John Erkert has helped IPEG Industrial Group buy three industrial companies and sell another over the course of six years to build a global business in the plastics-processing, waste recycling, and industrial heat-transfer markets.
“We’re more of a strategic acquirer,” says Erkert, CFO of the Cranberry Township-based business. “So, we look at a lot of deals, but we also pass on a lot of deals.”
IPEG bid on several companies last year but didn’t close any, he says. It has the ability to be patient and find the right deals.
Erkert didn’t have much M&A experience, other than as a CPA working on the due diligence of deals. He and the IPEG team have grown faster and smoother at pre-deal due diligence, documentation and the closing process. The biggest difference, however, has been with integration.
“Thermal Care and Republic Machine were the first two that we had done in a long time, and we hadn’t really built out the IPEG business system, which we call Amplify, for having a methodology for acquisition integrations,” Erkert says. “But I’d say by 2016 with Pelletron, we had much more of an idea of what we were going to do — what process we were going to follow, what timelines we were going to follow for the acquisition integration.”
Erkert has attended training along the way that he’s incorporated back at IPEG, such as ensuring valuations consider more than just multiples.
“I think that focusing on quality of earnings, quality of EBITDA, the stability and the reasonableness of it within the cycles, is just as important — or maybe even more important —than what multiple it is you’re going to pay,” Erkert says.
It’s also important to not mix techniques and terminology when you’re valuing a large public or middle-market company, versus a lower middle-market company.
“On a smaller deal, it would be a lot more focus on the cash flow and the leverage that you can do in the deal, the bankability of the deal, whereas in a larger company, you have a lot more information,” he says.
In a smaller company, it’s about more than discounted cash flows, Erkert says. You have to look at what is the customer relationship worth? What is the product portfolio worth? What are the non-competes worth? The same with brand name worth — something particularly important to IPEG.
IPEG also tends to look at companies in the capital equipment space, where cyclicality is critical.
“We see companies that have really high EBITDA as a percent of sales and our radar goes way up because we know how hard it is to make that sustainable,” he says.
On the other side
Another learning experience came when IPEG unexpectedly sold Rapid Granulator in 2015 based on an unsolicited offer.
The buyer wanted IPEG to stay involved with the U.S. business for three years under a transition agreement, Erkert says. Not only did they get to sit on the other side of the negotiating table, they saw firsthand what went on inside of the company they used to own. Rather than bringing a company into the fold, they were part of pulling something apart.
Having a mirror image of the other side of the process will help IPEG as it buys and integrates more companies.
“It helps you with the psychology of the sellers,” he says. “That’s something that we think about quite a bit because we’re dealing with companies that are privately held and the ownership has generally been there a long time.”
Professionalizing the integration
During his integration training class, which was geared toward much larger companies, Erkert learned how to set up project management offices.
“It was very eye-opening for me to be coming from a smaller, midsize company,” he says.
Even if you don’t have a full-time staff where multiple deals are going on and teams of people work on deals, you can professionalize your integration approach to make it more process-oriented, methodical and consistent.
With the 2016 purchase of Pelletron, which was IPEG’s most recent, the company broke everything up into workstreams for IT, finance and HR, Erkert says. The employees had certain things to accomplish within 30 days, 60 days, 90 days, 180s days and within a year. This helped prioritize tasks against an overarching plan.
Erkert knows a lot of people at companies from $25 million to $200 million in size that find it hard to think about having a systematic process if they’re not repetitively buying. “There are a lot of smaller, middle-market deals where people just wing it,” he says. “It’s more make it up as you go along.”
A systematic integration process isn’t just implementing a framework with forms and checklists. That’s important, he says, but so is the thought process.
“Every time I go through a new iteration, have I learned something about the speed and the breadth and the depth of what I’m doing?” Erkert says. “Have I applied what I did last time to what I’m doing this time? Am I doing it better? Am I doing it broader, faster, cheaper?”