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Ty Clutterbuck often relies on a simple question when evaluating potential acquisition targets at Peninsula Capital Partners: If the company didn’t exist today, would anyone care?

“In the middle market, your old economy manufacturing, distribution, industrial services and business services companies, you could always convince yourself to say, ‘No, nobody would care,’” says Clutterbuck, a partner at the investment firm. “But there is always a certain degree of customers who do care. So the question is, where do you fall on the spectrum? That's what we ask ourselves when considering an acquisition.”

Clutterbuck has more than 20 years of private capital, M&A consulting and auditing experience and has led hundreds of financial advisory engagements. In recent years, he’s spent a great deal of time thinking about Amazon’s influence on future business activity and his own acquisition strategy.

“You are always thinking about the Amazon risk,” Clutterbuck says. “Amazon is covering so many different facets of our community. It's not just the technology. It’s thinking about what’s the next technology that might antiquate your companies’ service or product offering.”

In this Dealmakers feature, we spoke with Clutterbuck to learn more about his approach to making and assessing acquisition opportunities.

What’s the right move?

One of the toughest parts of making an acquisition can often be knowing the right time to do it and the right time to wait.

“Maybe it’s a company that is just dead set on organic growth when acquisitive growth might be the path,” Clutterbuck says. “The flip side of that is maybe pursuing acquisitions for short-term growth at the risk of the long-term success of the company. That can be in different forms. Buying a business that's not complementary to the existing business. Buying a business and not appreciating the integration risks and complications that will exist, both from a cultural and operational perspective. Or potentially paying too much for a company because you're so focused on growing at all costs.”

This last point, paying too much to buy a company, can be particularly troublesome.

“There's a lot of guys out there who look at a company being bought and they say, ‘Well if that buyer can pay X for it, I can,’” Clutterbuck says. “What they're missing is that buyer might have the operational capacity or the human capital that they need to extract the most from that company which another buyer doesn't.

“Some people are better at buying and integrating companies than others. It's not as easy as some people make it out to be.”

Paying too much in an acquisition has the potential to “crush a company,” Clutterbuck says.

“At some point, you're going to have a down year in the economy or a down cycle in your industry. A strong economy can hide a lot of sins. When you have a downturn in the economy, that's where paying too much for a company can come back to bite you.”

Keep your options open

Sometimes the best path to growth is not making an acquisition, but being acquired. Clutterbuck recalls a transaction at Peninsula that involved “a mom-and-pop medical product business that was just under $15 million in annual revenue.

“We found it very attractive and more importantly, we found that it was lacking the investment needed to accelerate the growth that they were missing out on,” he says. “We acquired the company, worked with the management team and found a board member that knew the industry to help expand the sales force. They were already growing at about 8% a year and we were able to increase that to 10 or 12 percent by investing in in the business.”

Peninsula invested in technology, providing new sales tools, implemented commission structures and utilized the new board member to help guide the team to making more informed strategic decisions.

“We're still invested in that transaction, so touch wood, it should be a very nice outcome for us,” Clutterbuck says. “It's taking a less than $15 million dollar revenue business and doubling the size of the company in a short period of time.”

If you plan to stay with your business for the long term and pass it on to future generations, dealmaking acumen may not seem like an urgent need.

“But even if you're not terribly acquisitive, I think having a general knowledge of how deals get done is pretty important because you never know when a unique opportunity is going to cross your path where it just makes too much sense not to do a deal,” he says

To buy or not to buy

As Clutterbuck assesses potential acquisition opportunities at Peninsula, he analyzes the usual metrics, including margin, growth and the opportunity for growth, as well as how effectively the company is being managed.

“You need to ask yourself, if you can do a better job running the company, will that accelerate the growth?” Clutterbuck says. “Those are what we use to identify companies with potential. Then you have the basics in terms of what can kill a company, which is the opposite of everything I said. It's customer concentration, low margins, minimal growth opportunity. Low margins may be indicative of a commodity product and would lead you to the conclusion that nobody would care if that company went away tomorrow.”