[Mergers & Acquisitions Supplement] A forward-looking M&A strategy

One of the emerging pest control businesses in the Sun Belt is Bulwark Exterminating, a $20-million-plus company based in Mesa, Ariz. While the company has not been a major player on the M&A scene, it has made some strategic purchases, including the 2012 acquisition of Premier Pest Management, a company based in the Phoenix area that generates close to $1 million in yearly revenues.

Bulwark CEO Adam Seever said this acquisition will help the company build route density in an area of metro Phoenix where Bulwark had few customers. “The combined customer base yields geographically small technician routes. Customers will see our trucks very frequently,” said Seever. “When a pest professional delivers real quality, route density gives you more than lower gas expenses — it yields exponential referrals. Premier employees have great customer service skills.”

Under the agreement, Premier Owners Sandra Hellems and Becky Garr receive a large percentage of total receipts monthly for three years on every customer Premier provided to Bulwark and, subsequently, 7% of receipts in perpetuity after the first three years. This type of payout-over-time arrangement can benefit both the buyer and seller, according to Jeff Liebel, partner at CounterPoint Consulting, Williamsville, N.Y., who advises business owners on growth strategies and the people side of mergers and acquisitions. “From a structural standpoint, it is favorable to the buyer because they are essentially funding the deal out of the current revenue they are getting from the acquired business,” he said.

From the seller’s perspective, Liebel said, there is often this belief that “a 53-foot trailer will back up to their door with pallets of money, they turn over the keys and off they go. That is rarely the case these days as buyers are not inclined to pay ‘full value’ in a lump sum. The buyer can reduce their real risk by paying out a percentage of the actual post-sale performance to the seller. So if the organization and accounts are healthy they could continue to grow, and this increase in performance may result in a larger payout to the seller over time. The risk, of course, is if the new owners drive it in to the ground, but that is why the sellers have to conduct their own due diligence of the buyer.”

While the payout-over-time structure of the Bulwark-Premier deal is not unusual, the payment in perpetuity is interesting because this type of arrangement is mostly found in family business situations (e.g., generational succession). Seever said the payment-in-perpetuity component was important for these two reasons:

The Transition. Seever likes the fact that sellers have a contractual right to the revenue stream they bring to Bulwark, and thus have a stake in the successful retention of the transitioned business. “They remain active in giving feedback to our management of the newly acquired customers even though they are not on the payroll technically,” he said. “This was their business and they personally know most of their customers. When there is a problem, their customers usually will go through the proper channels; however, sometimes misunderstandings or gaps develop. 

“It is nice for the customers in transition to be able to contact the former owners. The former owners are not involved so much in the solution, but rather can give decision makers information. Former owners are not required to do this, but they do have a vested interest in solving misunderstandings to keep retention of future revenue streams.”

To Sweeten the Pot. As Liebel noted, sellers usually don’t get the premium they think they’re entitled to; Seever and his team believe offering payment in perpetuity was an opportunity to “mathematically convince business owners that we would pay as much as the big boys [if not more],” he said. “In many cases, we believe that our systems and processes yield enough additional value, to pay both the seller handsomely and the buyer sufficiently.”

Moving forward. Seever says Bulwark will structure future acquisitions similarly. “We are opposed to growing on loans or borrowed money,” he said. “We feel it makes an organization lazy. Our business process is strong enough to operate out of cash flow when acquiring these partners when they agree to a longer term relationship.”

The author can be reached at bharbison@gie.net.