“Seamless” is how marketing director Chris Martini describes Central Sanitary Supply’s latest acquisition process. In January 2009, the Modesto, Calif.-based distributor completed the purchase of Stehly Chemology, a company that focuses on food processing sanitation.

“Nothing was handled differently because we’re in a recession,” Martini says of the purchase.

In fact, Martini sees the current economic climate as an opportune time for the jan/san industry to continue consolidating.

“If you’re making wise business decisions, and you’re not overextending your company, I don’t think the risk is any greater than it is during a non-recessionary period,” he says. “For companies that are well positioned, there are great opportunities to be had.”

While some businesses are barely surviving the economic decline, many jan/san companies — like the aforementioned Central Sanitary Supply and also Indianapolis-based HP Products — are forging ahead with plans to expand their business through mergers and acquisitions.

“We will continue to focus heavily on servicing the needs of our existing customers while aggressively adding new ones,” says Bridget Shuel-Walker, president and CEO of HP Products.

Smaller companies in particular may take the brunt of the recession hardest and look to sell when profit margins drastically shrink. These companies will be the prime targets for aggressive distributors looking to buy.

“Smaller companies may find that they’re carrying too much debt during these recessionary times and are often forced to merge or even go out of business,” says Shuel-Walker.

Focus On Value

While struggling, smaller companies may be attractive to buyers during tough times, however, distributors should still proceed with caution. Just because a company is for sale doesn’t make it a wise investment.

“There are more businesses for sale during a recession, but you need to have your eyes wide open, because generally speaking, the companies that are actively for sale are the ones in the most trouble,” says Tim Feeheley, president and part owner of JanPak, Davidson, N.C.

According to Feeheley, an opportune time for acquisitions doesn’t depend as much on the economy as it does on the ability to identify a good target. So what should jan/san distributors look for when acquiring another business? First and foremost, the reason why the other company is selling.

“If they have a crumbling infrastructure, a disintegrating sales force, and their cash flow is negative, it’s not a business you want,” says Feeheley. “On the flip side, if they just need capital to continue growing, that’s a good reason to look at an acquisition.”

Also look for similarities between the buyer and seller. Acquisitions will be smoother if product lines, company culture and even locale are related to the buyer’s existing business.

“The best acquisitions are in the same business you’re in,” says William Garlough, managing director of The Change Agents, Holland, Mich. “You need to look at what products the company carries, whether they’re similar or completely different, and what markets they serve so that they’re compatible with the business you’re already in.”

For example, Central Sanitary Supply sells food disposables and packaging products — a complement to Stehly’s focus on food processing sanitation.

Ready To Buy?

After an outward focused examination, distributors need to look inward at their own motives for buying during a recession.

“Companies that are already struggling financially should be cautious about acquiring other struggling companies,” warns Shuel-Walker. “When you combine two small, struggling companies, you get one medium to large company that continues to struggle. Acquisitions are very expensive at the best of times, and even more so at times such as what we’re experiencing.”

Acquisitions can go wrong at any time — whether it’s during a recession or not, says Charles Wax, president, Waxie Sanitary Supply, San Diego. A distributor’s best defense against making a bad decision is to perform a comprehensive due diligence and be prepared to integrate the company and personnel immediately after the acquisition.

“When a buyer purchases another company, he has complete access to that company’s books and records,” says Garlough. “He has to make sure that company is what it says it is, and they’re doing the business they say they’re doing.”

Start with taking a close look at the company’s finances and make sure their accounts receivable and their margins are in line.

“In this industry, gross margin runs typically 32 to 35 percent. If they’re way below that somewhere, there’s got to be a reason for it,” says Garlough. “Either they’re priced too low, or they’re inefficient.”

To ensure the best deal possible —

particularly during a recession — Garlough recommends that distributors have a good financial advisor and a lawyer that specializes in acquisition law.

While a thorough investigation of the seller is necessary before entering into an agreement, Martini suggests that distributors try to remain open-minded.

“Think outside the box,” he says. “A distributor could acquire someone that in the past has been a competitor. Sometimes you compete with a company so frequently you can never imagine working with them.”

Approved Funding?

The current credit crisis will make it extremely difficult for companies with debt to buy another business because of lending constraints imposed by the banks, says Wax. In fact, the lending market is so tight that even financially sound businesses may have trouble securing the needed credit.

“Banks are hesitant to lend money to anyone — even those with excellent credit histories,” says Shuel-Walker. “That makes it difficult, but not impossible.”

Companies that have cash and available credit are in a more favorable position to buy, says Wax.

“Because it’s a capital-intensive business, most businesses in the industry rely on bank debt. Lenders generally grant loans that are renewable annually,” he says. “There are certain covenants in the loans, and if they’re breached, meaning the company doesn’t have sufficient cash flow coverage or sufficient profitability, then it’s possible their loans might not be renewed. And with the fiscal crisis going on right now, banks are reluctant to lend.”

A good, longstanding relationship with a bank should help distributors get approved for loans to continue making acquisitions. However, if they’re still not getting the desired credit limits, distributors should inquire with different banks, particularly local ones.

Financing should be set well before taking action. Distributors don’t want to be negotiating with sellers while still uncertain about how much they can actually spend.

Emerging Mergers

With this current bleak economic outlook not predicted to end in the near future, distributors should expect to see an increase in jan/san acquisitions during the next couple of years as larger companies will continue to buy up small and mid-size businesses, says Martini.

In particular, Feeheley predicts a rise in acquisitions of low-priced, distressed companies.

“I think the good companies that are positioned to be successful won’t necessarily be for sale because they see this kind of economy as an opportunity to capture market share more than ever,” he says.

Remember, these acquisition opportunities aren’t guaranteed successes. After the purchase, distributors can’t lose sight of their original operations while managing new employees, new inventory and new accounts.

Kassandra Kania is a freelance writer based in Charlotte, N.C.

Before buying, ask yourself:

Does the company have a strong sales force?

When merging with another company, distributors should take a good, hard look at that company’s salespeople.

“When we buy another company, we’re particularly interested in companies that have a strong sales force with good customer relationships and good customer service capabilities,” says Bridget Shuel-Walker, president and CEO, HP Products, Indianapolis.

In addition, distributors should look for a sales force that has the skill to adapt to the acquiring company’s sales tactics when necessary.

“We want to make sure there’s a good fit in terms of the channels we go after and that their sales team is very effective in selling into those channels,” says Tim Feeheley, president and part owner, JanPak, Davidson, N.C. “We don’t want too much conflict over what we sell, how we sell, and who we sell it to.”



Before buying, ask yourself:

Is the company stable?

Distributors should choose a commodity that can weather an economic downturn, says Chris Martini, managing director, Central Sanitary Supply, Modesto, Calif.

“The company we just acquired (Stehly Chemology) focuses on food manufacturing and sanitation, which is an industry that hasn’t been negatively impacted by the economy,” he says.



Before buying, ask yourself:

Is the company located in the same geographic area?

To ease the transition and integration process and help further consolidation in an existing marketplace, distributors emphasize the importance of merging with a company that is located nearby.

“It’s difficult to manage a company that’s located far away — and do it well,” says William Garlough, managing director of The Change Agents, Holland, Mich. “Buyers should look in their own market or adjacent markets nearby for acquisition prospects.”

For example, HP Products prefers to focus on companies within a 200 mile radius of its Indianapolis headquarters.

“We believe it’s a manageable span of control,” says president and CEO Bridget Shuel-Walker.



Before buying, ask yourself:

Is the company a good cultural fit?

Similarities between the seller and buyer should extend beyond product lines. Company culture also plays an important role in a successful acquisition.

“Be aware of the company’s philosophies and their ways of going to market,” says Chris Martini, marketing director, Central Sanitary Supply, Modesto, Calif. “How does that organization operate compared to how your company operates, and what can you learn from it?”