In November, I “officially” called the top for the pest control M&A market for this cycle and in July I said that you would see over a half billion dollars of pest control transactions close by the end of the year. I undershot volume by at least $100 million and missed the timing by a month or so, but I was close.
December and January were extremely active months in the US pest control industry.
- Rollins has officially entered into a purchase agreement to acquire Clark Pest Control of California, which is the 8th largest pest control company in the United States
- Rentokil was busy in the US in the fourth quarter, which we’ll be talking about more later this month with an announcement.
- Finally, the Anticimex crew caused me a lot of eye rolls from the wife with a New Years Eve closing, which we’ll discuss next Monday when I get back to my normal writing routine.
Now that the holidays are over, I am back home in Geneva (yeah, we’re getting some sun in January, see the photo above for proof) this week for meetings. I will be back to writing on a normal schedule next week and we’ll discuss the recent market volatility and its impact on valuations.
For now, I leave you with an interesting tale…
Gotta Kick Up Some Tribute to Uncle Paulie
Not so long ago we received a check in the mail with no name and no return address. The check was a bank check written out to me personally, not the company, which further added to the mystique of the situation.
When the envelope arrived in the mail, our accounts woman extraordinaire couldn’t figure out what to do with it. There was no letter, no invoice, nothing, just a check in an envelope from an unknown company (or person). Since this was a five figure check, you don’t just deposit it without asking questions.
The very next day, our questions were somewhat answered. We received an envelope with the following handwritten note:
“Paul, I forgot to enclose a note with the check that I sent you the other day. You’re probably wondering why I sent you a check? Well, here’s why. You were very generous with your time and expertise last year, spending a few hours on the phone with me and asking nothing in return. In fact, you pretty much did everything you could to convince me not to hire you. The advice that you gave me increased our purchase price by over a million bucks! Out of immense gratitude, I’m kickin’ up a little tribute to uncle Paulie. Check enclosed. Don’t invest it. Don’t put it in the bank. Spend it, have fun with it. You deserve it.”
So what advice did I give him that proved so valuable?
I had absolutely no idea. As the curiosity was killing me, I picked up the phone to find out exactly what happened.
What I discovered, can be used by you to enrich yourself.
So here it is.
This fella had called me out of the blue one day and asked me what the price and process was for a business valuation. As usual, I asked him what the purpose of the valuation was.
He said that he had been approached by a strategic acquirer and was toying with the idea of selling the business. He went on to say that he didn’t want to be a sucker and leave money on the table and he wanted someone to review the offer and negotiate for him.
He said that he had started following and reading my articles a few years ago and decided that when the day came, he wanted me in his corner. The day had finally arrived.
While I was flattered, his business was on another continent and it would have been hard for me to help him at the time with what I had going on. Although he was disapointed, I was happy to give him advice on how he should proceed. I told him that I would be happy to review the LOI for him and give him some sell-side advice. I closed our conversaton that day with a little story and he applied the lesson contained within to enrich himself.
That story is this.
About twelve years ago, I received a call from an accountant I had done a few deals with. He had a client named Scott who had received an unsolicited offer from a strategic acquirer on his residential services businesses and he needed some advice on valuation and negotiation.
The accountant admonished me that I wasn’t “selling” the business. The client really wanted to do a deal with that particular buyer and I was just there to advise on the terms of the LOI and negotiate the finer points of the deal. Although the president and founder of the firm knew the right thing to do was to take the business to market, he didn’t want to piss off the acquirer. In fact, he had an offer that he was willing to accept, he just needed expert advice on the process.
After having a discussion with the Scott, I told him that I thought he was making a mistake the way that he was approaching the situation, but at the end of the day, it was his decision. He said that he was ready to move forward, he just wanted my advice on the deal structure and to make sure that he wasn’t making any rookie mistakes (which, I believed that he was already doing right out of the gate). He said he had negotiated with the acquirer for two months and they had told him on more than one occasion that $18 million was the best that they could do. Although he had thought about going out to market, he believed that the $18 million “best and final” from the acquirer was fair and was really the best he could do. He was convinced that the buyer would stand firm, as they had told him they would.
The following Monday morning we had a meeting at the accountant’s office. We were to meet face-to-face with the acquirer and discuss the fine details of the transaction. I showed up a few minutes late and was introduced as the Company’s investment banker.
After some small talk, the head of M&A for the buyer asked if I wouldn’t mind taking a quick walk with him to get a cup of coffee down the hall. As we were walking, he said, “Look, we know you were engaged to run an auction and we’d like to preempt. Therefore, I am going to verbally increase our bid from $18 million to $24 million. That’s it. That’s as high as we can go. I’ll never get authorization to go a penny higher. We’ll revise the terms of the LOItoday and we expect your client to sign it by tomorrow morning if he’d like to move forward with us. If you go out to auction, we’re out… for good, we’re not interested in a bidding war.”
Was it my stunning good looks? Perhaps my sharp wit? How was it that I was able to increase the purchase price by 33% without even opening my mouth? More on that below… back to our friend, the mystery check sender.
When I called to inquire what had happened, he said, “I did exactly what you told me to do and it worked! I’m not going to lie to you, my palms were sweating as I thought it would backfire in my face.” When he received an offer on his business, he negotiated with the buyer until they told him that it was their best and final. The next day, he sent the acquirer an email saying that he wasn’t sure if it was a great offer or a mediocre offer, and that he was going to send the offer to me to seek guidance on how I believed that he should proceed.
About 30 minutes later he received a call from the acquirer and they asked him, “what’s it going to take to get this done with us?”
He named his price. Although he didn’t get exactly what he wanted, he was able to improve the sale price by slightly over $1 million, which made him very happy.
These two acquirers, like all others, don’t want to find themselves in an auction situation, or the process of competitively bidding against other acquirers in a tightly controlled and orchestrated process.
When the acquirer believed that Scott, the seller of the residential services company, didn’t have an advisor and wouldn’t be going out to formal sell-side process, they put a low offer on the table that was eventually negotiated up to a fair $18 million. What the seller didn’t realize at the time is that price is subjective, not objective, and acquirers will only pay slighlty more than the next likely buyer. If there isn’t another buyer in sight, then the acquirer controls the process… and the price. As the seller of an asset, you need to always be the process maker, not the process taker.
I still believe that Scott could have done better had he taken the business out to formal process. However, he was happy with the acquirer and the $24 million check was more than he had ever thought he would sell his business for, so it ended well for him.
You don’t need to hire a sophisticated advisor when you go out to market (even though the extreme majority of the most sophisticated shareholders do engage an advisor). However, if you do decide to take on a fool as a client, don’t forget, in negotiations, perception is reality, and the threat of the auction can, at times, be very powerful. You should always err on the side of running a quasi-auction, but in a pinch, the threat, if credible, can be powerful.