Douglas J. Sibila has become quite wary of the turnaround acquisition. He understands the appeal of buying a struggling business and making it profitable again. He’s just not sure it’s worth the cost.
“They may not have gotten into those issues overnight, which means they are not going to get out of them overnight,” says Sibila, president and CEO at Peoples Services Inc. “When we beat our projections, it’s where we’ve bought a successful company and took it to another level. Where we haven’t quite hit our projections, it’s where we’ve bought a troubled company and thought we could turn it around. We’ve done it, it just took about twice as long as we had projected. That’s why in the last 10 years, out of seven acquisitions, we’ve only done one that was in trouble.”
Sibila is a third-generation leader of his family’s business, which provides supply chain logistics, warehousing and transportation services in 42 facilities across seven states. Acquisitions have played a key role in the company’s growth. The purchase of Akron-based Terminal Warehouse in 2010 was a pivotal deal in what has been a decade of expansion.
“It was a significant investment that almost doubled our size,” Sibila says. “It gave us the people to help build for future growth.”
In this week’s Master Dealmakers, Sibila talks about his methodical approach to dealmaking and the role networking plays in his company’s M&A strategy, both internally and externally.
In 2010, we completed the acquisition of Terminal Warehouse in Akron. The owner was getting older and the economy had pretty well bottomed out. He had actually tried to sell the year before, but we had to make sure our own house was in order before we could pull the trigger. Even getting the access to capital at a point in time when most banks weren’t looking to get or loan on commercial real estate was a challenge. Because of the strength of our balance sheet, we were able to borrow money at a time when other people had a harder time borrowing money or even renewing their existing line of credit.
One of the keys to executing a good M&A strategy is making sure your own financial house is in order. You want a strong financial base, a strong balance sheet and collateral to be able to borrow against. Make sure you have strong and consistent cash flow. It’s making sure you’re in a healthy position, which means you have to mind your P's and Q's on the stuff you already are doing. I have a good operations team to help with that.
Next, how do you prequalify leads? How do you filter? We look at some geographic considerations. Right now, our main profile is in the existing or contiguous states we operate in. We also look at key industry segments that we service on the food related or the chemical side. If a customer came to us and said, ‘Hey, we’re looking for a service operator on the Gulf Coast or in Texas,' because of our exposure to the chemical industry, that would be something we would take a look at.
The third filter would be a customer asking us to go to a specific spot on a dedicated facility. Now you’re working directly with that customer at a dedicated facility. You have some protection on that transaction. So a customer might come to me and say, ‘Can you do what you’re doing for us here somewhere else?’ Depending on where that is, if it’s in the existing region or a contiguous state, that passes two filters. The customer is willing to commit and it’s within that geographic region. If it’s in an industry segment we are strong in and have an advantage, that’s something to look at.
Engage in conversation
Make industry contacts. This is where your reputation and integrity can play a big role. What is your reputation in the industry? What are you known for? If you are a fair competitor, people in the industry know each other. We value what our reputation is in the industry with our customers, our vendors and also our competitors. When the time came for some of our competitors to retire or sell, they approached us. They knew we might have some interest, one because of our past record. And two, if you know someone conducts business fairly and with integrity, wouldn’t you rather do business with someone like that than someone who has a reputation in the industry of not being as fair or reputable?
We try to put ourselves in the shoes of the company that we’re acquiring. When I bring our team in, a lot of the people who are talking to the people we are acquiring were in their shoes three to five years ago. They can directly relate. ‘Hey, three to five years ago, I was sitting where you are when Peoples came in and bought us. Let me tell you what I was thinking at the time and how things actually turned out.’ Culture matters. This is one of the reasons we’ve pivoted away from investing in troubled companies and decided to invest in successful companies. Sometimes those troubled companies were in trouble for a reason and it may have had to do with culture.
The Last Word
If you’re going into an industry segment that has a declining market share and you’re trying to get market share with that acquisition, you’re not going to get growth opportunity. Are you going to be able to make enough efficiencies in going after that market share to justify the investment? From an acquisition standpoint, unless you are really getting that asset at a reduced price, that’s probably not your first choice.
Look at where you have an opportunity to grow. Over the last 10 years, because we had previously done a lot with chemicals on the commercial or industrial side, we were exposed on the normal economic business cycle and the ebbs and flows of that. Food and food-related processing and packaging is pretty consistent, regardless of the economic cycle. So by doing more on the food side, which is one of the acquisitions we did in 2015, we feel that will better allow us to manage the upturns and downturns.