In his 30 years as a banker, John Simons of the New York-based mergers and acquisitions firm Corporate Fuel Advisors has seen many business owners take risks, make investments, and try to grow their companies. But one thing he has not seen enough of is a willingness to buy other companies.
“I think many business owners are intimidated by the idea,” Simons says. “But building relationships with other business owners and talking with them about their businesses should be something that most business owners do as a matter of course.”
Simons will speak on “using an active corporate development effort to augment organic growth strategies” Tuesday, February 17, from 6 to 9 p.m. at the Westin Princeton. The event, held by the Association for Corporate Growth NJ, costs $85, $75 for first-time attendees, and $110 for nonmembers. For more information, visit www.acg.org/newjersey.
By “active corporate development,” Simons means actively attempting to expand a business by buying other companies.
“Businesses have higher values by virtue of their size and by virtue of their growth trajectory,” Simons says. “So a buyer would typically pay for a business that is fast-growing and larger.” That is, if two companies had equal earnings, investors would pay more for the faster-growing one. “A growing business will increase in value over time whereas a static business won’t increase and as a result of that, isn’t worth the same high multiple that a growing business is.”
Sheer size, not just growth, is also valuable. “Larger businesses are typically worth more because they are more attractive to more investors and parties. Private equity firms are more interested in larger businesses; ones that generate earnings of $5 million or more.” As a result, larger businesses are easier to finance with a wide range of capital alternatives rather than just bank debt that is available to smaller businesses. “If you are buying a business for $10 million total consideration, you would have fewer ways to finance that than if you were buying a business worth $100 million. Larger sources of capital would look at a business that has $100 million in earnings and say it has more stability, it has fewer business risks associated with it, and it might have a professional management team that’s been able to get it to the $100 million level.”
For both of these reasons, Simons says, it makes sense for business owners to look for ways to acquire other businesses in addition to the usual “organic” methods of growth, such as courting new clients or introducing new products.
A good example of growth through acquisitions is the Long Island-based Hain Celestial group, founded in 1993 and headquartered in Lake Success, NY. The company traces its roots back to the Hain Pure Food Company founded in 1926 to make health foods. By 1992, the company was owned by the Pet Inc. and was languishing until it was bought and became the flagship company of the Hain Food Group. The company then bought the herbal tea maker Celestial Seasonings and continued to add brands and now owns more than 50 other companies.
“Hain Celestial trades at a far higher multiple than other companies of the same type,” Simons says.
For individual business owners, Simons recommends planning an acquisition strategy around the core business. “How can you improve strategy or build that business?” Simons says. Two major ways of doing this are:
Increasing geographic reach. “If you operate in New Jersey, buying a business that operates in eastern Pennsylvania could be a wise thing just by virtue of increasing scale,” he says.
Increasing products offered. Another area of growth is to acquire a company that sells products to existing clients of your company. “You could extend or deepen your relationships with your clients,” Simons says. “You already have your truck delivering product to your client, so why not deliver three or four other things when the truck stops?” Simons says.
Buying another company is a risky endeavor and requires a large investment of time and resources. Simons says plan on spending a year or two when embarking on an acquisition. “The chance of being successful in a short period of time is low, but the chance of being successful if you stick with it is relatively high,” he says.
The main risk, of course, is lack of knowledge — perfect knowledge of another company is not possible, even if risk is mitigated by financial advisors and lawyers. There could always be skeletons in the corporate closet of any company acquired.
Simons grew up outside Louisville, Kentucky, where his father worked for an insurance company. He earned his bachelor’s at Trinity College in Hartford, Connecticut, where he studied ancient Greek philosophy and logic. “The major dealt with arguing and communicating a position and listening,” Simons says. “Philosophy was the study of ultimate argument and was good training for my career.”
He got a job with Chemical Bank out of college and has worked in banking for the last 30 years. He founded the Corporate Fuel group in 2004.
In his career Simons has seen many acquisitions pay off well for the buyer. “The simple fact is that buyers are prepared to pay a higher multiple of income or earnings for a business that’s growing. So on that premise, and on the premise of having a larger business of greater diversity would allow somebody the opportunity to pay a higher multiple for that business, it’s entirely possible someone could make an acquisition, pay for that acquisition, and increase the value of that business by more than the cost. The reason to do it is to add stability, lower risk, and increase the rate of growth in the business.”