Dealmaking is often the payoff for years of tactical risks, hard work and considerable financial investment by an entrepreneur, says Huron Capital’s Gretchen Perkins. But it doesn’t have to be the end of that person’s role in the company.
“A founder has started a business, grown a business and is employing people,” Perkins says. “The introduction of our capital in a deal is allowing that entrepreneur to realize the returns on decades of sweat equity and pouring everything he or she had back into the company. It’s gratifying to help people who started a business and are creating jobs realize the fruits of their labor. It's the American dream.”
Perkins has more than 30 years of experience in the finance and business development sectors, serving a variety of capital market participants and loves working with people who have the skills to build a business.
“These entrepreneurs are always colorful characters,” she says. “They have an idea for a product or service, and they are relentless in making it happen.”
In this Dealmakers feature, we look at the dealmaking process when you no longer need to go it alone, but aren’t yet ready to step away from your business.
In many cases, Perkins works with business owners who still have the drive to run their companies. They just want to find a partner who can help them accelerate growth and bring capital to the business.
“You need money to make more money,” she says. “They're still fired up and excited to run their business, but it might be prudent to sock some of their money away and take some chips off the table. Then they can continue to grow with a partner that brings not only capital, but a whole bunch of resources they didn’t have before.”
If you do it right, one deal can create an opportunity for that desirable second bite of the apple for the minority piece of the equity the founder continues to own.
“Hopefully there will be an even bigger check down the road,” Perkins says. “The first bite of the apple was realizing the sale of the majority of their business. But that remaining piece, that’s what turns into legacy making. That’s money an entrepreneur can use for their philanthropic efforts.”
Take an honest assessment
To get to the second bite at the apple, you first have to get the deal done. This requires realistic expectations from the seller.
“The most common issue in us not getting to the completion of a transaction is the valuation expectations of a business owner,” Perkins says. “They read about all the publicly traded companies and they hear about all the different transactions that are happening outside their industry and in their industry. Very often, an entrepreneur feels his or her company is worth more than we think it is or than the market thinks it is.”
Sellers who work with advisers typically get a reality check and can adjust what they’ll accept from a buyer. But some are steadfast in their belief that their company can fetch top dollar on the market.
“You’ll have a business owner that perhaps we want seven times EBITDA, and he thinks his business is worth 12 times EBITDA,” Perkins says. “That happens all the time. We say, ‘OK, good luck to you. Go find a buyer who will pay that.’”
There is often a reason for this disconnect in what the seller wants and what the market is likely to offer.
“This could be the first time they’re getting real accounting diligence on their company,” Perkins says. “There’s usually EBITDA adjustments at this step, and it’s almost always downward. They’re not following GAAP for this or that because they don’t have to. They own the business. They provide whatever financials they have to their lender, if they have one, but they don’t have to have audited financials. When you actually do the quality of earnings accounting work, the number usually goes down a little bit.”
To remedy that situation, get an analysis of your financials before you get too far down the road toward a sale.
“That way, you know before you go to market what the real cash flow number is for your business so you’re not surprised,” Perkins says.
Control is still an option
Another key point to keep in mind is that some PR firms are willing to make a non-control investment in a company.
“So the business owner can still maintain control of their business, which sometimes is an emotional thing more than it is a financial thing,” Perkins says. “They want to make sure they’re in control. Business owners in particular, and even their service providers, haven’t seen a lot of this product or this ability for a private equity firm to come in and not buy control. For some owners, that has been a surprise."
Bottom line: If you need capital to buy out a shareholder, or if you need capital to make an add-on acquisition, you can do so, continue to gain scale in your industry and remain competitive with your customers. You have options.
"You don’t have to sell your company,” she says.