Tom Zucker takes a multifaceted approach to the act of buying or selling business. Years of executing M&A transactions has taught him that there are many parts to making a deal that leaves both parties satisfied with a deal.
“One of the facts that is really important to consider is that we all only see the world through our lens,” says Zucker, founder and president of EdgePoint, a Beachwood-based investment banking firm for middle-market companies. “The ability to take a much broader perspective on the outcome of what you’re looking to get accomplished — whether that’s a merger or an acquisition, whether that’s a buy or a sell — there are a lot of people who can be brought in as very strategic additives to the process.”
Prior to founding EdgePoint, Zucker spent more than nine years handling financial and transactional work at Ernst & Young and Arthur Andersen. Early in his career, he had a significant experience participating in a family business.
Smart Business Dealmakers spoke with Zucker specifically about selling a business and all that an owner needs to think about before, during and after the transaction. What follows is a transcript of the above video, edited for readability.
You can’t be the business
Getting ready to go to the marketplace is often difficult and assessing, is the owner ready? The owner is a complex person who has been an entrepreneur for many years. He’s been successful, he’s taken a lot of risks and usually has been financially rewarded for those risks. Now after 20 or 30 years of running and operating their family business, they are looking to the world and saying, “I really want to find someone to give me liquidity for this business and find somebody to take off some of the burden that might be attached to it.” That’s a challenge.
In helping them get prepared for that, they can’t be the business. They have to have a team — talent that sits around them — that the buyer is going to be able to leverage to produce the results going forward. So if you are the sole entrepreneur running the business every day, you essentially are the business and it’s very hard to transition that. Relative to the market being ready, we’re sitting in a wonderful M&A period right now. Low interest rates, low capital gains rates, a strong, vibrant economy and buyers outnumbering sellers by a large amount. And there is a tremendous amount of cash on the sidelines.
All of these things lead to a wonderful opportunity to be market ready. Five years from now, that might not be true. But today, it is. As we look, is the owner ready, is the business ready and is the market ready? The last part is, is the business ready? Financial and accounting due diligence, being well prepared, making sure you have contracts in place, low customer concentration. Things that generally make it more financeable. One of the largest components to an M&A transaction is finance. If a bank isn’t going to find this business exciting, many buyers aren’t going to find it exciting either because they can’t get leverage on a transaction.
The path to recapitalization
Not every transaction requires an owner to not be part of the business. Most of our owners are approaching transition with the hope of staying involved for some period of time. They usually are pretty involved in their business, they’re pretty important and these are their friends. These are the people they’ve spent the last 30 years of their lives being around, probably more time than they spend with their spouse. What we find is the recapitalization — whether it’s majority or minority recapitalization — is a very good tool to allow that to happen.
We’re working on a transaction right now for an $80 million business that is desiring to have a recapitalization. He would like to be in the business for five more years. He wants to find a partner. The people that are at the table are both strategic and financial. But he’s assessing and sitting across the table through dinners and management presentations to make sure that he fits with them and make sure it feels right. Make sure that when he asks a question, they respond in a way that is similar to their culture. It’s kind of like a dating service, if you will, of trying to find a right fit between Person A and Person B. It’s got a lot of similarities to that.
The implications of selling
As we talk about an owner going forward and the realization he will no longer have autonomous control to do as he wishes, it has many implications. The first is financial. Many owners’ pocketbooks — personally and corporately — are often the same. That obviously changes after the transaction is consummated. So it’s getting an owner accustomed to that conversation. Owners and entrepreneurs are really very control-oriented.
So the ability to give up control to an investment banker for a period of time to help sell your business is one level of giving up. But often the next level is you’re going to have a partner in your business with a much more sophisticated governance structure. That governance structure and that new way of operating is going to be different. Many entrepreneurs really struggle with that transition of control.
See your deal through a different lens
One of the facts that is really important to consider is that we all only see the world through our lens. The ability to take a much broader perspective on the outcome of what you’re looking to get accomplished — whether that’s a merger or an acquisition, whether that’s a buy or a sell — there are a lot of people who can be brought in as very strategic additives to the process.
So for example, a strong M&A transactional attorney is something that we bring in or advise our clients to make sure they have on board before we do a transaction. The terminology and the language that we go through is very different than what a traditional common lawyer might do. Additional to that is making sure you have great financials and historical representation and that your tax matters are done well and your financials are fair and accurate as reported.
The last part of that is team. It reminds me of a company that we sold that was a gear manufacturing company. For several years prior, this gentleman had spent time to nurture and make sure he brought on board somebody who could manage and control the sales relationships and the operations of the business in his absence. He incurred the additional expense two years prior to the business sale. But when he went to the sale process, the market recognized that he had in place the most important thing, which was somebody to run and operate the business. That bringing on of the additional person, he lost a little bit of EBITDA. But he gained and made that up in the form of multiple. The multiple expansion he would receive because of that was significant. I don’t believe the business would have transacted as successfully without that right person being on board.