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www.techairfirststep.com
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What makes a successful acquisition? It all starts with choosing the right partner.
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The key difference between Tech Air, a Danbury, Connecticut, independent distributor and the large consolidators in this industry, is how Tech Air integrates its acquisitions. Tech Air often provides the seller with a role, and not just a titular role. Myles Dempsey Jr., CEO, explains, “Many of our partners in Tech Air were in the same situation. They were the primary owners of smaller businesses. As owner-operators, they worried about accounting, payables, the computers, safety and compliance issues, health insurance and retirement plans, human resources and all of the administrative functions that our shared services perform for them. They often did not have a management team in place that was capable of taking them to the next level of growth. Or they didn’t want the headaches and financial pressures associated with major growth.”

When Tech Air acquires a company, the company identity is maintained. The acquired company is held accountable to specific, agreed-upon performance standards, but the seller and his or her employees are enabled and empowered to do the work that they do best. They are encouraged to maintain the entrepreneurial approach to managing their company without all of the administrative headaches. Local management is better able to focus on their customers and their employees.

What follows are the most common questions and concerns most companies have as they begin to consider an acquisition strategy…
Am I Going to Get What My Company’s Really Worth?
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The short answer to this question is that if you sell your business to a credible buyer with a track record of successful acquisitions you are going to get what your company is worth – but worth, like beauty, is in the eyes of the beholder. This means, in brief, that different buyers will value the same business differently. The reason for this is that a buyer doesn't value your company based primarily on how it performs today under present management, but on how they think it will perform in the future under new management.

For example, a consolidator that already has a large business in your market will be keen to acquire your business primarily to “eliminate a competitor” and thus increase their market share and pricing power. In addition, they may believe they can reduce headcount and expenses dramatically and gain operational synergies. You may be very happy with the transaction, but your customers and employees will probably not be. Invariably, prices will go up and service levels and employment will go down.

On the other hand, a strategic buyer that does not already have a large business in your market will want to acquire your business primarily to grow and will be much more likely to retain your employees and continue to give great service to your customers. They will also be more willing to make additional investments to support growth.
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What Happens to My People When the New Owners Take Over?
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Again, the answer to this question depends greatly on whom the buyer is and their motivation for the transaction. The large buyer who is trying to “eliminate a competitor” will be primarily interested in your customer list and your cylinders and perhaps your location if they don’t have one nearby, but may have very little interest in your people other than a few salespeople and drivers. It is not uncommon for 20 to 50% of employees to leave the company for one reason or another within one year of an acquisition.

 A strategic buyer entering a new market or adding to a small existing business will generally need to retain the majority of your employees and will be focused on training and developing your people. They will build on your existing culture rather than obliterate it. These buyers understand that by keeping your employees happy and motivated they will in turn keep your customers happy. In many cases, the strategic buyer will be able to offer a better benefits package that will help to retain good employees.
How Do Potential Buyers Put a  Value on My Business?
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Besides the size of a business, the most important criteria buyers use when evaluating a potential acquisition are:

Sales Mix –
The ratio of gas/rent to hardgoods sales has an important effect on valuation. Businesses with a ratio of gas/rent sales above 50% will generally trade at a higher multiple of sales than those whose sales are more than 50% hardgoods, because gas/rent sales are generally higher margin and tend to be more “sticky” and less variable. Investments made now in gas cylinders and equipment, along with well-documented supply agreements for larger customers, will pay off later when it comes time to market your business.

Sales Growth –
The growth rate of sales and gross margins also has an important effect on valuation. A track record of growth is very important to potential acquirers. Businesses with higher growth rates generally trade at a higher multiple of sales than businesses whose sales have “plateaued” for a number of years.

Customer Diversity –
Potential acquirers always look at “customer concentration,” i.e., the percentage of sales represented by the Top 10 customers. Generally speaking, the higher this number is the more risk that exists for a buyer and the lower the valuation. If your sales are dominated by a few very large customers, buyers will want to know how they can protect their investment. One way is by getting long-term supply agreements. The other way is to make sure that no single customer is greater than 5% of sales.

Corporate Structure –
Many sellers fail to consider the effect of their corporate structure on valuation. This often happens when a company was formed many years ago as a “C” Corporation and has not elected to do an “S” conversion. Because of potentially significant tax and legal liability issues, this is an area where it is definitely worth spending the extra money for a competent tax advisor who can guide you in the right direction.
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Swallowed up...or welcomed in?
What Happens to Me after I Sell My Business?
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Assuming you want to continue working in the business after the sale, this is perhaps the most important question to ask yourself. While changes are inevitable no matter who the buyer is, the process called “integration” can make all the difference in the world. Some buyers will try to build on what you have accomplished and accentuate the entrepreneurial aspects of your culture while making improvements in areas that are not as well developed. Often, this takes the form of increased support in the areas of accounting, safety and compliance, operations, human resources, IT and marketing plus better access to suppliers. This support can help to free up resources to devote more time to building the business and growing your customers and your people.

Larger buyers are by necessity much less flexible and generally take an “our way or the highway” approach to integration. In addition, decision-making is often much more centralized and so the business quickly loses the entrepreneurial culture that made it successful in the first place. This “culture shock” quickly becomes very frustrating for both employees and customers and is often the primary reason that employee turnover and customer dissatisfaction increases rapidly following an acquisition.
What Happens to My Customers Following the Sale?
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Besides your people, your customers are the most important asset of your business. In short, your business exists to service your customers and your customers are the ones who ultimately pay for everything. Although every buyer understands this in principle, in practice their approach to customer service may be vastly different than yours.

For large consolidators who are looking to eliminate a competitor, their primary objective is to increase their market share and pricing power, especially to medium-sized and smaller customers. As their market share grows in a given service area they will continually and aggressively raise prices while at the same time reducing service levels. Truck routing and customer service is very often centralized and deliveries are made from large distribution hubs, leading to a loss of service flexibility and personal contact. Customers quickly recognize the changes and very often vote with their feet and move their business to another supplier. In fact, large consolidators normally budget for a 15-20% loss of revenue in the first year following an acquisition which is offset by staff reductions and price increases on the remaining customers. This phenomenon is particularly evident in markets that have been heavily consolidated and where there are few remaining independent distributors to serve as alternatives to the majors.

A Strategic buyer entering a new market or adding to a smaller existing business will take a much different approach to your customers. First, they will be far more customer-focused, especially towards medium-sized and smaller customers, provided that the accounts are profitable enough to justify the high service levels. This approach normally results in a far higher customer-retention rate, which in turn translates to a better work environment and a higher employee-retention rate. Second, since the strategic buyer is primarily interested in growing the business, they will be more willing to invest in additional resources to support growth such as cylinders and filling equipment as well as employee training and development. In short, their culture will be more entrepreneurial and less top-down and corporate, while at the same time providing resources and tools to help your business grow and be even more competitive in the marketplace.
Can I Sell My Business to a Privately Owned Acquirer and Still Maintain an Equity Stake in the Business Going Forward?
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One issue every seller has to face is: What do I do with the proceeds of the sale? When considering this question it is important to think like an investor and get appropriate professional advice. It is usually appropriate to diversify investments across asset classes like cash, equities, bonds and alternative investments. One possible alternative investment is to invest a portion of the proceeds into the company acquiring the business. This is simple if the acquirer is a publicly held company where a market for the shares exists. Of course, the value of these shares is determined on the open market and is subject to the whims of Mr. Market. At any given time, shares of publicly traded companies may be priced well above or well below the intrinsic value of the company.

Some privately held acquirers also provide the opportunity for sellers to re-invest a portion of their proceeds in the equity of the acquirer. This can be an attractive alternative investment because these shares are often very conservatively valued using an agreed-upon formula. This approach has the advantage of giving the seller a potential “second-bite of the apple” since they can participate in the future growth of the acquirer. Of course, all investments have risks and so such an investment should be carefully considered against other available alternatives and should only be made as part of a well-diversified investment program.
About Tech Air
Tech Air is a leading packager and distributor of industrial, medical and specialty gases, welding equipment and supplies headquartered in Danbury, Connecticut. Since embarking on its present growth strategy in 2011, Tech Air has successfully completed 17 acquisitions and now operates from 33 locations across the continental U.S. and employs more than 300 people.

 

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If you would like more information or want to take the first step towards acquisition, contact Myles Dempsey for a confidential, no-obligation evaluation at (203) 731-8981 or myles@techair.com .