Transcript:
Host, Dustin Klein | Smart Business:
Welcome to Transaction Options: Variety is the spice of dealmaking. This session is presented by Gallagher and Cascade Partners. Let’s meet our panel.
First welcome Mark McCammon, Co-founder and Managing Partner of Strength Capital.
Next, meet Jack Lawless, CEO of Belle Tire.
Welcome to Jay Schreibman, Area Chairman from Michigan of Gallagher
And this session is moderated by Raj Kothari, Managing Director of Cascade Partners. Raj, the virtual floor is yours.
Raj Kothari | Managing Director at Cascade Partners:
Well thanks dustin and thanks to our panelists for joining us today for the conference. I’m really looking forward to a great conversation, talking about how the the world of deals is evolving and things that we can do to prep for transactions, whether we’re buying or selling, and just looking at some of the variety of transactions.
As you guys all know, the market still remains robust; there’s nearly a billion too of dry powder capital in just the private equity world waiting to be deployed in transaction. That along with another quarter of a billion dollars of debt capital is creating probably one of the most robust investment markets we’ve seen in decades, and with that is coming a lot of flexibility and creativity in deal structures interest, minority deals, and a variety of other tools that are available.
So, today, we get to hear from an entrepreneur that sold their business, an entrepreneur that’s actively acquiring businesses, and a private equity team that is investing every day. So, I look forward to having this conversation, getting your insight, and learning about some of the new opportunities and some of the challenges that you’ve all seen as you’ve looked at and gotten transactions done.
So, Jay, let me start with you. You know you obviously just went through a significant transaction with LSG and partnering with A.g. Gallagher. What did you do to prepare for the transaction that actually made a difference, and what do you with you had done—now that the deal is done—that would have helped you out through the transaction process.
Jay Schreibman | Area Chairman from Michigan of Gallagher:
Raj, thanks. It’s a great question. I’ve been, as you know, a buyer, a seller, and an advisor to many deals for many years on the PE side of the business. I thought I knew it all and I thought I knew how to get ready for a transaction, but there are so many things that you just can’t possibly imagine as you go through the process.
We did all the standard stuff; we worked with Ernst & Young, we got the Quality of Earnings in order, the finances in order, every little detail and understanding of the company was well-documented for the process. We had the right bankers and representation to tell our story—all those standard things. But, if you ask “What did I do right?” Well, I did that right. I think we also paid a lot of attention to our human capital and our team, and making sure that I had forward-looking alignment for all of the human capital that made the company what it is and made sure they would all stay on board. We can certainly dig into that if you want, but that’s a little different—it’s a super important thing to do, expensive but worth it.
What I wish I had done better is “the old shoemaker has no shoes” story. Being in the insurance risk management business, the biggest issues around getting our deal closed were managing to cut off the liabilities and get the proper tail coverage in place because deals are fluid—Mark will tell you that, Jack will tell you that. When something switches, maybe from a stock purchase to an asset purchase, the liability transitions. Where those things end up belonging, if you’re not properly prepared for that, you can derail a deal. And we’ll tell you, frankly, ours took a lot longer than it should have because I wasn’t prepared.
Raj Kothari: So, in particular, Jay, the challenge around your deal was really around directors and officers insurance, and putting that in place and having that ready to go.
Jay Schreibman: Yes. That at the last minute, as well as tail coverages for all the other policies we had because the liabilities of the previous entity, for the most part, were staying with its prior shareholders—me and my two partners. And, as a result of that, we were wholly unprepared because we thought we were being bought as a stock purchase, and that changed. And we were just unprepared to mitigate that risk—so, scrambling around an insurance market at the last minute, begging for cover, you’re kind of going to pay whatever price they ask you to pay.
So, I failed miserably on that one, which is a humble embarrassment from an insurance guy. But it’s super important to have all your ducks in a row in that area.
Raj Kothari: Yeah, it’s nothing like the insurance guy making sure he figured out insurance (laughs). So, Jay, we appreciate that anecdote, and the reality of what it takes to do that.
Jack [Lawless], you’ve done many acquisitions, and you’ve seen sellers do all kinds of different things. If you could give them one bit of advice that would help you get a deal closed—or actually pay more—what would you be telling a seller to, “Hey, if you really got this organized before you came to talk to us or other buyers, this would really help.
Jack Lawless | CEO of Belle Tire:
Well, I think it really depends on the deal. The first thing you really have to understand is what the acquirer wants to buy you for—do they want to buy you for distribution, product pipeline, personnel, your ability to grow new stores. Whatever it is, I think you have to understand what they want, and then kind of pivot off that and build your introduction to them around what you feel is why they want to buy you. I think that’s number one.
But, generally speaking, I always look for a solid track record of improving metrics throughout the company—from ops to distribution to marketing to HR to finance—because I like to buy something that I feel like they got their ducks in a row—they have good reporting, good financials, they have a track record of hitting budgets, they have believable forecasts. And I like when they want to take a meaningful stake in the company so they have some skin in the game too.
One tidbit I think that I’ve done: I was running an international building products company before I came to Belle Tire, I wanted to buy a company that had a great product; they had a brand new emerging product that would fit very well into my distribution and I wanted to buy it. They said, “$20 million,” and the company is worth $10 million. I had developed a great relationship with the two owners and I said, “Hey, listen guys, here’s the scoop: If you can do these five or six things over the next 12-18 months, I’ll pay you $20 million. I put my team in there and we worked on the plan expansion, finance metrics, operational issues. We worked on a good marketing plan and all those sorts of things. And over the next 13 months, I paid him $20 million, which was about 6 months forward earnings. Since it took a lot of risk off of me, because I would have had to do that, I was willing to do it for free, had a great relationship, and that’s a company I own for two times earnings in two years after we bought it.
So, it all really depends a little bit on the company and what you’re buying. But I think the key thing is to understand why they are buying you, then kind of build your pitch around why they’re buying you and why they should buy you—going from there, down to the bottom of the pyramid.
Raj Kothari: Great, great advice, Jack. I mean, what I heard you saying is make sure you understand your value proposition, back that value proposition up with data—often metrics and data, entrepreneurs of, hey, I’ve run my business, I get the feel, but that metrics and data helps a new potential partner come in. And the third thing I hear you say—which I think is really compelling—is make sure you take the time to figure out what else you could do to drive value in your organization, and step back and look at what simple, short putts you could accomplish that can materially change the value proposition.
Mark, I’ll call am audible on you and say I know you’ve been in that situation, where you’re looking at that opportunity—where can you change the dynamics and move the business. Are those similar situations that you’ve seen in the variety of companies that you’ve acquired. I know you did it very well with Hivol and Keo transaction that we worked on together where you really materially change the trajectory of the business.
Mark McCammon | Co-founder and Managing Partner of Strength Capital:
Certainly. I think that, for us, it would be painting the picture of the future and what the future could be. And then having passion behind that idea and who’s going to be the parties that are going to manage that vision. And so, if we’re going to learn about a company, and its history, and its value in the rear view mirror, that’s great and we will pay a certain amount for that. What it really can turn into and how we can help create or participate in that growth really adds that extra value. And, sometimes, that value can come in the form of increased purchase price that glows, or it can come in the form of earn-outs and other ways to enhance your overall value from the transaction.
So, the situations we’re paying what I would consider to be a value multiple would be where there’s not a well-developed strategy going forward. They’re saying, “Well, you’re the buyer, what do you want to do with the company?” Well, if we have to figure out what to do with the company, then we’re the ones creating the value of developing that strategy and you shouldn’t get any of it. But if we come in and say, “Hey, we’ve got this jazzed up management team, they have all these ideas, they haven’t been able to do all their ideas’ this is what they want to do over the next five years and things can really grow a lot and all we need is a partner who can help us make that happen,” then great! What an awesome platform, and we’re willing to pay more and, ideally, have success alongside with that team.
Raj Kothari: That’s an important insight, Mark. Really understanding and being able to articulate the growth opportunity—whether you’ve been able to seize it or not—is important because we remind folks when you’re going through and selling your business, 95% of the choirs have to grow it in order to get their return. So, if there’s not a growth opportunity, there’s not a growth picture, it becomes a really big challenge.
Mark McCammon: Yeah, those stories where it’s an entrepreneur and they have either themselves or their team saying, “Well, we always wanted to do this, but the entrepreneur didn’t want to keep all his capital in, didn’t want to over-invest…” Well, great! We’re the partner now; we’re the capital partner and we can help fuel that. Those are exciting conversations
Raj Kothari: Jack, you wanted to add?
Jack Lawless: Yeah, I mean on that I agree with Mike 100%. And I think one of the things I think I’d like doing too is paying 90-95% of the purchase price and then give them a 15-20% premium hit the agreed upon first-year budget. Because, that way, you work with them in the first year while you’re buying the company, while you’re going through the diligence, you come up with a budget that everybody agrees to in the first year. And that’s where I tell the guys, “I’ll pay you a premium.” You know, these guys want to pay 100%, I’ll pay 90-95%, but I’ll give you 15-20% to hit these first year numbers. As you guys all know, the first year in a deal is probably the most important. And so, I’d like to make sure I get major buy-in and tell them, “Hey, listen, I’m going to pay you 15-20% more than everybody else because we’re working on a plan that I can pay that much more if we hit the first year in numbers.” And then you get more buy-in early on in the process as you’re doing the diligence, coming up with a plan for the first 12 months.
And it could be, Mike, that a lot of these guys don’t have the capital, so you give them the capital to do it—”If we did this, would you do this?”—and, so, you develop a really good plan. And, like we all know, hitting the first year numbers is a big, big deal for the success of the acquisition, and now we’re seeing the capital providers on the bank side.
Jay Schreibman : I would just piggyback on that and say that was our experience as well. It played out differently, Jack; our acquirer was super interested in not only understanding the quality of what they were buying in the budgets and the money was right, but the first year matters a lot, and I learned a lot—I’ve only sold once, right? So, making sure that all the alignment of the company and the goals for integration and transition are all understood by everybody.
And I was structured similarly; there was a big bogey out there that I shared with my entire team and all the people who were driving those methods: Make sure that first year stuff happened and that we met our numbers, that the integration got done, that their customer base wasn’t affected. In fact, they saw increased value in it, and that was a lot of pre-work with my acquirer for them to really deeply understand my business—kudos to them for that, by the way—and learning how to translate that back down to my customers so they were super happy about the transaction as well, and then, of course, in my view, sharing that with my team who could make those things happen mattered a lot. And I’m proud to report we killed our first year numbers and everybody was happy with the deal, including my team, my customers, and certainly our buyers.
Jack Lawless: Yeah, you can’t underestimate the value of hitting your first year. It changes the whole tenor of the relationship.
Jay Schreibman: (nods) Really big point.
Raj Kothari: Fantastic! Well, I’m going to shift gears a little bit and talk about the growing trends. As I said in my earlier comments, the amount of capital in the marketplace has grown significantly, not just in the overhand, but in the overall dollars and the amount of private equity, family offices, independent sponsors, LP co-investments has increased the pool of capital looking for and chasing deals, and the pool of deals hasn’t grown that dramatically. So, it’s forced a lot of creativity in the market and you’ve seen an increasing number of—obviously, you’ve seen direct debt funds and we’ve seen an increasing number of investors establishing minority. Our own local Huron Capital have started their flex equity fund; New Mountain Capital just raised a 700 million dollar fund starting, specifically, in minority deals; a recent survey, that was conducted with private equity, indicated over 50% of the private equity funds, general partners were looking at establishing some kind of minority investment vehicle in order to find more attractive opportunities, expand to the top end of their funnel for a deal, and create value.
So, I’m curious, Mark—I mean, you’re our private equity guy here today. Why do you think this trend is growing, how do you see things playing out in the future, and how does that help entrepreneurs that are looking to grow their business and expand what they’re doing, not necessarily just interested in selling?
Mark McCammon: Sure, and you hit on it some; it’s maturity in the private market and the private equity market. I think a simple way for entrepreneurs to think about the private equity market is it’s actually the private stock market. It’s where companies trade, it’s where companies raise equity money that are private. And there’s a massive amount of demand for that by investment capital, but what there’s always been on the other side is a demand for minority growth equity, or for a sort of section of the capital structure that’s not supplied by traditional bank lenders, or subordinated desk investors, or control equity investors, like the average private equity firm is.
And so, that demand has been there for a long time. I think the massive amount of liquidity—including the rise of the family office and all the liquidity there—really started to fill that demand on the private company business owners side with a supply from the private capital market. And we’ve seen many opportunities where it’s a company that would really prefer to take on a minority equity investor to try and juice growth to maintain control and to be the one still owning and operating the company without giving up control. For the longest time, that was not well-served as a product, let’s say, by the private equity market. But that demand has been there forever.
So, now that there’s so much liquidity, including a search for yield my equity investors and investprs across the board, I think that demand is going to be met with increased supply over time. And you’re seeing that with the examples that you said.
Raj Kothari: And, Mark, don’t you think the success that many investors have had—and what they thought they couldn’t do with minority deals—has been a contributer to that growing appetite? You know, the old “success begets success”?
Mark McCammon: Yeah, absolutely. So, the returns are definitely there. I think that there was probably a hang-up years ago by control investors that you couldn’t get the return you were looking for because you didn’t have control, but what you do maintain, in a minority position, is really the incentives are extremely well aligned with the management team. So, if you get involved with the right owners, right management team—a team that has a passion to achieve the growth and what you’re looking for—well, that formula is all there to have an excellent return.
So, there’s some insight—or even religion—being absorbed by the market out there that this is a route that can go, and it put another tool in the toolkit of entrepreneurs, of how they can think about their business—growing it, getting liquidity—because this could be a source of capital just for growth, or half liquidity/half growth, or some small component of equity. And so, it’s a very good tool for the stock market idea I’m talking about because you usually just have to sell control, it used to be the old way.
Raj Kothari: Great insight. I think Jack even said it in his comments, that he likes to make sure they’ve got an interest in alignment; and the growing interest in role equity is a similar concept of creating alignment, and we talked a lot about, when we’re working with companies, about alignment. Jack described it as, “Hey, make sure you understand what they’re buying you for and what they see is your value proposition,” but also understanding, “Hey, what’s the relationship? How are we working in alignment or not in alignment if I’m packing my bags and leaving at the end of a transaction?” That has a material different value perspective from private equity partners and strategic acquirers alike, as opposed to the executive of the team that’s willing to stay on. And Jay and I talk a lot about this before the transaction, and a kind of a universal recognition that the deal wasn’t going to happen very well if Jay and Todd pack their bags at the end of the transaction.
Right, Jay? We talk a lot about this.
Jay Schreibman: Oh for sure, and while I wasn’t a minority situation—and I have a comment on what Mark said there in terms of minority investment because I have made small investments in partnership with Mark and others in this room as a minority and, now, seeing minority investments in companies for yield—so, I do think you’re completely on point. There’s an appetite for that and, if you have alignment management, you can get a good return without owning and controlling the whole thing, I think is your point there.
In my deal? Yeah, Raj, 100%. I had to be very focused on that alignment across the board for acquirer, for customers—yeah, rule of the world: Customers are number one, people for number two, stakeholders are number three, and I’m last. My job is to get number one, two, and three right, and that’s what I found in this acquirer; so, a strategic buyer, who wanted to make sure that we were going to work together over the next number of years to continue the great foundation we’ve started. And I kind of view my acquirer, not as money capital fuel for the engine, but as intellectual capital and resources fuel for the engine. And I’m enjoying—even through the pandemic garage, which has been tough on everybody. I’m sure everybody in this room has that war story—but we really enjoy expanding what we can do and what I can bring to my customers.
Before I became part of Arthur Jay Gallagher, I wasn’t running companies’ risk management programs in 23 countries across the globe, so that’s a perfect example of why that made sense to you.
Raj Kothari: Yeah, and we often find it’s much more than just the capital or the money that’s driving that interest.
So, Jack, I’m going to turn to you and say that’s a great tee up for you. How do you make Belle Tire and your organization an attractive acquirer to someone that’s looking to sell their legacy and their business? How have you positioned Belle and how important do you think that is for acquirers to be able to position properly?
Jack Lawless: Well, I’ve done a couple billion dollars worth of transactions before I came to Belle. I think the best part of buying is you really got to get into their heart and soul. So, it’s a courtship and it might take a year or two to get to trust ,and to recognition, and to talking about their business, and feeling like, many times, these guys are turning their baby over to you. So, you need to make sure [it’s a good relationship]. A lot of people want to go to the honeymoon as opposed to having a courtship, and that gets sniffed out pretty good. So, I really think it’s about starting a casual relationship and building trust—some of the deals I’ve done in my life took three or four years to get when I wanted to do it in the first 6 months, and some took a year. But you have to develop the trust with the owners and talking about the business, and go from there. Because the more you can do that, the less it becomes an auction, the less it becomes who’s got the most money and that last dollar of leverage—which generally doesn’t work well, that last dollar of leverage.
But I think that’s how you do it and that’s how you acquire companies at a reasonable price and have a very good start, because you’re building a relationship, talking about the future and building a plan before you even get in the driver’s seat. And that’s something a lot of people don’t want to do because it takes time, but once you got that, you might have developed a list of five, sic, or seven guys in different parts of the funnel of acquisition.
Raj Kothari: That’s great insight, Jack. I think people forget—especially on the acquisition front—that it’s a game of patience. You’re playing a long game, and you described it as a relationship. Often when we work with buy-side clients, we talk about selling before you buy. If you’re, especially, approaching a company that’s never been on the market, that isn’t actively selling, engaging with them and convincing them “Although, you’ve never thought about selling, but you ought to sell to me,” takes a lot of work, and a lot of relationship building, and a lot of patience and understanding of that value proposition: What do I bring to the table? What did Gallagher bring to the table to LSG that made them more attractive besides the dollars?
Jack Lawless: Right. And what I like to sell, Raj, too. When I buy, I always want them to have stake in the game—be it an earn out, 20% retainage, or whatever—because I want them to have stake in it, and you know that’s an important feature for me big time, for them to have a stake in it and how they can make more money as well.
Raj Kothari: Fantastic!
Jay Schreibman: And, Jack, don’t you love it when the seller puts every single employee in the company? Not just the management team, but every single employee in the company into that stake? Which we did, and I pat myself on the back for it because it was the right thing to do. The company, just ethically, is its people and that created the ultimate, ultimate alignment for everyone.
Jack Lawless: Yeah, I mean all the deals I’ve done, I’ve had 30, 40 people in the equity side of it—all at varying amounts—but it does a tremendous amount to hit the numbers and everybody’s working toward making more money. And I think that’s a big deal.
The other thing I like to sell is that I’m not going to leverage this thing up to the Nth degree because I know something’s going to go wrong. We don’t know what the hell it is, but something’s going to go a little amiss that I don’t want to be flipping leverage covenants the first six months or year in because I put that last dollar leverage in. We all know stories with that last dollar of leverage, when the deal blows up you look at each other and say, “What the hell did we do that for?” And there’s always times to take dividends out down the road or re-leverage it when you know exactly what you have. Because anytime you buy something, the seller knows a hell of a lot more about it than you do. I don’t give a damn how much time you spend in it. And there’s going to be something that goes wrong, and putting that last dollar leverage—in my view—is a massive, massive problem.
And I sell that to people I want to acquire. I’m not going to load this up with debt. You’ve got a 20% interest. Let’s keep the leverage modest until we know what we have coming out. We can do dividends or refinance down the road.
Jay Schreibman: I’ve seen Mark do the same thing. I didn not sell for the highest bidder, Jack. It was about the relationship, people, how is this going to work going forward, is the alignment good, are you gonna…It’s a legacy thing, right? It’s 31 years building a baby, and it’s a legacy thing.
You do the same thing, Marl. You don’t have to be the highest bidder to win a company—you shouldn’t be [the highest bidder], by the way.
Mark McCammon: I agree.
Jack Lawless: Mark, that’s good that you do that. A lot of guys don’t. I could tell you a lot, but we all know the horror stories about that last dollar of leverage doing a company in. Usually it’s not. A good company over leverage is not good.
Mark McCammon: Yeah, so exactly. Leverage should be a component of return, but the wrong buyer thinks it’s the primary driver. And so, we tend not to do that, we tend not to. Everybody wants to try to pay the highest price, but you guys have all talked about how you avoid trying to pay the highest price. And maybe we’ll find ourselves in situations where we’re told we’re not paying the highest, but there are other people who are willing to pay the same as us, but we’re winning the deal because of some of the soft factors that Jack put forth. And that could be good enough. Maybe you are willing to pay the market price, but you’ve done a ton of work and are winning the deal because you did some of the softer factors like building the relationship, etc. And that gets you over the finish line.
And so, we spend a lot of time working on that and just being those people. I think you can do that by building relationships with who you want to be in business with, acting like you’re the partner that you’re going to be, and then be a good partner. And then you’re referenced as the bull in the market as someone to do business with, and that will win you a lot of friends going forward.
Jay Schreibman: Yes.
Jack Lawless: Spot on.
Raj Kothari: At the end of the day—whether you’re a buyer or a seller—it cannot always be about the numbers. And that relationship you guys all have talked about is important. But in the end, Mark, you’ve done a lot of transactions over the last 20, 25 years; there’s always some crazy stuff that comes up and there’s the crazy things that come up that people couldn’t expect. But I’m sure you’ve seen a number where just a little bit of preparation on the part of the seller would have helped make the transaction easier. Are there some ones that your early radar screen thought to check like, “Hey, this is something we should get done and fix early,”? What have you seen in that?
Mark McCammon: Yeah, and so it’s interesting. Some of the people in the room probably have heard the phrase, “Every deal dies three times before it gets done.” That’s absolutely true. We count them. You might get to four—you’re probably not gonna only get the two—and so, when you’re a buyer and you’re looking at things, you will sit down after a ton of work and be like, “Well, it’s over and we’re not gonna get past this.” And then you figure our if you can get past it.
So, tons of things pop up all the time, you’re not going to anticipate them all; so the more that you can anticipate and work on the things that you have awareness of are essential to put time in. And I think if I can stress one thing—we’ve already talked a bit about it; having clean, accurate accounting is absolutely essential and it really is about momentum in the transaction. If you present the numbers to the buyer group and they end up having inaccuracies found during the due diligence, it won’t just affect the value, necessarily. It could affect the whole momentum of the transaction, including, say, if your margins were 11% on the EBITDA and somebody has a 10% minimum, and with an adjustment you’re down to 9.5%, maybe you’re still willing to sell. Maybe they had a minimum 10% and you were always with the wrong buyer, and your process found the wrong buyer because you’re information was inaccurate. You’re going to have a representative, like Raj, out there trying to present your company for sale. And if they don’t have the accurate information, they’re not going to find the right partners for you.
So, any prep like that is extremely important. And then I would also reiterate the idea of having your management team—who’s going to be the decision makers and the drivers of the vision—having them well-aligned and having those seats filled. You know, if you decide “Well, I just want to retire and the new buyer kind of needs to take it over or find some people…” That’s probably a 20% discount total amount. You’re really just not going to maximize. If you would look a year or 18 months out, fill those seats, and have talented people ready to run the company forever it’s going to take over, that adds 20% of the value. And so, those can make huge swings into what you’re trying to do.
Raj Kothari: Great! What it says is there’s an element for the seller to be prepared and organized. But if you’re the acquirer, the flip side of that is, if you have the resources and the inclination, you can create additional value by finding those organizations that don’t have that, and building that in and creating the team that can go execute that.
Mark McCammon: Yeah, if there’s a problem in the transaction, the person who solves the problem is either maintaining or creating value. So, if a problem is there’s not a full management team and I can come say, “Well okay, I have to go recruit a new one.” then I’m probably winning the deal versus other people, and I’m not having to pay as high a price.
If an issue pops up—some legal issue you didn’t know about—and you’re the seller, and you look to the buyer for their advisors to kind of figure it out, well, they’re going to extract value from doing that because the momentum has gone down, the demand has gone down. If a problem pops up that you aren’t aware of, you have to solve it—you’ve got to solve it for the buyer. It’s not their problem. You’re the seller. The problem is with your business. You’ve got to solve it. If you don’t take that direct attitude, you’re not going to be as happy at the end of the transaction. You may not get a deal done, or you may get a deal done at a price that isn’t as good.
So, the ownership of the whole process and trying to get across the finish line and being a solutions-oriented sort of participant is very important rather than saying, “Well, this popped up and these guys need to figure it out.”
Raj Kothari: Great! Well, as we’re getting close to the end, we’re going to do the Variety Is the Spice of the Deal: Top Two Issues for each of you.
So, Jay, we’re going to start with you. What’s your top two things that you want to leave either a buyer or a potential seller with.
Jay Schreibman: Sure. So, I think I said it all on my view as a seller and what mattered to me. I don’t know if it matters to anyone else, but Jack and Mark, as big acquirers, their wisdom was completely on point. And you have to find the right partner. All these comments of discussion about relationship and alignment, I think is probably the number one most important thing.
Second to that, I would say, as an advisor to buyers, you really need to be ready—and, of course, this is my work—but you need to be ready in the risk management space.
As a seller, you need to know what your acquirer is going to look for. The smart ones are looking under the hood. It isn’t about “quoting the insurance’ or somebody has a broker friend; there are a lot of things that can be dealt with in that transaction through rep and warranty insurance or figuring out, as a buyer, “Hey, my cost of benefits I thought was running X and it’s really running X plus 30%. I’m really only buying $15 million EBITA here, not 20%.” And the whole transaction falls apart.
So, as a seller, if you don’t really understand what you look like on someone else’s platform or in someone else’s shoes—right in line with Mark’s accounting requirements—and you don’t have your arms around your risk management program and really understand what it looks like in your buyer’s world; and as the buyer, if you don’t understand that and where the holes are that you need to stay out of, those are areas that—from my professional expertise—you’ve got to pay attention to because it can lead you to that dead deal that Mark talked about. I’ve more than once told that gentleman “You can’t buy that company.” Sometimes he listens, sometimes he doesn’t. But he knows the advice is true. When they make a decision to go forward, at least you have your eyes on the problem, and we go through and find a way to solve it. So, I think that’s the best advice I can leave everyone with.
Raj Kothari: Jack, how about from your point of view?
Jack Lawless: No, I mean, I guess the whole thing for me, Raj, is always looking, you know, pragmatism. Dealing with the realities, pragmatism. Dealing with the tough issues before you buy the damn thing. It could be personnel, it could be a product line, it could be a location, whatever it is—it could be Billy the uncle that’s over his head—whatever those things are, dealing with all the issues with pragmatism from the beginning and getting people involved from the very beginning [is most important]. To me, that’s the whole thing. If you start out that way, deal with the elephant in the room early on and that kind of stuff, you don’t burn as much time chasing after deals that you won’t do at the end.
I like to do all those things quickly—I have good, pragmatic people running the place, everybody knows what the issues are in the business, what they freely talk about, and what we’re going to do about it when we own them together. So, if I have that kind of an attitude going on as I’m courting or working through a relationship as a buyer or seller, I feel better about it as we move through the relationship.
The other thing is when you hit a point where you think, “Okay, I don’t like this point going on, going forward,” you cut bait and stop as opposed to keeping it going. When you know it’s probably not going to work out, you cut bait early on so you don’t burn a ton of dollars on things that you’re not going to ultimately end up buying.
So, for me, it’s pragmatism, the relationship, and dealing with the issues throughout the process is what I would tell both the buyer and the seller.
Raj Kothari: Fantastic. So, Mark, you’re in the hot seat; you got the clean up there, and they’ve given great bits of advice. How about from your point of view?
Mark McCammon: Yeah, I think I’d boil it down to—you know, the hardest thing is securing the transaction. If you’re the buyer, it’s getting somebody to sell to you. If you’re the seller, it’s finding the right buyer. And both of those…we try not to understate, but we can’t understate hoe important the relationship factors are on that. And so, whatever seat you are in, you really should put yourself in the shoes of the other side as you’re thinking through how you’re going to behave, what you’re going to make important in those discussions, and what you’re trying to accomplish. So, as a seller, we talked a lot about, “Okay, what is the buyer going to want to see as the buyer?” It’s being positive and sort of focusing on what is important to the seller first, and then checking to make sure that everything is the way it was said. The teams that aren’t great at securing transactions will go in and focus on the negative first and focus on the checkings first—not focusing on building the relationship and trying to find somebody that they want to be partners with and do business with. If you start with that, you’ll have a much better chance of success for both sides of that equation.
Raj Kothari: Yes, well said. Great insight, folks. I really appreciate you sharing your thoughts. As we wrap up here, I hope folks will join us for the live Q&A session that will be joining us next. So, again, thank you gentlemen for joining us on the panel. I look forward to seeing you soon.
Everyone in unison: Thank you!