The Art Of Acquisition

Three gases and welding distributors discuss the process of buying and integrating another company.

Acquiring anotherspecialty gases or welding equipment distribution company may be a relatively cut-and-dried transaction on paper, but GAWDA distributors who've been through the process note that the challenge lies not so much in the financials as in the human element. Three distributors with recent acquisition experience—Stacy Shelton, management team leader for Vern Lewis Welding Supply (Phoenix, AZ); Michael Dye, president of Phoenix Welding Supply (Phoenix, AZ); and Rick Kersey, president of Wright Welding Supply (Des Moines, IA)—spoke with Welding & Gases Today about the process of acquisition, how their companies eased the transition, and what other distributors who are looking to acquire or be acquired should bear in mind before moving forward.

Looking At a Potential Aquisition

Welding & Gases Today: Tell me about your most recent acquisition.

Stacy Shelton: In January 2007, Vern Lewis Welding Supply completed our first acquisition with the purchase of Yavapai Welding Supply, a small distributor in the Prescott Valley, which is about an hour and a half from our headquarters.

Michael Dye: Phoenix Welding Supply's most recent acquisition was Aztec Welding Supply in Sierra Vista and Nogales, Arizona, in August 2005. We also acquired Consolidated Welding Supply in Phoenix and Tucson about 15 years ago.

Rick Kersey: Wright Welding Supply acquired Dahl Welding Supply in June 2006, which gave us two additional locations in Omaha, Nebraska, and Council Bluffs, Iowa. It was our first acquisition.

What led you to make the acquisition?

Rick Kersey: Prior to this, Wright Welding Supply had always scratch-started branch locations, although we've toyed with the idea of acquiring. Last year, the owner of Dahl Welding Supply called us. His father, who had also been his partner in the business, had passed away a couple of years prior, and the owner was thinking of selling.

Michael Dye: We were selling to Aztec Welding Supply at a wholesale level, which is something we do with a lot of smaller companies. They know that if they ever decide they want to do something different or work for another company, then Phoenix Welding Supply is willing to make it work for both of us.

Stacy Shelton: The owner of Yavapai Welding Supply was a longtime customer of Vern Lewis Welding Supply, and he had gotten to the point where he either needed to really invest some time and money into the company to make it grow, or he needed to be acquired by somebody who had more buying power. He approached us in early 2006 with the concept that he might be interested in selling.

Rick Kersey: We did some business with Dahl Welding Supply, too. His company was smaller than ours, and we had a good relationship.

And that was why the owner approached you?

Rick Kersey: At that point, he wasn't soliciting an offer—he was just letting us know he was probably going to sell, so I set up an appointment to go and talk with him. He was also speaking with a large, global entity about purchasing his company, which was a challenge for us because obviously we're not able to pay the premiums the “big guys” can. But there were other considerations. He wanted to be listened to, and I guess the competitor was not listening to what he was actually saying.

What were his other considerations?

Rick Kersey: He's a younger gentleman, in his mid-40s, and his continued employment was important to him, so we found a sales position for him in our organization. As much as he wanted to sell the business and receive the monetary rewards for that, he also wanted to be a member of a team.

Stacy Shelton: The owner of Yavapai Welding Supply felt the same way. He didn't want to sell out to a big player—he wanted somebody who was like-minded and whose philosophies were similar to his. He signed a five-year contract to stay on and work with Vern Lewis Welding Supply.

What made you decide an acquisition was the right move for your company?

Stacy Shelton: We decided about a year and a half ago that we wanted to expand, and when the owner of Yavapai Welding Supply approached us about an acquisition, we liked the idea because the company was in an area with a lot of expansion going on but not a lot of competition. We'd always wanted to be in that area, but we hadn't pursued it because of our relationship with Yavapai.

Michael Dye: We came to a mutual agreement with the owner of Aztec Welding Supply that we could both grow together if we acquired it due to the capitalization of our company. He still works for us. And Aztec Welding Supply's locations offered us a whole new market in which to grow.

Rick Kersey: Even without the acquisition, Wright Welding Supply has grown about 100 percent in the last two years, and it's all been westerly. We already had customers in the Omaha market, where Dahl Welding Supply was located, so we were thinking of scratch-starting a store there. Then this came up, so we decided to purchase the business instead. It was what you'd call a no-brainer.

If you'd already been thinking of scratch-starting, what made the idea of acquisition appealing?

Rick Kersey: Dahl Welding Supply was very strong on walk-in business, but not as strong with direct customer sales—large end-users to which they would deliver—which is where we do a better job. So it seemed like it was the right balance, and it gave us a good base of operations there.

Stacy Shelton: It was a big step for us to make the decision to acquire, because we weren't sure if it might be easier to scratch-start than try to woo and keep another company's customers. We probably could have scratch-started more cheaply, but what would it have done to the market? We sat down and looked at the numbers, and we looked at what the owner wanted and what we wanted, and we figured out a way to mesh those together and come up with an equitable plan.

What do you look for in a potential acquisition target?

Michael Dye: Phoenix Welding Supply's number one concern is probably the customer base. As long as they have the same type of customers—in terms of size and what they buy—as we do, then we can provide the same level of service we're used to giving. We also look for a company in a growing market. And the ownership and the employees are very important. Our goal is to keep those employees with our company, so we look for good, knowledgeable people who have a good attitude and work ethic.

What steps do you take before actually going through with an acquisition?

Michael Dye: Obviously, we look at their financials. We only buy assets, not liabilities, so we find out what cylinders they own and what sales they have. We do cylinder audits at every customer site to get a feel for the customer base.

Rick Kersey: A lot of the steps involved just conversation—getting to know the owner of the company and what his personal and business goals were. Once we tendered a letter of intent with the terms of the offer, we went through negotiations. My CFO and vice president of operations worked with the accountants and attorneys to go through the due diligence process, which was pretty quick and painless. Once we were satisfied that everything was as it should be, we moved to close.

How long did it take to complete the acquisition?

Michael Dye: Altogether, about six months to a year.

Rick Kersey: We did it pretty quickly. My initial conversation with the owner of Dahl Welding Supply was the third week in March, and we closed June 1. The integration process took four months or so.

Stacy Shelton: We started working on the paperwork in September and finalized it in late October. We had our name on the store on January 2. It was crazy trying to get everything done during the holidays, but it was what the owners wanted, and we got it done.

Michael Dye: Our controller, purchasing agent and sales manager spent a lot of time beforehand putting everything together so that it was a very smooth transition. We made sure all of Aztec Welding Supply's accounts and inventory were set up in our computer system, so that all of the information flowed into our system very smoothly without having six months of rough edges.

Stacy Shelton: When we purchased Yavapai Welding Supply, they did not have a computer software system. They were doing all their invoices by hand. We worked closely with our software vendor to set up a computer system that could communicate interactively with ours via the Internet.

Rick Kersey: We were in the process of buying a new computer system for our whole company when the acquisition came up, so that was a challenge. But in a way it worked well, because when it was done everybody was on the same system, and there were no technology integration issues.

Stacy Shelton: After we got the technology in place, we had to bar code and price everything. Because their pricing was different than ours, we had to come up with an equitable pricing plan.

Rick Kersey: Our largest hurdle as far as integration was that we fill all of our cylinders here in our Des Moines fill plant, whereas Dahl Welding Supply didn't do any filling. Dahl owned some cylinders and was renting some, so we had to return the rental cylinders and then work on the logistics of delivering both hardgoods and cylinders from our central Iowa location to their stores.

Stacy Shelton: We send a truck up to our new branch once a week, so we had to come up with a good requisition system to make sure we get them the supplies they need. The last thing we want is for them to be stuck without a product they need just after the truck leaves.

Michael Dye: One of the first things we did at our new locations was add more inventory. Inventory and cylinder shortages can be a big factor in terms of cash flow for a small business, so we pumped both of those up right away and sales have increased because of it.

How did you inform customers of the change in ownership?

Michael Dye: We sent out a couple of different cards and welcoming letters, letting them know who we are, what we can bring to the table, what we offer, and how many other locations we have across the state, if they ever had business outside their area.

Stacy Shelton: The owner of Yavapai Welding Supply drafted a letter to his customers, explaining that he was being acquired by Vern Lewis Welding Supply, but that his service to customers would not change. Then in January we sent out letters to our customers and our vendors to let them know we had a third location, and it said basically the same thing—that we had acquired Yavapai, but that we would be giving the same service.

Rick Kersey: We sent mailers and that sort of thing, but we also teamed up our salespeople from other locations with Dahl Welding Supply salespeople and personally visited key accounts to discuss what was happening, why and the timeline. We feel proud of the fact that we lost very, very little business over there after the acquisition. Notification was important, but I think retaining the employees customers already were familiar with was equally important.

Did you do anything differently as a company to approach servicing these new customers to help them get through the transition?

Rick Kersey: Nothing sticks out in my in mind. I'm sure there were some nuances that we had to adjust to, but there were no major differences.

Stacy Shelton: In the three months after the acquisition, the owner of our company, Vern Lewis, spent three-quarters of his time at Yavapai Welding Supply, and I think that presence—that there really is a Vern Lewis in Vern Lewis Welding Supply—was very important for a lot of customers. It helped to maintain that small-town service mentality. Seeing him working together with Joe, the former owner of Yavapai, was good for the customers.

What costs were involved above and beyond the purchase price of the company?

Stacy Shelton: We used a lawyer to write the contract, which cost about $1,200. We also had a non-compete agreement drawn up for one owner who was selling out, and an employment agreement for Joe, the previous owner, to stay on board with us.

Michael Dye: Attorney fees and appraisal evaluations are part of a fair and successful acquisition. Obviously inventory costs are pretty much set, but we spent a lot of time making sure that the assets were appraised at a fair value, and that the worth of the customers and the goodwill of the company figured in.

Rick Kersey: We replaced one truck and added another, and we bought a lot of cylinders. There are many “hidden costs” in an acquisition—everything from signage to business cards to invoices, plus all the communication and advertising we did to notify the public. A lot of our key people spent time over there, which added more expenses related to lodging and meals. And there were extra costs for benefits for new employees, as well as bringing them in line with our pay scale.

Michael Dye: Replacing worn-out equipment is another expense. You're almost always going to end up buying more equipment, cylinders and trucks when you make an acquisition. They may have been doing without, but it's definitely something that's in order from a safety standpoint.

How soon do you expect to see a return on your investment?

Stacy Shelton: Our business manager estimated that if everything stays the way it is now and there's no additional growth, we'll make money on the acquisition in five years. But if we see conservative growth the way we have for the last several years, we should make money in our second year.

Rick Kersey: I would estimate about a 12-month payback, so we're close. You could argue that we've already seen a return. It was a good business, and we already had a base of business out in central Nebraska, and once we added more salespeople and more routes, it didn't take long before it didn't look like Dahl Welding Supply anymore.

Michael Dye: It will probably take about eight years to cover the costs of the acquisition entirely, but the return started right away. Obviously, they were making money prior to our acquisition, and we have had no turnover of employees or customers since.

Culture Shock

All three of you have said the owners of the acquired companies stayed on after the acquisitions. Did all the employees stay?

Michael Dye: All of Aztec Welding Supply's employees stayed on with us after the acquisition.

Rick Kersey: A year after the acquisition, all but one of Dahl Welding Supply's employees have remained.

Stacy Shelton: At the time that we made the transition, Yavapai Welding Supply had three employees: two part-owners and one driver. Our intention was to keep everybody, but one of the owners chose to move back to Indiana, and the driver didn't work out. So in the middle of December, we ended up sending people up there to help out before the transition because the remaining owner had no employees. We wanted somebody from our organization to relocate up there, but nobody was in a position to do that, so we each took turns. We've since hired three new people.

Are there any particular challenges when the owner or management of an acquired company is now working for yours?

Michael Dye: No, as long as there is open communication from start to finish. That's the most important thing. If everyone's above board and honestly trying to make it work, it'll work just fine. I believe total communication is the key to making a successful acquisition.

Stacy Shelton: The roughest four to six weeks were just after we took over operations of Yavapai Welding Supply, because Joe, who had owned the business, went from owner to an employee. Even though he was still running the store, in his mind one day he woke up and he didn't own the business anymore. It was really important to our owner, Vern, to make sure Joe didn't feel that way as much as possible, so we tried to make it an easy transition.

How did you do that?

Stacy Shelton: We brought Yavapai's logo into our signage, so that people would see it was still the same company, just under a different name. We tried to honor Joe's requests as much as possible during the transition. Vern's attitude was, “We're a team here,” and that's what propelled us.

Michael Dye: Part of what helped our transition was that we've left the Aztec Welding Supply name intact. That's partly out of recognition of the former owner's personal pride in what he started, but also, the name recognition in their marketplace is worth something.

What was the biggest challenge, overall, in making an acquisition?

Stacy Shelton: The hardest part was incorporating the two companies' philosophies together and making the transition a good one for everybody. That goes back to what I said before—it was a priority that Yavapai Welding Supply be involved in every step of the decision-making process.

Michael Dye: The biggest challenge was training—teaching the employees to understand how we do business. We did computer training, safety training, driver training and OSHA training. They may have been doing things very well before, but everyone does things a little differently. Of course, we learn from them too, so we may implement in our company things that they brought to the table.

Rick Kersey: The biggest challenge that I see—and the difference between an acquisition and a scratch-start—is, how do you extend your culture? How do you make these new employees part of Wright Welding Supply? A lot of that is training, plus having key people in our organization spend a lot of time over there, showing them how and why we do things. You can't expect to purchase a company and have the employees all of a sudden say, “We're part of Wright Welding.”

Were there specific differences you had to overcome?

Rick Kersey: Absolutely. On the surface, you can look at an organization and think, “They do things similarly, so this is going to be pretty easy.” But once you get into it, you find out just how many differences there are in just about every facet of the business—from the delivery process, to the sales process, to how we acquire customers. It certainly hasn't been bad, but it was more complicated than we initially thought.

Important Lessons

Based on your own experiences, what would you say are the most important questions a distributor should ask before making an acquisition?

Michael Dye: First, do you have the substantial capital required for an acquisition? Are the type of customers you're acquiring the type of customers you want to service? And are there any additional capital requirements about buying the business? For example, are you going to have to buy a new building, a new forklift or new cylinders? Often people look at the business, but don't look at all the capital.

Stacy Shelton: Number one, do you have people in your management team who are willing to support you in this? If the management team is supportive and has a positive attitude, that will filter down to your employees, and if you have your entire organization behind you, you can do anything. Number two, why do you want to acquire? You need to have a vision for how the market is. And finally, if you're going to acquire an existing distributorship, how can you do that the best that you can and still make money? You need to make sure it's a healthy investment.

Rick Kersey: Try to understand where the owners are coming from. What are their motivations for selling? What is their timeline for wanting to accomplish this? And what are their personal and professional goals? Get past the money and find out what makes them tick. If your expectations don't match, it's going to be tough.

What are some important questions a distributor considering selling his or her business should ask a potential buyer?

Stacy Shelton: Ask if the buyer will continue taking care of your customers the same way you take care of them now. It's also important to make sure your employees are going to be taken care of. You wouldn't want a buyer to bring in all new management and leave your employees feeling insecure and not part of the team. Make sure that the employees feel they're part of that decision-making process.

Michael Dye: Try to figure out how the potential buyer treats employees and what is the average length of employment—that tells a lot about the company. Do you get along with the potential buyer on his or her business philosophy? You might be be partners for a long time, so this is important. And what percentage of cylinders and inventory dollars do they keep at their existing branch stores? Sometimes when distributors sell, the first thing that happens is all the inventory goes away and the store's sales go down.

Rick Kersey: Get a good handle on the financial stability of the buyer. Be sure that the potential buyer's goals and expectations match yours. Try to spend some time in the buyer's organization, or at least speak with enough people in the organization to find out if it would be a good home for your employees. Is there going to be a culture fit? Is this potentially going to be a home for all the employees who serve your company so well?

Any final thoughts?

Rick Kersey: It's very important to have strong operational and financial people on staff. I was fortunate enough to have a very good, experienced CFO and vice president of operations, and that paid dividends.

Michael Dye: Allowing a business that you're buying to run the way it was run prior to the acquisition is a key to success. Obviously, cultures are going to change, but you have to remember that one of the assets that you're buying is people.