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And with that simple message, making the next acquisition gets easier. "The companies we buy know the other good companies because they've competed against them," says Chakos. "The word gets out that we treat operators well. And they all realize it's a survival issue. We give them autonomy. We also give them a huge dose of expectations. We tell them that what we did was great but not enough. They're excited and scared at the same time.

"When we walk in the door, we are not the enemy."

Edward O. Welles is a senior feature writer at Inc.

The Company

Kenny Industrial Services LLC, based in Chicago

Business: Provides a range of industrial services, including cleaning, painting, and maintenance, mostly to Fortune 500 customers, from 30 locations nationwide

Financial summary: Sales of $210 million in 2000, up from $20 million in 1998. That growth has been fueled by eight strategic acquisitions the company has made in the past two years.

Management: CEO Michael Rothman; chief financial officer Michael Chakos; and John Manta, president of Kenny-Manta, a major subsidiary of the company.

Capitalization: Kenny is privately held. In 1999 it raised $6 million through Bluestem Capital using the Shattan Group LLC, a New York City investment-banking firm. That gave it the legitimacy to attract a major investor -- Saunders, Karp, & Megrew, also of New York -- which put $31 million into the business, enabling Kenny to step up the pace and size of its acquisitions.

Strategy: Acquire thriving, well-managed companies that will allow Kenny to expand the industrial services it offers to existing customers and to extend its reach into new geographic markets.

Philosophy: Rothman believes in buying sound companies at a fair price, not broken ones for a bargain. He invests in his acquisitions so that they grow faster than they would if they had remained independent.

The Founder

Michael Rothman has always prided himself on being an operations man, having worked in the field from the moment he left college. "I'm not a financial buyer who can't add anything," he says. "I'm a strategic buyer." By dint of his experience, he knows what makes an industrial-services company tick, so he knows what to look for when he goes to buy one.

Rothman says the first thing to overcome in the acquisition process is prejudice and distrust. His industry is so cutthroat that every competitor is seen as suspect. "When you do an acquisition, you have to filter out all the negatives you hear about a guy," says Rothman. Then there's price. But that part of the deal has become easier for Rothman as Kenny has done more acquisitions, establishing price benchmarks along the way. He typically pays between three to five times trailing cash flow for a company. He says he offers sellers two things of value. The first is cash -- a way for them to diversify beyond owning what is often a small, privately held, illiquid business painstakingly grown over a lifetime of hard work. "I give people a chance to redeploy their capital," he says. The second is a chance for sellers to grow their business -- and its value -- beyond the limits it may well have bumped up against in a market that favors large companies and economies of scale. In sum, Rothman often gives ambitious entrepreneurs a second wind.

Rothman, similarly, profits in two ways. First, he gets more diversified, too. "My risk profile is reduced because I'm spreading out the seller's business over my existing capacity," he explains. Second, he gets a chance to challenge himself by targeting a higher return on his invested capital. He uses the example of paying $5 million for a business with cash flow of $1 million a year -- a 20% return. "Well, if I can increase your cash flow to $2 million, then I am making 40% -- and, in effect, I've paid a lower multiple for your company," he says. "That's why I am prepared to take the risk of buying you."

Best Practices

Rothman always pays for his company's acquisitions using some combination of cash and a seller's note. Although Kenny does have private stock, Rothman says it's too hard to value and too illiquid. Buying a company with stock "is gambling, and I prefer not to gamble.

"The secret is to buy companies you have a high degree of confidence in," says Rothman, who is definitely not in the turnaround business. Whatever business he buys, he wants to grow -- with a clear target. That figure typically is a 12% increase in revenues in the first year, rising to more than 20% by the third year.

Kenny invests in corporate management along the way but adopts the best practices of the acquired companies. One of the benefits of consolidation is that Kenny can now afford to hire top-notch administrative talent, such as managers in information technology and human resources. At the same time it aims to spread the best practices of the acquired businesses companywide. After Kenny bought Canisco, it adopted the newcomer's program for projecting and tracking costs on jobs, because that system was more sophisticated than anything Kenny's managers had seen.

Rothman doesn't pit former adversaries against one another. Kenny often ends up buying companies that previously fought tooth and nail over contracts. Ensuring who gets what job is a responsibility of management. If there is any doubt, Kenny will pay bonuses, if warranted, to both branches, rather than risk residual resentment.

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