Economic historians blithely attribute the expansionist efforts of Alexander the Great and Genghis Khan to their compulsion to capture markets. (Location 563)
With his partners in 1870, John D. Rockefeller founded Standard Oil, providing the base for his consolidation of the petroleum industry. (Location 577)
Overestimating the potential profits from consolidation, Morgan and his partners grossly overpaid to acquire several shipping companies, and the leverage became untenable when the projected benefits failed to materialize. (Location 585)
A fundamental problem faced by rollup practitioners is that the vast majority of businesses are not instantly identifiable in an easily accessed database. (Location 1070)
A high-growth prospect might be valued at eight times EBITDA, whereas a low-growth entity would be valued at six or as little as four times EBITDA. (Location 1274)
Therefore, when it comes time to sell, they demand a king’s ransom, and the acquirer should be ready to accommodate them with buckets of gold. (Location 1381)
Either they are happily managing the enterprise or they recognize that their lifestyle is dependent on the generation of cash flow, which is possible only if they continue operating an attractive business. (Location 1383)
The acquirer of multiple small businesses therefore must be prepared to pay up to motivate the majority of operators to sell. (Location 1387)
She must therefore be opportunistic and strategic in the process, focusing on acquiring the most value-priced prospects first and waiting patiently for the more expensive companies to lower their price demands. (Location 1389)
The majority of Trader’s deals were initiated by its own employees, who quietly contacted the owners and employed their powers of persuasion to entice otherwise complacent operators to consider selling. (Location 1393)
Cognizant that owners are more prone to welcome entreaties from people who are apparent decision makers, the first contact was almost always made by a senior executive who tried to reflect the genuine interest of an admiring peer. (Location 1397)
Trader, followed by a sincere expression of admiration for the apparent success of the prospect’s business and the impressive quality of its products. (Location 1400)
compliment a specific operational detail as an example of an especially astute component of the business. (Location 1401)
Very quickly, the conversation would turn to a request for an invitation to visit the business to discuss opportunities of mutual interest. (Location 1403)
Trader exploited the owner’s inherent curiosity about the possibilities. (Location 1407)
On rare occasions, a few prospects demonstrated strong paranoia about Trader’s executives snooping around their backyard, and a handful proved elusive, refusing to return phone calls. (Location 1413)
For many entrepreneurs, the business is like a child and evokes the same protective instincts. Like a devoted mother, the owners have slaved over its development, almost certainly spending more time with it than they have with their flesh-and-blood children. (Location 1423)
Failure to understand these parental dynamics causes some acquirers to err by assuming a threatening stance to compel an owner to sell: “If you don’t sell to us on our terms, we’ll move into your market anyway, leaving you in the dust with nothing.” Even if it is not stated in such reprehensible terms, an acquirer’s (Location 1428)
As the familiar adage advises, “You can attract more flies with honey than with vinegar.” (Location 1434)
They knew it was time to scramble to accelerate their acquisition efforts before Cox won even more attractive targets. (Location 1460)
To accelerate a quick decision, they employed a clever ploy that achieved 100 percent success in enticing immediate execution of their binding letter of intent. (Location 1492)
the key financial terms on a notepad and then present the full letter along with a $100,000 certificate of deposit to bind the deal. (Location 1494)
Notably, though specified as the binding payment, the certificate actually required both the buyer’s and the seller’s signature to be cashed at the time of closing, and Landmark was therefore protected from loss if the deal cratered. (Location 1498)
Although warm family dynamics made the acquisition of the Chicago Auto Mart possible, sometimes the opposite factor motivates a sale, and divorce represents one of the prime catalysts for many transactions. (Location 1586)
As indicated by the examples discussed earlier, Landmark and Trader did not rely on a single person to orchestrate negotiations. The involvement of several senior executives facilitated broader coverage of the prospect universe and dramatically accelerated the rollup process. (Location 1600)
In the realm of striking deals, it is sometimes tempting to agree to pay the seller’s asking price, especially when you retain the right to set the terms like the scurrilous agent in our parable. (Location 1681)
Particularly in the realm of small transactions, it is critical to understand the human elements that affect the ability to clinch a sweetheart deal. Unlike the megadeals trumpeted in the media, the majority are dependent on the individual perspective of a single owner who may be easily swayed by an astute negotiator. (Location 1686)
transactions, and it is rare for small entrepreneurs to seek professional guidance and inconceivable that they will solicit the far more sophisticated advice offered by Wall Street investment bankers. (Location 1689)
Like the business owners, Trader discovered, the advisors were typically harried hands-on professionals, and they usually perceived their key role to be a facilitator of their clients’ plans, (Location 1693)
to the quirks of human nature and employed the best tactics to capture tangible benefits and preferential pricing for the businesses that were acquired. (Location 1697)
but it is the experienced negotiator who is comfortable with the required give-and-take of haggling to produce the most advantageous deal. (Location 1699)
Although many buyers may not be guilty of making compelling first offers or be too quick to accede to sellers’ demands, (Location 1705)
Early on, one of Landmark’s managers regularly made the mistake of striving to persuade the owner that her business was not worth the asking price: “I’d like to pay what you ask, but your business just isn’t worth it for these reasons.” (Location 1706)
A more successful tactic was demonstrated by the shrewd Conrad Hall. Hall would focus on demonstrating how much Landmark had struggled already to justify its offer. (Location 1712)
Displaying genuine interest and sincerity, Hall would have the seller provide painstaking details and then confirm that he had considered each item and agreed unequivocally with the seller’s assessment. (Location 1715)
Trader’s representative suggested there was no need to waste the sellers’ time because Trader’s value was “south of $5 million.” (Location 1724)
when valuations had collapsed, Trader recommenced the process, ultimately agreeing to a $4 million transaction. (Location 1726)
Subject to the compulsions of “deal psych,” an inexperienced seller becomes impatient, reveals too much, and ultimately relents too quickly. (Location 1727)
Trader’s representative took an arbitrary recess but returned to the negotiating table 30 minutes later, prepared to split the difference. (Location 1729)
An asset purchase is the more selective acquisition of just the components specified by the purchase agreement, and the purchase price is paid directly into the company, whose stock remains in the hands of the original owners. (Location 1734)
but there are both risk management and tax considerations that strongly argue in favor of asset deals. (Location 1737)
In contrast, when stock is purchased, the buyer assumes all the acquired company’s known and unknown liabilities (generally characterized as contingent liabilities). (Location 1739)
With enactment of the Tax Reform Act of 1987, acquiring assets instead of stock provides the acquirer with a direct government subsidy in the form of tax deductions, effectively permitting most deals to be completed at a significant discount from their nominal face value. (Location 1751)
For example, by structuring a $10 million acquisition as an asset deal, the buyer can deduct the $10 million over time as an expense, sheltering $10 million of future profits from taxes and producing approximately $4 million in tax (Location 1755)
Fortunately, most small owners have little reason to prefer a stock deal to an asset deal. Because their enterprises typically are organized as proprietorships, partnerships, Subchapter S corporations, or limited liability companies, the proceeds from an asset sale are subject to the same tax impacts applicable to a stock sale. (Location 1762)
The tax on asset sales for a C-corp represents a compelling justification for entrepreneurs to elect an alternative form of legal organization for their enterprises. If the company was established as a C-corp, its owners should consider reorganization under another form if a future sale is contemplated. (Location 1770)
While assessing a free photo guide operation in the South, Trader discovered that although currently a limited liability company, the organization had been a C-corp during the first 8 years of its 10-year existence. (Location 1776)
The implied payout after eight years, of course, represented an advantageous deferred payment, providing financing benefits if the seller accepted a rate lower than Trader’s alternative long-term bank borrowing costs. (Location 1779)
Trader employed to mitigate some of the cost of stock deals was to persuade the seller to apportion as much of the total payments as possible to nonstock payments such as noncompetes, employment agreements, and earn-outs. (Location 1783)
Regrettably, most large, long-established companies are organized as C-corps, and the purchase of stock is the only practical option. (Location 1788)
Trader tried to obtain some protection in stock transactions by negotiating indemnity provisions in the acquisition agreement. (Location 1791)
The second, less obvious but often more valuable benefit is that deferred payouts can provide a surrogate escrow account to provide a source of funds to compensate the buyer for any indemnities subsequently owed by the seller. (Location 1811)
To collect such payments, it is advantageous to have funds conveniently escrowed to be tapped when due. (Location 1814)
However, in the real world of small transactions, deferred payments are more often the rule than the exception. (Location 1818)
Accordingly, an astute acquirer should openly and tactfully solicit staff input before issuing directives to implement more monumental changes. (Location 2648)
practices. That involvement makes the staff part of the decision-making process, and their participation tends to improve their willingness to support changes as they are implemented. (Location 2651)
Trader ran into these issues repeatedly, and they were difficult to resolve without the dedicated attention of local managers. (Location 2661)
For example, Trader understood that superior customer service would help solidify its market position, and with the participation of its field managers, it defined and adopted a set of consistent standards, including measures such as how quickly the phone was answered, the promptness of refunds, and the components of phone etiquette, among a variety of other items. (Location 2663)
Offering incentives often can be a valuable factor in motivating change. At Trader, those incentives were sometimes merely part of a (Location 2667)
To address the management vacuum, transferring talent into a location from the consolidator’s own staff is rarely an option. (Location 2673)
When it became obvious the appointed manager could not perform as necessary, Landmark was compelled to make another change, either appointing someone new or transferring a manager from another location. (Location 2681)
Eager to justify the cost of a transaction, an acquirer may blithely hypothesize that substantial costs will be reduced through the realization of synergies of integration and scale, (Location 2686)
After Landmark’s acquisition of the Winston–Salem Trading Post, it tested an aggressive increase of the magazine’s cover price, and the results demonstrated that it could be instituted elsewhere with high confidence of success without deleterious volume declines. The experience also produced a valuable template for best implementing the price increase to minimize negative consequences. (Location 2694)
Sometimes the programs simply required measuring and reporting results to encourage a focus on the criteria that produced improvements. For example, the weekly calculation of production labor-hours required to compose the average magazine page focused the local composing manager’s attention on modifying processes and adopting techniques to improve weekly results to align with those of peer operations. (Location 2697)
In the race to complete acquisitions, there is often a temptation to reduce the complexity of the transition by permitting the acquired entities to continue managing their own accounting and performance measurement systems: “Don’t fix what ain’t broken.” (Location 2722)
Moreover, most small companies have comparatively rudimentary accounting and administrative systems and have neither the time nor the ability to develop and report desirable (Location 2725)
new performance data without new systems. (Location 2726)
On the first day after acquisition, Trader would immediately assume responsibility for paying the acquisition’s bills and producing its monthly financial statements. (Location 2728)
Further assisting the effort to red-flag problem areas was centralized access to accounts payable and general ledger data. (Location 2732)
promptly identify the source of variances from expected performance. (Location 2733)
Shortly after the institution of centralized accounting functions, Trader implemented supplemental processes to collect nonfinancial performance data, including unit sales statistics, customer counts, and composition productivity, among other items, to provide (Location 2734)
“Easy,” she said. “I reassigned them to duties that drive them nuts! A little while ago, I pulled a girl off the ad floor, handed her the telephone book, sat her in the storage room, and told her to alphabetize the listings by first name. (Location 2752)
Operating well below the radar, small business owners exercise their freedom to do as they please, but a large organization must employ more enlightened practices to produce superior results and mitigate the costs and distractions of regulators and litigators. (Location 2760)
It is probably easier for professional managers to identify what small operators do poorly than to identify what they do exceedingly well. (Location 2763)
When Dollar Tree acquired the Chicago-based Dollar Bills, the knowledge it gained was truly transformative, according to its founding CEO, Macon Brock. (Location 2771)
That transformation proved critical to success in urban environments whose customers had little need for Dollar Tree’s original, more suburban-oriented merchandise such as Halloween lawn decorations. (Location 2775)
Economies of scale have the potential to produce savings in purchasing, marketing, sales, and administrative costs. In health club rollups, they were realized by eliminating the overlap through a combination of back-office functions; (Location 2780)
Rarely do small businesses offer the breadth of expensive employee benefits deemed necessary in the large company they join, and the consolidator is certain to incur substantial additional costs arising from supervisory oversight, travel, supplemental reporting, and other corporate overhead requirements. (Location 2789)
A prudent acquirer will make the most of these opportunities, gaining as much insight and offering as little criticism as possible: “How have you succeeded so well? That’s impressive. Tell me more. You seem to have such talented staff. Who are your stars? What are your tricks of the trade?” (Location 2799)
Because of their benefits, almost all the field visits were conducted by Trader’s top leaders. (Location 2803)
On rare occasions, the owner’s managers could be incorporated into pre-closing discussions to plan the merger’s integration process, and such contributions smoothed the transition. (Location 2810)
In the stressful aftermath of the deal’s close, the new owner’s first step is usually to meet the staff, followed by a review of the fringe benefit programs, employee policies, and procedures. (Location 2833)
Discussions of new policies and procedures can cause them to have concerns about the necessity to adjust to the new order. (Location 2837)
In almost every case, one or more of its top leaders stood before the new employees and expressed great enthusiasm for the prospects of working together to develop the business to its full potential. (Location 2839)
In almost every case, Trader’s benefits programs represented an improvement over those offered by the former owner, and those improvements were stressed in the presentations. (Location 2844)
As employees of a small company, most had never attended such an extensive review, much less given consideration to issues such as sexual harassment, open door policies, and employment of relatives. Not only did the presentations tend to be tedious, they undercut the original enthusiasm engendered by the opening comments. (Location 2847)
An acquirer rarely has the bench strength to appoint its own talent to manage the new entity and must usually rely on an existing manager to step into the more responsible role vacated by the owner. In most cases, this is a positive. (Location 2859)
Having previously operated in the owner’s shadow, the manager should relish the opportunity to blossom with the new responsibilities, and his appointment should comfort employees, who may interpret the action as a demonstrated commitment to the local staff. (Location 2862)
owner. Typically, she will aim to please, and like any new manager, she will be eager to demonstrate her dedication to the new boss. (Location 2865)
From the entrepreneurs of its numerous acquisitions, Trader learned countless lessons about providing alternative, more productive methods to manage distribution practices, pricing, private party and commercial ad development, product segmentation, and production processes. (Location 2899)
Landmark discovered that the now familiar titles had become an actual customer enticement, helping draw traffic to the stores. (Location 2903)
If a location’s staff and management are indifferent about a small change or if it is mainly administrative, it may require only a quick decision and a few instructions: (Location 2910)
People inevitably become comfortable with their customary routines, and dictating change produces at best begrudging acceptance and at worst outright rebellion, either of which could lead to the failure of the implementation effort. (Location 2923)
Distributed as a free publication from outdoor racks and in grocery stores, Auto Mart originally was tailored to attract one or two pages of advertising from a broad assortment of each market’s used car dealers. (Location 2927)
Headed by long-experienced media executives, Trader’s top management well understood that newspapers’ most profitable advertising appeared in the help-wanted section. (Location 3076)
An economic franchise arises from a product or service that: (1) is needed or desired; (2) is thought by its customers to have no close substitute; and (3) is not subject to price regulation. The existence of all three conditions will be demonstrated by a company’s ability to regularly price its product or service aggressively and thereby to earn high rates of return on capital. Moreover, franchises can tolerate mis-management. Inept managers may diminish a franchise’s profitability, but they cannot inflict mortal damage. In contrast, “a business” earns exceptional profits only if it is the low-cost operator or if supply of its product or service is tight. (Location 4024)
From 1975 to 2006, Auto Trader and its offspring magazines exhibited the key components of an economic franchise. As efficient advertising media, they offered consumers a remarkably effective means to sell their used cars at prices superior to those offered by car dealers. (Location 4035)
The concept of an economic franchise assumes a business that has a protected product, service, or content. (Location 4045)