Tom Knauff
Tom Knauff is founder and CEO of a company that acquires and operates propane distribution companies and midstream assets.
- The real payoff for an acquisition strategy comes with scale-when you've acquired enough companies and revenue to benefit from the efficiencies the platform company can provide.
- How you brand acquired companies will be critical to your ultimate success.
- When evaluating acquisitions, it's important to look beyond the performance and potential of the company for hard assets that can be used as part of the acquirers financing and tax strategies.
- As CEO, running an acquisition-based startup requires a nimble operating style.
The idea of building a growth company through acquisitions is appealing to many entrepreneurs. Sure, the entrepreneur doesn't have to start from scratch and it may look like a safe bet for investors because the capital will be used to grow an established entity that already has customers, cash flow, and operating systems. But the strategy only works if you understand the nuance of financing, branding and leading the acquired companies.
From my experience of having founded three successful acquisition-based startups since 1991 and completing and integrating more than 79 acquisitions, here are four things every entrepreneur should know before pursuing an acquisition-centered growth strategy:
- Finance to last. The real payoff for an acquisition strategy comes with scale-when you've acquired enough companies and revenue to benefit from the efficiencies the platform company can provide. These include back-office functions, such as accounting systems and consolidated purchasing power. In a well-run acquisition strategy, there's a tipping point where growth can accelerate because the company has reached a critical mass in terms of cash flow and shareholder value-with more assets that can be leveraged for larger transactions. It can take longer than five years for a startup to reach that point, so it's critical to have a financing strategy that will give you enough runway to maximize the value of your company over a longer term.
My current company is Energy Distribution Partners (EDP), which was founded in 2012. In forming the company, we wanted a long time horizon, so we first developed a unique special purpose limited partnership structure where we could attract a number of investors, including those who shared our long-term view. Had we relied on one or two typical venture capital or private equity investors, we likely wouldn't be in business today because the usual investment timeline for those types of firms is three to five years. That was my experience in two previous startups, which were sold to competitors before reaching the five-year mark. For their return, those investors settled for a double instead of a home run. I learned from those experiences and we founded EDP using an innovative financing structure.
- Decide on a clear branding strategy. How you brand acquired companies will be critical to your ultimate success. My current startup is in the retail propane business, a low growth industry where we compete with both national and locally owned suppliers. Earlier in my career, I was an executive with some of the larger propane companies and learned from their approach. Their strategy is to acquire a local operator and then immediately rebrand it with the national company name. They also institute national pricing policies that don't take into account local market dynamics, and change important points of customer contact, such as customer service and billing procedures. The result is an almost immediate 10 percent loss of business with each acquisition.
So if you acquire a company, consider keeping it local in ways that matter to the customers. The name, management decision-makers, customer service people, community relations activities and pricing decisions can all potentially remain local. As the acquirer, you can provide strong capital resources for growth and back office support to ensure a consistent and reliable supply chain through broader industry connections. Local customers don't necessarily have to know the acquirer's name because the business is already in the background, supporting the local operation. As a result, you may gain market share after the acquisition is completed because you're helping the local company better serve its customers.
- Look for fixed assets. When evaluating acquisitions, it's important to look beyond the performance and potential of the company for hard assets that can be used as part of the acquirers financing and tax strategies. For example, because we're focused on the retail propane business, one of the key assets my firm accumulates with each acquisition is the propane tanks we provide to customers. The tanks are kept on the customers' property and represent an important connection to them. They also have monetary value that can be used as collateral for loans, and they can be depreciated for tax purposes. Fixed assets can help elongate your investment timeline.
- Adapt your leadership style. As CEO, running an acquisition-based startup requires a nimble operating style. In part, that's because you'll generally have operations in multiple locations, spread over a wide geography. Knowing when to apply authority and when to let your managers make decisions unencumbered creates teamwork in a network of acquired companies. Striking that balance also establishes an employee culture that's productive from day one, and not disrupted and distracted by the acquisition process.
Startups that grow through acquisition have tremendous potential to succeed, as long as entrepreneurs remember to integrate each acquisition as part of a holistic strategy that's focused on the customer and financially savvy.
Thomas Knauff is founder and CEO of a company that acquires and operates propane distribution companies and midstream assets. He is a serial entrepreneur, having founded three such companies, all private equity backed. He has completed and integrated more than 79 acquisitions.