EP #5: Mastering Multi-Million Dollar M&A: Russell Cohen's Guide to Funding and Deal-Making Success

Unlock the secrets to multi-million dollar deal-making with M&A maestro Russell Cohen in our latest podcast episode. He's peeling back the curtains on the recent $100 million roofing company acquisition, revealing the pivotal role of funding structures in large-scale M&A. This is not just another business talk; it's a rare opportunity to absorb the wisdom of a seasoned professional who has navigated the high seas of private equity groups and lived to tell the tale.

Russell, alongside your co-host Jeremy Wolf, dissects the critical differences between private equity groups with committed capital and those scrambling for funds. This discussion is a treasure trove for entrepreneurs and business owners looking to understand what it takes to secure successful funding and why having an ace M&A advisor by your side is non-negotiable. Tune in for a masterclass on the art of the deal and equip yourself with the insider knowledge to ensure your next business move is not just a step, but a giant leap forward.

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.

Speaker 2: 0:13

Hello everyone, welcome back to the South Florida M&A Advisors podcast. I'm your co-host, jeremy Wolfe, joined by your host, russell Cohen. Russell, how are you doing today, brother? Doing great. How you doing, jeremy, I can't complain. Happy Monday to you. I got a great weekend store here and I know we did a couple of segments before. We were kind of dissecting and unpacking the recent $100 million deal that you did for Roofing Company up on Palm Beach I believe it was, and we were going through and kind of again, like I said, dissecting the different components of a transaction like that. So I thought today you could talk a little bit and give an overview of the funding structure that's typically involved with a large scale M&A deal and how that relates to other deals or other sites.

Speaker 3: 1:00

Yeah, my pleasure. So you know more than likely. Most of these companies that are trying to acquire your firm, for example, are private equity groups and most of the time you're an add-on acquisition. The private equity group buys their main platform that might have anywhere from a five to $10 million EBITDA plus, and they buy the main platform and then they start doing add-ons to augment the valuation of that platform. So the add-ons come fast and furious. But you know, once again, these are professional buyers and they know how to structure deals. They understand they've been doing it their entire life, basically from you know, just coming right out of college to get involved in private equity. So you're at a humongous disadvantage and that's why you need a professional M&A visor to guide you through many different areas of the M&A transaction, but with funding.

Speaker 3: 2:01

So if it's a private equity group and they have committed funding, that means they have money committed, earmarked in the bank, ready to go, okay, and they could just they could fund it, but what happens is they don't fund 100% of the down payment. So, for example, if something is, the business is going for $10 million per se and they're paying the other $9 million upfront. Let's give an example make it simple. They're not taking $9 million out of their bank account. What they're doing is they're probably taking about 30% of that $9 million down payment 2.7, and then they're going out and getting what they call senior debt Okay, and they will get, you know, debt. They'll get debt lenders, okay. So if they're not, if they are funded, that's how they're going to do it. They're going to put a fractional part of the down payment from their own money and then they're going to find additional financing If, if they're, if they're not funded, they have to then go out and get equity investors Okay, where? Which is that 30% I was talking about? Okay, and also debt lenders. So so you, when you're dealing in private equity, either they're funded or not funded, and that will dictate how tough it will be to get the money.

Speaker 3: 3:38

It's always better to have committed capital. If they have committed capital, then they have the equity to put down and have to get the debt lenders. If they don't have committed capital, they're getting funding for the entire amount, and that's where you could hit major, major challenges in the trends in the transaction. For example, in our roofing transaction, $100 million deal, this particular private equity group this was their first acquisition, they did not have the equity and they did not have the debt. So they were raising $70, $80 million for their equity because they were going to do additional acquisitions, so they had to raise a whole bunch of the initial money, they had to get their equity investors and they had to get their debt lender. So we were faced with multiple challenges on that particular Transaction.

Speaker 3: 4:38

So so what? What you need to take away from this is when you're, when we're working with business owners and we are Dancing with private equity I love that saying you need to know if the private equity group has committed capital. If they have committed capital, then they're just getting there. They're just getting their debt. Lending the senior debt, okay, that's it. And if they don't have committed capital, you got a journey. You got a journey on your hands and, with higher interest rates, creates More challenges ahead in the in the M&A transaction. It's a very confusing process, especially for a first-time business owner trying to sell their business, because they just think the private equity is just gonna write a check and it doesn't happen.

Speaker 2: 5:29

Yeah, definitely Confusing, and obviously the larger the scale of the deal, the more confusing it can be. So go back a little bit. Right, how, how do the size and complexity of the deal impact the funding options available, starting from, let's say, a business that you know might be a few million dollars? Right, and it's? It's maybe a more traditional type of structure where You're not having to necessarily go to private equity and explore different options. How, where does one go from there? Obviously, cuz I think of it in terms of I think most people think of it in terms of you go to a bank, you get a loan, sure, right, what's? What's the next step beyond that when you can't secure traditional financing, financing options? What does that look like?

Speaker 3: 6:10

SBA goes up the five million and and, and then the, the SBA lenders can do a second loan, probably for another two to Potentially five million. So so, yeah, so there's SBA and additional financing out there with the big banks, but it has to be the right business and has to have a great EBITDA, basically. But once you start dealing with Private equity, groups are not using SBA, basically it goes, it goes. You know the. The deal structure can happen a lot of different ways. You know, if you have a ten million dollar deal, a lot of times the private Private equity group would want you to take roll over equity. What? What basically means is that you are leaving 10% behind and now you're partners with the private equity for 10%. Sometimes they do an earn out to reach the higher price. Sometimes an earn out could be could be 10, 10% of the purchase price, based on achieving certain levels of EBITDA. Sometimes it's based on sales. So that's how they bridge the gap to get to that 100% by doing a roll over equity. Sometimes that's 10, 20% and sometimes the the earn outs can be Anywhere from 10 to 20% also. So, from a standpoint, when you're, when you're taking old, when you're taking roll over equity. Okay, you're getting equity in the new company that's buying you.

Speaker 3: 7:38

The problem is you have equity and you will not see that, that Equate, that roll over equity, until that private equity group really sells the platform.

Speaker 3: 7:47

When they sell the whole Platform and all the add-on acquisitions together at a higher multiple and they typically will sell Anywhere from seven to ten years at tops they will sell that entire Platform a greater multiple and you'll get a they call it the second bite of the apple where potentially that 10% roll over equity Could be bigger than what you got on the first time around, providing that the private equity group had a successful. You know all the, all the platforms and add-ons did well and they and they had a great EBITDA. They can sell it for greater multiples and that's why people invest in private equity, because they get these great returns upon the. They get returns while they're invested in it, but they also get great returns when they when it's sold. So it's a tricky. It's a tricky endeavor. Obviously an M&A advisor and attorney you got to build a team around yourself or trust trusted advisors to guide you through it. But you know it's it's very common steel structure that we've seen.

Speaker 2: 8:51

Yeah, no, that's. That's why you're out there, man, doing what you do is this complex stuff. I'm curious what are some Challenges or obstacles that you faced? I mean, in case you could talk about this, this hundred million dollar deer or other deals that you've had in the past, and how did you get past those obstacles, when we're talking about the financing and the debt structure?

Speaker 3: 9:10

Yeah, on the on the large roofing transaction, we had a double challenge where you had a brand new company raising their equity for the first time and getting debt for the first time Because they were raising funds for additional acquisitions. So it was, it was, you know, a full, full array of problems trying to do that. But you know the seller has to have current books and records. The books and records can't be six months old. They need like current pain, else like year to date. So if you're behind on your, if you're behind on your books and records, then excuse me, I'm buying fun. If you're behind your books and records, that will make it very challenging.

Speaker 3: 9:53

So in this particular situation they were raising funds, trying to raise funds, you know, $100 million, let's say, without with an old P&L from the first quarter, and we were sitting June, july and August and they didn't have a current year to date P&L. So one of the issues going out to these equity investors and and and debt lenders that they had old in their eyes, old numbers, and one of the challenge was that the controller was moving very slowly because he was trying to run, you know, do the work of the company plus carry on a quality of earnings at the same time, plus keep the numbers current. And then he hit a health problem, which he then had to resign, which then created a huge problem. And we then pivoted and got a fractional CFO which by the end of August, beginning of September, we had current numbers and and then the private, then the private equity group, was able to go out to the market and get the funding within 45 days and allowed us to close on the transaction.

Speaker 3: 11:06

So if we had current numbers and we didn't run into the CFO you know, quitting and if you didn't have health problems, then we could have had probably would have had less issues with funding. We just it was like we didn't have the numbers. It was a challenge raising that much money because of the rising interest rates and environment. So it was just became a whole bottleneck, you know. So that was a very big challenge, but we were to get through it.

Speaker 2: 11:40

So what due diligence is typically conducted by the lenders or investors when providing funding for an M&A deal? What goes into that? How do they kind of underwrite that aspect of it?

Speaker 3: 11:53

Well, I mean there's a, there's something called the data room and the entire file like five to six different layers of diligence, from financial due diligence, legal human resources, insurance benefits, the whole. They have access to everything. They also have probably have access to the quality of earnings and they also do a background check on the seller. So you know, as an M&A advisor now, you know, I know now to ask a seller, you know they're going to do a background check. So if you have issues, they're going in the partnership with you. Yeah, best to bring it.

Speaker 2: 12:32

Bring it to the table before they find everything to the table before Right and everything we know what we're looking at.

Speaker 3: 12:39

Yeah, because you know, listen, we're. You know, everyone was young once and people people you know do things that they, you know, 30 years later you're like what, what were you doing? But you know so people have issues in their past and it gets, gets brought back up and sellers will not feel good about it, no doubt. So, yeah, it's, it's like a colonoscopy second time.

Speaker 2: 13:01

Really, you know so yeah, now I can see how this this process can be extremely complicated and Requires you to have, like you said, a team of extremely qualified professionals. You know from what you do as the advisor to the team of accountants, attorneys and to have this in place, you have a lot of smart people dissecting these deals to make sure that it's beneficial for all parties involved. There's a lot, of a lot of money having a lot of experts in their field.

Speaker 3: 13:31

Look at your company and it's an uncomfortable feeling.

Speaker 2: 13:36

But it's a necessary.

Speaker 3: 13:37

Necessary, that's the word it was necessary because there's a lot of money changing hands and and you're, you're repping that this company makes money and and there's a lot of risk involved in what's going on. So, yeah, everything must you know, everything must, everything must check out, everything must be, you know, checked and eyes dotted and tees crossed. Basically you know.

Speaker 2: 13:59

Yeah, makes perfect sense. Anything else you want to share on this topic before we wrap this one up?

Speaker 3: 14:05

Just talk, talking to those business owners. Don't go it out alone. Once again, these buyers are professional buyers. They do it on a daily basis and and you're an expert in your field Get your trusted advisor team together and work together with the advisors. Trust me, life will go a lot better, no doubt.

Speaker 2: 14:26

Yeah, I mean I certainly could say I, if I got to a point where I needed to sell a business I had, I had grown from a scratch, I would definitely not want to go out of the loan.

Speaker 3: 14:34

I mean I would, I would seek outside help 100% because yeah, because every time you you call a buyer or their team, you're just showing motivation from your side. So it's always better to hide behind the advisor and Get the right advice, no doubt.

Speaker 2: 14:52

All right, sounds good. Russell, always a pleasure. And To our listeners, thanks for tuning in. We will catch you all next time. We want to take care.

Speaker 1: 15:03

Thanks for listening to the South Florida M&A advisors podcast. For more information, visit South Florida MA com or contact 954-646-7651.