Remember the video game Pac-Man?
Developed in 1980, Pac-Man was an arcade game where players use a joystick to move a round yellow figure through a maze trying to “gobble up” energy pellets while avoiding being killed by ghosts. Eating a certain type of pellet quickened the pace of the game and provided more energy to chase those ghosts who scatter in fear of being eaten themselves.
The flurry of acquisitions activity in today’s chauffeured transportation industry reminds me of Pac-Man. As a business consultant who earns a living analyzing problems and providing service performance training for companies around the country, and someone who regularly advises buyers and sellers during transactions, you would think I would want this frenetic pace of “gobbling up” to continue with reckless abandon. Instead, I would advise the would-be players of the acquisition game to learn some rules to avoid the “ghosts” that may come with an acquisition.
A well-defined process can ensure a successful outcome. Most people cannot win a game without following the rules, and even fewer can buy another business without following a process designed to help them avoid making costly mistakes. I have been engaged to consult for several major operators who purchased their competitors’ companies and brought me in after the fact to help fix problems that could have been greatly minimized if they were contemplated before the acquisition. Some problems are operational, others relate to personnel, but quite a few are evidence of poorly integrated processes. These issues inevitably lead to poor service performance and negative financial results. This seems to indicate buyers are not being prepared for the “ghosts” inherent in the transactional process.
"I would advise the would-be players of the acquisition game to learn some rules to avoid the ‘ghosts’ that may come with an acquisition.”Buyers should look at their existing operation to see if they can handle acquiring another company. This involves determining the strengths—and more importantly, the weaknesses—of your existing operation and anticipating the impact of more workflow, increased trip production, and the potential service problems. For example, if your existing fleet is already operating at maximum trip capacity or has high mileage, how can you take on more work without adding vehicles and chauffeurs? Or if your current reservationists can barely answer the phones during peak times now, how can you expect to add more customer communications to an already stressed staff? Even more elementary, if your current cash flow is strained during certain months and you have no cushion or credit line, how will you weather the added expenses of a larger operation? The answer to any of these questions should not be “we’ll wing it.” A well-conceived plan must be devised prior to acquiring another operation.
7 key questions to ask yourself even before you consider acquiring another operator:
1. Is your existing business in order? Are you earning an acceptable profit now? If not, don’t acquire anything more. Things will only get worse—I guarantee it.
2. Do you have the financial ability, banking relationships, and credit to handle an acquisition? Plan for unplanned transactional costs that routinely occur.
3. Do you personally have the mental bandwidth and physical ability to do much more? If you are stressed out now as an operator, buying another company won’t help.
4. Do you have enough staff, the right technology, and internal capacity to take on more work? If you can’t handle more internal work, what’s your plan when you double your size overnight?
5. Do you have the right managers and supervisors, and do they have a handle on their functions now? If your staff is already “too busy,” what happens when you layer on more work?
6. Can your present fleet handle more trips or are certain vehicle categories maxed out already? The total production and existing fleet capacity must be known before you acquire more work.
7. Finally, have you considered investing in marketing and sales to grow organically instead of acquiring another operator where ghosts (i.e., unknown pitfalls) may appear? Many people in several industries have told me how slow it is to grow organically compared to acquiring other companies. They are usually the ones that have no sales and marketing efforts in place. Some of the fastest-growing operators in our business today have sales machines that provide plenty of organic growth. Run financial models on this option before you buy another operator—remember those unforeseen ghosts.
If the answers to the above questions (and about 25 more) indicate that your operation could handle an acquisition, it’s time to lay out a well-defined plan. And how do you do that?
Assemble a team of professionals. The “go it alone” mentality where buyers and/or sellers try to handle transactions by themselves usually ends badly. Like buying a house without a realtor, home inspector, or closing attorney, people who buy and sell businesses without involving professionals usually regret it. When I was an operator, my acquisitions team included a CPA, a labor lawyer, and an attorney who specialized in M&A. I also retained two seasoned transactional advisors who, over the years, taught me what essentially amounts to an MBA in M&A.
Define a perfect match. Business transactions should be strategic and enhance the goals of those involved. Creating an outline that identifies the attributes of an ideal operator to acquire will increase the chances of success. Include fleet type, customer type, revenue size, geographic location, etc. For example, if you have excess capacity with your minicoach fleet, perhaps look for a company that has hotel, corporate, or group customers to maximize their use. If you are primarily a sedan company looking to expand service types, perhaps consider buying a specialty limousine, shuttle, or coach operation.
Identify potential targets. Finding sellers who match your criteria, are ready to sell, and are reasonable about the value of their company may be challenging. The key is not to waste time with unreasonable sellers. If they are realistic and ready to sell, a deal can be made. If not, move on.
Commence confidential discussions. By informally meeting with potential targets, you can casually bring up a sale or merger. Tread lightly and set up a friendly lunch. Your goal is simply to find out if they are interested, ready, and reasonable.
Align expectations up front. Talk through what each party wants to gain out of a transaction. Contrary to popular belief, many sellers are worried about more than a just final price. Some operators are concerned about the impact a transaction will have on employees and customers. Open and honest dialogue in the beginning increases the chances of a successful transaction in the end.
Create a win-win transaction. A business mentor taught me to go in to every transaction with the goal of making it successful for both parties. When people are up front about their goals, and each works toward achieving mutual objectives, a win-win can be accomplished.
Draft confidentiality agreements. Before sharing critical business data, both parties should execute an agreement not to disclose information. I was recently educated on the difference between a non-disclosure agreement (NDA) and a confidentiality/non-disclosure agreement. Rather than go in to the differences here, all I will say is the confidentiality agreement is just as important as the NDA.
Draft a letter of intent that lays out everything in broad strokes. Once a buyer and a seller come to a tentative arrangement, put it in writing. The document can be as simple as the seller agreeing to let the buyer evaluate key business data, and if it looks acceptable, the buyer agrees to make an offer. The letter usually sets a time frame for examining the business and can stipulate that neither buyer nor seller may entertain other transactions during this period.
Establish a due diligence outline, process, and timeframe. This is the most important part in any acquisition, where a buyer reviews the seller’s critical business data in detail before finalizing a transaction. Failing to perform a proper due diligence can cause lots of headaches after closing. This is so important in the M&A world that there are specialized companies who perform pre-transaction due diligence as their sole function. How buyers, in particular, think they can do this on their own without professionals involved is beyond my comprehension.
Formulate the value of a business. One of the most important elements for determining the value of any business, whether a flower shop or chauffeured transportation company, is an accounting acronym called EBIDTA, which stands for earnings before interest depreciation taxes and amortization. Start by reviewing the company’s financial documentation from the past three years to determine real earnings. This includes analyzing P&L statements, balance sheets, bank statements, and filed tax returns. Savvy buyers rely on EBIDTA as the foundation for valuing businesses, and this is the first thing outside financing or banks are interested in validating. However, some sellers try and focus solely on top-line revenue as the primary indicator to value their business. While revenue is important, it is not the basis for determining a business valuation. As far as real value, it’s less about how much money you take in and more about the amount of money you actually keep.
Closely monitor transaction documents and agreements. In today’s litigious society, the success of any business transaction relies on the accuracy, quality, and completeness of the agreements and documents each party signs. My best advice is to engage an attorney who specializes in M&A transactions to prepare agreements and all transactional documents.
Let the lawyers do their job. When all professionals involved do their part properly, the actual “closing” of an acquisition should be routine. However, attorneys—not buyers and sellers—should dictate this process.
Develop a post-acquisition communication strategy. How the transaction is communicated to employees, customers, and the marketplace is critical. The worst communication of an acquisition is when one party comes off like the victor and the other the vanquished. This serves no purpose except to inflate the ego of the buyer and almost always causes needless consternation and questions. My advice is to present the transaction in a positive fashion while minimizing change. The best announcements celebrate all parties equally and assure business as usual. Many companies work with public relations companies or communications specialists to craft these announcements.
Plan the post-transaction integration. Many times, buyers and sellers fail to plan the transition and integration part of an acquisition properly. At the least, this fails to capitalize on all the opportunities the acquisition can bring. At the worst, this can negatively affect the joined entity for a long time after the fanfare of the transaction has passed.
While there seems to be a frenzy of acquisitions taking place today, parties should focus on prior planning and a well-defined process to avoid pitfalls, missteps, and unforeseen “ghosts” that could chase you after the deal is done. [CD0819]
Ken Lucci is a consultant to the chauffeured transportation and hospitality Industries. He can be reached at Klucci@drivingyourincome.com.