Smart Business Dealmakers

Carveout transactions

Fri, 02 Nov 2018 05:35:48 Z

While any business acquisition comes with a level of complexity, a carveout can become significantly more challenging. Having performed four carveouts in the past six years, I can say that they are both more intricate than a straightforward business acquisition and require more focus. To be clear, a carveout is an acquisition of a business unit from a parent company where the parent company is providing shared services. Our biggest carveout acquisition was when we bought a $190 million business unit from a large European chemical company. This entity had operations in the Netherlands, the U.S., Canada and Australia.

The unit had hundreds of customers and thousands of SKUs. While it had a solid management structure, much of its back-office operations and some of its plant administration were conducted by the parent company. This included such things as the collection and payment of accounts receivables and payables, global banking, lockbox controls, IT infrastructure and management and payroll, just to name a few.

Details matter

So, in addition to the normal due diligence work, we needed to fully comprehend the existing parent’s shared services capabilities and how we would take over these functions around the globe. It required a very detailed understanding of both function and process. Thus, a whole new complexity was added to our diligence plate. It was clear that we could not take on all these operations on day one after the acquisition.

Our solution was to engage the parent company. We sought a transition service agreement that would apply to some of the tasks while we developed the capability to assume every function. IT was the most complex operation as it cut across the entire operation of the business unit. With the vast number of SKUs and customers, we negotiated a one-year transition service agreement for this function. During this time frame, we cloned the parent’s IT system and trialed it multiple times to perfect it before we cut over to our system. We also built the capability to assume all other shared functions and become fully self-sufficient.

Overall, the key was to fully understand the intricacies of each shared service and its cost to the business, and then develop a plan to implement within our business in a relatively short period.

We successfully acquired the company. More importantly, we met our timetable to become fully self-sufficient in the functions previously handled by the former parent company. We realized this by conducting weekly meetings on key aspects of the carveout. This allowed us to manage the transition and build an internal capability in a reasonable time frame.

Here are some key segments of a typical business and the corresponding focal points to zero in on when you’re involved in a carveout transaction:

Employees:Determine who comes with the acquisition.
Accounting: Evaluate existing policies and terms.
Banking: Verify if existing institutions will assume existing arrangements with the new business unit owner.
Tax: Understand the array of tax opportunities and exposures.
Legal; environment, health and safety; engineering:Evaluate the amount of internal support and cost for the business unit.
IT: What IT systems are in place? Can the processes be absorbed quickly or is a new system needed? Also, define software licensing issues.
Communications:How is this managed and at what cost?
Assets:Define which belong to the business unit.
Contracts:Will existing vendors meet the terms of existing agreements?

An intense process

In a carveout, identifying shared corporate costs is essential to bridging historical financials to a new stand-alone entity. In some cases, the existing cost structures can be more expensive as a stand-alone versus being provided by a large parent. It is essential that detailed diligence is carried out on such allocated costs. In our acquisition of this carveout, we ended up spending less than the parent on most of the shared costs, but the transition was an intense path.

Scott Becker is president and CEO of Ashtabula-based Chromaflo Technologies Inc., which has completed 10 acquisitions, including five in the last five years. His columns explore how he finds acquisition opportunities, the challenge of negotiating value and the integration template he uses to achieve a successful result.

How I find great deals

Fri, 02 Mar 2018 04:20:48 Z

In the 10 acquisitions I have completed throughout my career, only one was done through a bid process. Similar to my approach to gaining new customers, I find that successful acquisitions often begin with establishing a good rapport. These deals were ultimately won by building a personal relationship with the owner of the target company.

I put a lot of effort into developing a relationship with the owners of target accounts. The benefit here is that I often acquire businesses that others are not even aware are for sale. And quite often, the owners of such businesses are not even in the market to sell their companies. The key in initiating these discussions with owners is the opportunity it provides to spell out the strategic benefits available through the business combination.

Present the opportunity

I often point out there is greater growth potential for the business once it is acquired. We can take the acquired company’s technologies and expand them globally, offer existing customers more products, and provide more opportunities for employees because of our broader market reach. Most importantly, there is surety of value in selling the business to someone who understands the market and can thus close quickly because of that market knowledge.

A prime example of this is a company I acquired in Europe. The owners were true entrepreneurs who started their business 12 years prior to my reaching out to them. They successfully grew the company to a €15 million business. However, growth was becoming more difficult as they pursued more established customers and stiffer competition.

I pointed out that in the coming years, competition would only increase and the future would be uncertain at best. Considering our ability to transact a deal in a relatively quick timeframe, it became clear that undertaking a sale with us was the company’s best long-term opportunity. Within three months, we conducted due diligence and closed the deal.

All of this happened because I developed a relationship with the owner and showed a sincere interest in a positive outcome.

Develop a pipeline

Finding these opportunities is not easy. It takes a true effort to develop a pipeline of target accounts.

My search begins with defining the universe of companies that provide products — either like those our company provides or products that I would like to provide to our market. This effort starts with obvious target candidates.

However, the development of a comprehensive database offers the highest value as a more comprehensive potential target register provides the opportunity for a host of strategic gains. Such gains include the prospect for market consolidation, geographic or product expansion and market adjacency.

The process I utilize to develop a comprehensive list of target businesses is through the engagement of employees, customers, suppliers and industry associations. Each group can provide valuable information.

The list is then downloaded into a database where my team details the following key points in a table format:

Priority
Company
Background
Locations
Website
Ownership
Management
Employees
Products
Revenue

I prioritize the list of potential acquisition candidates based on our highest need at the current time. For example, in 2010, we needed to become a global business. Our position in North America was strong and we had many customers asking to supply them elsewhere in the world. Target accounts in Europe and Asia took on a higher priority than those elsewhere.

We undertook a review of our database and looked for targets that could expand our reach into both regions. As in my normal process, I personally began to reach out to company owners who had operations in these regions. Within two years, we were a global company with operations in Europe, Asia and North America.

Key takeaways

Engage your entire universe of contacts on developing a comprehensive list of potential acquisition targets.
Prioritize them based on your current need.
Personally reach out to the owners of your highest priority targets.
Explain the strategic benefit of the combination
Transact the deal in a relatively short period of time.

Small deal, big impact

Wed, 22 Nov 2017 04:35:06 Z

I have experienced a wide range of growth opportunities throughout my career. Whether it is earning share in a market where our company has a strong position, leading a business into a new market or acquiring another business, each task presents its own set of challenges.

In 1999, we had become a successful company focused almost entirely on one industry in North America.

The difficulty we faced was achieving robust growth in a market that we had already penetrated quite well. The bottom line was there was a lack of ongoing growth opportunities in this primary market.

We decided we could offer other industries high-quality products backed by strong technical resources and a culture focused on customer satisfaction. However, we knew the product development infrastructure necessary to enter an adjacent market would take a few years to develop. We would also have to deal with the time needed to achieve acceptance as an entrant to a new market.

So instead of going that route, we chose to use acquisitions to gain access to a new market.

Our M&A journey began with a relatively small, but challenging acquisition that involved convincing a widow to sell her business to Chromaflo. It was an emotional deal because she was letting go of an entity that her husband had created.

Trust and creativity

We learned some big lessons in this deal.

The first lesson was the importance of developing a relationship of trust, which is essential in any transaction. As the owner and I engaged in our discussions, I had to assure her that the legacy her husband built would live on at our company.

The second lesson was getting a better understanding of the importance of creativity, another critical component to dealmaking. We planned to move the existing production from Texas to Ohio, so we needed to validate that the new products could be manufactured on our equipment. The catch: The seller would not share the formulas until the deal was done.

We found a solution by having the company make intermediates that were shipped to Ohio and run on our equipment. The outcome of this trailed production proved successful and allowed us to proceed with a high degree of confidence.

Work through tough times

Neither of these challenges were easy to overcome, but being committed to finding a path forward proved fruitful.

That leads to a third lesson learned: Be committed to the process, especially in difficult moments.

This small acquisition provided us with the initial technologies to effectively enter a new market. Along the way, we added more technologies and grew this new market in North America to represent 40 percent of our revenue by 2010.

Scott Becker is president and CEO of Ashtabula-based Chromaflo Technologies Inc., which has completed 10 acquisitions, including five in the last five years. His future columns will explore how he finds acquisition opportunities, the challenge of negotiating value and the integration template he uses to achieve a successful result.