Is Growth Through Acquisitions Right For You?
A look at the process from prospecting through legal

By Fred Silberstein, CPA

An old friend used to explain to me that a business can accomplish absolutely anything as long as it has one of two resources: time or money. 

That’s especially true when it comes to growing your business.  Want to become the leader in your market?  You can, as long as you have the time or money to devote to the cause.  Looking to be the biggest in the nation?  No problem – as long as you have the deep patience or the deep pockets to make it so.

Which of these two is the better choice for you?  If you have superior service or proprietary products, you may want to go the organic route, building your business over time and expanding as customers recognize that you offer something they can’t get elsewhere.

But if you’d rather move more quickly than that, a preferable way to grow is through acquisitions.  Of course, buying a business may be one of the most challenging purchases you’ll ever make.  People like to talk about how purchasing a house is the biggest investment of their lives, but these are only people who’ve never tried buying a competitor before. 

It all starts by identifying what businesses are for sale.

PROSPECTING
HVAC businesses don’t stick “For Sale” signs out on their front lawn the way home sellers do.  And because many of these businesses are long-held family operations with a close-knit group of employees, owners often like to keep the idea that they’re willing to sell a secret for as long as possible.

So how do you find out who might be interested?  Begin by talking to your local distributors and peer groups – they often have their finger on the pulse of the local landscape.  They can tell you who might be reaching retirement age, who might be in need of cash and who might be grumbling about getting out of the business altogether.

Also consider a contact campaign through an M&A professional.  They may use a variety of techniques including direct mail, print advertising, phone calling and more to help you identify viable candidates. 

Regardless of how you find them, though, make sure that both parties sign a solid confidentiality agreement before you begin sharing any detailed information – it protects you both and gives everyone the degree of confidence they need to proceed in conversations with good faith.

Once you’re ready to get to know each other better, you’ll be able to conduct preliminary observations of the business – and here it’s a good idea to get the help of a professional advisor.  HVAC companies may all look very similar from the outside, but once you start looking under the hood, you’ll see that they can differ in significant – and frequently surprising – ways.  An M&A professional will be experienced at reviewing a broad range of operations and will help you quickly get a sense of whether this purchase is right for you. 

If things do look good, you’ll work up an offer and present the seller with a non-binding letter of intent.  It will include a number of caveats, but both buyer and seller will need to agree to the terms of the deal.  Upon execution of a signed letter of intent, it’s time for you or your representative to perform due diligence.

DUE DILIGENCE
There are two primary types of due diligence that you’ll want to perform: operational and financial. 

Operational due diligence is, as the name implies, where you look at the business’s operations in specific detail.  It is typically performed by whoever will be responsible for the overall operations of the purchasing company.   You’ll want to look at how they set their prices, how they market themselves and how they compensate their employees.  You’ll need to check out what benefits they offer, how solid they look from a legal perspective and what their insurance situation is.  The list goes on from there – anything that might influence their ability to operate is worth investigating.

Financial due diligence is where you look at the books and records from the seller to determine what financial footing they’re on and how accurate the information they have provided actually is.  It’s important that this is done in accordance with GAAP – Generally Accepted Accounting Principles – which is why it’s best performed by a team of CPAs, and they should make sure to include various accruals and allowances for doubtful accounts. 

Once both financial and operational due diligence have been performed, the buyer will decide if he or she still wants to honor the terms of the letter of intent.  In many cases, buyers will discover material adjustments that could cause the deal to fall through, though it often happens that an adjustment in terms is all it takes for a deal to continue.

THE LEGAL PROCESS
If the buyer and seller do agree to move forward, the legal process begins.  At this point in the transaction, lawyers will be introduced and brought up to speed with the overall deal terms.  Both the buyer’s and seller’s attorneys will work together not only to finalize these terms, but also to prepare the following items: 
 

  • Employment agreement (term and amount); this will be consistent with the business’ valuation
  • Non-compete agreement
  • Non-solicitation agreement
  • Lease
  • Assignment of contracts
  • Working capital adjustment (true-up vs. no-true-up)
  • Closing balance sheet
  • Representations, warranties and schedules as attachments to the agreement


Keep in mind that at any point along the way, it’s possible for a deal to fall through.  These are significant events for both buyers and sellers, and emotion can be just as big a factor in the consummation of a deal as any of the more material aspects of the transaction.  Maintaining perspective and having a degree of detachment are essential if you want to maximize your opportunity for a successful experience.