For some, the mergers and acquisitions market is something they will participate in just once while others build their entire careers in it. Many businesses land somewhere in between, using M&A as a tool for growth or occasionally transitioning from one ownership group to another as a company evolves.
Regardless of your company’s relationship to the M&A market, the 2021 BizTimes M&A Forum offered plenty of lessons to make your next deal a little easier.
The annual event was held July 21 at the Brookfield Conference Center. It featured two panel discussions, one focused on sellers, the other on buyers, plus a series of breakout sessions. The forum was made possible by sponsorship from Old National Bank, Reinhart Boerner Van Deuren s.c., Taureau Group and supporting sponsor Vistage.
The full program is
available on demand, but here are some key lessons offered by panelists:
The seller’s market may not last into 2022
"This is activity like we've never had before," said Ann Hanna, managing director and owner of Milwaukee-based Taureau Group and moderator of the sell-side panel.
She noted that seller activity and the number of deals the firm is handling have been at a heightened level after an initial pause at the onset of the COVID-19 pandemic.
Mike Malatesta, leader of West Allis-based ERC Midwest, said his company started with several deals in 2018 and 2019. There weren’t many buyers for the companies he was interested in and ERC ended up paying five to seven-times EBITDA. At the end of 2020, ERC was close to buying another business. About a week before closing the owner of the target company asked for $8 million more, a 30% increase. ERC had to walk away.
“Three months later they sold that business for that price to a competing private equity firm,” Malatesta said. “It really has made us rethink our strategy on how to grow the business.”
He later added that rethinking goes as far as whether ERC should be a seller instead of a buyer.
Dan Cahalane, president of Union Grove-based American Roller and Plasma Coatings, said many of the companies American Roller has targeted in the past are smaller firms with no immediate threats pushing them to sell. He’s often had to work to convince them to join American Roller. The story is a little different now.
“What I see is I see fatigue,” Cahalane said, explaining whether it’s the challenges of COVID-19, tight labor markets or a next generation just not as interested in the business, more companies are calling him with a potential sale.
“It’s clearly a seller’s market right now, but it’s been a seller’s market for five years,” said Sequoya Borgman, managing director of Milwaukee-based Borgman Capital. He pointed to low interest rates as one of the reasons the market has favored sellers. Even with more companies available for sale, the availability of capital has kept the market hot.
“We are seeing more books than we’ve ever seen,” Borgman said of company financials his firm reviews, but he expects those opportunities to dry up in the coming weeks with potential tax law changes looming for 2022. Deals that don’t get started now likely won’t close before the end of the year. If the capital gains tax were to increase for next year, a business would need to sell for a higher price for an owner to realize the same proceeds.
As a buyer, Borgman said he is looking forward to things settling down next year.
The pandemic impacted every business
It may be an obvious statement to say the COVID-19 pandemic impacted every business in some way, but in the M&A market, the question is how was the business impacted.
Rob Dillon, executive vice president at Waukesha-based OwnersEdge, said the pandemic created clear winners and losers. Those who lost out during the pandemic may be inclined to see it as a one-time occurrence that should not change the value of their business. The winners from the pandemic will want buyers to see their success as the result of great strategic thinking, not a benefit of a unique circumstance.
“The story cuts both ways and it’s created some ambiguity in terms of how to value these businesses,” Dillon said.
Borgman said he has had one deal temporarily delayed while waiting on approval of Paycheck Protection Program loan forgiveness while Al Orr, CEO of Milwaukee-based Reinhart Boerner Van Deuren, noted the support from government programs like PPP adds an extra layer of complexity to deals.
Get yourself an advisor
When Malatesta sold his first company to New Jersey-based Covanta, he didn’t engage an investment bank in the process.
“I should have, but I didn’t,” he said.
Malatesta figured it couldn’t be too complicated a process. He looked at the numbers, the deal would work well for him. He saw the sale as an opportunity for his team to grow as part of a bigger company. It all seemed to be working out.
“At the very end, there was a little tweak to the deal. It was not in my favor,” he said. “I will admit that it was probably a legitimate tweak to ask for, but if I had somebody, not just me, if I had somebody working for me, we probably could have done a better job on the tweak.”
Malatesta also suggested sellers hire an attorney who specializes in M&A.
“Do not use your personal attorney, do not use the person who has done your wills or been your, whatever, divorce attorney,” he said, noting that an M&A transaction almost has its own language and when both sides are well-versed in that language the deal is able to progress.
Cahalane said the sale and recapitalization of American Roller made clear the importance of having the right advisors. American Roller started with a wide net, evaluating 50 potential buyers before trimming the list to 10 and then three over more than a year.
“Those are big fees but, wow, the value of what that team did for us,” he said.
Dillon noted that having advisors to act as in intermediary in negotiations helped him maintain relationships with the buyer that he would need when he stayed on after the deal closed.
“It preserved the quality of that relationship better than I feel like I would have preserved it if I’m negotiating the nitty gritty day in, day out,” he said.
Owner involvement shapes business value
“I don’t meet too many business owners who don’t tell you that they have a great team,” Malatesta said. “The team still has a leader and that leader is you.”
For a buyer looking at an acquisition target, a great team makes for a great reason to buy, but the important question to ask is why is the team great? Does the business have a system and structure in place that allows the team to function without detailed management from the owner? Or is the current owner intimately involved in every decision and the team just executes well under his or her direction?
“The less you are needed in the business the more valuable your business is,” Malatesta said.
Orr said the deals in his career that have gone spectacularly bad are the ones where the owner or entrepreneur wasn’t what they represented.
“You’d come in after the deal and find out that this person made every decision, that the people you thought were the team really didn’t make any decisions,” he said. “It all ran up to this patriarch or matriarch and once that person’s out of the mix they’re paralyzed, they don’t know what to do, and if you’re expecting sort of a plug-and-lay deal post-closing, that’s a disaster waiting to happen.”
It is also not uncommon for an owner to stay on with the company after an acquisition and Borgman said he has seen cases where a buyer underestimates the value the now former owner brings to the table.
“That business owner has run that business a lot of times 20, 30, 40 years and has tried a lot of things over the years that did not work and they will tell you if you’re going to try something again that it didn’t work,” he said. “The buyers that don’t take that advice, that’s where I see mistakes being made.”
[caption id="attachment_531459" align="aligncenter" width="1280"]
From left to right: Ann Hanna, Mike Malatesta, Rob Dillon and Dan Cahalane at the 2021 BizTimes M&A Forum. Photo by Maredithe Meyer[/caption]
Be ready for a sale, even if you’re not looking
Malatesta and Dillon both said they were not looking to sell when the opportunity presented itself. After giving it some thought, both eventually moved forward with deals. Malatesta said that is why he suggests owners always be prepared to sell or have a detailed enough understanding of the business and its direction to be able to have a discussion.
Hanna noted that there is some flexibility for smaller companies when it comes to readiness to sell.
"As companies get larger, there's an expectation that you have the infrastructure and you have the level of readiness that you can go through a process much quicker, say in six months,” she said. “If you are a smaller business, and by smaller I would say less than $5 million EBITDA, I think there's an understanding that may take a little bit longer to put things in place.”
Borgman said it is important for owners to focus on the fundamentals of their business. Being able to operate with less inventory, collecting on balances sooner, being in a better position on payables or having a better cash position will add to the value of the company.
“The leaner you can run your business from a working capital standpoint, the more value you are going to get out of your business when you sell it,” he said. "You can't do that a month or two or three before you sell the business, you need to be working on that a year, two years in advance, because trying to convince a buyer that you don't need that working capital when you're closing, but you've maintained that working capital on your balance sheet for two years, that's a very, very hard argument.”
Involve the right people in the transaction
If you are thinking about selling your company, key questions to consider might be how many employees to involve in the transaction and what to tell others if it comes up.
Cahalane said American Roller told employees it was working on a recapitalization. He pointed out that he knew the process would involve several groups of bankers in shirts and ties coming into its Union Grove headquarters, something that would be hard to keep a secret, and he didn’t want people to be left to speculate.
Dillon said only one other person in his company knew about the pending deal and as a result he spent most of the 120-day process “haggard beyond belief.”
“I think to my detriment I failed to pull additional people under the hood with me,” he said. “I mean these are big boys and girls, they can handle it. And I think I overestimated potentially the impact of sharing this news with my employees for fear that if the deal went south my levels of employee engagement would drop.”
Malatesta said he had around five people involved in the diligence work for his sale.
“I don’t think it’s a great idea generally to broadcast it universally,” he said, noting that people will speculate and as an owner you do not need the extra challenge of controlling the narrative for all your employees. It is more important to have a clear message for when it is time to announce the deal, he said.
Don’t forget about people in integration
Karen Hung, CEO of Brookfield-based Silver Rock Consulting, said after a deal much of the focus is put on the integration of infrastructure. How will the IT systems come together? How will the combined business handle human resources and policies? The people and leaders are often the last consideration, she said.
Hung pointed to work she did with a major health system that had acquired four other systems. The first year was spent focusing on integrating health records, but the doctors from the various systems were not coming along because they still felt as though they were at competing systems.
“Once we got through it, they were the ones selling the new vision,” she said.
Terry Schneider, president of Colby-based Welcome Dairy Holdings and New Berlin-based Gamay Food Ingredients, said in a recent deal he knew the four owners of the acquired company would be exiting after the sale. He made it a point to meet with the company’s five key middle managers to be able to assess how they would fit with his team and fill gaps as Welcome Dairy worked to vertically integrate.
“If I could not have had those interviews, we probably wouldn’t have went ahead with the deal,” Schneider said.
He also made it a point to travel with his team to the acquired company’s plant in central Minnesota the week after closing. While there, the Welcome Dairy team met with every employee to help establish new relationships after the deal closed.
Cybersecurity is an M&A issue too
Another step Schneider took right after the deal closed was to have his IT professionals updating the acquired company’s systems right after the deal closed.
Orr noted cybersecurity issues are something that should be addressed in the due diligence process so the buying company has an understanding of what issues it may be confronting.
“A lot of it is hiring people who know what they’re doing to help you assess the risk and then isolating the risk where it ought to be, either with the seller or the insurer,” he said.
It may be OK to stretch on price, but not just to close a deal
The deal Schneider and his team recently closed was actually in the works prior to the pandemic. At the time, the target company was in the midst of an expansion and was seeking a multiple of 10- or 11-times earnings while Schneider and his team were thinking the multiple should be closer to 6 or 7. Welcome Dairy eventually walked away from the deal. Talks only restarted this winter when Schneider called the company back to see if they had interest.
"It is important to stay disciplined,” Borgman said. “As a buyer you cannot let yourself get emotional, if you do, you are going to overpay and when you overpay for a business that is really the worst thing you can do for that business because then you've really, really put some pressure on that management team, they've got to outgrow the market, they've really got to improve that business really more than the economy can allow it a lot of times and it's just not fair for the management team."
Schneider said that need to stay disciplined is why it is important to have good advisors.
“I get emotional too as a buyer, maybe we can justify paying another point here or another turn here and things like this,” he said. “Listen to your advisors and they say ‘it's not worth that Terry,' just heed their warning.”
“Don’t do a deal just for the sake of doing a deal,” Schneider added.
But Orr pointed out that it is possible to be overly cautious.
"I've also seen lots of examples where people who felt like they were stretching on purchase price got rewarded later because the dynamics of growth or the opportunity that was there, when they put it together with some other things or they added some accretive acquisitions at lower multiples, it paid for itself,” Orr said.
“The deals that we closed and the client was just so delighted with the low multiple they paid for that business, so often there was a reason that multiple was low and the business, you couldn’t scale it the way you need to and maybe instead of getting the great returns you thought you were going to get you end up with nothing because there just wasn't enough momentum in what you bought,” Orr added.
