Smart Business Dealmakers

Learn from your mistakes

Fri, 30 Nov 2018 04:33:46 Z

Growing your business through acquisition is a highly complex process with many moving parts. One misstep can cost you everything. Our team recently had to manage through a significant oversight that almost forced us to shut down operations.

As an employment agency with thousands of temporary employees working for companies on assignments every day, we are required to pay employees on a weekly basis. We bill our customers for the hours our employees work on a weekly basis. In most instances, our customers do not pay their invoices every week. They typically pay them around the 42-day mark. Therefore, we end up accruing large accounts receivable balances on our financials. We pay an associate on a given week, but we won’t receive payment for that invoice for up to six weeks. During those six weeks, we have continued to pay that associate every week.

Thus, operating our business requires a significant amount of cash out before you start to get cash in. To solve for this cash flow gap, we partner with banks to help us fund payroll until the cash comes in. They typically lend us money that is equal to a percentage of our accounts receivable. For example, if we have an accounts receivable balance of $1 million, the bank might loan us $800,000 to ensure we can fund our weekly payroll commitments.

‘We missed something’

In July, we completed our largest acquisition to date, acquiring Bonney Staffing Center, the largest employment agency in Maine. When we acquire a company, we do not bring their accounts receivable with the deal. Those stay with the seller. Again, banks provide us a loan as a percentage of the accounts receivable to fund payroll.

Because we are not acquiring accounts receivable in our completed deals, our banking partners do not have that collateral to loan us money to fund payroll. So, right out of the gate, we must use existing cash flow to fund the payroll of the newly acquired company — until their accounts receivable balance grows to the point that they can fund their payroll. This typically puts a slight strain on our business for 60 to 90 days.

With our three previously completed deals, we managed through this successfully. But this time was different. We missed something. We’d created cash flow models as we went through the acquisition process to ensure we didn’t encounter any hiccups along the way. For months, we worked under a specific purchase agreement and terms associated with the deal. All of our cash flow modeling was geared towards this arrangement.

Well, in the three weeks leading up to the close of the acquisition, we renegotiated the terms of the deal and the seller accepted. Overall, it resulted in a lower total purchase price, but it required more cash upfront. It was a win-win for all parties involved. However, because we have associates wearing multiple hats during these initiatives, we failed to update our cash flow projections to account for the increase in upfront cash needed to complete the deal.

A big problem

The acquisition of Bonney Staffing completed right around the end of the quarter. We typically pay commissions and bonuses on a quarterly basis. We also make large payments for workers compensation and unemployment insurance.

Our CFO quickly realized that we had a problem. We didn’t have enough cash on hand to properly fund payroll for the upcoming week. In my 17 years of owning a business, I had never dealt with a significant cash flow situation, and I was totally caught by surprise when this happened. Structurally, our business is in great shape. We are financially sound and our key financial metrics are all in line or better than industry comparables. Honestly … I thought we were crushing it. Suddenly, my business was in danger of not fulfilling its obligations.

I’ve always believed that one of my core responsibilities as CEO of my company is to build relationships with others in our community. I’ve worked hard to get to know many people with influence in our region. You never know when you might need someone to help bail you out of a crisis situation. As my CFO educated me on the dire situation we were in, I was thinking of who I could call.

I made two phone calls within a 10-minute time frame and was able to raise the money needed to fund payroll for the next week. In doing so, it provided enough time for our banking partners to execute on a strategy to permanently solve for the first 90 days of an acquisition and the cash flow needs to fund payroll. Our banking partner understood the dynamics of our situation and came up with an easy solution to the problem.

Changing for the better

Going through this experience, we’ve learned many lessons. Structurally, our bank has built in a process that eases the burden of how we fund a newly acquired company’s payroll for the first 90 days. That will be a huge relief. We are also reviewing our current process and implementing additional checks and balances to it so that we catch these types of issues before having to face them firsthand.

Some of the best lessons we ever learn, we learn from our mistakes and failures. The error of the past is the success and wisdom of the future.

Aaron Grossman is CEO at Alliance Solutions Group and has grown the business to support nine specialized staffing and recruitment brands across a variety of industries. He was recognized as a 2016 EY Entrepreneur Of The Year®. He also founded the Wrestlers in Business Network.

Take the guesswork out of making acquisitions

Target identification

Thu, 17 May 2018 06:33:17 Z

When we first decided to pursue an acquisition strategy to accelerate our growth goals, we had to understand what the ideal acquisition should look like. As a beginner to this process, my first reaction was centered around the profitability of the potential acquisition target.

Once our team began to ask more questions and dive deeper into the exploration around this subject, we began to uncover additional requirements that would be necessary to ensure a successful result. Ultimately, our goal was to paint a picture that helped us easily identify the one target that stood out from the sea of potentials that existed within an industry that contains 20,000 companies.

As we began the process of uncovering “The One,” we first did a self-check to understand our makeup. In doing this, we were able to identify some important levers that we would then apply to our sourcing of potential targets for acquisition.

Diversified portfolio

Prior to beginning to execute on our acquisition strategy, our customer portfolio was highly diversified. At the time, our biggest customer was no more than four percent of our total revenue. We weren’t beholden to one customer, in particular. In our world, ALL customers were important to the health and well-being of our organization. As a result, we wanted acquisition targets to have a diverse customer base that closely mirrored ours.

Pricing

Having a diversified customer portfolio means that we tend to solicit small and mid-sized companies where heavy volume is typically not found. We are really comfortable providing a high-service solution to companies that might utilize our services once or twice a year. Our pricing model reflects this. There are other staffing agencies throughout the U.S. that focus on high-volume national business and they price to the economies of scale around this model. These agencies would not be a fit with our go-to-market strategy and therefore, not be a viable target to consider

Leadership

In our current structure, we had organically created several small, specialized staffing companies to provide focused service offerings to our clientele. Each of the staffing companies we had created had their own leadership and staff to support them. As the CEO of the overall company, I was not leading or managing any of the individual staffing companies we had established. Therefore, we determined that an acquisition target must have existing leadership that could effectively operate the business once we purchased it.

At the macro level, we wanted to develop a very simple way to quickly identify whether or not an acquisition target was truly viable. The three levers above simplified the sourcing process for us, and we ended up establishing criteria that we would use when making a decision on whether to take a deeper look into a business — or simply pass.

I feel strongly that coming up with a simplified approach to how we evaluate acquisition targets has really enabled us to be laser focused on identifying “The One” when we see it. In fact, we were able to know within 15 minutes of looking at the prospectus of the last two acquisitions we completed, that they would be the ones we wanted to buy.

Aaron Grossman is CEO at Alliance Solutions Group and has grown the business to support nine specialized staffing and recruitment brands across a variety of industries. He was recognized as a 2016 Ernst & Young Entrepreneur of the Year® Award winner. He also founded the Wrestlers in Business Network.

Related posts: How culture shapes our M&A strategy

How culture shapes our M&A strategy

Fri, 02 Feb 2018 04:15:53 Z

As we embarked on pursuing acquisitions as a growth strategy, I immediately put my active learning hat on.

I began reaching out to people I knew in the community who had a lot of experience with mergers and acquisitions. I met with investment bankers, as well as principals of private equity firms. I spoke with independent companies who had executed on multiple transactions.

What was glaringly consistent was the importance and value of culture.

It wouldn’t be hard to identify profitable businesses that look like they could make a lot of sense. That wasn’t going to be our problem. The issue is understanding how to look at these profitable businesses and identify which ones actually align to your culture.

I left the various conversations I had with the sense that acquiring businesses was a much more difficult task, especially if we didn’t have a very strong sense of our culture.

If we were going to follow through on our goal of becoming the succession plan for successful staffing companies that didn’t have one, we had to really understand our culture so that we could measure possible targets against it.

Does it support your purpose?

I spent close to a year formalizing what our culture looked like. I actually created an infographic of a redwood tree to describe our culture.

At the core is our purpose. This is why we exist, why we come into work each day. It is to motivate the world to unlock its unrealized potential. The essence of this phrase is of a giving mindset. Our purpose alone could be leveraged to vet out the vast majority of targets who were simply in business for the money and hadn’t set up a culture to support our purpose.

With our tree, the roots are considered to be our core values, and they have simple definitions that tell a story. As we all should know, a great redwood tree doesn’t grow in Northeast Ohio. It grows strong in the Pacific Northwest. Why? Northeast Ohio doesn’t have the right environment to support the roots of a redwood to take hold and grow into a tree.

I correlate this to the values of a business. If the right environment doesn’t exist to support the core values to grow, then that business will either die or be unable to scale. We spent some time understanding the environment we needed for our core values to grow and we defined them and placed them into our tree concept.

Are you willing to walk away?

Once we had a simple way to understand our culture, we could leverage that knowledge to help us determine if possible acquisition targets could align to it.

We began acquiring businesses in 2014. We have completed three transactions and are looking to do 29 more in the next decade.

We have leveraged our culture tree infographic in our diligence process with every acquisition we have executed on. As we interviewed potential acquisition targets, we devised questions centered on our culture and leveraged the answers to these questions to understand if there was a potential fit.

We have reviewed well over 100 companies since 2014, and we have only moved forward on three of them. Each of these acquisitions has been successful up to this point, and I firmly believe a strong alignment to culture has been the driving force behind each success story.

As we continue to refine and improve our culture, we will continue to understand how to assess this in the diligence process. With a goal of becoming billion-dollar company in the next 10 years, we know we have to be great at figuring this critical piece out.

Aaron Grossman is CEO at Alliance Solutions Group and has grown the business to support nine specialized staffing and recruitment brands across a variety of industries. He was recognized as a 2016 Ernst & Young Entrepreneur of the Year Award winner. He also founded the Wrestlers in Business Network.