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 .