Examples? Take Clay Teramo, founder of Computer Media Technology Inc. (CMT), a Mountain View, Calif., reseller of magnetic recording media for computers that made the Inc. 500 for the last two years. For Teramo, starting CMT back in 1984 was both terrifying and exhilarating, particularly since his initial assets consisted mainly of a Rolodex. But once the company was successful, boredom set in -- and Teramo began looking for a buyer. "The business was just perking along wonderfully, and if I were 50 years old, that's where I'd want to be. But I'm only 31 -- I want the juice, I want to build again. The fun part for me is to start something new." Teramo sold CMT last November.
Many of the starter-uppers went so far as to structure their businesses for easy sale from the beginning. "I began this company with selling in mind, and I've designed it to keep it groomed for sale," says the M.B.A.'d owner of a year-old diaper-delivery service, requesting anonymity. Rather than invest in her own laundry facilities, for example, she contracts out the washing of the diapers. The decision hurts her in the marketplace a little, since competitors can tout the quality assurance provided by in-house laundering. But it keeps her fixed assets low and thereby expands the number of potential buyers. Francis Farwell, founder of WinterSilks Inc., a Middleton, Wis., mail-order apparel company, also planned to sell from the start and also built the business accordingly. The key decision: instead of plowing all his earnings into growth, he made sure the company maintained a sizable free cash flow, making it more attractive to potential buyers. A year ago Farwell sold out, pocketing several million dollars.
Then too, the 1980s gave birth to a host of new industries, from asbestos abatement to video rentals. These businesses are undergoing a constant -- sometimes brutal -- process of churning and consolidation, leaving a lot of company founders eager for exit. Marshall Smith, a Boston-area entrepreneur, started a chain of paperback bookstores in the 1960s; the chain grew rapidly, only to founder on a couple of rocks named Waldenbooks and B. Dalton. When Smith started his Videosmith chain of movie-rental shops, he "anticipated the same thing as happened in bookselling" -- and sold out on the upswing rather than the downswing.
The treated-lumber industry, to take another example, is populated by an estimated 300 small companies, many of them started in the past decade. "It's a perfect example of a fragmented industry -- one that's already undergoing consolidation," says Elizabeth Squeri, editor of "Buyouts," a newsletter.
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The buying side of the company marketplace underwent even more of a transformation during the 1980s; indeed, a seller of 10 or 15 years ago would be amazed at today's array of potential purchasers.
Big corporations, both U.S. and overseas, still work the acquisition trail, seeking smaller companies that can provide them with new products and new markets. They've even stepped up their efforts in the current downturn. ("More Big Companies Set Sights on Small Acquisitions," read a recent headline in The Wall Street Journal.) But traditional corporate acquirers have been joined by a coterie of other business buyers, including small companies, investment partnerships, and well-connected, market-savvy individuals. Each group works by its own logic, seeking out certain kinds of businesses and avoiding others. Taken together, though, they represent an accumulation of buying power that simply wasn't available to business sellers in the past.
The consolidators. Most of the small companies pursuing acquisitions are looking to expand their markets -- and market shares -- in growing industries. Consider Terry MacRae, co-owner of San Francisco-based Hornblower Dining Yachts, who has built a $23-million company in only 10 years. MacRae's strategy: judicious purchase of mom-and-pop cruise-boat operations in San Diego and other California coastal cities. Most cruise operators, he observes, know boats; what they don't know is stuff like accounting and budgeting and marketing. So they're happy to sell when business looks bleak or the competition heats up. Over a series of deals, MacRae has learned some sophisticated tricks of the acquisition trade. Money for his purchases, for example, has come not only from straight debt but from limited partnerships and subordinated mezzanine financing.
The same phenomenon can be seen in software, environmental services, and a host of other new industries. Symantec Corp. has snapped up several smaller software companies; with its recent acquisition of Peter Norton Computing Inc., it is now one of the larger companies in its industry. Mindis International Recycling, a four-year-old metal-recycling company headquartered in Atlanta, has grown to $100 million in sales, mostly by buying local scrap yards. "The small guys are on the acquisition trail," says Jeff Mick, a principal with Bridge Group Investment Banking, in San Francisco. "Particularly the ones that have relatively sophisticated managers."
The investors. Giant leveraged-buyout deals may have peaked and vanished with the 1980s, particularly now that Mike Milken is out of business and Drexel Burnham Lambert in collapse. But the buyout concept has percolated down into the world of small and midsize companies. Partnerships that might once have been scouting out venture capital investments are looking instead for small-scale buyouts and recapitalizations of existing companies, and are often planning to stay with their new acquisitions for several years at a minimum. In many cases, private investors and money-fund managers are bankrolling the partnerships.
