Courtside Story #1 – Absolute Commercial Cleaners

*Note, company name and key information was redacted and/or changed to maintain confidentiality.

“You are either growing or you are dying, there is no staying the same.”

Absolute Commercial Cleaners (“ACC” or “The Company”) is a 30 year old commercial cleaning and maintenance company that provides janitorial and property maintenance services to its customers who are commercial property owners and managers. With locations in six states, ACC has a strong geographical reach and lives strongly with its core values that are centered around excellence, people and customer service. ACC’s business model requires people to lead with accountability which allows the company to enjoy an organizational structure that is able to grow and scale while maintaining industry leading margins.

ACC has focused its attention in investing in technology which, coupled with its high performing employees, allows them to outperform their competition in the customer service category of their business. As the leadership team looked at its position in the market and its ability to generate higher margins, it considered a growth plan that included executing on strategic acquisitions. For ACC, the acquisition strategy includes one that involves geographical expansion which requires a strong foundation of very good people and technology enabled capabilities. Without these, geographical expansion acquisitions come with additional risks. ACC is an organization that has both a strong culture of leadership excellence as well as a robust technology platform which provided for a great foundation to grow from. While ACC’s leadership acknowledges that this type of growth plan can be tricky to implement and potentially disruptive, it decided to proceed by hiring an outsourced search firm to identify potential acquisition targets and put into action a full-blown strategic acquisition growth strategy.

ACC was able to secure a target company under LOI as it met many of the pre-defined characteristics outlined in their investment thesis. With their industry leading margins, it was called upon the CFO to be instrumental in performing the necessary due diligence required to ensure the target company had what it would take to fit within ACC’s business model. As the CFO dug into the due diligence process, he was struck with a myriad of challenges that he and his leadership team would have to overcome if it were to successfully acquire this particular target company.

With a heightened focus on the target company’s profit margins, the Company had to first sort through the spike in profit margins the target company had due to the COVID pandemic. To fully understand this important deal characteristic, the Company, with the help of a 3rd party advisory firm, had to really dig into both the historical financial performance but it also had to bifurcate what was ‘normal business’ and what would be considered ‘abnormal’ due to the improvement in margins they experienced due to the operating conditions they encountered during the pandemic. Analyzing abnormalities, even positive ones, creates both more due diligence work as well as some increased risk to an acquisition transaction and it was no different for ACC. If they made the wrong conclusions or made mistakes with their assumptions, the target transaction could result in a big waste of time, energy and capital to a company that was already performing at near peak operating levels.

The company also had the challenge of making decisions regarding a few major assumptions around the future duration and severity of the COVID pandemic would have on the business, its employees and customers. These are the type of assumptions that, if wrong, could significantly alter the value and investment thesis of the acquisition. With a good amount of capital on the line, the CFO and his team needed to dig in and stress multiple scenarios to make sure this target wasn’t outside the lines of the Company’s risk/return profile.

Lastly, as the due diligence process wore on and the Company was digging further and further into the target company’s profit margins, the CFO came upon another unexpected hurdle to work through. He uncovered the target Company was using a very unsophisticated accounting procedure in their accounting function which made analyzing their financials extremely challenging. With ACC’s diligent focus on ensuring high quality margin generation as a key tenet for its acquisition strategy, messy accounting was a huge red flag. To make matters worse, the target company’s accountant was not engaged in the due diligence process until the very end which produced additional pressure on the CFO and his due diligence team to get to the bottom of how the company was actually performing.

With messy financials, margin assumptions and the unknown future of the pandemic in play, ACC needed to decide if this acquisition target was worth investing the Company’s hard-earned capital on. The CFO was able to engage his leadership and ownership group to advise an acceptable solution to deal with the risk the accumulation of these challenges presented. As the group worked through the issues and analyzed the risk, they were able to put together, and negotiate, a very creative deal structure that both, lowered the risk to ACC and still produce an acceptable deal to the sellers. A win-win for both parties.

However, the work was not yet done at closing. The CFO and his team had to quickly integrate the financial function of the newly acquired company to bring its accounting standards up to where they needed to be – a delicate dance between making a big change in the midst of welcoming new members to their team. Fortunately, the CFO has been through this process before and had a solid 90-day integration plan ready to go which was proven extremely valuable as they came together as a team to make significant, yet necessary, changes. ACC worked through the challenges together as a team with collaboration and creativity and, because of this, they were able to add a very complimentary add-on to their business which ended up being very accretive to the bottom line.