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Archive for June, 2018

THE DEMYSTIFICATION OF M&A – PART 1

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 THE RULE OF THREES. Oftentimes, life gives us three choices. When we were kids, it was Rock, Paper, or Scissors on the playground. As we got older, perhaps it was Dribble, Pass or Shoot on the basketball court, or Call, Raise or Fold at the poker table. When owning a heavy duty collision repair company during a time of potential consolidation, the choices are Exit, Expand or Exist.

This article is the first installment of a step-by-step, hands-on guide to the first two choices (we’ll assume that simply existing doesn’t require a lot of coaching). Subsequent articles will explore some of the motivations fueling mergers & acquisitions (“M&A”), the typical M&A process and flow, and the best practices from both a seller’s perspective (i.e., “The Exit”) and the “Buy Side”. If you are contemplating the sale of your business, or are considering an acquisition-based growth strategy, you won’t want to miss this column.

As a passionate student and practitioner of investment banking and corporate finance for over 20 years, getting a platform to share my thoughts on heavy-duty collision repair M&A is both exciting and a big responsibility. The Wall Street Journal has at least one M&A headline in every edition. Numerous academics have studied the effectiveness of M&A. It’s even sexy enough to make movies about it – think Michael Douglas as Gordon Gekko or Richard Gere as Edward Lewis. My goal is to demystify M&A; I hope the following articles help you gain a solid understanding of M&A best practices and prepare you for a deal whether you’re growing your business through acquisitions or you are looking to monetize your retirement by selling your business to a larger operator or private equity group.

As you read through these articles, please feel free to send me feedback, ask questions or suggest future topics. Thank you in advance for your trust.

DEFINITIONS. Before we have a history lesson, let’s agree on some definitions (for the purists and deal attorneys, I acknowledge that some of the following definitions may be oversimplifications – but they are adequate for these columns).

The “A” in M&A – Acquisition – typically refers to one company (the “buyer”) buying substantially all of the assets or stock of another company (the “target”), such that the buyer takes full control and the seller has little or no continuing interest in the business.

Acquisitions of small companies (i.e., US$25M or less in enterprise value) frequently are “asset deals”, which refers to the purchase of a target’s tangible (i.e., equipment, land, computers, fixtures, inventory, receivables, work in process, etc.) and intangible (i.e., brands, patents & trademarks, websites, phone numbers, customer lists, and, as much as possible, the company’s reputation) assets. Because the company/corporation is effectively stripped of its assets, but the legal entity itself is not acquired, the seller will continue to own the legal entity that sold the assets. This is notable because the legal entity will continue to retain any assets that are not purchased, as well as all of the liabilities not assumed by the buyer.

The alternative, a stock deal, is easier to understand because the purchaser is simply buying the shares of the corporation (or in the case of a limited liability company, the member interests). In a stock deal, the buyer gets all of the company’s assets as well as all of its liabilities. It’s just like buying shares in 3M through your online stock broker – except you would need roughly $120 Billion to buy all of the approximately 600 million shares outstanding.

Typically, all of the target’s stock or assets are included in a transaction. It is not uncommon, however, for a buyer to take a partial interest in a target. These partial acquisitions of stock can be “controlling”, wherein the buyer has majority voting rights or influence over key operational and strategic decisions, or “non-controlling”, wherein the buyer does not have enough ownership to make decisions unilaterally. Oftentimes non-controlling acquisitions are made by “financial” buyers that provide capital (i.e., money) to a company to be used to fund growth (i.e., acquisitions), in exchange for a minority share of the company’s future profits. On the other side of the buyer coin are the “strategics”, which are companies that generally are considered competitors or peers of the target company.

Non-controlling deals also occur when a strategic takes a minority ownership stake in a smaller company in the same or adjacent industry. This will occur when the larger company wants to prevent one of its competitors from acquiring the target, while not wanting to acquire the entire target (perhaps due to lack of money, or uncertainty surrounding the target’s business model, or countless other reasons).

The ”M” or merger, on the other hand, refers to a combination of two companies, wherein the owners each contribute the assets and liabilities of their respective companies to a new legal entity (let’s call it “NEWCO”) and then each owner receives an ownership share in NEWCO in proportion to the value that each seller contributes to NEWCO. For example, if one company contributes $6 million of assets to NEWCO, and the other company contributes $4 million, then the first owner will own 60% (6/(6+4)) of NEWCO. In a typical merger, the companies are combined and the management teams meld together to run NEWCO, with the management team from the company with the highest ownership in NEWCO getting ultimate authority.

There are other types of business combinations, including ESOPs (wherein the employees own the company) and Joint Ventures (wherein two or more parties invest into an entity and share in its risks and rewards, but the investors maintain separate identities), as well as trendy terms such as “acquihires” (which occur when an acquired company’s assets are primarily employees).

HISTORY. M&A has been taking place as long as there have been companies. Notable mergers occurred as long ago as the 1700’s in India and Italy. In the United States, the first big merger wave hit during a 10-year period beginning in 1895 when over 1,800 companies were consolidated into others. In 1900, the value of all M&A equated to 20% of the United States’ Gross Domestic Product (compared to 3% in 1990).

Merger activity can be measured broadly (at the “macro” level), such as the above trends, as well as at the “micro” level (e.g., individual industries). At the macro level, M&A activity is influenced by governmental policy, economic trends, interest rates, demographic shifts, etc. At the micro level, it’s primarily strategic reasons that drive significant M&A. For example, industries that exhibit certain characteristics (e.g., profitable, sizeable, easy to understand, etc.) tend to get “consolidated” – wherein a couple of large, dominant players evolve as the result of numerous acquisitions of their smaller rivals or peers.

The next article will examine the motivations fueling M&A activity as well as provide a primer on the typical steps in an M&A deal. Until then, happy dealing!

Road to Green: Culture Change? You Can’t Make Anything Idiot-Proof Because Idiots are so Ingenious

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HD shop owners and managers are starting to realize that the reliability and quality of their products and service processes are vital to a successful business. Everyone is also realizing that today’s world is changing faster than ever before. Technology developments, restructuring and mergers, new ideas about management concepts are all putting pressure on owners to change and be agile. The HD industry is acknowledging that HD shop and parts supplier business owners clinging to same old structures will ultimately lose out.

Everyone is seemingly looking for the perfect solution with the right business processes to secure their future. Well the answer to that task is one single, make it right, solution does not exist.

Many studies have shown that the main causes of performance problems of staff and Management are actually in the business structures, systems and culture within which these people work. Seldom is the culture of the business properly examined by Management. It is a fact that if Management put good people in bad systems you will get poor performance, however, it is also a fact that 20% of the staff works against Management to implement change within their structure and system. They are very uncomfortable with the introduction of new ideas and new processes. They only know and want to remain within their comfort zone environment of “same old, same old”.   They just don’t realize that if we want things to stay as they are, things will have to change. So to tackle the problems of the HD shop or store, Management tries to make things “idiot-proof” hoping to improve the businesses overall performance by reorganizing or introducing new training and development programs. These moves create change, but when this is done without understanding the HD shop or store’s unique culture, owners will in fact solve one problem while without knowing it, create others. The stress level of the business actually increases and then Management in turn says the reorganization and new programs don’t work.

It must be clearly understood that within the HD aftermarket, we operate a very complex business. Management must acknowledge quick fixes don’t work, don’t exist and is totally unrealistic thinking. Business processes and change concepts must be tailored around the culture of the business itself. To achieve this takes time and if Management has ignored the business “change” required for years, or never understood the culture of the business they manage, he/she is going to be disappointed with any training or development programs they participate in. Implementing culture change and fine tuning business processes in the HD aftermarket takes on average 2 to 3 years and it is for this reason many HD aftermarket owners and managers are struggling today with their business. They failed to embrace change. They also failed to involve their staff and understand the Chinese Proverb “Tell me and I’ll forget, show me and I may remember, involve me and I’ll understand.”

The solution is not simple but it must start with ownership undertaking a complete “inventory” study of its personnel and management culture to determine what is going to be required to move their specific business forward. Once this is done, then and only then, the right training and development processes can be sought out. Slow down and really think about your business. What do you have now, what do you want it to be and whom are you going to involve?

Bob offers personal business coaching and on-going business development and training for Heavy Duty mechanical shops focusing in on building NET income. He can be reached toll free at 1-800-267-5497 or email him at  greenwood@aaec.ca   

What’s New in Heavy Duty Welding, Part 2

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Last month, I-CAR started a discussion of welding requirements for heavy duty collision repair. Brian Wasson, Welding Program Manager at I-CAR, presented ‘What’s New in Heavy Duty Welding’ at the HD Forum in Fort Worth, Texas. The first step is identifying the materials and preparing the working environment and tools. Next up is the actual welding process.

 

Preparation is key. Don’t forget to wear the proper safety gear, including a helmet with proper lens shade, respirator, heat-resistant jacket and pants, gloves, and boots. Did you know that inhalation of welding fumes can lead to Parkinson’s disease, and viewing the UV rays from a weld arc without proper shading causes “flash burn,” which is like a severe sunburn of the eyes?

 

Once the correct welding machine is identified and set up and the right electrode wire is selected to match the material being joined, you can move forward on the steps needed for a proper weld. First, perform test welds on the sample material; most use scrap from the part being removed. The tests must duplicate the actual weld you are going to perform in material, orientation and application. Inspection of test welds ensures the setup and method are correct. Tests typically include visual inspection and bend and break destructive tests. However, on certain weld joints it may be required to perform magnetic particle, X-ray, or dye penetrate inspections. These advanced tests are typically required where hazardous material is being transported; however, there may be other applications, too.

Documentation of test samples and results should be added to the repair file to demonstrate that proper steps have been taken. This one simple step can save headaches down the road.

How can you make sure you and your staff have the skills and knowledge to perform those repairs? We will discuss welding training options next month.