Natural Selection

• September, 2008
• Smart Business Dallas Magazine

A few months ago, Bob Livonius and his leadership team at Nursefinders Inc. targeted a promising company for purchase. The initiative was by no means unusual at the growing family of health care staffing providers. Livonius had already overseen a number of acquisitions since coming on as CEO in August 2003. And he’d overseen approximately 40 at another company in the 12 years prior. So when the targeted company’s executives presented him with strong financials and an enthusiastic pitch, Livonius didn’t immediately sign off. He insisted on drilling down deeper.

“We thought we had a very strong candidate,” he says. “The financials looked really good. (But) once we were finally permitted to go and visit some of the people down below, we were very unimpressed. There was not nearly the strong motivating attitude that we would have expected, that we saw from the leadership team. You couldn’t feel that at all when you walked through and talked to people on the floor. It was pretty obvious that (the leadership team) was dressing it up for sale and that they didn’t really have strong operational expertise.”

After that encounter, Livonius and his team passed on the opportunity and focused their attention toward other prospects.

He says you can’t acquire every promising lead that presents itself. A successful merger or acquisition requires considerable due diligence on the front end, combined with the discipline to step away if certain warning signs present themselves. Though you’ll inevitably pass on many opportunities working within the framework — Livonius says he passes on approximately two to three such opportunities every month — your company will reap the benefits when you eventually jump on the right opportunity.

In April, for example, Livonius added Resources On Call to Nursefinders’ family of eight existing brands. The allied staffing company specializes in staffing imaging and medical laboratory technologists, a growing industry segment with plenty of untapped market share. Despite this obvious draw, Livonius didn’t hastily jump on this opportunity either. Instead, he approached it with the same, calculated methodology that has boosted the 1,039-employee company’s combined revenue from $224 million in 2005 to $418 million in 2007.

Here’s how Livonius weeds out the pretenders to acquire the best prospects in the industry.

Follow the signs

Livonius didn’t happen upon Resources On Call by chance. The company was one of a handful of opportunities that would expand Nursefinders’ ability to tap into the growing allied staffing industry, which includes every health care professional except doctors and nurses.

“The need is so great that we can add a second brand, and we’re not going to overlap anything,” he says.

What separated Resources On Call from the other allied staffing providers were certain characteristics shared by all great acquisitions. Livonius says there are four key attributes in all, including financial dynamics, business concentration, turnover rates and senior management tenure.

The first sign to look for when vetting potential acquisitions is a positive financial dynamic within various indicators, such as growth rates, revenue, gross margins and expenses.

“The trends for these are key indicators when you compare them to the industry,” Livonius says. “If the industry’s growing at 10 percent and this company’s growing at 15, that’s a very good sign. Obviously, the reverse would not [be a good sign.] If margins are lower than the average in the industry or if expenses are higher, those are all very key factors to look at.”

Livonius says it’s also important to compare these indicators historically. Has the company’s revenue grown at a steady pace for the past five years, or has it increased dramatically one year but fell the other four years?

“That’s often a warning sign,” he says. “They’ll say we had a one-time write-down for insurance or a lawsuit or a one-time problem with our health insurance. Oftentimes, these are appropriate adjustments. But they really need to be investigated to determine if they really are part of the ongoing cost of business, but they put them into a one-time cost instead of appropriately spreading them over the course of the business so that they really are a normal cost.”

The second sign of a great acquisition is what Livonius refers to as concentration of business.

“(Business) needs to be spread across a large customer base where there are multiple years of sales to those clients,” he says. “This indicates that their client retention is high.”

On the flip side, Livonius says to be wary of companies that receive a bulk of their business from one or two clients.

“One of the warning signs would be more than 20 percent of your business concentrated into one client or more than 50 percent in the top five to 10,” he says. “That’s a warning sign that says perhaps you’ve got one really good contract that’s driving a lot of profitability, and you need to understand what the certainty of getting that contract again and again and again as opposed to getting a lot of different contracts that have a lot of tenure.”

The third sign you should be on the lookout for is low turnover rates. While it’s certainly important to include key executives in this assessment, Livonius says you should also look at the front-line employees.

“Oftentimes, people say, ‘How long has the senior management been in place?’” he says. “That’s important, but what’s really important is, ‘Do you have a 50 percent turnover of the people who are actually in the desk working and filling out the orders, or do you have 10 percent?’ It depends on the industry, but for example, if we saw turnover rates in excess of 30 percent a year, we’d think there’s a real problem there.”

Finally, the last sign of a great acquisition is a management staff that intends to serve through and after the acquisition.

“It’s key to know what they want to do as part of this transaction,” he says. “It’s obviously better if they want to stay, and you think they’re good, but oftentimes, the situation is that the management is leaving after a transaction, and they’re planning on selling and retiring. What is the backup plan? Do they have a successor in place? Has that successor been in place long enough? Are you going to have to bring somebody else in?”

Just as important as gauging key executives’ future plans is looking at their history of employment.

“One of the key signs is that if there was a management team that was brought in in the last 12 to 20 months and then they’re ready to sell the company,” Livonius says. “Oftentimes, that means that that was probably a transition management team or a turnaround management team that was brought in to cut costs and get the company ready for sale. It’s a warning sign if they cut too much in order to get their price better because their profits are a little bit better. When I take over, will I have to add back expenses that they cut out? Or will I have to restructure some contract they might have put in play?”

Acquire what you know

When Livonius was conducting acquisitions at his old job in the ’90s, a long-time mentor offered the following advice: “You need to feel equally comfortable going to dinner or being stuck in an elevator with the management team.”

“It’s an appropriate saying because during the good times and bad times, you really want to be comfortable working with the management team that you’re acquiring,” Livonius says.

The easiest way to ensure that level of comfort is to seek a company with a culture similar to your own.

“It starts with, do you want to buy a company that is similar in culture to your company or not?” Livonius says. “If you do, it’s a lot easier. If you’re culturally mismatched, if someone is highly autocratic or authoritarian and you’re more participative as a management team and you’re more open, you’re more communicative, it’s probably not a very good idea to acquire the company.”

When asked what attracted him to Resources On Call, Livonius points to the cultural similarities above all else.

“There are 10 other companies out there that we could have acquired besides ROC, but in our mind, ROC had the best match to our culture.”

He didn’t come to that understanding over the course of two or three meetings. The process requires numerous visits by every one of your key executives.

“You’ve got to know them well enough through several encounters to have that feeling,” Livonius says. “Have members of your team be present or have separate meetings with management and then compare notes. On my team, my CFO or another VP of operations will all be involved in assessing the culture by interviewing different people. We don’t always do it as a group; we sometimes do it individually and see if we get the same answers, and then come back and compare notes.”

Bringing your direct reports into the process will provide new insight that you may have missed during your own encounters. Livonius also suggests referencing outside parties for additional perspective.

“The way I think you understand the company’s culture is also through references that you can rely on that are independent of the transaction, such as a former employee or colleagues in the industry,” he says.

In most cases, these interactions will take place within your or the potential acquisition’s workplace. Livonius says that it shouldn’t be limited to these settings, though.

“Over the course of those meetings, some are social,” he says. “You go to dinner; find out what the rest of their family is like and what the rest of their lifestyle is like.”

Such interaction is a great way to gain a deeper familiarity with another leadership team. He says there’s no substitute for face-to-face interaction in a variety of settings. If nothing else, it provides a more intimate understanding than any psychology test can provide.

“(Some companies) actually have psychological testers come in and actually do some testing of the type of individual that this person is,” he says. “I’ve really never done that. I think it’s better to assess them through the interviews that you do during the due diligence process.”

And as you try to understand them, one of the most important things to look for is their understanding of their own company.

“The last thing when you interview a culture is do the management and the leadership ... talk about their team in enough detail that they really understand what’s going on all over the business,” Livonius says. “Do they talk about them in a way that is positive about the people that are below them?”

That promising company that Livonius and his team eventually passed on lacked this understanding. If you value your employees and maintain an interest in the day-to-day operations of your company, you should only acquire a management team with the same cultural philosophy.

“Obviously, most people are going to say great things about the people below them,” Livonius says. “Can they describe their team in detail? Can they talk about somebody that’s two or three layers down as an example? When you’re starting to tell them about the business, ask questions like, ‘Well, tell me about an example of a person in your organization that blah, blah, blah, and it’s got to be three layers down.’ If they can do that, then that tells us a lot about the culture.”

Press Contact

Tricia Boone

The Marcom Group, Inc.
770-887-3971
tricia@marcomgroupinc.com