tell them too much. I had one deal where we told them so much, they pulled the deal and executed our strategy, and they didn’t sell the business.”

Ultimately, the strategy you follow in buying a business will contribute to your success should you ever go on to sell it.

“Sol Siegal at Olympic Steel, he always said, ‘Anything well bought is half sold,’” Schneeberger says. “There is a certain price where you can buy a company. You need to know where that endpoint is, no matter what you’re doing with it. Some of the best deals you do are the ones you don’t.”

 

Related post: Helping clients complete deals is always special

You can’t fake passion

Passion is an authentic emotion. That’s why it’s the first trait Pete Martin looks for in Votem Corp. employees.

“You can teach people just about anything,” says the founder and CEO of the mobile voting company. “At the end of the day, if they have their own attitude, they don’t fit with the culture and they’re not passionate about what they’re doing, it doesn’t matter how skilled they are. It won’t work.”

Five years ago, Martin attended a conference where he was asked to write down an idea that would positively impact a billion people. He wrote two words: mobile voting. Since that day, he’s worked tirelessly to create a safe, trusted platform to enable people to vote via their mobile device.

The pressure to get it right is immense. To succeed, Martin needs people who feel just as strongly about Votem’s mission to make mobile voting the norm for all elections, including U.S. political races. “If anyone of us screws this up, if there is a hack, we’ll set this industry back 10 years,” he says.

In this week’s Dealmaker Startup, we talk to Martin about building on market opportunities, the role of resilience and going all in on your vision.

The first steps

I spent six to eight months listening to anybody who would talk to me. I did tons of research, talked to people who won elections, secretaries of state, my competitors. I talked to everybody just to understand the market opportunity. What’s the competitive landscape look like? What are the obstacles to making this happen?

We offered a quarter-million dollars to anybody in the world who could come up with a technical architecture or an online voting system that couldn’t be hacked. We said, ‘Look, nobody is doing this in a significant fashion, certainly in North America. We don’t have any designs on what the solution should be. So, let’s go to the crowd.’ We had about 200 people from 30 different countries make submissions. We were blown away.

When you build a company, you want to build it for the future, not the past. About one-third of the solutions revolved around blockchain technology. I had a guy on my board who was from Microsoft and he said they plan to invest $20 billion to $30 billion over the next five years in blockchain. They never do that unless they have vetted the technology. We decided that’s the direction we need to go.

Success factors

The No. 1 thing that drives any successful entrepreneurial venture is grit, or resilience. This embodies a bunch of things. If you’re out selling into the market and the market is not buying, you have to figure out what to do. Are you failing from a sales perspective? Is it just a product people aren’t going to buy? Is it a price point that somebody is not going to buy? It’s constantly adjusting to figure out how you can grow and sustain the business. In our case, if you talk to people who run elections, they will tell you it’s not a matter of if, it’s a matter of when we’re going to do online voting.

A big part of our strategy was to make sure we could support and grow the business. We started in the private elections market, where online voting is much more acceptable. We realized we could grow the business without doing any online voting in the public sector. But that’s still the long-term vision of where we want to be.

So we picked up an established company in San Diego, Everyone Counts, which was in the voter registration market and brought us decades of experience running elections. That ability to be honest and adjust as you need to through resilience, flexibility, pivoting, whatever it is — that is key. The folks who don’t survive either don’t have the honesty to adapt or don’t recognize what the problem is.

Every once in a while, I’ll wake up and say, ‘What are we doing?’ Can we really make an unhackable online voting system? I’ll get on the phone with my engineers, and they’ll say, ‘Yes, we can do this.’ But we have to continue to prove ourselves every day. We have to be one step ahead of the bad guys every single day. I’m confident we have the right people and the right technology and architecture to do that. It can be a challenge, but I also find it intellectually stimulating.

Final thoughts

In most cases, given enough time and enough focus, you can create anything out of something. You need to have the financial backing to do it, so you can pay the bills without stressing out too much. But most importantly, you need to be really committed to it. Lots of people want to be an entrepreneur. Very few people can actually be successful because you have to be all in. If you’re not all in, you’re probably not going to make it.

Embrace fear and uncertainty

If there’s not something wrong with the business you’re investing in, you’re probably paying too much, says Umberto P. Fedeli.

“You take a great company, great quality and great growth, but the value is so expensive that you overpay, and now it’s hard to make that up,” says Fedeli, president and CEO at The Fedeli Group. “You can’t pay an unlimited price. I need fear and uncertainty to create volatility, and then ask, ‘Is it a problem or is it an opportunity?’”

Fedeli is a competitive investor, constantly reading up on what’s going on in the market and scouting out the next great opportunity to earn a sizable return. “I have no interest in getting involved in something just to play,” Fedeli told Smart Business. “If we’re playing on the field, we’re playing to win.”

In this week’s Dealmaker Strategies, we talk to Fedeli about his approach to identifying good investments.

Have room to grow

Fedeli admits he used to be a “deep-value investor” who would look for opportunities that were relatively inexpensive.

“I couldn’t resist them,” he says. “Sometimes it worked. But Warren Buffett calls them cigar butts. You get one puff and you have to figure when to get in and when to get out. You have to get the timing right.”

The key is finding investment opportunities that have room to grow.

“It could be a great company, and you could be buying it at a good value,” Fedeli says. “The problem is there is nowhere to grow. It’s already grown too much. What works is a company that has value, quality and is ready to grow.”

Be wary of turnarounds

Turnarounds obviously have the potential to provide a great return on your investment. But, too often, the much-anticipated turnaround never happens.

“There are always more problems than what you see on the surface,” Fedeli says. “You see on the surface what you know. But you don’t know what you don’t know, and then it always takes longer.”

Don’t be a know-it-all

Be honest with yourself about your limitations, Fedeli says. Understanding your personal strengths is more important than seeming like you have all the answers.

“You don’t get in trouble if you don’t know something and you say you don’t know something,” Fedeli says. “When you really get in trouble is when you say you know something that you don’t know.

“I wasn’t good at much, but I always seemed to know who was good and who did know. I thought it was a weakness to say, ‘I’m not good here, but I know who is good here.’ But knowing who to trust and who is good at something is not a weakness. It’s a strength.”

Keep a checklist

Successful investors understand the value of a formal process for everything they do, Fedeli says.

“What’s your investment criteria?” he says. “What’s your process, step by step? What is the final checklist? Did you go through and look at the customers? Did you look at the balance sheet? Did you look at their vendors?

“Some people may have a checklist that has five items, but I’ve seen others that had hundreds of sub-items. You need to have a process.”

Entrepreneurs often rely on instinct in the early days of their business, gradually developing a more process-oriented approach as they scale up. A clear process will help you both understand and plan out what you need to ensure success.

“Usually, the biggest obstacles we have in our life are us,” Fedeli says. “You’ll see great athletes who will sit there and see themselves running and jumping in the air to grab that ball. They can visualize their performance.

“Sometimes in business, guys don’t have that vision. They don’t know how to go to that next level. The process is important, and the checklists are important. If you analyze people who are super successful, you see that there’s a reason.”

 

Related post: A man of the people who seeks to win at everything — and usually does

Elements of an effective M&A strategy

John Ensign doesn’t have much downtime. But that comes with the job at MRI Software.

Since he joined the real estate software solutions provider in 2010, MRI has made more than 20 acquisitions, including one announced earlier this month.

“With heavy deal volume definitely comes a bit of chaos,” says Ensign, MRI’s president and chief legal officer. “You’re not going to be able to control every aspect of the process. You’re not going to know everything when you have three or four deals going on all at once, and they all have competing deadlines and rely on shared resources to get done.”

Though it’s a constant challenge, Ensign has helped steer the aggressive acquisition strategy in the right direction. “We’ve had a good run of finding companies with the right people, cultures and products to fit what MRI is doing and where we’re going,” he says.

In this week’s Dealmaker Strategies, we talk to Ensign about the elements of an effective M&A strategy.

Stay humble

Modesty is a valuable skill to have when you’re exploring an acquisition, Ensign says. It sets a tone of camaraderie that can go a long way toward making a deal work long term.

“As you’re learning about someone else’s business and how they run it, you discover there are a lot of ways to run a great company,” Ensign says. “We have a way. That doesn’t make it the best way. We take that into account that as we’re looking into acquisitions and understanding the companies and the teams and how they operate. We don’t have all the answers. We’ll have a high-level plan coming in. But one thing we’ve learned is that what we know about a business during the diligence process is a lot different than what we know four weeks after we own it.

Have a shared strategic vision

Each company has its own structure. One of the keys to an effective acquisition strategy is maximizing everyone’s skills and talents, so they can better inform your M&A decisions.

“We have two private equity sponsors currently invested in the company, and we spend a significant amount of time building out that shared strategic vision,” Ensign says. “So, where are we trying to go, and what are the pieces we need to get there?”

Ensign has been part of both companies and growth strategies where the path is much more random.

“So, something down the street is for sale: It’s an acquisition. Let’s grab it,” he says. “That can obviously lead to a lot of challenges. When I look at why we’ve been successful, especially at MRI, it’s because we’ve had really good results from the acquisitions that we’ve made. It comes back to that shared strategic vision.”

Focus on what matters

MRI buys a lot of companies that Ensign refers to as ‘mature startups’.

“They’re not enormous companies, but they’re certainly not what you think of as startups,” he says. “They have revenue, they are established, they have a nice client base, and they have systems and processes in place.”

The goal isn’t to buy huge businesses and simply watch the revenue grow exponentially, Ensign explains. You want to develop a targeted approach that boosts your odds of a successful deal.

“We don’t think of our goals in the context that we want to hit a certain revenue number,” he says. “We certainly have financial metrics that drive the business on a year-over-year basis. But if we look at our five- or 10-year plan, it isn’t about having this much in revenue or this much profitability.

“It’s more about: Where are we in the marketplace? What markets are we serving? What clients are we serving? Where are we from an employee engagement perspective? Where are we from a client engagement perspective? Are our retention rates improving from a client perspective? Those are the things we’re really focused on.”

Related post: The time you take to get to know partners, potential acquisition targets is always worth it

 

 

Plan your exit before you need it

David Levine was thinking exit before his wireless lighting startup, Mr Beams, was even operational.

“It forced me to lead the company in a wholly different manner,” says Levine, who co-founded Mr Beams with Michael Recker in 2004 and later sold to the home security company Ring (which Amazon bought last year for over $1 billion). “Because of the growth of private equity and all the money following private equity, it’s a unique opportunity in our country’s history to build a business to the point you’re capable of and then pursue exit opportunities.”

Levine is now president of Amazon’s Ring Beams, the line of smart outdoor security lights that employs his innovative lighting technology.

In this week’s Dealmaker Strategies, Levine talks about planning your exit, saying no to investors and the risk of feeling dangerous.

Manage your financials

It’s pretty simple: When you’re a startup entrepreneur, you need to structure your company as if it’s going to be sold to private equity, Levine says. That begins with clean, audited financials and clearly documented processes. You need to be ready when the time to make a deal arrives.

“You’re building the organization to ramp up more quickly, meet criteria that are important to private equity firms, and then have everything clean enough to exit,” Levine says. “The worst situations I’ve seen are when companies count on a deal happening and they leave their financials and their cash situation in a tricky area. All of a sudden, if this deal doesn’t come through, you’re in really bad shape. You have to have a healthy balance sheet.”

It’s OK to say no

When Levine was building Mr Beams, investors pushed him to raise a round of venture capital funding.

“We never did,” he says. “We just funded ourselves at $100,000 or $200,000 a clip. Had we taken more money at any point, we were pointed in the wrong direction and it just would have accelerated our movement in the wrong direction. That’s a big problem when people do that, and you see it fail quite a bit. Unless you have the soul of the business down and you really know who you are and what your purpose is, you’re probably pointed in the wrong direction. And any fuel at that point is just going to get you more off course.”

You’re not Baker Mayfield

It’s one thing to feel dangerous when you’re the star quarterback of the Cleveland Browns. It can be quite risky when you’re an entrepreneur who has an unshakeable belief in your latest idea. Levine developed a power screwdriver that 15 out of 16 people in his focus groups did not like. He went ahead with it any way and the product was a success. But his hubris could have easily come back to bite him.

“I’ve been wrong on ideas like that just as often,” Levine says. “It can get dangerous. Too much market research will hold you back and you’ll miss out on a number of innovations. But getting arrogant enough to think you completely know better is also dangerous. You have to team with people who have a mix of both. Too much of either one is going to hold you back.”

 

Related story: Lessons learned on the right way to sell your business

Next Sparc’s Len Pagon Jr.

Even Len Pagon Jr. can balk when it’s time to sign on the dotted line.

It happened in 2008, when Rosetta was ready and waiting to buy Pagon’s Brulant Inc. The deal was all but done, but he felt the pull to return to the negotiating table.

“I knew things were not good,” says Pagon, now chairman and CEO at Next Sparc. “The market was dropping by a lot. At the same time, our business was way outperforming our forecasts. I was strongly considering re-trading our deal.”

Pagon ultimately sold Brulant to Rosetta, which Publicis acquired in 2011 for $575 million.

“I realized the best deal is sometimes the one that gets closed,” Pagon says. “While I could have re-traded earlier in the summer, I was just grateful that my deal was done. Not being greedy and not over-negotiating is really important.”

In this week’s Dealmaker Strategies, we talk with Pagon about his approach to making the right moves at the negotiating table.

Minimize the turns

People can sometimes really grind on certain deals, Pagon says. They get hung up on details that in the end, aren’t nearly as important as they seem.

“In my experience, a good or great deal doesn’t necessarily matter at the margins,” he says. “People might be grinding on a valuation or working capital. But if the deal turns out to be good and you’re hoping to get dollars, the nickels and dimes don’t really matter.”

The constant churn of the negotiating process can eventually hurt your chances of getting a deal done.

“Where things break down is when people are constantly negotiating, and they are changing this and that,” Pagon says. “That will ruin trust and could ruin a deal. If possible, minimize the amount of time and the turnarounds in negotiations.”

Push through fatigue

There are usually a few moments in any business deal where it feels like it’s all going to fall apart, Pagon says.

“You worked really hard on the deal, and all of a sudden they’re drawing some lines and you’re drawing some lines, and whatever issue or risk that’s on the table just won’t go away,” he says. “Or you think you have an issue handled and it just keeps coming back, whether you’re the buyer or the seller. It gets really fatiguing and then super intense because you’re trying to get the deal closed, but you’re just exhausted. To some extent, even if you love the deal, you just want it over with one way or the other.”

Have a backup plan

Ideally, you always have a backup plan in place just in case negotiations break down.

“I’ve had a couple deals, one as a seller and another one as a buyer; you get the purchase agreements and you’ve spent a couple of hundred thousand dollars on legal fees and due diligence,” Pagon says. “And then at the last minute, the seller walks in says, ‘I’m not signing it. I changed my mind.’ He sends me an email the day where he’s supposed to sign all the agreements and says, ‘I’m not doing the deal.’ When something doesn’t work out, ideally, you want to have a backup plan and keep moving forward.”

The bottom line

No matter how arduous negotiations get, understand that the real work often begins after the agreements are signed.

“Getting a deal closed and then working on the business is the best part,” Pagon says. “But it’s also, ‘All right, now we have to execute.’ You feel some success and satisfaction, but really, the work just begins when you close a deal.

“Actually getting it over the finish line and getting it closed, and now working on the business, is a big part of the satisfaction. Now you’re getting to work on the business and prove out your assumptions, hypothesis and investment thesis.”

 

Related post:

How a failed deal led to a better price for Brulant

LeafFilter’s Matt Kaulig

As quarterback for the University of Akron, Matt Kaulig brought passion and intensity to every game. Now that energy fuels his ventures off the field, including the multifaceted business empire he’s creating in Hudson.

“You have to have a lot of energy and passion, and it has to be fun,” says Kaulig, the entrepreneur behind LeafFilter Gutter Protection. “I loved practicing, watching game film and everything about football. After I couldn’t play football anymore, I got into business, where I take the same approach.”

Kaulig made $50,000 in the first year running LeafFilter. After 13 years — and one investment by Connecticut-based Gridiron Capital — the company is the nation’s largest gutter protection company and expects to crack $300 million in annual revenue. Kaulig played a key role in the Gridiron Capital deal, which helped drive 300 percent organic growth in only two years.

In this week’s Dealmaker Strategies, Kaulig explains how to show your value to potential investors and position your company for a sale.

Let talented people do their jobs

It sounds so simple, but it’s a critical piece to building a strong, enduring business.

“Some people say that the proof is in the numbers,” Kaulig says. “I think the proof is in the managers. Numbers can look good for a short period of time. It’s the people and the management of the company that really prove what a company can do over time.

“I invest more in people than I invest in the numbers because most of the numbers are created by people. If the people aren’t good, and the people aren’t there, then it’s just numbers.”

Address your weaknesses

In the early years of LeafFilter, Kaulig didn’t have a financial background or a professional CFO. He had his dad.

“I had to hire somebody to run our books, so I had my dad do it,” Kaulig says. “He doesn’t have a background in finance either. He had to go night school at the University of Akron to learn QuickBooks.”

Though unconventional, the approach worked. But Kaulig knew he needed a financial professional for the private equity world to take him seriously. So he ultimately hired a professional CFO.

“Get your stuff tight and professionalize whatever you need to,” Kaulig says. “If you’re really serious about going to that next level, find out what your weaknesses are, handle those, and then you can take your business to market.”

Clarify your role

Sellers often have an interest in remaining with the business, and that’s great — as long as the buyer is on the same page. Be clear about your role after the transaction.

“If you’re selling equity in your company, especially the majority of the equity in your company, you’re definitely giving up control,” Kaulig says. “So you just have to choose the right partner, and know if it’s somebody you want to work with or work for.”

Prioritize revenue

Through buying and selling companies, Kaulig has learned the importance of numbers. Intangibles such as culture and philanthropy matter a lot, but they’re rendered meaningless without solid revenue.

“Revenue shows everything,” Kaulig says. “If I can make more revenue, I’m going to be fine, and everything else will take care of itself. That’s always how I felt. If we can market and sell the product, no matter what the product is, we’re going to have a much better chance. I like to see revenue growth, and that’s what I look for, as opposed to all the other things we can fix with experts.”

The bottom line

Private equity companies are investing in you, Kaulig says.

“They are investing in the business, but they are really investing in the person who is running the business,” he says. “They want to see that they’re not only going to make their money back, but make a healthy profit. If they can double, triple, quadruple their money, they’re going to look to you.

“You have to sell yourself. You do a great job marketing and selling your product. Now you’re at a different level. You’re marketing and selling a product, which is now your whole company.”

 

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TownHall’s Bobby George

Every dealmaker remembers “the one that got away,” none more so than Cleveland businessman Bobby George.

“There were a few real estate deals I passed on in 2009, and every time I drive by them, I get a feeling in the pit of my stomach,” says George, owner of TownHall, Barley House and Rebol, as well as founder and president of George Capital Partners. “It’s cost me millions of dollars.

“I was so cautious because I was just starting to make money and I didn’t want to overextend myself. I didn’t have the deal principles then that I have now.”

Today, George consults his list of dealmaking principles on a weekly basis – and uses them to inform his investment decisions.

“Every dealmaker has different principles that are important to them,” he explains. “As long as you stick to those principles, you’re usually successful.

“I focus on companies that I can handle —­ smaller to midsized companies, or cash flow in companies that have some kind of asset backed. I try to avoid startup companies. And I love companies that, when I buy, I can use my knowledge to help generate revenue or turn the needle and add value.”

In this week’s Dealmaker Strategy, George talks about how he evaluates acquisitions to seize opportunity when it strikes.



Check for compatibility

If I can understand the business based on my experience, that’s the first step. If I can’t, I’m not interested. Once I understand it, I want to see how well the company is positioned and I want to understand the leadership. If I believe in the leadership and that the leader is the right person, I take the next step. If I don’t, I don’t have the resources to move forward and I won’t.

Approach your seller with compassion

If you approach [the seller] too aggressively, they might get offended. They might not be interested in a sale and might not see the synergy. As I’ve gotten older, I’ve gotten a lot more compassionate about how I approach someone. I don’t want to offend, and I don’t want to hurt someone’s feelings. They could take it the wrong way ­— as if you think they’re doing a bad job — when really, you’re interested in buying their business because they’ve done a lot of good things.

Ensure financial accountability

I want to see where the margins are, what potential growth opportunities there are and what the revenue is. Then the last thing I make sure of is that I can make the right deal. Any deal I do, I like to take control of and have majority ownership. If I don’t have majority ownership, I like to have the right controls in place where if they don’t hit financial benchmarks, I have the right to take over operations — immediately.

Don’t repeat mistakes, but do reflect on them

The reason I look back is that I don’t want to continue to make the same mistake. I can look back at properties I didn’t buy that I should’ve bought and analyze why I didn’t buy them.

Don’t let money be the deal breaker

Unless it’s something way out of your range and it’s going to take way too much time to put the money together, or it’s way too risky, if you can put the deal together and you know it’s the right deal, do it. Even if you have to give up more equity. As long as you can stay in control. I’ve learned that, and as I’ve gotten older, I’ve gotten a little more aggressive.

Related post: Owner of TownHall takes a bold, yet humble approach to dealmaking

Reading people is critical to acquisitions

If there is one thing that master dealmaker Gregory J. Skoda has learned from a lifetime of dealmaking, it’s that empathy is among the most critical components of an effective acquisition strategy.

“It’s a very different thing to be able to talk somebody out of their livelihood, to talk somebody out of the business they’ve built, to have them believe they are getting the maximum financial security out of this transaction for their families,” says Skoda, chairman of Skoda Minotti.

He speaks from the experience of hundreds of acquisitions in his career, including 135 deals he closed in just two years with billionaires Michael DeGroote and Wayne Huizenga when the trio started CBIZ in the mid-1990s.

When you craft an acquisition strategy, there is a whole host of data points that must be considered. But you can’t forget about the human element and its impact on a negotiation.

“A huge part of dealmaking is reading and understanding people,” Skoda says. “It’s trying to get inside their heads and in many cases, figure out what they want.”

In this first installment of Dealmaker Strategies, Skoda examines the risk of not fully exploring the wants and needs of the seller when pursuing an acquisition.

Words aren’t enough

When you’re negotiating an acquisition, you need to dig deep to understand the mindset of both the employees and the owner of the company you want to buy.

“Have you asked enough questions?” Skoda says. “Do they want to be there? Do they want to make you better? Do your employees want to work with their employees? You start to pull the covers back on how do all these people function together. Where do they want to go and how do they want to get there?”

Manage the data

When you’re in an environment where you’re rapidly growing by way of acquisition, the amount of data that one has to deal with and the amount of people that one has to deal with can be daunting at times, Skoda says.

“It really takes the right people assembled on our side of the ledger to input, control and manage the data; input, control and manage the people,” Skoda says. “It takes regular interaction multiple times a day with the teams that are involved so that everyone knows what’s going on. Use technology the way you can use technology to share information. You need to stay in front of the information.”





Assess the opportunity

As you get a sense for the people involved in the transaction and the data, you need to begin looking at the big picture, Skoda says.

“What are the attributes of this particular acquisition that mean something to us?” Skoda says. “Is it going to be transformational for us? If it’s going to be transformational for us, in what ways? Do we really have the team lined up that can take advantage of it?”

As you begin to narrow everything down, you can start to appraise the merits of the deal you’re exploring.

“Try to get inside everybody’s heads on the buy side and on the sell side,” he says. “What’s really the beneficial transaction here? How do we think about the people that we’re meeting? How do we think about the people that we’re interacting with? How do we put them together? How do we make one and one equal three or four or five in some cases?”

The bottom line

People can and often do get themselves into trouble because they don’t know what they don’t know, Skoda says.

“They thought they had it,” he says. “They thought they knew it. Probably in the first few acquisitions we did, we thought we had it. You can never in the dealmaking business think you know all there is to know. You’re going to get taught a lesson the moment you think you know everything there is to know. There always has to be this thought that there is something here that is going on. I don’t know what it is and I have to figure it out. If you can keep that intellectual curiosity in working through transactions, you’re going to be more successful.”