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.

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

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.

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

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.

Founder’s Syndrome Can be Deadly (to the Business)

I’m working with a client whose company was hurt and is experiencing a slow recovery. After decades of ownership the owner is burned out and knows he needs to sell, but also fears not having his business. For background, it is not a dynamic industry, the management team is weak, and their pace is the opposite of “having urgency.”

We’re talking with an industry buyer with the right people, the right technology, and the money to take my client’s firm and modernize it. FYI, estimates are my client would need to invest about $1 million to get the needed technology and people.

That said, every so often my client will say something like, “I’m not sure others can do what we do.” I call this the “Founder’s Syndrome.” As in, my business is so special it will be tough for anybody else to run it. In this case he’s ignoring the fact the suitor overlaps about 2/3 of what his firm does, has about four times the sales, is growing fast, and is very profitable.

Founder’s syndrome usually equals an owner dependency. As in, the owner is the only one who can:

  • Work with key customers.
  • Finalize and approve all bids.
  • Design products (last year we ran into a company whose 82-year-old owner was the lead designer of very complicated and technical products). 

On the flip side, a great owner will listen to his or her CFO, management team, and outside advisors. They’ll delegate and let people grow. They realize their value goes up when they are somewhat expendable, because they work on not in the business.

“Every sin is the result of collaboration.” (Author) Stephen Crane

“The problem with putting two and two together is that sometimes you get four, and sometimes you get 22.” (Author) Dashiell Hammett

Overthinking is Prevalent

On New Year’s Eve I was talking with a new business owner. He closed his deal and takes over operations on January 3. During the conversation he stated he is nervous and has anxiety about owning and running a company. I told him if he wasn’t nervous there would be something wrong with him as it is a huge step. 

Or, as I say in my book, Buying A Business That Makes You Rich, you are making a leap of faith and you want it to be off a chair not the roof, which he clearly is doing (making a small leap) due to all the diligence and preparation. His response was an indifferent, “OK.: Then I said:

“Don’t overthink it. You’re smart, capable, and have run larger companies than this.”

His enthusiastic response was, “That’s really great advice.”

It’s something we all do too often, we overthink by wondering about:

  • All the things that could go wrong, which have never gone wrong in the past
  • Scenarios about how others will react when they probably aren’t giving the issue one iota of thought
  • All the minutiae, most of which doesn’t matter at all, and keeps us from moving forward with our plans on a timely basis

A new year is a great time to consider this. Although it is just as important every day, week, every month of any year. 

“If you can’t beat them, arrange to have them beaten.” George Carlin

Was it Covid or Was it Not?

According to the New York Times, the current situation with Covid and the economy breaks down into two distinct categories.

  • Republican politicians have done their best to downplay Covid, its effects, the vaccine, etc. and emphasized business viability.
  • Democratic politicians have been ultra-cautious with everything related to Covid and yet have ignored the side effects including the disaster of remote education, mental strain, lost jobs, and business failures.

There is a similar separation of opinion when it comes to the selling and buying of businesses and the effects of Covid. Here are three examples:

  • A client is blaming Covid for not hitting their goals this year. Last year was a super year with one reason being the employees had nothing else to do but work. No travel, no entertainment, not much of anything. This year has shown a drop from that peak performance because people now had things to do and were more than ready to do them, to make up for lost time. Were the goals overly optimistic?
  • A friend told me his business is up 50% this year. He knows part of it is a Covid spike that will not continue but he doesn’t know exactly how much of his growth is related to Covid because 2020 was flat. (thanks to Covid).
  • In analyzing a company for a buyer making an offer, we see tremendous growth from 2020 to 2021, about 60%. We know some of this is normal growth and some of it is related to the pandemic. We just can’t figure out the mix.

This is a tricky situation. A buyer can’t discount all the growth as coming from Covid and a seller can’t claim Covid had no effect when they grow 50 to 60%. It takes some creativity so that neither side gets burned. A buyer will easily get burned if they are not skeptical about huge rates of growth in a business and if that happens the seller may get caught in the fire also. Best to pay attention to the quote below.

“The question is not what you look at but what you see.” Henry David Thoreau 

Sand Trees (Will Disappear)

We were in Florida in early December and happened to see the Palm Beach Christmas displays. The tree in the photo is made of sand. It is gorgeous, you can see it’s about 30 feet high, and obviously took a lot of hard work and skill to create.

It’s a lot like a business in that it takes a lot of skill and hard work to create a good company. And when somebody does that it is quite an accomplishment.

As you look at the sand Christmas tree, imagine what would happen if a rainstorm hit. Or if a rain and windstorm attacked the area. This tree wouldn’t last very long, would it? Businesses aren’t as fragile as a sand tree, but they do have things that can cause them to have reduced performance or even collapse. 

It’s one of the trickiest things a business buyer deals with, determining if those issues are serious enough to cause them to back away from the company. Of course, when a company is for sale, everything is rosy and portrayed the same as if the Christmas tree is resistant to everything.

Look no further than the headlines for what some of those things are in the small business world. They include:

  • The employee retention and recruitment situation given there’s a shortage of good employees.
  • The supply chain issues, which affects small businesses a lot more than huge companies like Amazon and Walmart who can control their own supply and delivery chains.
  • Escalating real estate prices, which may make future rent more expensive than it has been historically. 
  • A customer base that is not only fickle, but it is much more educated due to the plethora of (online) information available on everything.

And then, for companies who have thrived during Covid, the question is, is it a spike or a trend? It causes a great deal of consternation for buyers as they surely don’t want to pay for something that won’t be there in another year or two. Quite a dilemma trying to figure out the staying power of recent growth.

This issue is not going to go away for a while. Just another thing we have to deal with.

“Living at risk is jumping off the Cliff and building your wings on the way down.” Ray Bradbury