EP #2: Unraveling the Intricate Process of Mergers and Acquisitions

Do you ever wonder how the world of mergers and acquisitions operates? Have you thought about how a company's worth is determined or what the process of bringing on a new client entails? If so, you're in luck. Join us, Russell Cohen and Jeremy Wolf, as we pull back the curtain on the intricate, complex, and fascinating world of M&A. From the initial meetings with potential clients to the final stages of engagement, we break down the journey. We share how we get to know a business, its industry, and competitors, and how we gather and analyze crucial financial documents to determine business valuations.

But that's not all. We dive into the delicate art of pricing, the influence of the economy and interest rates on multiples, and the detailed process of setting expectations for business owners. Understand the importance of the owner staying on post-acquisition and the necessity of providing working capital for the new buyer. We also discuss the engagement process and why a retainer is essential for producing an executive summary. Discover how we prepare a buyer list and the tools we use to find potential buyers. Prepare for a rich, insightful discussion which serves to illuminate the many facets of this intricate field. Whether you're an investor, a business owner, or simply an intrigued listener, this episode promises to unravel the complexities of the M&A process for you.

Transcript

Speaker 1: 0:02

Welcome to the South Florida M&A Advisors podcast, your trusted M&A team. Here's your host, Russell Cohen.

Jeremy: 0:14

Hello, hello and welcome everyone to episode number two of the South Florida M&A Advisors podcast. I'm your co-host, jeremy Wolfe, and I'm joined with none other than your host, russell Cohen. Of course, russell, good to see you again. Hey, good to see you again, jeremy. Yeah, so what I thought we would do, being this the second episode, I thought we would talk a little bit about the mergers and acquisition, the M&A process. Obviously, it's a detailed process and there's a lot to unpack there, so maybe we could break it into little pieces, more digestible components, so you could share some insights and some nuggets and tips for listeners. So why don't we start with, I guess, onboarding of a new client? Like, how does that process work? Talk a little bit about that, if you could.

Russell: 1:04

Great, thank you. So obviously, a lot of times we get invited into a potential client via referral. Sometimes it's all different types of marketing. How are we able to generate our new clients? Once we actually get in front of the client, it's very important that we start learning about the business, get familiar with the history of the business, the team, what makes the company unique and stand out amongst the competitors in the industry. So that first initial meeting could take a couple hours and leading up to, I would have to say, probably three to five more meetings before we're actually selected to get the engagement process. So you know, during those three to five meetings, you know we are starting to gather the financial documentation. You know digging into the balance sheets, p&ls. You know the back side of the financial side of the company. So we can either recommend a valuation, a business valuation, or we can also put together a broker opinion and value which will let the seller know where the business value could land.

Russell: 2:38

Now in the M&A process, you know $5 million or less, you're probably going to come out to the marketplace with a price. But as we exceed $5 million, more, $10 million, $20 million, $100 million, you know, with EBITDAs of, you know $2 million, you know to maybe, let's say, $15 million. That's where our niche is. You're not going to put a price on it. You're going to have kind of like a structured transaction where no price and we go to market and we let the marketplace determine the price. So the seller has a couple options set a price or not set a price. And that's where we have the ability to get better multiples. Now, economy drives that multiple too. We're in a period of high interest rates, so the multiples are going down as a result of higher interest rate. Yeah, so the market is still very hot right now, but multiples have a higher tendency to go down, as I mentioned before. So once we give the seller a kind of like a potential landing spot, if they feel good about it, there's potential to go to the next level. So we really don't have to set a price. So that's very important. So when we get past that process and we know we have a seller that is ready to sell, there's a real reason to sell retirement or they just really roam the business to a level and they need help to get to the next level.

Russell: 4:34

A lot of business owners, entrepreneurs, self-finance their business. You know credit lines and they get to a point where they hit the wall I call it the wall and they've taken it as far as they can. They don't know how to break through that wall and get to the next level and they might be in their 50s and great time to take some chips off the table. But bring in a partner, let's say like a private equity group or private company in their industry that is already at that higher level and they can let them run the company and guide them to that next level that they just can't seem to break through. So those are your life-changing events are great, but a lot of these buyers of M&A companies, they want the owner to stay on. So we have to set the expectations. You're probably going to stay on from a year or two and you have to be part of the team Very important if you're in it for a cash-out position just not going to happen that way.

Russell: 5:48

So that is, we have to set the right expectations when we're meeting with the business owners. That this is not about. It's great to have, you're going to get a great multiple for your business, you're going to get a very large sum of money, but it's not going to be a cash deal where you should expect all the money all at once. So setting proper expectations as we go through that early process with the business owner is extremely vital. We also have to set expectations where they are providing working capital for new buyer. So the business is a machine. You built up this company doing 25, 50 million, 100 million, and the buyer is not coming in to recapitalize the business. So we have to set the.

Russell: 6:52

This is probably one of the key factors for our success is explaining to the seller that a buyer is going to dig into 18 months of balance sheets and they're going to determine how much money needs to be left behind, either via accounts receivable or cash, just depending where you negotiate. More likely accounts receivable, so that working capital leave behind is probably one of the stumbling blocks in a M&A transaction. Earlier we addressed that, the better success that we will have getting to the finish line. So setting the right expectations early, yeah. So moving forward in the process, once they have the expectation of the working capital, we have a general idea of the multiple and they're ready to go to market with our company. And this could take, you know, three. You know the signing process, the engagement process can take a few months and one day. On board us, we typically have a small retainer.

Jeremy: 8:14

I was just going to ask how that works with the retainer. It sounds like you do an awful lot of work on the front end in terms of discovery and background, you know. So how does that typically work in terms of the retainer?

Russell: 8:31

Yeah, so you know a lot of M&A firms might charge 25, 50 grand retainer front. You know we're going to, you know we might. Our range could under 10,000. Certain cases, smaller deals will probably go under five. We need that retainer because we're going to put together a executive summary.

Russell: 8:53

We outsource that executive summary to a company called ValueCraft which is a professional sim writing firm and what they do, and this company is based in the United States. They have a team that will completely take you from start to finish from writing that executive summary. So there is a cost associated with that and there is a seller interview and it goes into tremendous amount of information. You were talking about 25, the 40 pages information about the business. So when we provide that executive summary to a potential buyer, they already know quite a bit about the company at that point and the financials and they're at a point where sometimes they move right to a letter of intent and sometimes they would want to talk to the business owner and other times they would combination, talk to the business owner or and review the data room that we put together of the financials. But you know, so like if we're going to be start using like a structure transaction, where we are taking offers, where we're trying to get the highest possible price. Then what we're doing is we are preparing a buyer list. You know 100 to 200 of potentially the best buyers out there who can buy your company, and we're utilizing tools called private equity info, which is basically all the private equity companies in the United States. We're able to go into this software, plug in certain keywords and we will be able to get which private equity firms are actually have a platform in the industry. For example, if I was trying to sell a plumbing company, I plug into the platform plumbing contractor. You know all the different keywords and I will be able to get a list of all the private equity groups that have a platform. You know main investment in plumbing and I will be able to get maybe 30, I'll make up a number 30 to 50 private equity groups that have already have a platform or are adding on. They wanna add on to their existing platform and in certain cases, if you have a high enough EBITDA, your company is then the platform and that's where the multiples get very, very lucrative.

Russell: 11:38

And then there's also private companies. We use private company databases. That allows us to research based on many different criterias revenue, number of employees, ebitda and we can pull a list of private companies throughout the United States and our databases go worldwide, of course, but let's say United States and we're able to add to that list. So once we have this buyer list okay, and it could be 30 people, it could be 200, it could be 500, we will then reach out more than likely via email and send a like an introductory teaser, a one page information sheet about the company and it's fairly quickly a yes or no if they're interested. Because a lot of times, like for example in plumbing, if you're doing new construction, a lot of companies don't want you construction, they want service work, they want commercial service work. So for, like, new construction that's not a sexy word in the plumbing world of for private equity, you know what I mean.

Russell: 12:58

So once we reach out to all those firms through the list, then they're gonna sign an NDA but they're gonna get the executive summary and then they're gonna express interest to either get into the data room either they're gonna make an offer the letter of interest, letter of intent, you know or you know, if it gets a very competitive situation, we're gonna set a date where we're gonna ask for a letter of intent by a certain date.

Russell: 13:34

And if we get a bunch of them, you know we're gonna pick the top three and do a management meeting on Zoom. If they're not local one likely not local and then we're gonna pick one and we're gonna negotiate and then obviously try to maximize because we have three offers, hedge each one to get to the best top line price unless the seller feels certain companies are better like a culture fit and feels certain companies are might be better fit for their employees or most capable of getting to the finish line. So sometimes price is not the key factor that drives the business owner. It's, you know, can they do? They have the funding, are they the right fit? You know, is there a right understanding between the owners? So it's a very complicated process and you get to that LOI signing and your work has just begun.

Jeremy: 14:48

I mean, yeah, it sounds certainly like a complex transaction to deal with the sale, structuring the business, and I think we just tip the iceberg touching on some of these topics here. Moving on, we can get into in future episodes like deal structuring, negotiation, talk a little bit more about pricing and all that, but I certainly think that's a good place to end for today. Russell, always a wealth of knowledge, definitely a master at your craft, so it's always nice being in your company, brother.

Russell: 15:20

Thank you very much. I appreciate it, looking forward to the next episode Absolutely Everyone.

Jeremy: 15:26

Thanks for listening and we'll catch you next time. Take care.

Speaker 1: 15:33

Thanks for listening to the South Florida M&A Advisors Podcast. For more information, visit southfloridmacom or contact 954-646-7651.