Elliot Foo knew some time ago that he wanted his title and escrow firm to break into the California market. But with strict licensing requirements, that was a challenge for Foo, president and CEO of Closing USA LLC in Gates.
While he was going through the process, however, a different opportunity came up for the local firm. Rather than obtaining a new license in California, the company learned through its lawyers that it could acquire a firm already established there.
It was an option Foo decided to pursue. In May, Closing USA acquired a controlling interest in American Coast Title Inc. of Glendale, Calif.
The deal gave Foo's firm access to the California market, which accounts for nearly 25 percent of all real estate transactions nationwide. While the 99-person local firm has a national customer base, California was not an area the business had access to before the acquisition.
"It was good timing and the right fit," Foo says.
While he declined to disclose the purchase price, he says the acquisition made better sense financially than going through the process of obtaining a new license.
It took close to a year to finalize the agreement, and while Foo says that length of time is not unusual in such a deal, he was surprised by all the work required. That included dealing with California's Department of Insurance, as well as using outside legal and accounting counsel.
"It wasn't a simple process," Foo says. "It wasn't just one company working with another company on the deal; there were a number of (entities) involved."
It was worth the effort, though. Foo estimates the deal will increase Closing USA's annual sales by 30 percent.
Currently it is business as usual at the California operation, where there are roughly 50 employees, Foo says. Management there has stayed on, and the company, while now part of Closing USA, is still known as American Coast Title.
Foo now is evaluating the next steps, looking at ways to use the new resources, and is optimistic about growth prospects.
"It took a while, but we are very excited to move forward," Foo says.
While acquisitions are standard procedure in the business world, such transactions are less common with two small firms.
Clifford Smith, Epstein professor of business administration and professor of finance and economics at the University of Rochester's Simon Graduate School of Business Administration, says that acquisitions most commonly involve a large firm buying a smaller one. But companies of all sizes make acquisitions.
The reasons for purchasing a company also vary as much as the types and sizes of businesses that do it, Smith says.
Like Closing USA, some companies acquire other businesses as a way to enter a new market.
"If they know of someone in an area they are interested in expanding in and it is an already established business, that can make sense," Smith says.
Another reason for an acquisition, particularly among small businesses, is the ability to become more vertically integrated. That can be done, for example, by acquiring a supplier. In doing so, a business would then offer its customers those services, instead of having to go to other firms to get the job done.
"Those deals can work out, too," Smith says.
While a large corporation has the resources and manpower to dedicate to acquisition candidates, smaller companies often fall into a deal, perhaps with one small-business owner hearing about another who is looking to retire and may be interested in selling. Whereas public corporations have access to public capital markets and can offer shares of stock in the company as part of a deal, smaller firms do not and cannot.
"Initiating a deal like this takes a fair amount of time, which is something smaller companies don't always have a lot of," Smith says. "Most small businesses run fairly lean, so when it comes to an acquisition, some companies need to have some basis to believe there is a deal to be struck."
Ultimately, each acquisition is different, with outcomes tailored to individual needs.
"These are not cookie-cutter deals," Smith says.
Adding new services was the driving force behind the recent acquisition by Popli, Architecture + Engineering & L.S. P.C., which does business as Popli Design Group.
Last December, Popli Design Group announced its first acquisition in 29 years. The Penfield architecture and engineering firm acquired Fraser & Fassler Consulting Engineers P.C., a Syracuse-based firm that specializes in the design of heating, ventilation and air conditioning, electrical and plumbing systems.
Jay Popli, the company's vice president, says his firm already did business in the Syracuse area but did not specialize in the mechanical systems of the building as Fraser & Fassler did. Fraser & Fassler has designed systems for more than 3,400 buildings.
"It was a service we did not offer but wanted to," Popli says.
After Popli Design Group decided it wanted to expand its offerings, it arrived at the question of whether to grow organically or by acquisition. Popli says the firm weighed the pros and cons of each before deciding to pursue the deal with Fraser & Fassler.
"With the acquisition, we were getting the benefit of a skilled workforce instantly-the 'just-add-water' approach," Popli says. "While it may have been less expensive upfront to grow organically, we felt the price of the acquisition was worth the risk."
Popli did not disclose the purchase price but says the deal was funded internally. The agreement took roughly three months to complete, and most of the work was done between the two firms, with some outside legal and accounting assistance.
"The timing and the price were right," Popli says.
Popli Design Group is a certified minority-owned business that specializes in transportation and environmental design. The firm ranked fifth on the Rochester Business Journal's most recent list of minority-owned businesses with 35 local employees. The company has a total of about 50 workers at sites in Albany, Binghamton and Buffalo.
Fraser & Fassler's former president, Robert Fassler, joined Popli Design Group to help lead its newly formed mechanical, electrical and plumbing division, as did the five employees there.
Popli estimates the new service initially will increase annual sales by as much as 15 percent, and he expects that to grow to as much as 30 percent over the next five to eight years.
While the deal went fairly smoothly, the biggest surprise for Popli was integrating the cultures of two separate companies into one. That included looking at everything from reassuring employees about the changes and keeping the firm's identities to aligning email and computer systems.
"There was more to it than I realized," Popli says. "But we've worked through most of the bumps, and I'm pleased with where we are now."
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