Succession Planning: Integral to Your Business

By Diane M. Calabrese

Succession is something solid businesses consider an integral part of business planning. It takes many forms, including allowing a business to be acquired. Nilfisk Group recently acquired two companies familiar to our readers. In November 2015, Nilfisk acquired Hydro Tek Systems, Inc. in Redlands, CA. And, at the start of this year, Nilfisk acquired Pressure-Pro, Inc. in Fort Pierce, FL.

In a press release on December 17, 2015, Jeff Barna, president of Nilfisk-Americas in Brooklyn Park, MN, cites the importance of the two acquisitions to the vitality of his company. Among the anticipated gains are “additional market access” and broader product range” for Nilfisk.

Writing to customers and partners on November 12, 2015, John Koen, founder and general manager of Hydro Tek wrote about the benefit to his company: “This acquisition provides Hydro Tek with an even stronger platform and access to additional channels.” Citing the commitment of his company to keeping customers front and center, Koen also notes customers can expect “an expanded portfolio of products to meet even more of their needs.” The strong 30-year foundation of the company remains in place.

“As far as where we go from here…we are ‘business as usual,’” says Denise Tyo, marketing coordinator at Hydro Tek Systems. Production, product line, personnel, and location all remain constant, she explains.

Pressure-Pro was founded in 1995. It, too, has a strong foundation. “Pressure-Pro, a 21-year-old family business, was officially purchased by Nilfisk on January 1, 2016,” says Dale Reed, owner of the company. “We are very excited about the opportunity that the Nilfisk acquisition affords our company for both dealers and employees,” explains Reed. “The synergies of the two companies and the additional resources will give us an even greater opportunity than in the past. Nilfisk shares the same value system as Pressure-Pro, which makes us a good fit.”

Bringing two leading U.S. manufacturers together under one group also adds strength. “The addition of Hydro Tek will also offer many other exciting opportunities for our dealers,” says Reed. “Ryan [Reed] and I will continue to manage the company in the same manner as we have done in the past,” says Reed. “This new partnership will be a ‘win for all’.”

As the foregoing illustrates, succession in a company often means being acquired. In other words, the company becomes part of a bigger group, a more diverse entity, or both. Nilfisk has approximately 5,500 employees and sells its products in more than 100 countries.

No doubt many readers learning of the acquisition of two well-known manufacturers in our industry have asked themselves, at least in passing, one question: When does it make sense to allow your business to be acquired by another company?

Many members of our industry have reflected on that question. For some, the reflection was a general part of succession planning. For others, it was because they had at least an informal inquiry about their interest in selling or because they were weighing their readiness to be acquired.

Many Reasons, All Good

“The reason that I purchased a company is because of the customer base they had,” says Roy G. Chappell, CEO, Chappell Supply and Equipment in Oklahoma City, OK. The customer base included “some local, some national, some international” buyers. “What I was really after was the customers,” says Chappell. Yet that does not mean there’s not abundant due diligence that goes along with a decision to make an acquisition.

As for why a business owner wants to be acquired, there can be many answers. “People decide they want to get out of business,” says Chappell. It may be as simple as that. For others looking to be acquired, it may be that the company is “just getting too large for them” to manage without significant investment, explains Chappell. “The bigger you get, the more detailed information you’ve got to have.”

Chappell says that it’s convenient to think in $5 million increments. “Once you get past $5 millionin sales, it changes the footprint of your company,” he explains. A bigger footprint demands several adjustments (scaling up). Changes in software are required. “Most software packages are written in $5 million increments,” says Chappell. New hires are needed, too.

Companies that have in mind the making of acquisitions use different criteria to evaluate the companies they will buy. Chappell has criteria that work well for him. “I want companies that have 20 or more employees because they’re more focused in on service and quality of products,” says Chappell. “One of the things that has helped us over the years is focusing on larger companies.” (The corollary is that smaller companies may be too focused on price to the detriment of quality and service.)

Chappell also looks at the annual sales of a company before talking acquisition. He explains that the average sales per customer at his company are three times the average of other companies that are members of the Cleaning Equipment Trade Association (CETA).

From the side of a company that may be considering being acquired, the basics matter. The buyer will want to see year-after-year growth, says Chappell. “That’s why it’s so important to grow your business.” And an astute buyer will want to know much more, such as peak months and percentage of gross profit on a monthly basis. The more hard numbers made available to support the strength of a company, the easier a solid company will be to sell.

“I know what we’ve got to do to make a net profit,” says Chappell. In that context, he wants to be sure that any company acquired will be a good fit.

One thing that many new and small businesses do not realize, at least in early years in business, is that a prospective buyer may be taking a look at them. That’s because sometimes the best way to buy a company is to do so before it decides it wants to sell.

“Another thing you’ve got to do, if you’re looking to expand in an area is to go in and do searches,” says Chappell. Target companies by their sales, their niche, and size, for starters.

Change As Catalyst

One thing that acquisition does is contribute to the vigor of the company acquired. All the parties cited in the first section regarding Nilfisk point to synergies expected. Any kind of change is a stimulant. And acquisition or being acquired represents a change. New people, new levels of interaction, and new ties are sources of energy.

The catalyst that is change can be appreciated even by those who have not been directly involved in an acquisition. “I have never really purchased or acquired another company,” says Bill Sommers, president of Pressure Systems Industries in Phoenix, AZ. “I have helped build other companies for friends—because that’s fun.”

Putting the “fun” together with operating and growing a business is bold. Yet when manufacturers, distributors, and contractors pause and recall why they own a business, at some level they must admit they enjoy what they are doing.

A business owner may consider acquisition when things get a little unwieldy, even though there are other solutions. For instance, says Sommers, perhaps a business has so many locations that it adds to complexity (in logistics). Consolidating instead of selling may be the answer. Another possibility for a business considering re-scaling is to not sell the entire business, but just a component of it. This works well for companies that have discrete components, such as selling boilers and pressure washers.

At the same time, while evaluating the valuable components of a business, remember to factor in expertise of the owner. “I have seen many small businesses close or be sold to new owners who are not able to keep the customers because the business was operated so differently,” says Judy Bowers, vice president sales, R.J. Bowers Distributors, Inc. in Rockford, IL.

The concept of having the owner of an acquired company stay on for an agreed interval can smooth a transition, even if the owner wants to move on as soon as possible. Having the owner stay on can be a good way to increase the comfort level of the existing customer base.

Bowers explains she has not sold a business or acquired one. She has, however, observed others who have done so. And she has developed thoughts about when it might make sense of a business to consider being acquired. “When you stop loving the business or its worth is so valuable that you reach the land of critical mass,” says Bowers, it may be time to be acquired.

“I think it comes back to the same reason that real estate is sold or purchased—change in life, age, health, or land of critical mass,” explains Bowers. “Land of critical mass is the place in your life where money is no longer a concern because your net worth is so large that you can live and do whatever you wish. Financial expert Bob Brinker talks about the land of critical mass…That’s when I am going to sell my business.”