M&A Update from ACG

The February ACG (Association for Corporate Growth) was the annual M&A update panel discussion. While the panel spoke of middle market deals a lot of what they covered applies to the lower middle market. Here are my top 10 takeaways, with my comments:

  1. It’s a frothy valuation market – sure is although my market has the two sanity checks the larger deals don’t have. It’s usually the buyer’s personal money (individual or small business owner) and the bank is the largest component of financing not just a small piece of it. A similar talking point was, “We’re wading into dangerous territory on multiples, which are being driven by growth and a lot of capital. 20x plus at $50 million plus deals. 
  2. There’s fear of missing out – with the low cost of capital and a demographic push based on the age of owners there is a fear there won’t be as many deals in a few years.
  3. Defense and satellite are strong vs. aerospace – I agree with this. Owners I talk to who do defense work are booming. We can see plane deliveries and how low they currently are.
  4. Must position the business correctly – to get maximum value out of it, yes. Don’t care about price, just want out? Then flip the switch and sell no matter what shape the business is in.
  5. Projections are tough with Covid – projections are tough without Covid. Keep in mind, banks will investigate (thoroughly) and Covid tailwind or headwind, as they should.
  6. Buyers want businesses well represented and presented – the more information provided upfront the better and provided by someone professional who’s done their homework.
  7. Looser definitions of EBITDA – as in the definitions are weakening. With smaller businesses this is the blending of the business and personal checkbooks (and wanting the buyer and bank to believe it all). A related point was, “watch out for big add-backs.”
  8. Founders may know how to grow but don’t want to – I get this because I see it so often. An owner is making a lot of money and doesn’t want more risk, more people, more stress. So they coast, which is opportunity for buyers.
  9. Looking at wages, benefits and other things to retain employees – retention was a huge issue to these buyers, lender, and investment banks. All shared the same thought on this, you have to keep the people you want.
  10. Can this manager think like an owner? – not as important in the small business market but it’s how you get people to grow so the owner can step back and not do day-to-day tasks. They emphasized you have to spend a lot of time on coaching and development. 

It’s an interesting time and all of us in the buy-sell & M&A industry expect 2022 to be an active year. I know we’re busy with sellers and buyers.

Projections, Projections, Do We Really Need Stinkin’ Projections?

I know they need to “check the box” and get projections. In this case, “they” being bankers. Recently one asked for three years of projections with the first two years by month and the third year annually. Just for fun, consider the following:

  • The folly of predicting winners in March Madness. Column in the Seattle Times said pick Kentucky, they’ve got it all. Oops, out in first round. The WSJ had a column saying pick the defending champs because most don’t pick them. Oops, out in second round. In conference tournaments one announcer said Iowa was so hot they’d go to the final four and another said Seton Hall would go deep as they were peaking at the right time. Oops, both out in the first round.
  • It’s early 2021, vaccines are available, and things are opening up. Would you, would anybody, have predicted future mask mandates after politicians proudly stated if we get vaccinated there’ll be no more masks? What about massive supply chain disruptions, employees taking control of the job market, or a war in Europe?
  • What about inflation? (Almost) nobody predicted that (I’d bet those who did predict inflation are those who have predicted inflation, a stock market crash, depression, etc. for the last 10 plus years, and are finally right). The Fed chief said it was transitory. The Seattle Times business columnist said the other day he was wrong when he said inflation had peaked in December.
  • Just read about all the SPACs. It seems few if any are hitting their projections.

Look, projections can be a good exercise and they set goals. But three years out? The one thing I can predict is in three years multiple things will have happened that nobody thought of.

“Until the lions have their own historians, the history of the hunt will always glorify the hunter.” Chinua Achebe

It’s All About Perspective

I’ve been listening to a very interesting podcast with a geologist named Randall Carlson. He’s discussing the changes in the earth over the last 15,000 years and he states there’s evidence there was a mile thick sheet of ice over the top half of the northern hemisphere. Then it seems an asteroid hit the earth, the ice started melting, and it was a 5,000-year process to finish melting.

Asteroids are a “thing” with Mr. Carlson. Given his field the changing earth, the history of it, etc. he’s super focused on if and when another asteroid of destruction size will collide with the earth. Most of us go about our days not thinking about meteors, comets, or asteroids. Not Mr. Carlson, he seems to get nervous when something in space comes within 100,000 miles of earth.

I’m talking to a business owner whose company’s earnings in 2020 and 2021 were 20% of 2019, yet he sees nothing but rainbows and opportunity. All is rosy. The asteroid only glanced his company. 

In both cases I’m reminded of old sayings (cliches) like, “Take your blinders off,” and, “Can’t see the forest for the trees.” When it comes to buying, selling, or growing a business:

  • Buyers will get excited about the big picture and at the same time play forensic mechanic on the workings of the company. Trust but verify and then verify again.
  • Owners, especially smart owners, will realize even if they have the best product in the world, they still need to work hard to get people to know about it and buy it.
  • Sellers believe they have a great business and sometimes don’t understand why all the questions. And one of my favorite sayings is, “Just when you think you’ve answered every possible question (about your business), the bank asks more.”

It’s a combination of optimism and skepticism that often leads to success. As in, I’ve got something good and realize it won’t sell itself.

“The future depends entirely on what each of us does every day; a movement is only people moving.” Gloria Steinem”

“It’s hard to be diamond in a rhinestone world.” Dolly Parton

You Want to Sell Your Business to Whom?

I can easily tell you some people who would never make it as a business owner.

  • The editorial columnist in the Seattle Times who wrote about lingering Covid, masks going away, and how scared he still is.
  • The news announcer on NPR who had to “warn” listeners they would hear gunshots from a firing range in the next segment.
  • The arts organizations executive directors who say they’ll still require masks after WA State removes the requirement.

Being a business owner and/or buyer requires guts, among other things like smarts, desire, and risk-taking. For business sellers, here are some things to be concerned with about any buyer.

  • Are they the right person for the business? Do they have the skills to grow it and the personality to relate to the customers and employees?
  • Money, as in can they afford the business and the corresponding bank loan, still have cash left to help grow the company, and can they manage finances? 
  • Do they have a team to help buy it and can they effectively utilize the existing management team?
  • Can they make decisions without getting analysis paralysis?
  • Does he or she ask good tough and insightful questions to show they grasp what’s going on (a buyer skating through diligence is a bad sign)?

Diligence goes both ways and it’s more than money that makes someone (or company) the best buyer.

“A bad rendition of you is better than a good rendition of somebody else.” Willie Dixon

Observations from Antigua

We recently returned from our Rotary service project in Antigua, “Improving Education Through Technology” and I’d like to share seven observations, with a business lesson or tip with each.

  1. Observations from Antigua We had a meeting with the Prime Minister, his first question was, “What do you think is going on with Covid?” and I answered, “I think it’s about over. Omicron is much weaker, more vaccinations, and even the NY Times says there’s probably a high percentage of unvaccinated people with natural immunity they don’t know they have.” His response, “I agree but I can’t say that – yet.” Lesson, in government and in business there has to be a “need to know” policy. Not everybody in a business needs to know all going on.
  2. Antigua is a lifestyle country. Time and timeliness aren’t as important as in the hectic US (and other developed countries). This is not always a bad thing. There seems to be an appreciation for life not just how productive one can be. Tip, take the time to honor the cliché, “smell the roses.”
  3. You’d never complain about roads where you live after driving on the narrow, pothole filled roads in Antigua. The roads are like an airline hub system. To cross the island, you have to go north to a hub, south to another one, and then to your destination. A friend commutes from the NW corner to the SE corner, it’s not that far and it takes 45 minutes. She says, “You get used to it.” We can get used to a lot of minor inconveniences in life.
  4. Business is business, service is service, and education is education. Doesn’t matter if it’s in the West Indies or the USA. The basics are important. It’s just that in Antigua the time for the service is a bit longer than at home. But you get used to it.
  5. People are people. They have the same feelings, cares, and desires no matter where they live, their race, religion, etc. Treat others fairly and good things will happen. And on that note, while there I was emailing our cousin in Slovakia, about what’s going in the Ukraine. He’s about 4 hours (drive) from western Ukraine and 14 hours from Kyiv. He also does business (construction) in Russia, this has hurt his business, and his comment was he really feels for his Russian friends who are “normal people” being affected by this.
  6. Be careful who you take on as a partner. Antigua has signed on to the China “Belt and Road” program. More Chinese investment than ever including a massive embassy, with a huge part of it underground (wonder what they do there?). We’ll see what transpires. It could be great, or it could be like a really bad investor in a business, creating more problems than it’s worth long-term.
  7. Finally, a restaurant owner shared she has the same issues with finding good people as we have here. And she added, it’s also tough to get reliable provisions. No Sysco, US Foods, or others with regular deliveries. The day we had lunch there she opened late as she was driving around looking for the produce she needed. I’m sure she’d trade the higher cost of cucumbers (delivered) for the time, gas expense, and hassle of doing it herself. Reliable service and providers are worth it.

Contrasts in Style

In the US, especially in Washington State, when there’s a government project everybody gets paid the absolute maximum wage, even if they’re inexperienced and not worth that wage. In Antigua, where we are now on our Rotary project, government projects seemingly pay everybody the absolute minimum, as in minimum wage.

We have a journeyman electrician helping us because he’s learning computer networking to add to his skills and abilities. He’s the one who told me about the wage situation, which is why is doesn’t do government work (we’re paying him 4X the minimum plus a bonus)

Learn from these government extreme policies, apply them to small business, and pay attention to the following.

  • Pay people what they’re worth and bonus them when they exceed expectations.
  • Create an atmosphere so people want to stay. If they’re good, and maybe even mediocre, they’re getting calls weekly or more often from recruiters. 
  • Watch out for the hiring bonus trap. A client has to be careful because the going rate for hiring bonuses is more than the bonus amount for current people in the same position (Yikes! See the bonus pool going up?).
  • One thing employees have learned from Covid is they can go do something else if they want to. It may not be your or your client’s, fault, it may be a desired life change (so do what you can do  to postpone this as much as possible).

Sometimes (often) we can learn a lot by traveling and helping others, as well as listening to them.

“Okay, that’s it, I’m out of here.” (The hilarious) Jan Martinka as she ended her talk at an Antigua awards ceremony and exited stage left.

PS People in Antigua have asked us what the hell is going on in Ukraine. It’s a tough question to answer.

When You’re in Over Your Head

We were in Antigua on our Rotary project in the schools although this year there were no students given there’s a ban on field trips in the Bellevue School District. So, we adults are doing a lot of the work the kids usually did.

I quickly realized I was in over my head when attaching RJ45 connectors to ethernet cables. I haven’t done it in over seven years, when I wired access points around my house. If I was the one responsible for cables we’d be in trouble. So, I figured out other things I can do (besides project management) and I found some of those things to help this incredibly successful project, which has made the lives of many people richer (including us).*

The same philosophy goes for many other things in life and business. Don’t do everything. Get experts  who can do whatever it is faster and better. Doesn’t matter if it’s menial tasks like attaching connectors to cables or strategy or advisory work. Get the best suited person for the task and concentrate on those things you do best (and better than others).

I find it a good sign when a business buyer says they want to focus on vision and growth. It’s also good when an owner says “I don’t know how to do that because we have people who do it for us.


“Those are the memories that make me a wealthy soul.” Bob Seger

Full Disclosure – It’s What Works

Headline in what I call the personal interest column in the Wall Street Journal on February 8, 2022, “Realtors Embrace Brutal Honestly. ‘Smells Like a Farmtown.’” The article is about how some realtors are mentioning the downside of their communities whether it’s smell, weather, terrain, or something else. 

Taking care of (potential) problems before they happen. After all, there are detriments to every house, neighborhood, and community. 

In our world of buy-sell deals we see a wide range of business-for-sale descriptions, including:

  1. Those that state nothing more than opportunity, potential, and growth. My favorite was a business losing over $200,000 per year for at least the last three years and when justifying the price, the broker said, “potential.”
  2. Some that are very basic, just lay out the facts and history, with very little embellishment. As in, here are the numbers, so make a decision. An example of this was a one paragraph description of the business with the P&L from the preceding year. And somebody paid this person to sell their business.
  3. And then there are the memorandums with complete information. If there’s customer concentration, mention it. Same for restrictive license agreements, a key employee dependency, or upcoming capital expenditures. A memorandum on a deal I was involved with a couple years ago covered the following topics to show honesty and reality (there are no perfect businesses):
  • Business weaknesses
  • Impediments to growth
  • Limitations on services
  • Buyer concerns

All the above were pretty mild and when you fully disclose, the rest or what you state is taken more seriously. And this applies to everything in life. Sooner or later weaknesses are discovered.

“Where is the knowledge we have lost in information.” T.S. Eliot

Making the Simple Complicated

My wife was going crazy. She said our younger daughter was going crazy. Why? Our grandson needed a picture of his dad in his work uniform (police officer) for school in a day or two. They were frantically trying to find one on their phones, sorting through thousands of photos. My response was:

“Have her take a picture of him in his uniform.”

We all move too fast sometimes and miss the obvious answer. You do it, I do it, we all do it. Often the obvious answer is right in front of us. Which is why one of my favorite sayings regarding business buy-sell deals is: The bigger the spreadsheet the less chance of a deal.

Don’t get bogged down in the minutia, don’t overthink, don’t make something simple complicated, no matter what the business or personal situation.

“If you can’t be kind, at least be vague.” Judith Martin

“it is more fun to talk with someone who doesn’t use long, difficult words but rather short, easy words like, ‘What about lunch?’” A.A. Milne

Agendas Can Get in the Way

We all have agendas, every one of us. First let’s look at a couple in the media and then some in business.

Are you surprised there are bi-partisan bills to forbid members of Congress to actively trade stocks while in office (as they have access to “insider” information)? This trading has been something both very left-wing and very right-wing politicians have been accused of. Of course, will anything happen? 

No surprise, probably not because those responsible for taking the bills to the respective floors are active traders. As we know, their agenda (all their agendas) is to benefit themselves first and their constituents and the country next. 

Then look at the vaccine and related issues (disclaimer, I’ve received two shots). Lots of agendas. 

  • Don’t tell me I have to get a vaccine.
  • Everybody must get a vaccine.
  • Can’t go to public places without a vaccine card.
  • You must wear a mask.
  • You’re ridiculed if you wear a mask.
  • Executive orders circumventing democratic processes (to be in control).

I know people who won’t get a vaccine because of number one above, some who can’t because of chemo treatments, and some who just don’t trust a synthetic vaccine, which really isn’t a vaccine but a “shot” because it doesn’t absolutely prevent Covid like the vaccines for polio, measles, rubella, etc.

And of course we hear about people who cheat to get a fourth (or more) shot even when after it was mandated in Israel ABC news reported, “An Israeli hospital on Monday [January 17, 2022] said preliminary research indicates a fourth dose of the coronavirus vaccine provides only limited defense against the omicron variant…”

And speaking of vaccine agendas, follow the money. The top investors in Pfizer are Blackrock, Vanguard, and State Street. For Moderna it’s about the same with the top investor a British investment firm. Think the push for governments paying for more shots is altruistic? Think there are government employees thinking about leaving government and getting a nice job in pharma or the pharma lobbying industry?

Let’s move to things in our daily business lives. Everybody we deal with has an agenda, some aggressive, some for personal gain, some for business gain.

Employees – Just read the articles on people sabotaging fellow employees for their own benefit and you’ll realize it’s often “all about me.” Career advancement by any way possible is common (but it’s not done by all). Long-term, doing the right thing the right way is more beneficial to career growth.

Advisors – The attorney was a good friend, he had done our wills, we referred business back and forth, and did things socially. I called to ask a yes or no question about a new will, got the answer, and then a bill for over $125 for a “minimum phone call” charge. He lost the job of the new will and future referrals to his firm. Doing the little extra for a client pays off in the long run. 

Customers – A friend shared with me how a long-term customer recently left for a few pennies an item, ignoring that he had provided proprietary (and exclusive) designs, which she wanted to take to a competitor. Good customers value service, quality, and value. 

Business buyers – The good ones, the majority, want a win-win deal. Some want the best deal possible, for (only) themselves, and these are the buyers who rarely, if ever, actually do a deal. It must be too good to be true and sellers are too smart for that. A mature, profitable, and fairly priced business should be the goal. 

Business sellers – Sometimes there’s a huge emphasis on the price, at any cost. The real emphasis should be a fair price from a great buyer. who will let the employees thrive, preserve the legacy, and make any payments due the seller.

Fact it, most of us have agendas, but good agendas don’t make the headlines or cause problems.