Smart Business Dealmakers

Top M&A negotiating mistakes

Fri, 20 Feb 2026 16:22:54 Z

Negotiating mistakes in M&A, on either side of a deal, can strip value and hamstring the opportunity for long-term post-deal success. So, avoiding the most common mistakes at critical junctures is immensely important.

Bill McComas, co-founder of the law firm Jensen & McComas, drops by to talk about the top M&A negotiating mistakes from both the buy and sell side, what they can do to a deal, and how to avoid them.

Here’s an excerpt:

“I always say in transactions like this, or any real business transaction, that people fail in business for the same reason why they fail in their personal lives,” McComas says. “And that is, for transactions like this, it’s almost like you’re dating someone. The courtship process is very similar. So, if you asked in a courting relationship for a pre-nup on the first date, that’s not going to send a very good, strong message. It’s certainly not going to suggest trusting one another.”

Arc Of An M&A Deal

Fri, 26 Sep 2025 15:49:46 Z

For owners of legacy businesses, the first time they sell their company is often the last. With only one chance to maximize the value that will be leveraged during life after business, it's important to get it right.

Mark Jensen, a member at Jensen & McComas LLC, offers an overview of the arc of an M&A deal — from assembling the deal team to the day of close. He offers tips on what to do and what not to do, and how to deal with the emotional issues that come with selling what is often a life's work.

Here's an excerpt:

“The deal is going to run at a certain pace, and you really can't rush it because the people with the money are going to insist on all the things we've talked about — due diligence and negotiating documents and things,” Jensen says. “So, don't become impatient. And don't get insulted when people question your business or your business judgment or your financials or anything about your company.”

The ESOP Exit: Rethinking the End Game

Fri, 26 Sep 2025 11:24:42 Z

For business owners thinking about their exit, the choice often seems limited to selling to a competitor or to a private equity firm. But there's a third option, ESOPs, that secures their legacy and rewards the very people who helped build the company.

Royer Cooper Cohen Braunfeld’s Andy Rudolph, Marc Hirschfield and David Dalesandro take a deep dive into Employee Stock Ownership Plans to break down how this unique succession path works — from the powerful tax advantages to the mechanics of financing the deal. They also explore the founder's role after the sale and the keys to building a thriving ownership culture long after a transition.

Here's an excerpt:

“This is a ESOP transaction that I did in the 90s,” Rudolph says. “This was a management team that had taken a leveraged buyout from a large, well-known public company in the Philadelphia area. They did a 1042 rollover transaction, and ultimately did four transactions that got the ESOP to be a 100 percent owner of the business. All of those proceeds of sale were deferred in rollover transaction. Six of those people have gone on to their eternal rewards — there's one survivor — and all of those six decedents’ families have benefited from a step up in basis, and the company ultimately operated as an S corporation free of federal income tax. So, the transaction design over a lengthy period came out exactly as hoped and planned.”

Factors Affecting Public And Private Dealmaking

Thu, 14 Aug 2025 10:19:08 Z

Regardless of what uncertainty exists in the market or from where it originates, deals continue to get done. However, doing deals during more turbulent times takes some strategic maneuvering.

On the Smart Business Dealmakers Podcast, a few folks from Riveron: Alex Shahidi, Transaction Services Leader, Jeff Bernstein, Equity Capital Markets Leader, and Ryan Gamble, Tax Advisory Leader, explore the current deal environment, and the factors affecting public and private dealmaking. They talk tariffs, capital and debt markets, legislative changes affecting tax, IPO, SPACs and other factors that affect the execution of M&A deals in uncertain times. Here’s an excerpt:

“The things that are going to become important over the next three or four months as a result of the tax policy and as a result of the tariff back and forth is, is the consumer holding up? And are corporate CFOs scared enough to adjust their budgets for lower spending at their companies, which obviously would impact the overall economy?” says Jeff Bernstein, Equity Capital Markets Leader, Riveron. “This is all still a TBD on the macroeconomic front. And the factors that we're considering right now are probably not the factors that we are going to be looking at at the end of this year.”

M&A Trends In The Government Contractor Space

Fri, 01 Aug 2025 11:24:54 Z

It was supposed to be a great year for M&A in the government contracting sector. New SBA rules were expected to drive GovCon sellers to market as they raced to beat the rules’ implementation. But then the Department of Government Efficiency happened, which sought to cut government budgets, something that threatened to negatively affected many GovCon businesses since, as the name implies, government contracts are key to their value.

Helping to identify the trends that are pulling GovCon businesses in two extreme directions, Wright Lewis, a Partner at Dunlap Bennett & Ludwig, stops by to talk about the factors weighing most heavily on M&A in the sector. He also offers a lesson in the key differences between commercial and GovCon M&A, as well as perspective on the sector’s unique risk factors and advice on how to maximize value in what is shaping up to be a tricky market. Here’s an excerpt:

“I think the feeling in the industry was this was going to be a big year for M&A because of the SBA rule going into effect, and the delayed effectiveness of that particular rule on the set-aside multiple award contracts,” Lewis says. “And then obviously, a huge wrench got thrown into that earlier this year. I actually had a deal blow up last year, immediately after the election, because the buyers foresaw that this was going to happen, and so they just pulled out and said, ‘We're not going to spend any more time on this.’”

To Get The Best Deal, Be Prepared

Wed, 28 May 2025 17:15:37 Z

Perhaps the worst thing a business owner can do ahead of the sale of their company is not be prepared. Not only could that crater the returns the owner was hoping to get for what is often their life's work, it could nuke a sale entirely. Fortunately, James Hipolit, a mergers and acquisitions partner in the Berwyn office of Troutman Pepper Locke, has advice for those who've never sold before.

In this podcast, James covers the basics from first steps to pre-diligence to common pitfalls, offering advice to get first time sellers off to a strong start. Here's an excerpt:

“Selling a business is a process, and ultimately a transaction, where both sides are going to be trying to get the best deal possible,” James says. “You've built something, and in some cases, the business you're selling is your life's work. And in most cases, the buyer will seemingly be going out of their way to find every flaw they can in their business. In many cases, these things the buyer and their advisers come up with will seem trivial to you and there'll be things that you won't see as flaws at all. All this is just part of the process.”

Buyer Pre-And Post-Close Commercial Insurance Due Diligence Considerations

Thu, 17 Apr 2025 12:25:00 Z

One area of complexity in a buy-side M&A transaction is commercial insurance. Given all the potential liabilities, hidden risks, industry-specific needs and coverage gaps, knowing what to look for during due diligence is critical to maximizing post-deal value.

On this episode, Brian Stovsky, senior vice president and practice leader for the Oswald Companies and Unison Risk Advisors Mergers & Acquisitions Practice, and Joe Curtis, vice president and director of benefits for Michigan at Oswald Companies, talk about buyer pre-and post-close M&A due diligence considerations of commercial insurance for risk management.

Here's an excerpt:

“What is deal threatening in terms of compliance? Are they out of compliance with the Affordable Care Act? The IRS? The Department of Labor? ERISA? Things like that can kill a deal. Do they have an outstanding pension liability, of an owner that's not continuing with the business, that's underfunded? That's a huge time bomb for us that could threaten the deal. Whether their ERISA documents are in place, that's something that we could fix post closing. For commercial insurance, is there an impending cyber liability that is going to really impact earnings post-closing? Is there a litigation that's ongoing that's going to impact earnings post-closing? Those are deal-threatening issues. Whether the limits or a policy could be enhanced — cost-neutral considerations that could be done following close — we'll break those things out, whether it's a platform or an add on.” - Brian Stovsky, Oswald Companies

You can catch the full conversation on the podcast.

Tackling ESOP Myths

Thu, 17 Apr 2025 12:19:58 Z

There are many myths about ESOPs — that they’re complicated or that once within its structure a company owner loses control, or that banks won’t lend to them. David Solomon, a member at Levenfeld Pearlstein, is here to bust those myths. In this interview, David, who in 2009, founded and currently serves as the head of the firm's Employee Stock Ownership Plan practice, sets the record straight on what an ESOP is, and what it isn’t.

Here's an excerpt:

“Getting stock into the hands of the employees, giving them information, treating them like owners, having them adopt an ownership mentality does improve how the business performs. And it's a really nice thing to see when you have companies that are worried about selling to third parties and what happens to their business. A lot of times these ESOP companies are the biggest employer in town. They build soccer fields. They're involved in the community. To see all of those things be able to be preserved, and then also have employees be given a chance to get these retirement benefits in the form of stock that have their fingerprints all over it, to be able to affect how their retirement is funded and provide what we call a dignified retirement to employee owners, it really does translate, if you think through it just intuitively, it does translate into a much higher-performing company.” - David Solomon, Levenfeld Pearlstein.

You can catch the full conversation on the podcast.

From Public to Private, A CFO’s Perspective

Thu, 10 Apr 2025 11:28:26 Z

What happens when a publicly traded company transitions to become privately owned? During the midday Fireside Chat at the Boston Smart Business Dealmakers Conference, two CFOs share firsthand insights on the realities of life as a public company, the strategic considerations behind their respective sales to private equity firms, and what the transition process entailed.

Cassandra Hudson, CFO of StackAdapt and former CFO of EngageSmart, along with John Wagner, former CFO of Brightcove, in a conversation moderated by Bank of America Managing Director Phil Ianniello, discuss what changed post-transaction and how the shift has impacted operations and financial strategy, and offer key lessons from navigating this major transformation.

Here's an excerpt:

“Life as a public company, I always say, I have a love-hate relationship with it. I must be some type of glutton for punishment, but I love public companies, but it's really hard. Everyone gets super excited about the IPO and it's an event, it's one day, and then you have to live and die by every quarter. And people are going to try and influence you in some way, whether it's public company investors that you're talking to all the time, your board, the management team, to commit to more than you want to, or you should. And so, that's the real tough part, in my mind, is just sticking to what you feel really comfortable with and what you believe in for the company, and telling that same story and not letting anyone influence you.” - Cassandra Hudson

Dissecting The Letter Of Intent

Thu, 10 Apr 2025 11:17:16 Z

A letter of intent, often referred to as an LOI, is essentially the first formal document in a sale process between a buyer and a seller. It not only establishes the intent of two companies to move forward into a sale process, but it sets some terms for the process that sellers should carefully consider.

Tony Montanaro, transaction advisory partner with Louis Plung & Company, talks on the Smart Business Dealmakers Podcast about LOIs, and what sellers need to know about the terms within them before moving forward with a deal.

Here's an excerpt:

“We talk about an LOI being non-binding, but the terms within this agreement, if things come up during the sales process of putting together the actual purchase agreement, I can tell you from experience, the first thing people do is they go back to the LOI and say, ‘How did we address this in the LOI.’ If it was addressed, if it was defined in the LOI, then it's going to be very, very difficult to negotiate new terms on those provisions later on in the deal.” - Tony Montanaro.

You can catch the full conversation on the podcast.

Discipline Drives Successful Deals

Thu, 27 Mar 2025 20:44:15 Z

Executing on a buy-and-build, hub-and-spoke strategy, Schill Grounds Management Founder and CEO Jerry Schill, having recently brought on an equity partner, has been strategically looking for new opportunities as a buyer in very specific markets.

“(We) go in, find a beach head and then build around that beach head model to gain more and more market share,” Schill said at the 2024 Cleveland Smart Business Dealmakers Conference. “Our opportunities are ranging anywhere from about $500,000 in EBITDA upwards to $4 million in EBITDA, and we've currently been acquisitive and organically growing for about the last three years.”

But through that recent strategic growth period, there are still ripples from the pandemic with which he has to contend. He says there are two post-COVID periods for Schill and the business. There's immediately following COVID with people starting to come back online, and then there’s all the inflationary pressures from aspects such as supply chain issues or interest rates. That’s made it challenging to normalize a target’s business activity, whether it was the seasonal nature of high years and low years, or inflated or deflated margins that can be attributed to the pandemic.

“Going in and being able to have all the data, the resources and really the perspective to go and meet with these sellers and make sure that we truly understand the story, so that coming out of a deal post-close we're able to maintain margin profiles has been a big challenge,” he says.

When it comes to the due diligence process, Schill says he starts with why he’s going to do the acquisition.

“All deals are inherently risky, but really going back, analyzing why you want to make this move or do this deal, is critically important to going back and looking at your playbook and making sure that the playbook reflects all the value drivers and the blind spots that may exist in that particular opportunity,” Schill says. “And then making sure that your team, your deal team, your integration team also drill an inch wide and a mile deep on those specific blind spots that could eventually cause erosion to margins post close. Remaining very disciplined and very strategic in your go-to-market strategy is going to be critically important, especially now with the cost of capital. A couple of years ago, you could make a couple of mistakes and arb those deals down relatively quickly. Today, those opportunities don't exist as much as they used to, especially when you're looking at the margin compression in all businesses, small businesses, across the United States today. Discipline is the primary driver to making sure you have a successful transaction.”

In order to ensure your vision as a seller becomes a reality, he says the best advice he received early on was to start with a plan. That means preparing to sell the business. There are a lot of steps, and exactly how to approach it depends on where the business is in its lifecycle, where the owner is in their personal life, and the goals that the owner has for both personally for the business, post transaction. But, generally, a good first step is to build a team of trusted advisers who can offer honest, constructive feedback to make sure that the business is actually ready to sell.

“The messiest deals that we've seen are the deals where people wake up one day and say, ‘There's some sort of pressure in the business, or friction, and I'm done with this. I just want to sell the business.’ And they're going to take it on the chin in terms of enterprise valuation,” he says. “Making sure that you find mentors or advisers that can help you get alignment in what your personal and professional goals are is going to be critical to maximizing the enterprise value that you're going to get for the business, and is also going to help you prepare for that transaction. Transactions are very disruptive. People say business is business, but they become very emotional. People get very frustrated. Deal fatigue is a real thing. So, making sure that you've got people around you advising you and preparing you for that transaction is critically important.”

How Lowering Health Insurance Costs Can Increase Value At Sale

Thu, 06 Mar 2025 11:15:05 Z

Self-funding health insurance through a group medical captive can be a way for businesses of any size to better manage what is often their second greatest expense. And according to Roundstone Founder and President Mike Schroeder, it may also be a way for business owners to increase the company's value ahead of a sale.

On this episode of the Smart Business Dealmakers Podcast, Schroeder talks about the self funding model, as well as its impact on an M&A transaction. Here’s an excerpt.

“Employee benefit health care is a No. 2 expense. Industry average (cost per employee) is $16,700, so if you're selling your company and you're spending more than $16,700, you have an opportunity to reduce a No. 2 expense, increase your EBITDA and have a higher value. Anybody that's selling a business should be looking at that metric, should be looking at their health plan and making sure they're managing it in the most efficient way possible. In today's world of multiples, 10,15 times, a 100 employee firm can save half a million dollars by getting in an efficient-run health plan, as opposed to the industry average. Half a million dollars with those multiples, that's some real value. Any seller should be paying attention to that. And the buyers should be looking to see if there's opportunities for improvement there as well.”

After A Liquidity Event, Don’t Just Retire

Thu, 20 Feb 2025 16:22:38 Z

Every liquidity event is different, says Steve Kirk, Executive in Residence at Cleveland State University, former COO at Lubrizol (where he served when the company was acquired by Warren Buffett’s Berkshire Hathaway in 2011) and former Board Chair at Valvoline. So when one happens, what’s next for the business leader involved?

“It depends an awful lot on age,” Kirk said at last year’s Cleveland Smart Business Dealmakers Conference. “In my case, when Warren Buffet bought the company, I was already 62 years old. I was so-called retirement age. Had I been 40 years old, I would have made a different decision.”

The same thing holds true in in private equity sales. Another variable, one that he says he’s seen as a board member for several private equity firms, is the family involvement in the business. Without family employed in the business, he says it’s easy to sell — it can provide liquidity while taking away the concern. But if family is involved, it becomes a little bit more complicated.

“In my PE experience, a number of them have family implications in the business, and I think it's important for the private equity firm that typically buys these companies to be very aware of that and make sure that the family thrives in this situation,” he says.

As he was preparing to transition from executive rolls into his next chapter, Kirk says he was helped by really good advice from a mentor of his — a former boss.

“He said, ‘Don't just retire. Always retire to something,” Kirk says. “’Have a game plan.’”

That boss, he says, after his retirement, devoted virtually every morning to Habitat for Humanity building houses. Kirk had several months to plan when Warren bought the company. He was very active at Cleveland State and he talked with the Dean of the Business School, who created a role for Kirk in the business school, giving him the title of Executive in Residence, which he still holds.

“Whatever it is that you do, whatever you retire to, should be something that you're passionate about, something that makes you feel good,” he says. “In my case, it's all for fun. It has nothing to do with money.”

However, money, and wealth planning, had been on his mind for some time. He says some 20 years ago, he worked with a wealth management firm on taxes, managing sources of income and making sure that he’s not putting himself into tax jeopardies. That early relationship won his confidence, so that when he did have his big liquidity event, he was totally confident that the firm would do a better job in managing those funds than he would.

“I don't want to do that,” Kirk says. “We'll let the pros do it. And they've done a superb job.”

Technology As A Value Driver

Thu, 06 Feb 2025 17:52:59 Z

Technology is a core tenant of value creation in M&A says Dean Graves, U.S. CEO at Freeman Clarke.

“You can't, in our opinion, drive value and scale without the right technology applications and infrastructure in and across your business,” Graves said at the New York Smart Business Dealmakers Conference. “What technology provides is effectively your ability to see across your business, look at those KPIs, those business insights and analytics that empower you to develop the right qualified strategies and plans, and build confidence around what those strategies will relate to as it ties to your overall thesis and strategy that you're looking to drive towards.”

He says they focus on areas that they can affect from a top line revenue standpoint, such as different pricing strategies or additional ways to expand revenue opportunities in respect to product development and product expansion, how to engage the market from a sales and marketing perspective, as well as client engagement, client growth, client retention and client experience, and looking across the business to optimize the source-to-pay capabilities. Ultimately, the emphasis is on making the right decisions that ultimately give confidence that leadership not only sees the right things across the business, but give the right level of focus in the order of priority that will deliver the right ROI aligned to the overall thesis and plan to deliver value.

“A lot of our work begins with consulting around understanding the current state in a business and doing a thorough assessment of how the business is organized, what policies, procedures, governance and controls, and how the organization manages risk,” he says. “It's a full end-to-end review, and that's overlaid then with a practical technology roadmap with accountability that ties in an order of priority to the business imperatives that ultimately tie to that value opportunity.”

On the integration side, he says one thing to understand that is typical in the middle market across all sectors is companies and leadership are experts in what they do with competency and are focused on the sharp end of their business — they focus on why they exist, how they compete, how they differentiate, how they can continue to drive and grow their business. What most middle market companies lack and have not invested in is building out the right kind of infrastructure, technology platform, administrative function, with the right leadership from CIO or a CTO standpoint. That’s mainly because it's considered an expensive role to put into the business and typically technology is not a core competency. So, there is a perception of what is important versus what they do, enjoy and focus on.

“Part of value creation is, how do we introduce the right technology strategy to support the business, bring that right level of strategic leadership to the table to be the voice to the board that can translate technology into a business conversation, and then look to assess the business and derive and build and execute a technology strategy accordingly?” he says.

Then, when considering grow through organic and inorganic opportunities, he says if there are systems, the capability, leadership and best practices that constitute alignment to the direction the business is heading, there is great efficiency in integrating those opportunities into the business and driving arbitrage. The next step is to go down the value chain — from sales through managing risk — between the two firms to identify crossovers that drive either efficiencies, optimization, value, or how one might leverage another, either through geographic expansion, products and services and the like to cross-sell, up-sell, and drive greater value in and across clients.

“It begins with appreciating that most companies in the mid-market have high competency in why they exist and how they compete,” Graves says. “But the real opportunity is how to build out the right level of infrastructure that's right for them, that supports them today, that's aligned with the direction towards that North Star in terms of the thesis, but then has the ability to be agile and grow and scale with the business. Our operating point of view is, if you can see clearly across your business and you've got the right indicators communicating the right KPIs, it helps you in a qualified fashion make those right decisions, and you're able to report and operate and ensure that your business can achieve those things in lockstep with expectations.”

Positivity reigns as dealmakers expect a bullish M&A market despite continued macroeconomic challenges

Thu, 06 Feb 2025 17:37:36 Z

The pace of dealmaking is picking up, says Robert Brown, president of DataStrike, and the debt markets are starting to accept the higher interest rates.

“PE firms are adjusting to the new norm of higher rates,” Brown says. “They seem to be underwriting deals that make more sense and are more flexible.”

The signs, according to James Myers Jr., vice president, business development at BEAM Collaborative, suggest a 2025 M&A environment that is dynamic and full of opportunities.

“Economic stability, rising valuations and strong buyer demand are driving activity,” Myers says. “Private equity firms are aggressively pursuing deals and the generational shift of retiring business owners is creating a steady stream of businesses entering the market.

Though there is continued M&A activity despite macroeconomic challenges, it’s more selective, says George R. Thomas Member Metz Lewis Brodman Must O’Keefe.

“Strategic buyers and private equity firms are focused on high-value, transformative deals rather than broad-based acquisitions,” Thomas says. “Rising interest rates have increased the cost of leverage, making financing more expensive and impacting deal structures. This environment favors cash-rich strategic buyers or PE firms with strong dry powder.”

While Kristine Carpenter, vice president legal and assistant corporate secretary at Constellium, says the general outlook for 2025 is cautious optimism, the fourth quarter of 2024 was a busy time, which indicates that the appetite for M&A is increasing and bodes well for a busy 2025.

“From all facets, there are upsides in 2025 — buyers need to continue deploying capital effectively in an environment where shareholders and stakeholders continue to push for growth,” Carpenter says. “Sellers are always looking to make a meaningful exit or need to optimize their portfolio.”

Dealmakers we spoke with seem generally bullish on the coming year in M&A, though conditions in some areas affecting dealmaking are less than ideal and a cause for a measured approach. They offer their perspective on the M&A environment and how they see the deal year wrapping up.

Watching the market

Among the macroeconomic factors the dealmakers we spoke with have their eye on are the geopolitical landscape in the backdrop of a new administration taking over in the Oval Office; the tariff environment and its impact on trade imbalances and earnings at multinational businesses; the budget deficits and tax policy, and their impact on capital formation and CAPEX; and progression of inflation and its impact on interest rates and labor economics, says Rama Subba Rao Mithipati, CFO of Aquatech International,

Thomas says he, also, continues to pay attention to interest rates and inflation.

“Higher interest rates have made debt financing more expensive, reducing leverage-based dealmaking, especially for private equity,” Thomas says. “Increased borrowing costs and uncertain inflation projections could temper valuations, causing longer negotiations or a shift in deal structures, such as earnouts or equity rollovers.”

Further, Thomas says concerns about a potential global economic slowdown or mild recession persist.

“Uncertain economic conditions may cause acquirers to delay or scale back on large transactions,” Thomas says. “On the other hand, distressed assets and underperforming companies may present acquisition opportunities for cash-rich buyers.”

Nick Conti, vice president at 3 Rivers Capital, says now that the interest rate regime has changed, the incoming administration’s impact on the markets will be the closest thing to watch in 2025.

“Some of the policies proposed by the incoming administration could have a significant impact on the supply and demand of middle-market companies,” Conti says.

Carpenter agrees that the ushering in of a new administration in the U.S. will have impacts on the M&A market.

“Advisers are watching for changes in government regulations, tax law, interest rates and competition law among myriad other policy positions,” Carpenter says. “Even without proposed changes, the rhetoric after 2024 is one of being pro-business and pro-growth, which can impact business sentiment.”

However, economic and policy uncertainty seems to be making everyone a bit more cautious, says Toby Kreidler, Director, Stellex Capital Management.

“Beyond interest rates and inflation, we’re seeing more focus on supply chain resilience with potential tariffs under the new administration,” Kreidler says. “Labor shortages and an aging workforce are some other additional topics of focus.”

Still, stable GDP growth of 1.9 percent, consistent interest rates and favorable credit markets are significant in the shaping of the M&A landscape, Myers says.

“These factors foster confidence among buyers and sellers,” Myers says. “Additionally, potential deregulation and tax incentives could further boost dealmaking, making this a strong year for M&A activity across various sectors.”

Strength gets numbers

Because strategic buyers are seeking acquisitions to drive growth, expand capabilities or enter new markets, sellers with strong financials, proven growth potential, or niche expertise can command premium valuations.

“Quality still wins,” Kreidler says. “If you’ve got a strong business with good fundamentals, there are still buyers out there, especially strategics. Companies that have adapted to the current environment are also in demand — for example, domestic manufacturers that have invested heavily in robotics, automation and technology to improve labor productivity.”

Sellers have a multitude of exit options today, perhaps more than they ever have, Conti says. Those include selling to a strategic, a private equity group, an individual, an ESOP, or a management buyout. But too many options can create challenges.

“The capital markets are increasingly liquid and accessible, which can cause sellers confusion during exit planning,” Conti says. “With exit options increasing, I think buyers must find more ways to add value to sellers pre- and post-close.”

Subba Rao says working in sellers’ favor is that there’s lots of cash on the sidelines chasing deals in a moderating interest rate environment.

While sellers can anticipate a market in which strategic buyers need continued growth and are searching for inorganic ways to continue achieving their economic targets, the headwinds of the past few years continue, Carpenter says. Still, there is pressure on strategic buyers to both minimize risk and deliver shareholder value.

Thomas says economic conditions have caused buyers to adopt more conservative valuation approaches, often resulting in lower offers compared to previous years.

“Buyers are scrutinizing revenue growth, profit margins and forecasts more rigorously, leading to tougher negotiations and reduced willingness to pay premiums,” Thomas says. “Further, higher interest rates and tighter lending standards have constrained leveraged buyers, such as private equity firms, reducing the pool of potential acquirers or deal sizes.”

Also, the valuation gap is real, Kreidler says, adding, “sellers need to be realistic about what the market will bear.”

Myers says valuation gaps between sellers and buyers can pose challenges, particularly in competitive industries.

“Regulatory scrutiny in sectors like health care and technology may also complicate deals,” Myers says. “To overcome these hurdles, sellers must present clean financials, articulate growth potential and engage experienced advisers to navigate the process.”

Year of prudence

Buyers are taking advantage of a generational shift, acquiring established businesses as retiring owners look to sell, Myers says. Improved credit markets and record levels of dry powder are enabling buyers to pursue strategic acquisitions. And with many businesses SBA-loan prequalified, buyers are well-positioned to act quickly and secure deals.

More realistic valuations, in some cases, are giving buyers a bit of an advantage, Kreidler says. The current environment is also a chance to be selective and focus on strategic fit and operational quality.

“Buyers right now have the ability to grow the pipeline of potential deals because a lot of companies and CEOs have been on the sideline for the last couple of years,” Brown says. “They have been waiting for the market dynamics to change and that is occurring as we speak.”

Thomas says valuations in many sectors have come down from the peaks of recent years due to rising interest rates, economic uncertainty and shifting market conditions. This adjustment creates opportunities for buyers to acquire quality assets at more favorable prices. But higher borrowing costs due to increased interest rates have made leveraged buyouts and debt-financed acquisitions more expensive, reducing purchasing power for buyers reliant on external financing.

“Banks and other lenders are more cautious, limiting access to capital and increasing the scrutiny of deal structures,” Thomas says. “Economic instability and fluctuating financial performance in many sectors make it difficult for buyers to assess fair valuations, increasing the risk of overpaying. And many sellers remain anchored to pre-pandemic or peak-cycle valuation multiples, creating a disconnect between buyer offers and seller expectations.”

For Subba Rao, while sustained strength in GDP growth rate with record back-to-back years in the market are a benefit to buyers, impending changes to tax policy could create headwinds. Navigating economic and policy uncertainty, Kreidler says, makes forecasting just a bit tougher.

Brown says because the M&A market is coming back, multiple bids are being placed with good, if not over-the-top, valuations.

“Buyers are encountering stiff competition for attractive businesses, which can drive up valuations,” Myers says. “Regulatory issues in specific industries also present barriers to closing deals. To succeed, buyers need to conduct thorough due diligence, remain flexible with deal structures, and pursue acquisitions that align with their long-term goals.”

Carpenter says sellers and buyers continue to face economic environments that are unpredictable, largely due to geopolitical and macroeconomic factors.

“As a result, sellers and buyers have a number of competing objectives on any given day,” Carpenter says. “M&A requires significant time, effort, resources and planning, and buyers and sellers need to be able to commit to their M&A objectives while continuing to manage day-to-day operations.”

She says failure to plan and lack of clarity on strategic objectives are large obstacles in getting deals done. Sellers need to be prepared well in advance of a sale process for full fledged financial and legal diligence. Anticipating a buyer’s diligence process and proactively addressing issues or disclosing issues leads to greater deal certainty.

Buyers, for their part, are keen to purchase streams of revenue growth and not liability. The past few years have shown an increase in shareholder and stakeholder engagement, she says, leading management teams and boards to make considered and risk averse decisions. However, both need good advisers and clarity on their objectives in order to be able to absorb large amounts of information and still make decisions.

“Decision fatigue in both the M&A and business environment is real, and being able to deftly navigate complex issues is critical to a successful M&A process,” Carpenter says.

Great expectations

With inflation moderating and interest rates potentially peaking or beginning to decline, Thomas says buyer confidence is likely to improve, leading to a rebound in deal activity in 2025.

“With private equity funds under pressure to deploy capital, the middle market will see increased activity, particularly in sectors offering scalable growth or recurring revenues, while large corporates will continue to spin off non-core assets, creating attractive opportunities for buyers in the middle-market space,” Thomas says. “Companies in industries under financial pressure, particularly as some companies struggle to refinance debt in a high-interest-rate environment, will create opportunities for buyers to acquire assets at lower valuations.”

Kreidler expects an uptick in M&A activity in 2025, fueled by demographic shifts driving family business transitions, public companies unlocking value through carve-outs, and private equity firms pursuing exits of mature portfolio companies.

“While the macro environment appears supportive, forward curves indicate that interest rates will remain elevated, a stark contrast to the easy money policies of years past,” Kreidler says. “Consequently, the days of financial engineering as the primary value driver are over. Going forward, we believe successful deals will result from a relentless focus on operational improvement.”

Myers says M&A activity in 2025 is expected to end on a high note, with increased deal volumes and rising valuations. Strong economic conditions, coupled with eager buyers and motivated sellers, will drive continued momentum. The market is likely to remain favorable for sellers, while buyers will continue to seek scalable businesses with growth potential.

“In the light the anticipated supportive policy environment, it is likely to be a fairly strong deal year,” Subba Rao says.

Brown expects more deals to happen in 2025.

“The excitement in the buyer and seller market is better than it has been the last few years,” Brown says. “Things are settling down. Activity is up. 2025 should be a good year for the investment community.”

View from the early stage

On the early stage side, Ven Raju, president and CEO of Innovation Works, says overall, venture funding and valuations have contracted quite a bit from all-time highs of 2021. And liquidity options for late-stage tech companies remain limited as capital markets have largely been unfavorable for late-stage tech IPOs. This has prompted renewed focus on capital efficiency for investors and companies alike.

Still, it’s easier than ever for entrepreneurs to launch business ideas.

“The democratization of technology along with access to networks and capital help enable entrepreneurs to quickly build and test products and get them into the market faster than ever before,” Raju says. “This has only compounded with the availability of AI tools to help develop and market products and services.”

Meredith Meyer Grelli, Asst Dean of Entrepreneurship Initiatives, School of Computer Science; Director, Project Olympus and Asst Professor of Entrepreneurship, Tepper School of Business, Carnegie Mellon University, says entrepreneurs who are finding success today are those who start small, pick a wedge, nail the wedge, and have an advantage in terms of data sourcing and data accuracy.

“They can then grow from there,” Meyer Grelli says. “Entrepreneurs working to build yet another marketing AI bot will face a tougher road in terms of fundraising.”

Despite these opportunities, Meyer Grelli says entrepreneurs face significant challenges, particularly in scalability and funding.

“Expanding beyond that initial focus without diluting the product’s effectiveness or losing its competitive edge can be difficult as they begin with a specific niche,” she says. “Additionally, the current investment climate is quite challenging, especially for those seeking early stage funding. Seed funds are difficult to secure, as investors are becoming more cautious and selective about where they place their bets.”

Over the course of the past 10 years, Raju says significant global capital inflows into alternative asset classes, including venture, have contributed to increases in deal volumes, deal sizes and valuations.

“While we have come down from the all-time highs of 2021, it isn’t necessarily bad for investors as valuation and valuation expectations are calibrating to more ‘rational’ levels and creating opportunities for investment,” he says. “Further, transformative technologies like AI are providing for investment opportunities that didn’t exist before.” ●

What Investment Criteria Reveal About Deal Prep

Thu, 06 Feb 2025 13:14:36 Z

Over the past 12 months, Patriot Capital Vice President Sean Bilbrough says they looked at around 700 deals that met the firm’s mandate — and about 1,200 if that includes desk kills, which are eliminated by reading the CIM and determining that it doesn't fit their criteria. Those 700 get filtered down to 30 issued term sheets. So, what happened to the 670?

“Most of those fell out for financial reasons,” Bilbrough said at last year’s Baltimore Smart Business Dealmakers Conference. “That could be structure of the deal — the LBO is just too levered, doesn't make sense for the credit structure of the business. That's probably 50 percent of the things that get killed are killed for that reason. And it's go to market, strategy, ops, that's going to be 40 percent of it. But then there's about 10 percent there that it makes some sense, but it's just death by 1,000 knives.”

Once a term sheet issued, it’s under LOI with the sponsor, they’re working towards a close and they’ve got all their diligence streams running, what can tank a deal at this stage is often and unexpected, last-minute killer.

“In my career I’ve had three deals fall out for background checks,” he says. “You do a background check on management and you find out a guy went to jail for 10 years for bank fraud. You just never know.”

When they find a deal that they think they like, the first two weeks of the process is underwriting. They’re exploring how flexible the business is from a downside scenario and how that downside can be protected, mainly. They put together an underwriting memo, go through the sources and uses, make sure things make sense, take it to their team to get a initial green light with the goal of issuing a term sheet. Usually, once that's issued, that's going to be a two-plus week negotiation before there's something actually signed. All this is on the debt side, primarily, not on the control.

Once they sign that figure, it’s six-plus weeks of buy-side diligence through various advisers. Through that process, they're working on their final work product to present to their firm to get a vote on the deal.

“We're working towards close, putting together this book explaining the deal to our team — it could be 30 to 50 pages, with a pretty robust financial model behind it, a bunch of different scenarios,” he says. “And we try to vote on that about two weeks before close. It's a two to three month process. It's a couple weeks to get a term sheet out the door, and then the heavy lift begins.”

For someone considering the sale of their business, Bilbrough says starting early is really important.

“Once you've rationalized it to yourself that you want to sell your business, it's at least a two-year process,” he says. “What can I do today to maximize value two years from now?”

He also advises getting a sell-side quality of earnings report done. It’s something that, because of the cost, many sellers balk at. But having an accounting firm come in and look at the earnings potential the business, do a quality of networking capital, generally look at the financial health of the business is a great practice run for the sale, he says, because the buy-side quality of earnings is going to be more extensive than the sell side would be.

“I spent a couple years as an investment banker,” he says. “When you get sell side (QofE), it helps you sell that business. You have more conviction in the numbers. You can give data faster.”

He also suggests hiring an M&A attorney rather than using a general counsel, even someone who has been working with the business for a long time, because their inexperience could cost the owner down the line.

“If you're selling into private equity, we do this for a living, so we're going to have an M&A specialist, from a legal standpoint, on our side,” Bilbrough says. “So, just coming into that transaction from a position of power and limit your weaknesses.”

University of Michigan’s Warde Manuel on The Business of Athletics

Thu, 06 Feb 2025 13:11:57 Z

Warde Manuel, University of Michigan’s Donald R. Shepherd Director of Athletics, oversees an athletic department that sponsors 29 varsity teams with more than 950 student-athletes and around 400 staff members. To run it, the former collegiate athlete relies on more than just his 30 years of experience in athletic departments. Warde also leans on his MBA. In this episode of the Smart Business Dealmakers Podcast, sponsored by Old National Bank, the official bank of the Big Ten Conference, Warde talks about hiring top talent, maintaining culture, funding in the age of NIL, and how much running an athletic department is like running a business. Here’s an excerpt:

“If all they want to talk about is the transaction piece of NIL, this is probably not the place for them. But if they want to talk about the totality of academics and athletics and growing as young people and NIL and what the University of Michigan has to offer through all of that, those are the type of individuals that we want here. Because if you are only talking transactional, the next time somebody offers them more money, they're leaving.”

Staying Clean When Buying Car Washes

Fri, 31 Jan 2025 16:54:38 Z

Jose Costa estimates he’s bought over 2,000 car was units Whistle Express Car Wash. At the Charlotte Smart Business Dealmakers Conference, he said that as the company’s CEO and board member past two and a half years, he’s seen trends in the industry change.

“I've seen probably the early innings of consolidation,” Costa says. “A lot of large private equity firms trying to get in. They like the unit economics. They like the membership model, reoccurring revenue — about 70 percent of the revenue is reoccurring. So, in the early innings for a single unit, you could pay eight to 10 times. For anything bigger than three units, you could pay 15 times.”

He says fewer units are being opened since the fourth quarter of last year. There are about 20,000 car washes in the U.S., of which some 4,000 are consolidated, 16,000 are moms and pops (they own somewhere between one and 100 units. Today, the options on the table have significantly shifted.

“Multiples are going down,” he says. “We've acquired in the last 10 months about 45 units, and anywhere from low single digits. The highest we've paid is probably nine to 10 times, not more than that. Rewind that 24 months ago, those numbers go up exponentially. The other thing we're seeing right now is a lot of seller-held real estate, so you can play with the rent factor. That's one option. The other option, today, that is more available, that wasn't here two and a half years ago, is earn outs. In car washing that wasn't a practice, but today it is. And then the last one is sale leasebacks. There's a lot of sale leasebacks for sellers that don't want to hold the real estate. It's an attractive time to buy car washes.”

A good process starts with trust. That can mean taking the time to go visit the seller, even if it's one location.

“I drove to a very rural place in South Carolina and had lunch with a potential seller,” he says. “And I do that every single week, sitting across from them. And for many of them, if it's one unit or 15, it doesn't matter. It's their baby, it's their employees. They really care about the success of that company, and especially if they're going to give an earn out. If they're going to sign up for an earn out, you want to make sure that both sides are very comfortable.”

He says he also does a lot of due diligence. If it's a single unit, it's 90 days. If it's more than that, it's usually 120 days or longer. Additionally, for some 70 percent of the acquired talent, they show them a career path. There can be four to five employees actively on the site at any given time, with 15 on payroll. For every 10 units, there is a mechanic. And he says all those individuals want to see a career path.

“So, for about 70 percent of them, we show them what (a career path) looks like,” he says. “The other 30, they don't want to stay; they can make some money, and they think they're winning the lottery, and they move on and do something else. So, it's a combination of trust, showing a career path and ultimately paying the earn outs. We really like paying the earn outs, because if we pay you an earn out, you're going to turn around and tell your friends and anyone in the car washing community that we are paying the earn outs.”

Sharing data when there is an earn out is important because, as a type of investor, they want to know how the company is performing. So every month, he says they are very transparent in sharing all the information so they know how the sites are performing, and through that, how much money they can make.

Something else he says they do is roll out equity down to the district level so that every district manager in the company is an equity owner. That has galvanized their efforts to really push performance.

The company has an in house M&A team sources deals for the singles to 10 units without any advisers. But anything bigger than that, they bring in advisers.

He says they are very disciplined on where and how they grow.

“Sometimes a red flag is people that are not disciplined, people that are not transparent,” Costa says. “In the age of social media, there's very few secrets, so you can find a lot online. We mystery shop multiple times every location. A red flag for me is when they don't allow you to go in the back of the house and look at the equipment, because there's probably something to hide. Everyone buys from the same two equipment suppliers, the same four point of sale suppliers, so it's not like you have a secret that I don't.”

These 3 Questions Determined Whether Or Not To Sell

Fri, 31 Jan 2025 16:52:55 Z

Tellepsen has recently sold off some non-core businesses that had been part of the company for quite some time. Executive Vice President and CFO Matthew Elswick says that came about as the company faced the challenge that a lot of businesses run into, which is they get complacent.

“We had to have tough conversations, really look in the mirror to answer really three questions: No. 1, do these businesses align with our strategic direction? In our case, the answer was no,” Elswick said at the Houston Smart Business Dealmakers Conference. “We went through a generational leadership change and the fourth generation wasn't passionate about these businesses, so that's strike one. The second question we had to ask is, how intertwined are they with the rest of the companies in the organization? What kind of synergies do they hold? On paper, they look like they should have a bunch of synergies, but in reality, they were almost standalone or very different. And so that was strike two for us. And the third question, and probably the most important, is, is the juice worth the squeeze? Over time, we applied a lot of effort, energy — they were very capital intensive businesses. And at the end of the day, the realization we came to is they were more or less a distraction from our core business, not necessarily accretive to the overall company value.”

Still, there were inherent challenges in that construction companies traditionally can be difficult to value. Elswick says a dynamic exists across all service-based businesses that have a low percentage of annuity revenue. Those inherently become hard to value because the majority of the revenue is project based, or one off. And so that makes the traditional multiple approach very cumbersome, and typically leads to a pretty significant discount for the seller. Knowing that, he says they entered into a non-traditional deal structure where they took on some risks to maximize the potential return from the business.

“It's worked out favorably,” he says. “That deal structure included we were paid for our assets, goodwill. At closing, we maintained control of the customer receipt bank account, if you will, and then we allocated receipts on a weekly basis between us and the buyer, so that we didn't have to take a discount on our working capital. So, although cumbersome, although it took about 15 months, it was very successful for both parties. It certainly helped us not take the discount on the working capital, but it also helped the buyer not have to outlay as much capital up front, and they were able to fund their own working capital with the savings from paying us up front for ours.”

To help with deals, he says there certainly are times when an investment banker can add value to the transaction. But it can sometimes be the case that they get in the way.

“As the transaction gets more complicated — larger or maybe it's in a niche industry — I think it makes sense to keep them in the loop. But for me, I like to maintain the flexibility,” he says. “I like to know, real time, what's going on. I like to have control in my own data room. And so I think there's a hybrid approach. It doesn't have to be a Full Monty or nothing with investment banking, but we've leveraged a hybrid approach to where it's basically you pay a finder's fee — give me access to your Rolodex, and let me control the information and the flow of the deal. And so you pay a very small contingent based fee based on the enterprise value. And that's been very successful for us.”

As someone who’s sold businesses multiple times, this can work. But, he says, for those who are not comfortable or don’t know what they're doing, they should hire the experts.

“It is a big lift for our internal team,” Elswick says. “It was a massive distraction over the last 15 months, but ultimately, it saved us a huge chunk of change. And so at the end of the day, it's worth it.”

Taking Deal Prep To Heart To Maximize Value

Fri, 31 Jan 2025 12:02:29 Z

Nick Beste, founder of Mighty Spark Foods, had been thinking about the concept of selling the company more or less since it began.

“It was always on our mind,” Beste said at the Minneapolis Smart Business Dealmakers Conference. “We were always asking people what did they do? How'd they do it?”

He says they interviewed many different investment banks, law firms and accountants and asked them what benchmarks the company should meet in order to get sold and the benchmarks to reach different valuations.

“We heard pretty consistently certain benchmarks in terms of gross margin we needed to be at, EBITDA we needed to be at, certain hurdle levels on those, which I think is somewhat different for every industry, but it was pretty consistently if you're above this certain EBITDA mark, if you have these gross margins and these revenues, you're at least sellable,” he says. “And then the big thing was for us, we needed a team that could sustain the company afterwards, as well as through the process. It couldn't just be a one-armed paper hanger out there in myself trying to do this. So, we recruited a great team that was able to run the business and show that they would be able to do it after the sale as well. Once we hit those benchmarks and had the team in place, I felt we were ready.”

He says they were given multiple diligence checklists from their investment bank, attorneys and accountants, and they started working through those well before going to market. Early on, they began populating the data room with items they thought they’d be asked for and got them buttoned up. And then they also did a lot of things to derisk the deal and overcome concerns that they anticipated they would have — things like customer concentration.

“Having less than 20 percent of our sales tied to a specific customer was something we really pushed hard for,” he says. “We (added) in a couple new sales channels and new products, just to prove that when we say we're going to grow by adding new SKUs or new channels that we can do it. And those weren't huge things for us, but we got 100 stores here and prove that we can go into convenience stores, for example, or launched a new item that was in an adjacent category just to prove that consumer would want that.”

He says they co-packed their products and had one plant making the products. That was a risk, so they got backup co-packers for all their categories. And because they sold meat products and that price fluctuates, they recognized that as a commodity risk and got all of their meat on contracts for 18 months. They also changed their recipes so that they were less dependent to a specific type of meat or a specific provider.

“We did all these things just to anticipate the concerns people would have and derisk the deal,” Beste says.

Before they started interviewing investment bankers, he says they sat their team down and told them they were considering a sale and what they needed to do as a company to get sold. They put exit bonuses in place and equity for everybody on the team — from the admin all the way up, so that everybody was aligned and incentivized. And they shifted much of the day-to-day operational responsibility to the CFO so Beste could focus on selling the business and the process.

“Having that team aligned that this is what we're trying to do, this we're trying to go for, was important,” he says. “And also recognizing that we were all going to point out the blemishes on our baby and that that wasn't a bad thing. And so let's all come together and think about what could somebody poke a hole in this business with? Like, what could they say that would potentially decrease our valuation? Let's get all those ideas on the table, and let's figure out how to overcome them before we go to market.”

He says the reason he told everyone in the company about the impending sale process was because they wanted everybody to work really hard.

“We were asking a ton out of people, to say the least,” he says. “We have half of the amount of staff that we probably need getting paid probably not the market rate for their comp and, oh, by the way, now I'm going to ask you for the next year to have two jobs: your day job and then we're going to try to sell this business, which is a whole other job in itself. And we knew that management presentations and management interviews were coming, and I was afraid that somebody might not say what they should say, perhaps, or be as excited about the future or whatever. And so I wanted them to be excited and to want the sale as badly as I did.”

He says the timing of when they went to market based on the lifecycle of the company was important to maximizing value, and was something they’ve thought quite a bit about leading up to the process.

“Your growth rate mixed with what your revenue and margins are at leads to potential different valuation metrics,” he says. “If we would have held onto the business for another year or two, we would have grown — our growth rate probably would have decreased from what it was, is my anticipation. So, maybe we got a slightly higher valuation overall. But I think we really maximized it for where we were at, at the stage of the company.”

A process, he says, is an auction at the end of the day, which is something he didn't appreciate before they got into it but it also helped maximize value.

“Having that second bidder, or third or fourth, in the process is so critical, because I really feel that the bidders, they definitely catch on pretty quickly if they're the only bidder that's interested,” Beste says. “So, thankfully, we had multiple and we could accidentally, casually, make it somewhat known or imply that we have another meeting going on so it can't do a management presentation that day, those things really help.”

The Challenges, And Benefits, Of Selling To An ESOP

Fri, 31 Jan 2025 11:59:07 Z

Doug Bawel joined Jasper Holdings right out of college in 1976, starting on the shop floor. In his 10th year, he told the company’s owner and founder that he wanted to pursue his own venture — an engine company. Bawel said as many as six people might go with him, as well as six customers. So, the owner proposed instead that he buy the business.

Over the next year, the owner put together the opportunity for two families, Bawel’s included, to buy the company, which happened in 1987.

“We purchased the company,” Bawel said at last year’s Chicago Smart Business Dealmakers Conference. “At the time, we were right at $45 million and we were just an average company. We were in remanufacturing of gas and diesel engines and transmissions, and we're pretty happy with it.”

In 2001, they had some big money out of Detroit that wanted to buy the company, but it didn't feel right. Five years later, the two owner families began to think about where they were going to go with the business. That’s when they began looking at an ESOP.

“There were some things we liked about an ESOP, but there were some things we just weren't too sure about an ESOP,” he says. “We went to a couple conferences. We went and visited a couple of ESOP companies.”

When the Great Recession hit in 2008, the business took off.

“Nobody was buying new vehicles, so they were putting money into their remanufactured engines and transmissions,” he says. “And sure enough, here came the big boys out of Detroit again, trying to buy us. And there were four things that were important to us. No. 1 was we wanted to protect our communities. At the time, we were the third-largest employer in Dubois County, Indiana. Today, we're the largest. We were the largest in Crawford County, Indiana, and our Willow Springs plant. We give a lot of money away, whether it's the Girl Scouts, the Boy Scouts, Youth for Christ, churches, etc. And we really didn't think that people in Detroit would really care about small town USA. Third thing was our customers. They didn't need our customers. At the time, 65 percent of our business was with little independent garages — the little guy down the street from you; maybe it's just he and his wife or he and two or three other people that operate an independent garage. The balance was what we call fleet business. So, we all got in a room and everybody wrote a number down, folded a piece of paper, put it in an envelope. And then we went out and had a valuation done. The valuation came back, and we opened the valuation up, and then we opened the envelope up, and looks like we’d rather do an ESOP. March 2 of 2010, we announced. I've got 350 people in front of me, we're live streaming it to our other operations, and we're going to become 100 percent ESOP. No one, and I mean no one, clapped. No one really knew what an ESOP was.”

They had meetings and the legal team met with employees to try to sell them the idea. It was either apathy or complaints. But the ESOP went forward.

“Thirty days later, you get a letter at home, and the average person on the shop floor got 30 shares of stock and had a price of $2.30 a share,” Bawel says. “There was no fist bumps. There was no emails. There was nothing. It was crickets. The next year, the stock was $24. I'm thinking 10 times; you're going to get excited. No. No one got excited until the seventh or eighth year, where it hit right around $345; last year, $1,183. We’ve distributed $609 million of stock back to our people, and we've already redeemed $90 million. There's tax advantages, but think of the lives of your people. So, after we made our what's called, in ESOP country, your ‘reveal’ each year, usually in April or May, I asked our president, run some numbers. How many millionaires do we have in this company today? Ninety two millionaires just under the Jasper engine and transmission brand.”

Selling to private equity, when it’s known that the model is to sell the company in five to seven years, didn't make much sense to Bawel, neither did selling to somebody in Detroit. But the ownership wanted employees to know that they didn’t need be an owner to be in leadership, which is another reason why an ESOP made sense, even to those who join the business through an acquisition.

“By having an ESOP, I think you get the best of both worlds,” he says. “You can take some chips off the table. You have a chance of rewarding people. You can do phantom stock — we do that for our key people. Every acquisition that we've done, we've carved off some phantom stock where they're part of the big ESOP, but they're also part as they grow that company, so you get a second bite, if you want to. In our case, all leadership has remained on.”

He says ESOPs sometimes are formed because someone couldn't sell their company, but that doesn’t tend to turn out. Some ESOPs gave the stock away too quick, and they had to buy the stock back so they could then redeploy it.

“We wanted ours to last forever, so we originally set it up for a 40 year life,” he says. “Now we've been 15 years. We realize that we were hitting about a 25 percent of your gross pay in the new benefit you're going to receive, and then when you look at the appreciation plus the forfeit and trust fund shares, we had some truck drivers who were making $90,000 but their increased value in their ESOP was $100,000 in a year, over 100 percent of their pay. And we said, ‘Time out. this is not going to be a structure that's going to work out.’ So, now we target between 12 and 16 percent of their pay in a new contribution each and every year. Last year was 19 percent, plus then the appreciation they got on the rest of their stock.”

He says having an ESOP has employees far more engaged with the bigger-picture business than they otherwise would be. He says about two months into the ESOP, some people asked why the regional VPs average hotel bills $25 higher than the president of the company, which prompted him to email those people to make adjustments.

Once when out on the shop floor, someone pointed out that another employee seemed to be underperforming. Bawel asked why that was being brought up at that moment when the underperforming employee had worked there for several years.

“Well, I'm an owner,” Bawel says was the employee’s response. “When I worked for you, I didn't care about your money. But I care about my money.”

He says under the Jasper brand, they’ve been on their Lean journey since 2001. Over the past five years, they've averaged 15,000 continuous ideas each and every year and they’ve implemented 86 percent each of the last five years. That’s in part because in order to reach the higher levels of the company’s pay, employees are required to implement eight continuous improvement ideas every year.

In one case, a company they looked at ended up going private equity, which he says ran it in the ground. But the reason they didn't do an ESOP is because they were told by their local attorney that their kids can't be involved in the ownership of ESOP stock, but that's not the case.

“ESOP is the only thing that most Democrats and Republicans agree on,” he says. “And the reason is because most people do not have enough money to retire on, and Social Security is not going to be enough. I mean, it isn't. So, what a great way to do it, and yet you can then continue to see your business grow.”

Managing Transitional Mind Shifts When Selling

Fri, 24 Jan 2025 17:55:49 Z

Mark Mangan, president of Turf Care, worked his way up to where he is today by starting at a local fertilizer plant in Hatfield, Massachusetts, as a part-time employee, surviving an acquisition by LESCO and progressing to the director level at its Cleveland location, and then a sale of the operational side to Platinum Equity where he became its EVP of Operations, to his eventual purchase of the company with partners from the PE firm. Mangan then ran it for five years before an event happen and he and his partners sold the business to another private equity firm, Platte River.

At last year’s Cleveland Smart Business Dealmakers Conference, he told attendees that the most recent sale came about when one of the three partners looked to retire.

“He said, ‘Hey, I want to retire. This is what our company is valued at and I need a check from you two,” Mangan says. “We were like, ‘Wait a minute. Some of that money we wanted to put back into the business.’ And that's what made us go out to private equity, because they could initiate those funds into our business.”

One of the things that he says they could have done better was to create an exit plan when they first became partners. It would have meant they could determine their timelines, their horizons and their expectations at the time they exit. Still, as someone who has a large portion in the rollover, he says he’s glad the sale happened when it did.

“At the time we sold our business, the company was just taking off,” he says. “It was at the end of the COVID year, everybody was at home so everybody was working on their yards, everyone was putting down fertilizer. Business was grand. The timing was good. But I don't think I would have triggered the event, though, if he didn't.”

Even though they knew their partner wanted to retire, within his timeline to retire and get paid out were certain triggers within their agreements together that gave them limited time to act. And that was stressful.

“We were not prepared,” he says. “I was going off the edge. It's hard enough the three of us just talking normal business, but now we're talking selling the business, and you got bankers involved. I love my bankers. However, you never know what conversations are taking place with what partners. And then they're talking to the equity company, and what are they really saying to the equity company? Am I really getting the full story back? So, a lot of that just weighed on me. And I would call [his adviser] and be like, ‘Ground me.’ From that standpoint, there was no preparation and that's something that I think, talking about that exit planning, really just setting yourself up for success will help you better plan your business and get your business organized.”

As they considered potential buyers, he says a strategic buyer wasn't going to meet his goals, largely out of concern for what would happen with his team.

“Strategic buyers are typically looking for that consolidation. And that certainly didn't meet anything I wanted,” he says. “My team did a lot of work to help get me to where I was. So, I felt like I didn’t want to reward them by saying, ‘Hey, by the way, you're being consolidated and you got to move to Florida.’ The other one was just the amount of capital coming back into the business. So, from that standpoint, private equity was the way we had to go to get capital back into our business. We were under a little bit of strain with one of our partners retiring and having to pay him out. So, that equity money coming back in is putting us back on our growth path.”

When he met with different investors, he would tell them his plan to grow the business. Most of the firms were behind the plan and were encouraging. But one firm, Platte River, challenged his assumptions.

“They're like, ‘You don't have the organization, you don't have the capital, your IT system is not there. Like, we believe you, but you need money,’” Mangan says. “And that was really eye opening to me. And I said, ‘Well, what about my team?’ And they're like, ‘We're going to give your team incentive.’ And I didn't have to prompt them on that. They were there. And that was really important to me. If you think about it, as business owners, yeah you're the owner, but there's a whole bunch of people on your boat paddling, and you know the people that are paddling harder than the other people. That was really important to me to make sure that they're getting rewarded as well on that next bite of the apple.”

The transition from going from owner to an employee or a partner was a mind shift he says he was not prepared for. As an owner, he didn’t need to explain the moves he’s making. He can just move forward because he feels it’s the right decision. Now that there are other people that have large investments in the company, they’re asking more questions and need answers before a plan can move forward.

“When you think about that transition, I think for me it was a slow mind shift and I wish I flipped it more like a switch,” Mangan says. “I almost fought it a little bit. And I think as business owners, if you do that, and you're selling your business, and you're still going to be in there and still have a critical role within the business, you have to flip that switch. You have to say, ‘No, it's no longer all mine. I now have to work. I have to report. These are the rules, let's run by them.’ And that's the mistake I think I made was I tried gliding into it, and I'm not a glider. So, in that sense, I definitely think I should have switched — just flip that switch in your head and say, ‘No, this is who I am now and this is what I got to do.”

Learning The Sale Process Mid-Flight

Fri, 24 Jan 2025 17:53:09 Z

When it was decided it was time to sell Vaddio, a company Tom Mingo, now a founding partner at ArchStar Capital co-founded, it was a unique opportunity. One of his two partners wanted to leave the business. They couldn't decide what his valuation was going to be, so they hired an investment banker to get a valuation of the business from an outsider's neutral view. Ultimately, they decided they didn’t want to pay that third for the partner to leave, so they hired the investment banker to start teaching them to go through a process.

“And one of the most valuable things they taught us right away, or really coached us into, was share the responsibility and a little bit of what's going on with that senior management team right below us as owners because it can be an enduring task to sell these companies and do all the due diligence and have all the reports and all that,” Mingo said at the St. Louis Smart Business Dealmakers Conference. “As owners, we tell the story and we're the passionate founders that are really giving the hype story to who might ultimately buy it next. But it takes a team of people you trust and are probably going to have some small financial benefit to this ultimate exit as well, because you need that help. So, that's the OPs person, the CFO/controller type person, that's probably the VP of sales — people that can help tell the story and show what a strong organization it is that would ultimately be getting sold to that next buyer.”

When they finally decided it was time to sell, he says they learned how different their days would be as they went to market and through a process.

“Our investment banker did a great job, they went out and solicited our book, and got it all going,” he says. “And all of a sudden they came back to us, they're like, ‘You got 40 IOIs.’ And I'm like, ‘What's an IOI?’”

After conferring with the banker, they learned they only need to talk with about eight to 10 of them and were coached on the interview process — that as sellers, they’d be interviewing buyers, but the buyers also were interviewing them and learning about their company.

“You're going to be the consummate salesman and show all your passion in the company and what's so great about it, and why they should buy your company,” he says. “But ultimately think about it as business owners.”

Mingo had a lot to learn about the terminology and the impact each could have on the deal. For instance, he says he knew what the company’s EBITDA was, but didn’t understand equity roll, or even who works for who once the deal is made.

“What I figured out is both sides are interviewing each other because you are getting into a new marriage for the next six to seven to 10 years — however long that's going to be — and you need to find that good partnership and someone that you can trust, and they believe in your vision, and you believe in their capacity to help you achieve that vision as partners going forward,” he says.

Ultimately, Thompson Street Capital Partners bought them, and he says he’s grateful to have found the best fit. Many of the other firms wanted to take control and exclude the partners in the path forward, but that’s not what Mingo and his partner wanted.

“Finding that cultural fit for us being Midwestern folks, finding a Midwestern buyer, worked out great for us,” Mingo says. “But it also was very crucial and critical to us as a team to find a partnership that, in the end, dollars are dollars, and that's great and we all are in the capital markets to try and earn it and do it. But, you know, God forbid you have a little fun and enjoy what you do for all that time as well. And that was very important to us.”

For those considering a sale, he says have a trusted team to help weigh the options. Some owners are very passionate about their business and are on a path to continued growth. But there can be risk for owners who are comfortable with what they’re earning or have most of their net worth tied up in that business. Others want or need some help to get to that next level, or want to take some chips off the table, so bringing in an investor makes sense, especially if they’re looking for another bite at the apple.

“These are the kinds of things you want to think about as an owner about finding a partner,” he says. “There's multiple ways to do it. And I would think about the culture and the partnership and where you see yourself. Are you looking for a partner that's going to allow you to walk away right away because you truly want to retire tomorrow? Or do you still see some passion in the business for yourself? Is it still fun for you to go to work every day and you could see doing something for the next five to seven years with a new partner and go for it? Those would be the two things I would ultimately contemplate as an owner.”

Operate Every Day As If The Sale Is Tomorrow

Fri, 24 Jan 2025 17:51:32 Z

While preparing for a sale is important, Peter Mangal, former owner and president of The Flag Company says better than that is running the business every day as if you’re going to sell it tomorrow.

“When I acquired the business, I knew that I had to transform the business, not thinking about selling it and just transforming it, make it a profitable business — not that it was not before I bought it, but make it a lot more profitable than it was,” Mangal said at last year’s Atlanta Smart Business Dealmakers Conference.

The reason for selling his business, he says, is his family dynamic change. He had two grandkids and he wanted to spend more time with them as well as his wife. So, he put a management team in place so he would need to spend less time in the business. But as the CEO, he found he still had to answer a lot of questions, which didn’t give him the freedom and the time he wanted.

“I knew my kids weren't interested in The Flag Company,” Mangal says. “They had careers of their own. So, I decided, might as well just sell it. I did not do any planning or go out and get any advice. I just went to Sarah [Burden, principal of Walden Businesses Inc.] and said, ‘Let's sell this business.’ I had known where I wanted to exit out. The EBITDA was triple what I had when I acquired it. So, it was a good position for me, that I was comfortable selling it.”

When he first got into the business, its top line growth was not great, but bottom line growth and EBITDA was terrific — he says he tripled what the EBITDA was. But to get there, he had to transform the business. He put in a new ERP system to make sure he could support any number produced in a report. But even with all that, getting into the selling process, depending on the buyer and their motivation, buyers might have doubts that a business with solid numbers is as good as the owner presents it.

“[The potential buyer] hired a consulting firm to do the QofE,” he says. “I gave them all the numbers, I opened my books to them, and they couldn't find anything wrong with the amount of EBITDA that I was reflecting. They wanted to fire their consultant. They said, ‘If you want to keep your job, go back and find something.’ So, it becomes nitpicking of well, we got to find something. They picked on inventory. Again, once you select a buyer to go to the next step, make sure they understand your business and what makes your business the business it is and successful, because if they don't have an understanding, then your due diligence is even longer because they're going to question things that you explained to them.”

In his business model, the customer prepaid, so they don't have a receivable per se, he says. The buyer running the diligence took a while to understand why this business is so cash rich.

“When I explained the concept that my order book is fully paid for, so all that cash I already have, so when this transaction goes through, I write you a check for that. They couldn't grasp that,” he says. “It took a while to grasp the concept. When it eventually hit them in the middle of the head then they said, ‘Oh, wow, we're in a better position than we thought we were.’ But yet they were looking every which way to do a clawback. So, the experience going through the selling process is to make sure you have your business in such a way that you can support the data — you can give anybody a report and be able to explain it to them.”

The other thing that the experience taught him is to put a management team in place and make sure they understand what their goals and focus should be so when it comes time to go through a process, they know the end goal in terms of having a viable company.

“What I learned is run your business every day as if you were selling it tomorrow,” Mangal says. “And if somebody wants to come in and look at it, everything you have, they don't have questions.”

Build Trust For A Stronger Post-Deal Relationship

Fri, 24 Jan 2025 17:45:33 Z

Even if a seller has audited financial statements, or a sell-side quality of earnings, Bunker Hill Capital Co-Founder and Managing Partner Rufus Clark’s strategy remains the same.

“We're going to do a buy-side QofE as well,” Clark said at last year’s Boston Smart Business Dealmakers Conference. “Even if you've done the sell side, we don't always trust you, so we'll have somebody else look at that. We'll do our own due diligence regardless. It certainly makes it easier if a seller has everything pulled together, but it's not required. We don't mind digging in and going through that work to make sure that everything ties out.”

In situations in which the seller isn’t surrounded by the same types of advisers that he might have, and might not be best positioned for a process, Clark finds often there are more opportunities in companies like that. While it may mean getting comfortable with the risks, a plain dealer might be a hidden gem.

“Founders are amazing people. And they're great at getting a company started. But at some point, all their money's tied up in that business,” Clark says. “They may underspend on that. They may not have the experience that's needed to take it from $10 million in revenue or $15 million in revenue to $50 million in revenue. And that's where we can help out. So, if a seller is honest with himself or herself, honest with us about where the opportunities are, where there might be opportunities to spend more, bring in new people, bring in resources and accelerate the growth with a partner, those are the types of opportunities that we look for. I don't think perceived or unperceived weaknesses are necessarily a bad thing for a buyer, if you find the right buyer that wants to partner up and help you take it to the next level.”

In most of the transaction he does, the founder or the owner is sticking around and he’s partnering with that person going forward. So, the aim is to have a good partnership post closing. But because issues can arise through a process, he says there's always going to be a little contention on the pre-closing as they try to work through them.

“At the end of the day, you have to trust each other or the partnership post closing is not going to work very well,” he says. “In developing that trust, a lot of that can start to be developed in that due diligence process. If you're each honest about how you're thinking about things and how you want to try to resolve them, and you resolve them in a fair way, then it's going to bode well for post closing. But if somebody's hiding it — if an owner is hiding something, or tries to sneak something by — and we find out about it post closing, that's not going to play well. And if we're jerks on the front end, and we don't try to resolve something in a fair way, that's not going to work either. So, that process starts during the due diligence process.”

Something that can create trust issues is when a seller elevates or promotes people internally ahead of a sale in order to try an ensure they have a position in the business post close.

“Post closing, we're going to figure out whether that employee deserves that or not,” he says. “So, if the if the seller has tried to do that — to sneak it through or to protect somebody that doesn't deserve protecting — that doesn't help the relationship at all.”

If they find out post closing that the employee isn't qualified, it’s clear what needs to happen next.

“Generally, the seller has reinvested in the deal. Generally, the seller likes money, and wants to maximize the value of that rollover. And so we're, in most cases, in agreement on what needs to happen there,” Clark says. “But we're pretty honest upfront that there's going to be changes post closing. It'll be a collaborative decision. But at the end of the day, generally it's pretty clear what needs to be done.”