Morehouse BioEnergy is a massive industrial facility that produces 450,000 tons of compressed wood pellets for use in electric utilities every year. Located in the northeast corner of Louisiana, just outside of a small town named Bastrop, it sits on 138 acres of land and took 10 months to build. It was here that Darren Turner began wooing Terry Wallace.
Turner is the CEO of Amteck, a Lexington, Ky.–based design-build firm, and at the time Wallace was the owner of Consolidated Electrical Contractors & Engineers (CECE), headquartered in Dothan, Ala. Their respective companies were tag-teaming on the design and construction of the Morehouse plant’s electrical systems in 2015 — from the distribution system to low-voltage switchgear for chipping and debarking operations — so it wasn’t uncommon for the two to talk. And it wasn’t long before their conversations turned to business.
After nearly three decades of not just bidding jobs and doing the work, but also shouldering the financial risks and responsibilities of running a contracting firm, Wallace was feeling the strain of being a small business owner. He looked at Amteck, with its substantial back office operations that could handle administrative duties like staffing and health insurance, and he couldn’t help but feel a little jealous. He understood the value of those things, but for CECE, which was just a fraction of Amteck’s size, they’d become burdens that got in the way of what Wallace enjoyed most: designing and building quality electrical systems.
Turner had a suggestion that would benefit both companies: Why not allow Amteck to acquire CECE? The former, which had acquired two other companies the year prior, both located in Greenville, S.C., could continue to expand its reach throughout the southeast. And the latter could take on more work while leveraging Amteck’s administrative support structures.
There really was no downside, and in August 2017 the two made it official. A joint press release used jargony phrases like “to meet market demands,” “pre-existing professional relationship,” and “strategic placement” to explain the deal, but it was a simple one that described it best: “It only made sense to add CECE to the Amteck family.”
Pairing off
No, it’s not your imagination: Small to mid-size electrical contractors are getting gobbled up left and right these days. A March 2017 study released by the engineering and construction consulting firm FMI shows that despite a drop-off in megadeal acquisitions within the industry in 2016 (as compared to two years earlier) the market has remained strong overall — thanks in large part to more purchases of niche operations.
Alex Miller, the study’s author and a director of FMI’s investment banking subsidiary, says that has translated to a healthy appetite for specialty contractors.
“New buyers have emerged for mechanical and electrical contractors that weren’t present in our market 24 months ago,” he says. “We have buyers who are actively looking to grow their businesses and are now in an acquisitive mind-set.”
There’s no question that this is a buyer’s market. But that demand — along with an improvement in capital markets over the last three to four years — has dovetailed nicely with the business recovery of many of those smaller companies that are being targeted for purchase. Miller says that owners looking to cash out or continue working while reducing their personal financial risk may have been game for acquisition years ago but were forced to hold off when the Great Recession killed their company’s valuation. Now that the industry has bounced back — and most contractors are seeing volumes and profit margins rise again — it finally makes sense to sell.
What are these buyers hoping to get for their money? For starters, for those looking to expand into new geographic territories, it’s just easier to buy an existing operation than start from the ground up — especially as the industry continues to grapple with a skilled labor shortage.
As Miller points out, though, in many cases the goal is to control more of a project’s life cycle. He compares what we’re seeing now to what the industry experienced in the ’80s — when utilities purchased electrical contractors to improve their access to end-users. Now it’s the contractors themselves who want to diversify vertically, making it possible to design, build, and service a facility. Why turn your back on additional revenue streams when you can buy a smaller company that opens them up to you?
That’s partially what has driven Amteck’s acquisition strategy. The two companies it purchased in 2015 allowed it to broaden its service capabilities.
“Traditionally, we would build the factory but then maybe not do any work there afterward,” says Amteck Chief Operating Officer Pete Bierden. “We decided that we wanted to be able to support these new facilities that we were building.”
Bigger isn’t always better
Every acquisition is different, though, and sometimes a company’s motivations can’t be that easily categorized. In early 2016 Capitol City Electric (CCE) was in the midst of a riotous growth spurt that would take it from a 15-person shop to a 150-person operation by mid-2017. Two years earlier, in 2014, Adam Randall had purchased the 36-year-old Lincoln, Neb.-based union contractor from his father, and almost immediately he began looking for work outside of its traditional territory. That took CCE to Columbus, Neb., where it assisted in the construction of the town’s new high school.
As the project wound down in 2016, though, the company faced a tough decision: It had just spent nearly 18 months hiring and developing a talented and trusted crew of electricians based in Columbus. Leaving town now would mean releasing those men and women back to the hall — assuming they weren’t willing to move to Lincoln. But what if there was a way to keep them?
That’s when Rodger Dean got to work. Hired as chief operating officer in 2015, his primary role was business development, and in Columbus he saw an opportunity for just that. Rather than open a new CCE office in town, though, he got to work on looking for an existing company to acquire — a company like Marley’s Electric.
Marlin Frauendorfer had been wiring homes and businesses in Columbus for nearly 60 years. And though by 2016 his staff had dwindled to just two people, including himself, his reputation was still rock solid. He was decades past when most his age would have hung up their tools, but Frauendorfer wanted to keep working — he just wasn’t interested in actively seeking it out. If CCE could combine its new crew with Marley’s established name, Dean believed the company could do big business in the area, which is about 90 minutes north of Lincoln.
And after nearly a year of hammering out the details — including what Frauendorfer’s schedule would be, because he sure as heck wasn’t going to retire — CCE completed the purchase of Marley’s Electric in February 2017. But it wasn’t easy, despite the relative sizes of the companies involved.
“We had to become friends before we could become partners,” Dean says. “They wanted to be sure that whoever bought the company wasn’t going to tarnish Marley’s reputation. They felt like they had the highest quality name in the community, and they wanted that to continue.”
Time for self-reflection
No matter what shape an acquisition takes, though, the first question any business owner should ask him- or herself before taking that step should be, “Why do I want to do this?” And if the answer is, “Because I’ve got some extra cash lying around,” there are much less risky places to invest your money. H. Lee Rust, a corporate finance consultant and the author of Let’s Buy a Company: How to Accelerate Growth Through Acquisitions, warns that an overly aggressive company can acquire itself right into bankruptcy.
He’s seen it happen. Over a decade Rust helped a Lakeland, Fl.–based electrical contractor acquire more than a dozen companies and expand his annual sales from $4 million to $55 million.
“The acquisitions quickly outstripped my client’s ability to manage what he was building, though,” Rust says.
For example, rather than invest in a CPA who would have commanded a $125,000 salary, the owner hired a controller for $45,000.
“His logic was that accounting wasn’t a profit center,” Rust says with a sigh. It wasn’t long before the bank questioned whether he had the cash flow to service his debt and called his loan. In case you haven’t guessed the end of the story: “He lost the whole thing,” Rust says. “Everything.”
That underscores a point that both Rust and Miller, of FMI, make: Acquiring a company means not just significantly increasing your revenue in a relatively short period of time, but also significantly increasing your responsibility and risk. Managing both requires a healthy dose of business acumen and time.
“Many firms are already stretched under their current operations,” Miller says. “Do you and your management team have the bandwidth to vet an operation, shepherd the transaction, and then integrate and effectively manage that new acquisition?”
That first step — doing your due diligence on the company you hope to purchase — is the most crucial one of all. Sure, you can hire accountants to review financials and lawyers to draw up the paperwork, but you can’t outsource researching the intangibles. What’s their customer concentration? If they only have four accounts and one bails after you seal the deal, you just paid full price for 75% of a revenue stream. (That issue sunk an acquisition CCE tried to make as Dean was joining the firm. The target company had just a handful of clients but wouldn’t agree to allow CCE to reduce its payments accordingly if one jumped ship.)
And what about its accounts payable and receivable? If the former is in arrears, clearly the company isn’t financially stable enough to pay its debts. The latter is just as troubling, though. If a contractor is having trouble collecting, that means either it’s choosing its clients poorly, or — worse — its clients aren’t happy with the services it provides.
Transition time
There’s one more question you need to ask: Does the target company have the management wherewithal to handle the transition? Because you’re going to need them.
“Ask a contractor how often they put a lot of money into something, and then never look at it again, waiting for the checks to clear,” says Miller. “It doesn’t happen.”
A successful acquisition requires a smooth transition, and that begins with acquiring a company with a culture compatible with your own. From there, though, the key is using that common ground to establish a connection that includes give and take.
“It’s a learning process for both sides,” says Bierden, Amteck’s COO. “It starts with us saying, ‘Okay, this is how we would take a project from the bid phase to the construction phase,’ and them saying, ‘We’re used to bidding it a little different.’” He even advocates using real world projects for working out those kinks.
Most important of all: Whatever you do, soak up as much information from the target firm’s management team as possible. Assuming you’re buying a company with a quality track record — and if you’re not, you might want to rethink things — those responsible for that success will have invaluable intel on the market and its customers. Amteck prides itself on having never eliminated a position from any of the companies it acquired. “We’re buying companies to grow, so there’s plenty of work to go around,” Bierden says. “If you were adding value to the previous company, we think you’re adding value to our company.” And every owner has remained in the Amteck family.
The situation between CCE and Marley’s is a little different. Frauendorfer can’t work forever (though he may try), so in the meantime Dean understands how crucial it is to capture those decades of institutional knowledge.
“These first two years are key,” Dean says. “Every time he gets a call, he’s sharing with us what’s going on.”
It’s a process that should keep CCE plenty busy for the time being — or at least until it completes its next acquisition, which will probably happen sooner than later.
Halverson is a freelance writer based in Seattle. He can be reached at [email protected].
SIDEBAR: Acquisition Dos and Don’ts
DO approach an acquisition like a sales call. When assisting his clients, corporate finance consultant H. Lee Rust will write letters to target companies that focus on the strength of the company he represents, and not once does he use the words, “We’d like to buy your firm.”
DON’T take out a massive loan to make a purchase. If you can’t pay cash, you should put down at least 25% — and have the seller finance the balance. “Construction is a risky enough enterprise without turning your balance sheet upside down with debt,” says Alex Miller of FMI.
DON’T overcomplicate things. While a typical purchase agreement between large companies can run dozens of pages, Pete Bierden of Amteck prefers to keep it to three or four pages. “It’s 25 employees,” he says. “We understand their customer base, we understand who they are, so let’s just keep it a simple transaction.
DO remember that small contracting firms are typically family businesses — and owners are fiercely loyal to their employees. “These people have produced enormous wealth for the owner,” says Rust. “They want to see that those people are treated well.”
