5 Tips for Making Smart Acquisitions

Rob O'Regan -- Expert Business Source, 1/4/2007 6:09:00 AM

The slump in the housing market has caused many construction firms to hunker down. But for businesses looking to grow, the time may be right to consider a strategic acquisition. After all, the funny thing about cycles is that every downturn is followed, eventually, by an upswing.

“The housing market will come back – it’s not a matter of if, but when,” says John Dorey, senior managing director at investment banker RSM EquiCo, in Costa Mesa, Calif. “You can anticipate a lot of action back in the housing sector in Q1 or Q2. You’re already seeing little blips of it on Wall Street.”

Because a transaction can take several months to close, forward-thinking companies may want to think about casting around now for potential targets. “You don’t have to wait for the market to be boiling to get into it,” says Dorey, who leads EquiCo’s Specialty Construction Division.

For construction companies heading down the acquisition path, Dorey offers a few tips:

• Find the right market.
  Buyers must be diligent in defining their acquisition goals. “Are you looking to expand within your region?” Dorey asks. “Are you looking to grow horizontally or vertically?” Regardless of whether you’re seeking to fill a gap in your product or service offerings or enter a new geography, picking a market that will best serve your business over the long term is crucial to a successful deal.

• Decide whether to build or buy.
  Because construction companies are somewhat nomadic, they don’t always have to buy their way into a market. “If you’re based in California and want to bid on a highway job in Phoenix, you don’t have to be a Phoenix contractor to do that job,” says Dorey.
  For companies looking to plant more permanent stakes in a region, the question becomes whether to build a new facility or buy an existing company. A key consideration is time. Building a facility, hiring and training new personnel, or transferring existing personnel to a new location can be a lengthy process. If you want to be up and running in a market quickly, you may be better off buying an established business and tapping into the existing people, knowledge, and equipment that come with the purchase.

• Check out the backlog.
  An acquisition target with a weak backlog should be a red flag for any buyer. “If the backlog is down, they’re not going to be able to sustain their cash flows and revenues,” says Dorey. “A stronger backlog means a more valuable company.” Of course, that also means you should expect to bid more to purchase it.

• Look for a deep bench.
  When targeting a smaller business, take a long look at the management team – if there is one. “You want to see who’s running the company,” says Dorey. “If the owner is wearing all the hats and is planning to leave [after the sale], there’s not much to buy.”

• Don’t ignore the cultural fit.
  Beyond the management team, the overall culture of the acquisition target should be a good fit with the buyer. “The trick is to be able to blend your culture in with the other companies in such a way that you don’t lose valuable people,” says Dorey. If you’re buying a company outside of your existing region, the local knowledge of your new employees will play a crucial role in your success in that area. “You need to keep the people with the expertise, like those who know how to bid correctly in that environment,” he says. “Otherwise, what have you bought?”

Rob O’Regan is a freelance writer based in Londonderry, N.H.