Upsize primer: Mergers & acquisitions

On the block M&A, done the right way, starts with proper planning

Selling a business involves both personal and business concerns, and a panel of experts hashed out both at an M&A workshop presented by Upsize and Club E.
Plus, acquisitive members of the audience asked about the flip side of the coin: how to buy a business. Here are excerpts from their advice.

Rick Brimacomb, Brimacomb + Associates and Club E, moderator:
When someone’s anticipating selling a business, what planning should they consider? David Eijadi, you recently sold your firm, The Weidt Group. Why don’t you start us off?

David Eijadi, The Weidt Group: I’m here thanks to Franklin Partners, the investment banker, and my good friends at Winthrop & Weinstine, my law firm.

We are a small company, and having transitioned out of the first generation we wanted to transition to a third generation. About every 18 months someone was coming, saying they wanted to buy us.

We said, we’re just ignorant. We said help us, what do we do? We put together a list of potential consultants to hire. Lo and behold, Chip Myers at Franklin was the most charming guy, but also in the process the most creative guy.

When you go through that part of the process you’re looking to find someone you really feel you can talk to.

Mark Johnson, Winthrop & Weinstine: The process entrepreneurs are going to go through, you’re not going to want to take that on yourself. Through the whole sales process, you don’t want to distract yourself too much from your core business. Engaging a banker is one of the first words of advice I have for someone that comes to me.

Chip Myers, Franklin Partners: It is true most of our clients underestimate this. It is a campaign. You’re really selling an investment thesis, and that’s a different type of approach.

There’s another piece, and I’ve seen so few people prepare themselves personally for this process. There’s a lot of tax and estate things that you want to do a year or two in advance., that very few people really do.

I encourage you to talk to your estate attorneys and identify what those opportunities are, things that most people have never thought of. It’s all about maximizing after-tax proceeds and having a better life after the sale.

Sean Boland, DS&B: It’s an emotional sale. You’re always dealing with two or three of your kids, one’s in the business, one’s not. Once you’ve figured that out, the rest just falls in line.

How much does your family need to live on? You’ve built your baby for 40 years, now it’s gone. So you have to make that emotional cut.

Mike Mahoney, Bell Capital Finance: We see transactions where the seller may want to stay on. They will retain a real material ownership and be the leader. The seller needs to decide, what’s my role going forward? Can I have a boss? What kind of a buyer do I have?

David Eijadi: For the record, I cannot have a boss.

Mark Johnson: A lot of times your business is your primary source of net worth. So it’s critical to do an analysis of what do I really need to live the life I want? Sometimes it’s surprising, you don’t need as much as you thought.

A lot of times people have charitable desires as well. But do that financial analysis up front. Have a professional sit down and do a thorough analysis of what you reasonably can expect to get, and how much it will provide you.

John Anderson, The Anderson Winberg Group of Merrill Lynch: What’s always interesting to us is you’re moving from, your business is an income source for you, but the security is there because you’ve been running that company.

And now you’re asking yourself what’s next. You turn the net worth over to a group like ours. And who are you guys? For some people that’s easy, and for other people it’s terrifying, because they always had maximum control. You go through an economic downturn and tighten up everything in ‘08 or ‘09.

That feels different when that’s your company, vs. a group of individuals managing a portfolio for you. That’s why a lot of times we’ll see business owners have all their money tied up in a company. They’re not thinking at this level. That’s a process that takes a while to ramp up.

Sean Boland: My guess is everyone in here does not like paying taxes. But for the couple years going into the sale, you want to pay a lot of money in tax.

You want to have a big W-2. Because the sale price is a multiple of cash flow, three times cash flow or five times cash flow. Clean that up. Don’t have “add-backs,” where you’re paying for your car or your kids’ college education.

The other thing is, make sure your contracts are all good.Your non-compete contracts, etc. Make sure your best customers are tied down for three or five years. Get that locked in on the front side. Get rid of the bad clients, the bad margins. Your business will be worth a lot more.

David Eijadi: Some things were intuitive to us. We got rid of clients that weren’t profitable. We got rid of unnecessary expenses we had—we were buying pizza three times a week.

We had some employees that we needed to let go. That was obvious. But there was a whole lot that never would have occurred to us, without consultants.

Chip Myers: You have to deal with the leadership piece. A business is made up of people and invariably we have buyers looking hardest at the management. Everybody can buy machines. It’s not about assets or book value, it’s about markets and growth, and people who can execute.

Mark Johnson: With financial buyers, the existing management team is critical, because they don’t want to run the company.

Mike Mahoney: Financial buyers are looking for, how do we grow this business, how do we support that growth. They will pay a premium for companies that exhibit growth.

David Eijadi: Our buyers really worked us over on those projections, and how credible they would be. There were aspects of the partnership we were optimistic about, and aspects we were pessimistic about, and that had to be worked out.

The one thing I tried to do, is know who your current partners are, what kind of people they are and how they’ll react in certain types of stress. They’ll play that out in spades in a sale situation.

From the audience: How do you handle the sacred cow, like a family member who’s unqualified?

David Eijadi: The way people handled it is the way they’ve always handled it. I tend to be brutal. My partner is passive, and I want to strangle him. One way or the other the problem areas have to be discussed.

Chip Myers: They’re going to come up, and you want them to be discovered in a way that’s at least neutral to you. You’ve got to get all the sacred cows on the table. So, you don’t have a contract with your biggest customer. Well, you’re not the first guy.

From the audience: I’m a small family business looking to buy another strategic business, maybe from a reluctant seller. How do you prepare?

Chip Myers: You have to start out with an understanding that you’re committed to it. Being committed to it means you have a real strategy, and you understand what’s involved with buying a business. It’s a living, breathing thing, with a market and sales people and all sorts of issues.

There are numerous ways to value it, there are numerous ways to go about the process, but you have to have a goal in mind and criteria to check it against. You have to start out with, what is it we want to do and where do we want to end up.

Then there’s a whole question of process. There’s a big difference in buying another small company with sons and daughters in the business, or maybe a business acquired by a private equity firm and it’s cleaned up, with real contracts, audited financial statements. Now you pay more but you get something that actually works.

Mark Johnson: It’s important to think through what your goals are. Are you trying to expand your market share in your existing business, or are you looking to diversify. I have a client with a wonderful business but limited growth opportunities.

So that’s what they’re doing. They spent a decent amount of time analyzing what are their core strengths, and how could those play into another business. The key thing is what are we trying to accomplish with this? A big challenge on the buy side is identifying good targets.

From the audience: How expensive is that to get someone to identify targets in a strategic way?

Chip Myers: It depends on the size of the deal. There are firms who do searches and there are individuals doing searches. Someone looking for a $50- to $100 million deal will be looking for 1 percent. That guy is not going to work on a $10 million deal for 1 percent.

And there’s a real high level skill set in doing this. In my opinion, guys who run companies aren’t necessarily any good at the acquisition game, and it’s expensive to hire someone.

A good development guy is $200,000. You’ll pay attorneys at least $100,000 to close, the search firm at least $5,000 to $10,000 a month to search, so it’s a significant undertaking.

Growing by acquisition, it’s quite an undertaking and a lot of money. I’d expect to spend a couple years and $200,000 and realize you may not actually accomplish anything.

Mike Mahoney: From a debt provider’s perspective, for buyers, if we get introduced to a buyer that doesn’t run the traps and spend the money and do formal third party due diligence—we want to know everything there is to know about the business, and we’re just the lenders.

The buyers should want to know just as much as we do . So if a buyer is not serious and is willing to take the seller’s word, none of that means anything until it’s verified.

Rick Brimacomb: John Anderson, how do you help potential buyers get back in the game, after they’ve sold their company and come to you for wealth management?

John Anderson: We spend time discussing what does this look like in the future. Oftentimes when our clients do retire, they’re making the decision to completely exit that level of risk.

Rick Brimacomb: Leave us with a closing thought, about M&A?

Mark Johnson: One mistake is where it’s a rifle shot. Company X has approached me, and I want to sell to Company X. Those deals are perilous. There’s no leverage. You’ve got one buyer and one seller.

And having a sale forced on you is a bad way to go about it. If you have to sell you have to sell, but that’s a bad time.

Sean Boland: Don’t pretend that you’re the most important part of your business, because that devalues the business. Don’t answer every fire drill. Have the employees do it, because the buyer will see that.

Chip Myers: Our view is the market establishes the price. That said, there are things that happen in this market that make it frothier or not. Right now is a very good time to sell a good business.

People say, what types of multiples? It’s entirely dependent on the individual business. But generally, it’s a turn or two higher than it usually is. Better deals have strong industry fundamentals, high quality of earnings, and strong management teams.

A lot of the data that gets batted around are averages, and I don’t think the averages mean much of anything.

Mike Mahoney: There’s excess capital at every level now, whether it’s debt or equity. There are more buyers than sellers. The private equity guys will look at the cost of having that money sit there idle vs. put it to work, so they will accept a lower return.

John Anderson: What you’d want to be thinking about, if you’re looking at selling your company: it’s people, process, philosophy. Are these people experienced in this space, what are their processes, and ultimately what is their philosophy on investing.

David Eijadi: It’s a very technical process so make sure you have a good technical team. It’s also a very creative process so make sure you have someone who can think that way. And make sure you have someone to negotiate on your behalf.

Mark Johnson: One is plan. Second is, if you are thinking of selling it’s a great time to be out there in the marketplace.


John Anderson,
The Anderson Winberg Group
of Merrill Lynch:
john_anderson2@ml.com; www.ml.com

Sean Boland, DS&B:

Rick Brimacomb,
Brimacomb + Associates and Club E: rick@brimacomb.com;

David Eijadi, The Weidt Group:
david@twgi.com; www.twgi.com

Mark Johnson, Winthrop & Weinstine: mjohnson@winthrop.com;

Mike Mahoney, Bell Capital Finance: mmahoney@bellbanks.com

Chip Myers, Franklin Partners:

Beth Ewen