Most target companies are small and have local customers. (That's a major reason why their markets are fragmented to begin with.) A successful roll-up must maintain that local feeling while adopting the operating practices of a much larger corporation. And yet such small local companies are entrepreneurial in nature. So they often chafe at the prospect of being managed from afar. "You can't just leave them alone and tell them to create value," says Kocourek. "On the other hand, you can't discourage their entrepreneurial impulses. That's a very fine line to walk."
You have to go into a roll-up with your eyes open and with few illusions, warns Ken Hendricks, chairman of ABC Supply Co., in Beloit, Wis., who has done his share of consolidating. Over the past six years, ABC, which sells roofing and siding to the wholesale market, has made about 60 acquisitions, giving it annual sales of $1.4 billion.
Hendricks has found that keeping the acquired company's original owner in place usually doesn't work. "In most cases the business is better off without the owner because he's out golfing half the time and then comes in to clean out the till," says Hendricks. "When we buy the business, the owner usually retires."
Hidden problems within companies and greed on the buyer's part can also be pitfalls. Many consolidators have visions of a rich public offering waiting in the wings. What Hendricks looks for is far more mundane than that: hardworking middle managers who can flourish (once the owner is gone) and take the business to the next level -- with Hendricks's help. "We give them buying power and organization," says Hendricks. "We are their salvation."
Rothman, clear-eyed and plain-spoken, agrees with much of what Hendricks says, save for one obvious difference. He doesn't buy broken companies, and he insists that the owners of his rolled-up companies stay on. Based on his experience at Waste Management, he understands the pitfalls of buying a company just because it looks like a bargain. "I left there because I didn't agree with their acquisition philosophy," he says.
To him, the Waste Management experience was mainly about finding operating efficiency, while the customers' needs and sense of urgency were given short shrift. "You have to have a high level of pride and intensity to do business with the companies we work with," says Rothman, referring to his roster of large companies that expect blue-chip service. "There's a difference between consolidating companies to take out costs and consolidating them strategically for the customers' benefit."
When Rothman started Kenny, he first focused his buyout strategy on building what he calls a national platform. The idea was to buy companies in regions of the country and in service niches that Kenny had yet to cover. That would allow the company to land national contracts that could be serviced uniformly yet would still have regional or local oversight. "We will say to an oil company, 'We can negotiate one set of prices and work rules to paint your tanks all over the country," says Manta.
Hardly a day goes by in which somebody at Kenny doesn't receive a call from an entrepreneur wanting to sell his or her company. So what exactly is Kenny looking for?
The answer is healthy companies run by seasoned managers. "We look for sound companies that are not distressed or on the block," says Darryl Schimeck, Kenny's executive vice-president of business development. Beyond that, the target company must have a culture committed to safety. Applying those criteria eliminates three-quarters of the companies Kenny looks at.
"We want operators who will stay on," says Manta. "That's key." Kenny is not so much buying companies as it is investing in entrepreneurs who share its values. The company's goal is not to cut costs but "to add capacity," as Rothman puts it.
What Kenny is offering its newly merged partners is, in effect, a quid pro quo. Kenny brings to the table management support and money. In return, the acquired companies step up growth. Rothman says he typically sets a target of 12% growth for the first year after acquisition, ramping up to 20% in the third year. "You buy a company because it's a great company. You support it," he says. "Other consolidators will buy a multiple of earnings and cut G&A. That destroys that company's ability to operate."
With an eye to rapid growth, Kenny now employs 25 salespeople, up from 3 two years ago. That takes the pressure off the small acquired companies, which often land jobs and then get so consumed by them that they don't have time to prospect for the next one. "We want to give our operators a chance to sip from the fire hose," says Rothman.
Kenny's bias for buying well-operated companies is reflected at the corporate level, where the average manager has 15 years' experience in the industry. But even more notable, middle managers at Kenny subsidiaries average 25 years' experience. It is there, at the project-manager level, that Rothman believes the battle is won or lost.
"The difference between Rothman and the typical CEO is that he comes from the operations side. He talks at that level," says Ted Mansfield, former CEO of Canisco, which was bought out by Kenny. Mansfield started Canisco and has devoted his career to it, and to him Rothman's down-to-earth style counts for a lot. "He's down there in the trenches," says Mansfield. "Most CEOs are financial guys. These managers at Kenny are young, aggressive guys who are not afraid of change." Mike Chakos, Kenny's chief financial officer, says the company's mission is simple: deal with change. "We want to show them where the market is going and how we are going to be a part of it," he says.
