|
|
One on One
with Fred Hageman
Kim Phelan
Contributing Editor
|
| |
| He’s held national sales posts with manufacturers and, during the peak of the roll-up era, he finessed acquisition deals for a national consolidator. But in the spring of 2000, Fred Hageman teamed up with fellow acquisitions co-worker and former independent rental dealer Gary Stansberry to form a dynamic M&A brokering and consulting business specific to the rental industry. Now, Hageman, Stansberry and Associates, see the good, the bad and the ugly in rental operations, and, come what may, promise to tell it like it is.Rental Pulse: You attended the California Rental Association trade show, Fred—tell me about some of the highlights; what did you see, what was the buzz you were hearing?
Fred Hageman: First, with the seminars, I was seeing a thirst for information and the sharing of ideas among the independents. The one I attended the first day was packed, standing room only. It ran over and they had to come in and say, ‘Ok, the show has started now.’ You could see the appetite was there for seminars pertaining to the day-in, day-out operations of these rental companies.
As far as some of the things I was hearing, the primary thing was concern over insurance. I’d say workman’s comp, with the increase there – and in California there’s an indication it’s going to jump another 8-10 percent – it really had a lot of people talking and concerned.
The economy was obviously a topic of discussion for attendees and manufacturer exhibitors alike—the need to sell service, not focus on price, but on value. Rate pressures were discussed, too. I think the concern for the slowdown in non-residential and commercial construction activity was also a topic of discussion.
Turnout was good, and a lot of networking was going on.RP: What about manufacturers—what sorts of things were on their minds?
FH: They’re wanting to forget about ’02 and get to ’03. Many have said it’s the worst they have seen in 20 or 25 years, and they are really anxious to start over with a clean sheet of paper and hope the economy continues to improve so they can move some of their iron. They just want a fresh start and to put ’02 in the rear view mirror.RP: So there was some optimism for ’03?
FH: I would say optimism for ’03 is going to be tempered; I don’t think anybody’s looking for a boom. A slight up-tick is what everybody’s hoping for and predicting. It can’t be suppressed forever. Most people out there are optimists, not pessimists.RP: You’re in a unique and strategic position to observe consolidation trends, Fred. What are the patterns you’re seeing, both with nationals and independents?
FH: First, we’re not seeing any activity from the big national companies. What we are seeing, basically, are what we term new era owners—people with rental industry experience, former employees of national rental chains. Sometimes they were employees of independents that got bought out, and they continued as employees with the nationals. They’re looking to become entrepreneurs and own their own businesses, and call their own shots. They are seeing that the level of personalized service has really decreased and has not been there, that it’s not all about price. We’re seeing these new era owners who have 10, 15, 20 years of experience going out on their own. They want to take the plunge. And companies that have been formed or acquired by the new era owners are all highly successful.
Secondly, we’re seeing regional types of companies that have two or more locations looking to acquire, to expand their geographic coverage. These are financially secure companies; they realize that acquisitions and pricing are realistic and now is a good time to expand. They, too, are leveraging their equipment, their personnel and some of their infrastructure and can acquire an additional location or two and really get some synergies. This is becoming a trend and has been very successful.RP: So is it generally more cost effective to acquire rather than start up with everything new?
FH: Absolutely. With an established business you’ve got a running start—you’ve got a customer base, employees with knowledge, a well-known location, and so forth. You’re not starting from scratch, flat-footed from the standpoint that you’re going to be in the red for up to a year or more. When you cold-start, you have to educate customers that, ‘Hey, we’re here,’ and you need to staff the business properly and you have to fight city hall—you’ve got to get zoning. It’s a long, hard process.RP: Getting back to consolidation one more time, what else do you see by way of trends?
FH: On the party and special-events side, we’re getting numerous inquiries from investment-banker types looking to investigate and perhaps invest in the industry. We’re not seeing this on the tool and equipment side.RP: What’s the attraction with party?
FH: It’s highly fragmented, and there are opportunities for synergies in this segment. There are a lot of mom and pops, and the largest national company is doing only about $40 million. I think they’re looking at the fragmented market and the opportunities there.RP: Will party rentals be the next roll-up target?
FH: I’d say that’s overstating it. I think acquisitions are going to be selective, very methodical. It’s a different type of animal, so to speak. Bankers tend to have a harder time wrapping their arms around the party rental industry because you don’t have the assets you have with the equipment side.
You’re going to see some new entrants into the special events and party side, although there will be no frenzy like there was a few years ago on the equipment side. We’re fielding a couple of calls a week from different boutiques and investment bankers wanting to pick our brains about the industry.RP: You haven’t said much on the subject of nationals. What’s your analysis of that scene?
FH: There seems to be a lot of employee turnover with the national consolidators. They seem to be focused strictly on price, not service, and don’t appear to have the ability or capability to make quick decisions at the local level.
They’re cutting rates so they can make some of the projections on revenue, and make some of their payments and overhead coverage. But they need to focus more on service and value, not just price. Price is only one function of value, and I think they’re missing the service and personal relationship side of the industry.
And that ties back to why the independents are doing well, and why the new era owners are doing well. Contractors don’t care about share price, they don’t care about what the shareholder thinks and what the analysts think, and what you’re EBITDA is. They just want to make sure their equipment is there, that it works properly, that decisions can be made quickly, and that any billing issues don’t have to go through layers of bureaucracy.RP: What’s your view on the pick-up of the economy?
FH: We, like others, are looking for a slight up-tick in ’03. When we talk to rental-store owners around the country, we see the most optimistic ones have smaller equipment, a strong homeowner base, a smaller contractor base, and daily and weekly rentals that are less price sensitive. They’re selling service and holding the line on pricing.
These are the ones who are flying under the radar of the national companies, and again, we see the new era owners even getting into some of the larger equipment areas and getting a higher rate because they’re providing a better service. Everybody says they’re service oriented and that customer service is No. 1. There’s a lot of talk out there, but the ones who are walking the walk are doing well.RP: What specific things should a rental dealer be doing to guard against pitfalls or, conversely, to capitalize on opportunities?
FH: We believe in the mix of lighter equipment, shorter term rentals, value added, and the best piece of advice I can give would be to closely watch expenses, especially payroll. Also closely watch your inventory, both your rental and your resale—be conservative and watch for any non-moving, non-revenue-producing assets. You’ve got to run a little bit leaner and meaner in times like these.
For companies that are strong, both financially and management-wise, now’s a great time to expand. Prices are reasonable and realistic, and we’ve seen companies in the past that have expanded in downturns and they have just boomed when the economy picks up.RP: Fred, in your opinion, what type of company is an ideal candidate for selling? Describe what that business looks like.FH: The best opportunities are for companies are doing $1-to $3 million in revenue, they’re general rental, they’re homeowner and small contractor based, they’re in a good location, they’ve got a good market, and they’ve got up-side potential. This is the type of company that acquirers have an appetite for, and these are the most saleable companies we’re seeing out there.RP: Who’s getting the better deals in the current market—buyers or sellers?
FH: It’s a fairly level playing field as far as the prices are concerned—things are at a realistic level so both sides get a fair deal. It’s got to be right and fair for both sides to get a deal done, or else it doesn’t go through. It’s got to be win-win.RP: When you broker deals for rental acquisitions, do you more commonly represent buyers or sellers? FH: We’re fairly balanced between seller representation and buyer representation, and have a good balance between our valuation and consulting services. We feel representing buyers and sellers gives us a unique perspective, and it keeps us current on market trends. It’s very important to look at all sides of a deal, no matter what position you’re in. We’re true intermediaries in this sense.RP: So, what does that mean exactly? What kind of role do you and Gary actually play in the process?
FH: We manage the entire process. We identify and qualify prospects, we execute confidentiality agreements, we prepare a professional prospectus, we negotiate letters of intent and legal documents, we coordinate all closing activities, including due diligence, and we do a lot of work for both sides, particularly in number crunching. We’ve even assisted with business plans for buyers when we represented the seller. We help both sides along.
We make sure everybody’s in step, and we put out timelines once we have a deal in place—it shows who should do what at what time, when, where and why. And there are several other finer details, too, like employment agreements, leases, excluded assets, structure of the deal, things of that nature.
You know, it’s a life-changing event to sell your business or to acquire one. It’s not an everyday occurrence, so there’s a lot of hand-holding, a lot of explaining, a lot of communication, circling back, making sure everybody understands what’s happening and why it’s happening. It’s hard work and it’s taxing for all parties.RP: I’m reaching for my Ibuprofen just listening to the list of tasks involved. What are the headaches you guys feel during these situations? FH: Snafus are fairly routine. Most of the hassles are caused by third parties to the deal—a third party landlord whose consent you need, a lender with stringent requirements that give you problems. Or an accountant or an attorney who doesn’t have the experience with the merger and acquisitions process, or who doesn’t understand all the steps and structure of a deal. We’ve been at closing tables waiting on third-party landlords to fax over the assignment of lease, for example. I’d say the biggest problem is getting these third parties to meet deadlines for the deal closings.RP: Do you have any fingernails left on your hands?
FH: I’ll tell you what, I definitely have a few more wrinkles, a little less hair, and maybe a little more gray than I used to. But we love what we do. We enjoy it, but it is a full-time job. And we definitely pride ourselves in bringing the value of our commissions to the forefront and making sure people understand that they’re saving money when they retain us.RP: As your clients breathe sighs of relief when their deals are sealed, and just when their seismic stress is ending, you guys are launching into another one of these things. What are the intangible rewards? FH: The highs are helping hard-working, honest people maximize the proceeds from their lifelong investments. They’ve put blood, sweat and tears into their businesses, and it’s rewarding to help them and bring our expertise to the table; to boil down issues so they understand what the issues are and how they affect them. This is how deals get consummated.
It’s a long and arduous process, but our job is to make sure we’re the steady hand in the deal. I’d say the highs are when, at the end of the deal, our clients say, ‘Man, are we glad we hired you guys!’ It’s good to know that people don’t have to lose sleep over this process wondering if they left money on the table, because they’re only going to do this one time.RP: You guys do consulting work, too, for the rental industry. Who are your typical clients, and what sort of problems are you helping them resolve?
FH: Most of the operational consulting we do is with long-term, well-established rental companies that have multiple locations. These companies realize, perhaps, that they’re not as profitable as they could or should be, and maybe they’ve lost market share due to increased competition. A lot of their practices have been in place for years with no thought on how to change things. A lot of these companies do things on gut feel.
Between us, Gary and I have seen over 2,000 rental stores over the last 15 years—we’ve seen the good, the bad and the ugly, and we’ve taken things from each, whether it’s ‘Don’t ever do this,’ or ‘That’s a great idea.’ We always take best practices from these companies and apply them.
We bring a fresh perspective, a fresh set of eyes and ears to the company. We might say, ‘Well, they’re doing this in Texas, have you ever tried that?’ or ‘Hey, we’ve seen this and you’re not doing it.’ Or we might ask, ‘Why is your damage waiver at this number?’ We look at all areas, from financial to administrative and sales and marketing.
We know what the big boys are paying for equipment, so a lot of times we can say, ‘Why would you ever pay X for an air compressor?’ We always say our suggestions will more than pay for the price of our services, and so do our clients after we’re through. Some owners are surprised this can come within the first hour we’ve been at their location.RP: What are some sticking points you run into when you’re there in the trenches of a rental company’s real-world operation?
FH: Some of the management may be a little bit uneasy when they think perhaps they’re being second-guessed. But we go in with an open mind; we’re just looking to help improve the company. We’re on their team, we’re not the enemy. We’re good at breaking down those misguided perceptions. We interview employees, we get them to open up to us, and I’m going to tell you, a lot of times they have fabulous insights and suggestions—sometimes they just haven’t been heard or haven’t had the opportunity to speak up. We give them some liberty to get their ideas out on the table.RP: I would think it would be hard to be painfully honest at times in a consulting scenario.FH: One thing we pride ourselves on is telling it like it is, even if it’s not what they want to hear. You’ve got to be diplomatic. But at the same time, we’re not big on sugarcoating things. It’s strictly business, it’s not personal criticism.
When we go in, we’re looking at ways to improve, we’re not looking to pat them on the back and tell them how great they’re doing. We’re there to add value and get them to be more profitable and efficient.
There was one instance where we went in and said, ‘You need to shut this thing down; the property’s worth more than the cash flow of the business. It needs to be shut down.’RP: That was pretty severe.FH: It was, but the reaction was, ‘We kind of thought you were going to say that.’RP: It still took a lot of guts, though.FH: That’s what they’re paying us to do. We’ve got to treat people fairly. We’d be doing them an injustice if we didn’t tell them what we saw.RP: What personal philosophy do you operate under? What are your own truths to live by or rules to play by?
FH: It’s being honest, straightforward, consistent and persistent. Don’t cut corners. Treat people fairly.
We believe in business karma—if we’re going to do something that doesn’t pass the smell test, it’s going to come back to us threefold. So we’re honest in our dealings, we tell people the way it is. We try to get things done today rather than putting them off for tomorrow.
We’re rental guys; this is all we do. We don’t do dry cleaners one day, supermarkets another day, car washes next week. This is it. And we live and die by our reputation. |
|
|
|