“I find that using some of these other ‘screens’ can actually lead to greater success in buying.”
The consolidation trend in the architecture and engineering industry is showing no signs of abatement. Zweig Group’s close relationships with the owners and top managers in so many A/E firms throughout the country gives us a window into their thinking that few others have. Many small and mid-sized firms no longer see selling to another firm as a failure, but rather as a growth strategy. And there are so many buyers. It seems like most firms we work with have acquisitions in their strategic plans.
Once firms make the decision to grow through acquisition, the next question that has to be answered is “What firms should we be looking to buy?” The discussion usually centers around traditional firm demographic criteria, including size, location, discipline, and market sector focus. The problem with this approach is that many firms are looking to buy the same types of companies in the same few “hot market” locations. That drives prices up and decreases the odds of success in consummating a deal for individual buyers.
But how about looking at OTHER acquisition criteria? Let’s call them “situational characteristics.” Some of these include:
- Financial condition. Firms with a weak balance sheet – meaning assets may be less than liabilities – can be ideal acquisition prospects. Many times these situations arise for reasons that have nothing to do with employees and their abilities to do successful projects for clients. It could just be the result of bad top management decisions to expand offices when they shouldn’t have or committing to obligations the firm couldn’t support. Or perhaps billing and collection practices aren’t what they should be. In any case, the result of their missteps can be a firm that is highly motivated to sell.
- Financial performance. By “financial performance” I’m talking about a company that cannot make a profit. Perhaps their overhead costs have spiraled out of control. Their project management system may be broken. They may have management that won’t cut people when the workload isn’t sufficient or they may have tolerated dead wood that should have been cut for too long. I could go on and on. Maybe they resist specialization and are trying to do too many different things for too many types of clients and can’t get good fees. Again, however, there’s no reason to think an unprofitable company isn’t one worth buying. They have clients, employees, project backlog – all of which could be valuable to you IF working under your management. And their owners could be highly motivated to sell.
- Single-person management. You will find this situation quite frequently in 20-, 30-, or 40-person companies, and there are so many of them in the A/E industry. There is one paternalistic, sometimes benevolent and sometimes dictatorial owner who micromanages the staff. Everything stops when this person is unavailable. No one else really sells work in this type of firm. No one else understands the business aspects of the business – they are all kept in the dark. Staff turnover is frequently a problem for firms like this. Owners of companies like this are beyond their personal capacity to run their business. And if this owner gets sick, goes through a divorce, or has any kind of personal problems and loses interest in the business for any reason, the system breaks down.
- Lack of management and business development depth. Again a very common problem with some smaller or mid-size A/E firms (let’s say fewer than 100 employees) in particular. The owner(s) may be bad delegators who don’t trust their people or share any financial information with them, nor do they do anything to train their people in selling and management. The result is there is no one to transition to. When the owners get tired or want to move on to the final chapters of their lives they are often trapped by their own companies. There is no successor or successors. They can’t get out. An external sale or shutting down are the only options. And no one wants to shut down.
- Firms with a PR problem. There could have been a disastrous project that resulted in a public lawsuit. Or maybe there was an ethical breach that has sullied the company’s reputation. While your first reaction could be this is the last kind of firm you’d want to buy, consider that you may be able to get them for pennies on the dollar. And again, you may get good employees and pick up some clients to boot. And if your post-acquisition plan includes an immediate name change with an aggressive PR program, you may be able to shed their damaged reputation quickly. Bad things happen to good people. You can be their white knight savior.
I find that using some of these other “screens” can actually lead to greater success in buying. The owners are motivated and more receptive to your inquiries, the prices you have to pay are lower, and their employees are more likely to be glad to see you in their offices coming to their rescue. These firms aren’t always easy to find. It takes some research and diligence. And they may be in Cleveland or Bakersfield instead of Dallas or Austin. But that doesn’t mean they can’t be great companies to buy.
Rarely does a business achieve great success by doing what everyone else in the industry is doing. Is it time you looked at your acquisition strategy differently from all of your competitors?
Mark Zweig is Zweig Group’s chairman and founder. Contact him at mzweig@zweiggroup.com.