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Buyers, CFOs

Why Barbecues Are More Important Than Balance Sheets for This Corp Dev Team

Winsupply, a wholesaler distribution company based in Dayton, OH, owns a majority equity stake in nearly 600 local companies across the United States. As part of our ongoing series profiling the workings of active corporate development teams, we spoke to Ward Allen, vice president of finance, and Jeff Dice, chief information officer, about Winsupply’s acquisition strategy, how they evaluate cultural fit, and more.

MMR: Tell us about Winsupply’s local ownership model.

Ward: We are looking for companies where someone from the management team wants to retain ownership in the business. Many of our acquisitions are asset-based, so we’re buying the assets of the old company and starting it up as a new corporation.

We currently have 594 companies in the Winsupply family. Under our model, we retain at least 51 percent ownership and sell back up to 40 percent of the company to the local team. Winsupply provides back-office support for the companies — IT, accounting, marketing, training, etc.

A lot of time our model appeals to older sellers who are looking to cash out of the business, but want to leave their employees with the same benefits of ownership they’ve had over the years.

MMR: What does your ideal target look like?

Ward: We’re in wholesale distribution and serve six verticals — plumbing, HVAC, industrial PDF, electrical, irrigation, and water works. We really try to focus on businesses serving those same verticals because a big part of our advantage is being able to leverage existing vendor relationships.

We’re looking for profitable companies. The minimum revenue is probably $5 million, though we may consider slightly smaller if its in a market area we want. On an upper level, you’re probably talking about about a revenue size of $50 million to $60 million. The largest acquisition we ever did was buying a publicly traded company called The Noland Company back in 2005. At the time of purchase their revenues were $500 million. So we certainly have the capacity and the wherewithal to buy larger companies, but it’s not an everyday occurrence.

MMR: How many acquisitions do you typically do each year?

Ward: In a normal year it’s about two or three. Although, recently that has picked up quite a bit. Last year, we did five, which is a pretty crisp pace. Three of them were within 45 days. Between now and year end we’ll probably do at least five if not more.

In addition to acquisitions, we also have two other methods of growth. First is the hub and spoke model, where an existing company will start up a new local company in a contingent market. We also have a new start model, where we find someone in a market area who wants to have ownership of a company to start up a new business.

MMR: Can you give me an example of how your model adds value for sellers?

Ward: We bought a company in Columbus, Ohio run by two brothers in 2013. It was a good company and we paid a fair price for it — I think everyone was happy when we closed. At the time we bought the company it was about $60 million in sales.

The older brother had been president and he left the company after the sale. The younger brother, who was in his mid-fifties, took over. In five years, the company doubled in sales.

What had happened with the company — and we see this all the time — is that it had gotten to a size where the need for capital was such that the risk that the owners were taking on personally had gotten to be so great that they hit the brakes from a growth perspective.

The personal guarantees on debt for a $120 million sales company can be pretty big. You’re putting a lot of personal and business assets at risk. We became the bank for them — we provided the capital to help de-risk growth. So the company was still risking capital, but it wasn’t personal capital.

MMR: How do you evaluate cultural fit?

Ward: My favorite way to think about it is, “Do they pass the barbecue test?” And what that means is, would you have that guy over to your house for hamburgers and a beer? If the answer is yes, that’s a pretty good indication that it’s probably going to fit. Keep in mind too that throughout due diligence and the rest of the process, there are probably around 20 people from Winsupply talking to the people at these companies. It’s not just one person’s opinion.

I was at a management presentation recently. They were kind of on the fringe in terms of their industry vertical, but these people were so passionate about what they did, and so humble about it, and so caring about their customers — they sounded like Winsupply people. We walked out of there and said, “I know they’re on the edge here, but these are the right people for our organization.”

MMR: You mentioned your pace of acquisitions is increasing. How do you source opportunities?

Ward: This is a consolidating industry; on a weekly basis I probably get contacted with a minimum of two new opportunities.

We’ve been getting our name out there more and have been getting a lot of activity since signing up with Axial. We’ve also started developing relationships with regional investment banks. Developing relationships with regional firms usually brings in potential targets with anywhere from $20 million to 60 million dollars in sales. A lot of it is word of mouth when it comes to creating relationships — sitting down and spending 30 minutes on the phone, trading emails back and forth.

We’re doing the barbecue test on these M&A firms too. Some are trying to drive value for their own firm and probably not listening to their client as much as they should. But the good brokers, they’re the guys that understand and try to maximize economics, but also want to make sure their client is satisfied post acquisition with the acquirer.

MMR: Tell me more about your due diligence process.

Jeff: Our early acquisitions were very balance-sheet based, very financial-based. I come from an accounting background. I learned quickly though that the real due diligence is talking to people and having them open up to you because that’s when you really find out what you’ve got. We’re looking for a highly functional team that excels at communication and that has a clear plan for the future.

I learned quickly though that the real due diligence is talking to people and having them open up to you because that’s when you really find out what you’ve got.

We did make a few mistakes early on because we were so focused on financials. Around eight years ago, we actually changed our whole acquisition and due diligence process to start addressing culture and the people side of the equation earlier on. We transitioned from a balance sheet-based to more of an operational-based due diligence after a fairly explosive failed acquisition.

MMR: What happened?

Jeff: We were basically just given access to the company’s financial information. We weren’t given access to any people in the company other than the owner. The financial piece was very clean, and it was a pretty quick due diligence process. The results of the company over the past few years had been great.

We closed the acquisition and the former owner got his money, and I think he lost a bit of interest in the company. That’s when we realized the people at the company weren’t as strong as we’d been led to believe. It was right before the recession, and when that hit, the company just didn’t have the strength of people to keep a business strong. Everything went south.

That was the last time we ever did an acquisition like that — where we didn’t meet enough of the key people to know that there’s strong people who can lead the company into the future.

We took a breather on acquisitions for two or three years after that, and that’s when we redid the process. And then we started picking up acquisitions about five years ago, and we’ve gone full throttle since.

MMR: If you could go back in time and give yourself advice when you were just starting out in corporate development, what would it be?

Ward: The best advice I could give myself would probably be to always have the courage to walk away. It’s human nature once you get invested in any project to want to see that project to fruition. But there are instances where it’s not in the best interest of either the company that you work for or the company that you’re acquiring. You should be disciplined around what you’re trying to achieve for your shareholders from a return perspective, and if doesn’t hit those parameters you should have the courage to walk away.

Winsupply: Axial Profile | Website

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