Is Buying Your Competitor a Good Idea or Bad?

We wrote this article for auto and heavy duty distributors, jobbers and retailers – however the basic principles are in intact:

1. Expand Your Geographic Market One of the biggest recent consolidations was the purchase of CSK by O’Reilly Auto Parts. O’Reilly added stores in Western markets and grew into a nationwide chain in months that otherwise would have required years of organic and new store growth. And they were able to leverage the asset to pay for this rapid acquisition.

2. Take Out a Competitor One compelling reason to buy a competitor is to eliminate price pressures, especially if the competitor is the low-price leader. With the competitor gone, customers have one fewer location to shop, and your opportunity to market branded and private label products increases. Eliminating a competitor may also reduce the market’s advertising clutter.

3. Increase Market Share and Reduce Costs for More Profits Most businesses organically grow revenues by perhaps 3-5% annually and market share 1-2% annually. Contrast that with a 30% annual revenue growth and 10% annual increase in market share that could be realized by buying a competitor. You also gain leverage for better prices and terms with suppliers due to your larger purchasing power. Increased margins then improve cash flow, allowing you to complete additional acquisitions.

4. Secure Valuable Supplier Contracts A competitor may have valuable, exclusive supplier relationships, including direct imports and direct from US-based suppliers. These contracts, spread across the larger footprint achieved through acquisitions, may generate substantial revenue at higher margins.

5. Gain Coveted Locations Securing ideal locations – a high-traffic corner location or one that is in the middle of an industrial or auto/truck repair district – may not happen unless you buy it and convert it to your brand. Run the financials to ensure this is smart use of your human and financial capital.

We recommend you develop an “Intelligent Strategy” about how to best grow your business. Consider all the pros and cons of acquiring a competitor. Acquisition cost and value is more than just dollars invested. It’s also long term strategic positioning as well as your own exit strategy.

Valuation is More Than Just a Formula

The LOI is optimally made after preliminary information has been gathered and intensive analysis and projections have been completed. Determining the offer price is the most difficult aspect of preparing an LOI.

So how do you determine the initial offer price (IOP)?

As a starting point it is essential to recast financial statements to determine what the finances of the business look like without extraordinary expense and income events. Once that is done you can determine a true EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) figure. A comprehensive valuation will then determine valuation from the perspective of several different financial valuation formulas and then average those results (or if appropriate weight them) to determine a value of the business.

From our perspective, once this valuation process is complete the real work begins. The offering price, whether from the buyer or seller, is seldom what the formulas provide. Rather the offering price should always BEGIN with this number and then be adjusted by a variety of considerations. To think that you can determine the true value of a business with a formula puts you in a position to end up with a poor valuation assumption.

We are reminded of the cliché: “An ounce of planning is worth a pound of gold.” To make an intelligent determination of an IOP, it is essential to invest the time and resources on the front end to identify and evaluate the intangible elements that can affect the true value of the business.

This is best accomplished by hiring experts to assist you. For example, we have represented sellers who have through our efforts discovered alternative strategies, such as deciding to reject offers to sell their business in favor of a strategy that involves selling an interest to a key stakeholder. By building in future incentives for that stakeholder, the seller is able to leverage this newly hired executive’s expertise until the market rebounds and multiples increase. It is an essential advantage to build a team to serve you that understands the variety of possibilities that can influence the value of the business.

Distinguishing Value

The most essential step to assure success in the valuation process is paying attention to what we call the “discovery process.” The assumptions that you rely on, the scenarios that you think through and the strategies that you choose to implement in the discovery process are the foundation of your success. The result of faulty thinking may be a failed transaction, and often at an incredible cost of time, energy, money and lost opportunity. There are two intelligent processes that can lead you to success:

Engaging in intelligent strategic conversations among a variety of your constituencies, including your financial and legal advisors, board of directors, industry leaders, top management staff and even your family, is important to the overall process of discovering optimal short and long term concerns that can be taken into account to determine the value of a business.

Well designed scenario planning and mind mapping for the consideration of multiple and alternative “what if” strategies to determine the potential profitability of varying strategies.

The IOP may well be different from the value that you place on the company. The value of a particular company depends on that company’s ability to realize future results, which of course are greatly impacted by the strategic opportunities that its managers identify and then choose to engage in.

The value may include the following and is usually based on a strategic plan for the business after the transaction is complete:

  • Development of a new product line or supplier relationships
  • Development of new marketing initiatives
  • Development of new distribution channels
  • Decreased operating costs
  • Removing a competitor that is a low price leader
  • Rollup with related companies

The value is also influenced by intangible assets such as:

  • Quality and loyalty of clientele
  • Competency of key management
  • Operating systems
  • Technology systems
  • Physical locations and their value
  • Proprietary rights such as patents and trademarks, licenses, technology and or training
  • Industry trends
  • Stand-alone value of the target company
  • Acquisition premiums
  • Synergies resulting from the combined companies
  • Competitive environments
  • Seller’s objectives and the buyer’s objectives
  • History and nature of the business
  • Economic outlook
  • Market value of comparable companies
  • Debt and capability to repay debt

A thorough valuation recognizes that financial modeling is not an exact science. The professional appraisal is a base line to the commencement of the discovery process that unleashes all other relevant factors to determine an appropriate offering price and the value of the business at hand. It is in the discovery process that you can unleash all the other relevant factors to determine the value of the business at hand and then craft an appropriate IOP on your way to a successful transaction.

Lifecycles of Mergers and Acquisitions – Are You Prepared?

There are five phases of a merger or acquisition that, if fully respected and developed, can make the difference between a successful transaction that works for all parties involved and lay the groundwork for seamless transition, or if ignored or under-executed can spell disaster.

1. Pre-Deal Preparation and Evaluation of Transactional Assumptions
2. Due Diligence
3. Pre-Close Planning
4. Post-Close Planning
5. Post-Close Execution

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Mapping the M&A Journey

This version is the synopsis of the article that is available FREE to our readers. Email Tom Marx at tmarx@marxgroupadvisors.com for access to a PDF of the entire article. We trust this helps you embark on this journey with greater confidence.

1. Mergers and acquisitions

2. Divestitures and asset sales

3. Joint ventures and alliances

4. Going public or private

Mergers and Acquisitions

Mergers and acquisitions are the most common forms of these transactions.Typically a merger is a combination of two companies in a stock exchange transaction, i.e. Company A sells all of its corporate stock to Company B in exchange for cash, stock or some combination of both.

An acquisition is the purchase of the stock or assets of the business. A merger and acquisition are not mutually exclusive. However a merger is typically thought of in the context of two companies that are of relatively equal size and an acquisition is thought of when a smaller target is purchased by a larger acquirer.

Quite a bit of research has taken place regarding the reasons why mergers and acquisitions succeed or fail. Profitability is obviously a factor in every analysis.

Some studies have argued that more profitable firms are more subject to takeover than less profitable companies while others have argued that profitability has less to do with the likelihood of becoming an acquisition target. Corporations that are relatively inefficient will be targets of acquisition for more experienced and intelligent acquirers, as well as acquirers that are looking to purchase companies at a highly discounted rate.

There are a number of factors why certain companies are acquired and others are not:

  • Some companies acquire companies that are more profitable than they are, some equally as profitable and some less profitable.
  • Some acquiring companies look for target companies that are inefficient and therefore offer the opportunity for significant improvements in efficiency and profitability.
  • Shifts in the capital markets are a significant factor to consider in this process, i.e., in periods of high interest rates or when capital accumulation is difficult.
  • Changes in tax laws like the Tax Reform Act of 1986 can facilitate or inhibit restructuring activity.

It should be noted that in today’s marketplace, cross-border mergers and acquisitions are occurring with more frequency because they often provide an opportunity to capitalize on internal advantages in foreign markets including financial, organizational and technological strengths.

Divestitures and Asset Sales

Typically divestitures and asset sales are seen as an approach to corporate restructuring that eliminates underperforming assets while capitalizing on the value of a stronger performing asset or simply exiting from a business to repay debt and, in either case, create value.

The divestiture process generally includes three approaches to selling the company: the negotiated sale, the controlled competitive sale and the auction. Each of these approaches has different competitive landscapes. Valuations of companies or assets in a divestiture need to undergo the same analysis as a valuation of the company in a merger or acquisition.

The most common transaction is the asset sale of a business. This has benefits over other forms of divestitures, most significantly the ability to negotiate with multiple parties in order to obtain maximum value.

As in all steps of the M&A process, tailoring the process to the unique needs of the client and an intelligent understanding of the marketplace insures a more intelligent chance of success.

Joint Ventures and Alliances

A joint venture is a relationship between two or more parties where an independent entity is created by the parties for a specific activity or undertaking. The independent entity is usually jointly owned by the parties and the parties each take an active role in contributing either intellectual property, capital, assets, marketing and sales or any combination of the above.

An alliance may not involve the creation of a new independent entity and may not involve any equity contributions by either party.

In a time when success in business requires forming relationships between competitors in ways that were unheard of years ago, alliances and joint ventures have become quite commonplace and it’s clear that profitability is often created in the formation and operation of joint ventures and alliances which can, in fact, surpass those found in mergers and acquisitions.

Going Public or Private Transactions

Occasionally we are asked about a going private or going public transaction. A going private transaction is the acquisition of the equity of a publicly traded corporation by an independent privately held entity.

In the context of the aftermarket it is usually in the form of a leveraged buyout in which a group of managers (usually with equity partners) acquires an existing business that is publicly owned or a division of the same.

We are also occasionally asked to consider the benefits of going public. Either the potential size of the existing company or a rollup of a number of companies with potential to show market rate returns provides an opportunity to consider the benefits of public ownership.

Conclusion

The underlying assumption in any of the categories or merger and acquisition is that there will be benefits that occur as a result of the transaction. Consolidations continue to recontextualize many industries and have significant impact on the entire supplier and customer chain in a vertical industry.

We believe that profitability has far less impact on the ultimate value of the transaction. Instead, strategic advantage becomes more key, whether it allows the elimination of a competitor, gains a valued customer or adds an important product line.

SEMA 2011: Acquiring or Selling: Preparing your Business to Achieve Maximum Value

Presented by Tom Marx and Paul Cooperstein

Whether you are a seller looking to retire or divest an unprofitable or poorly integrated business, or a buyer that realizes the value of growth through acquisition, the goal is the same- to position your company for maximum perceived value.

Download Presentation: SEMA 2011: Acquiring or Selling: Preparing your Business to Achieve Maximum Value

SSA 2011: The Art of Buying and Selling an Aftermarket Business

Presented by Tom Marx and Paul Cooperstein

70% of all small and mid-sized businesses who are thinking of selling their business don’t sell. In order to prepare and follow-through with the right ways to successfully value and sell their business, the following information should be considered:

  • Why an exit strategy is necessary
  • What information needs to be prepared before going to market
  • Why non-disclosure agreements are important and what they should include
  • How deals are usually structured
  • How to get the price/terms you want
  • What you should expect from buyers and why backup offers are critical
  • The closing process: escrow, transition issues, and closing the deal

Download Presentation: SSA 2011: The Art of Buying and Selling an Aftermarket Business

PERA 2013: ASPECTS OF BUYING/SELLING A SMALL BUSINESS

Presented by Tom Marx 
In this webinar we will answer many of the common questions people ask about selling and valuing their business, including the necessary paperwork and information needed to get a business ready to go to market, what to look for from a broker or agent, and how deals are structured. We will also look at proven steps to follow to increase the chance of closing the sale of a business.

Topics to be covered include:

  • What paperwork and information to get ready before going to market
  • Why understanding your tax returns and financials are so important
  • How to value your business using various techniques
  • Why financing could be important to your deal structure
  • What you should look for from a broker or agent
  • Understanding business buyers and what is important to them
  • Why non-disclosures are important and what they should say
  • How deals are usually structured
  • How to market a business for sale to get the price/terms you want
  • What you should expect from buyers and why backup offers are critical
  • The closing process: escrow, transition issues, and closing the deal

Download Presentation: ASPECTS OF BUYING/SELLING A SMALL BUSINESS

Why Use a Mergers and Acquisition Intermediary?

Byline
First, the full disclosure: we can’t be 100% objective about this question because we are merger and acquisition (M&A) intermediaries. That being said, this is exactly what qualifies us to write this article. We have the experience to know what works and what doesn’t, and we have seen many cases where engaging the services of an intermediary has helped make a deal that would otherwise break.

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Transaction Types: Mergers and Acquisitions, Divestiture and Asset Sales, Joint Ventures and Alliances, Going Private

by Tom Marx and Paul Cooperstein

Marx Group Advisors explores the four basic types of transfer of ownership transactions and explains in broad terms the situations, internally and externally, that could make one transaction preferable over the others:

Mergers and acquisitions
Divestitures and asset sales
Joint ventures and alliances
Going public or private

Download White Paer (PDF): MGATransaction Types of Mergers and Acquisitions

Lifecycle of Mergers and Acquisitions

by Tom Marx and Paul Cooperstein

There are five phases of a merger or acquisition that, if fully respected and developed, can make the difference between a successful transaction that works for all parties involved and lay the groundwork for seamless transition, or if ignored or under-executed can spell disaster.

  1. Pre-Deal Preparation and Evaluation of Transactional Assumptions
  2. Due Diligence
  3. Pre-Close Planning
  4. Post-Close Planning
  5. Post-Close Execution

Download White Paper PDF: MGALifecycles of Mergers and Acquisitions

Parts Store

Single location jobber store in Southern California supplies replacement parts to professional service providers.

  • Jobber store specializing in parts for Asian light vehicles
  • Projected annual sales are $1.2M / 65% DIFM and 35% DIY
  • Specialize in underhood, brake and chassis parts
  • One of the few independently owned and operated auto parts suppliers in their area
  • Inventory turns about 3.1 times
  • Opportunity for owner-operator to grow sales and expand territory; for existing business to add location; for competitor to remove company from market
  • Close to a major thoroughfare that features auto dealerships, retail and malls
  • Located close to a wide variety of independent and chain auto repair businesses, all located within a 5-mile radius of their location
  • Future growth can be achieved by adding inventory of parts for domestic vehicles

Contact Christine Campbell at ccampbell@marxgroupadvisors.com; 415-453-0844, ext. 112

Marx Group Advisors Assists with CRC Industries Acquisition of ChemFree Corporation

CRC Industries, Inc. (CRC) a global leader in the production of specialty chemicals for maintenance, repair and operational professionals and do-it-yourselfers within the automotive, heavy duty truck, marine, electrical, industrial, hardware and aviation markets recently acquired ChemFree Corporation, a subsidiary of Intelligent Systems Corporation.

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SOLD – DRIVESHAFT AND COMPONENTS MANUFACTURING

Midwest-based manufacturer of drive shafts

Business for sale
Respected and well-known manufacturer of new driveline products and components, primarily for on and off-highway, industrial, mining and agriculture vehicles and equipment businesses, and driveline repair shops.

  • In-house engineering and R&D designs product and components to exacting OEM specifications
  • Extensive variety of products, including driveshafts, yokes, stubs and flanges
  • Outstanding reputation for quality products, delivered on-time at very high fill rates
  • Customer base includes OEMs throughout US and Canada as well as international customers
  • Diverse customer base with no customer concentration; diverse industry sectors served
  • Experienced and loyal manufacturing team, on-going in-house training program, all cross-trained
  • Total manufacturing, office and warehouse of 54,000 square feet with easy access to major highways and excellent location for nationwide shipping
  • Present owner will stay on during transition; key staff committed to remaining with company
  • $12.7M revenue, 58% margins and 8-10% EBITDA

For more information, contact Tom Marx at 415-462-1805 or email tmarx@hartmarxadvisors.com.

CONTACT US

DRIVE SHAFT MANUFACTURING COMPANY

FOR SALE: Drive Shaft Remanufacturing Company

  • Manufactures / remanufactures drive shafts for cars, light and medium duty trucks and SUVs
  • In the Midwest, but can be relocated
  • Primary markets: distributors, driveline specialists, fleets and other remanufacturers
  • Focus: four-wheel drive and light truck market
  • Hundreds of different part numbers, providing coverage to a wide range of vehicle makes, models, and years
  • Current  Sales $6.5M; current EBITDA:  $1.4M
  • Owners wish to retire
  • Consistent growth in the past 4+ years
  • Excellent strategic acquisition opportunity for an acquirer that wishes to gain reliable market share
  • Upside growth opportunity to extend into other vehicle brands, regional and national fleets and other markets (company has not been aggressive in marketing and sales)
For more information, please contact Christine LeMay, Marx Group Advisors,  clemay@marxgroupadvisors.com or call (415) 453-0844 x 112.

COLLISION REPAIR SHOP

FOR SALE – Collision Repair Shop

  • Auto body and paint repair facility, jobber for paint and supplies
  • Profitable, stable, with growth potential
  • Total revenues around $700,000
  • Strong relationship with insurance companies (ICAR Gold Certified)
  • 6 Bays
  • Located in Northwest Wisconsin
  • Owners ready to retire

For more information, please ontact Christine Campbell at ccampbell@marxgroupadvisors.com; 415-453-0844, ext. 112

Marx Group Advisors Announces Formation of Collision Division

SAN RAFAEL, CA— Tom Marx, CEO of Marx Group Advisors announced today the formation of a new business segment in the collision repair/paint, body and equipment (PBE) segment of the aftermarket for mergers, acquisitions and divestitures. Marx Group Advisors Collision Division will be led by Ray Datt, vice president, and Mike Bryan, who recently joined Marx Group Advisors as its newest vice president.

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Marx Group Advisors CEO to Help HD Leadership Students Understand the Ins and Outs of M&A Activities

SAN RAFAEL, CA — Tom Marx, CEO of Marx Group Advisors will share his expertise on mergers and acquisitions (M&A) as one of the featured presenters at the 2014 University of the Aftermarket Heavy Duty Leadership program. Marx will explore the topic “Surviving and Thriving During a Merger, Acquisition, Divestiture or Other Change in Ownership” on Thursday, August 7 on the campus of Northwood University in Midland, Mich.

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