As an entrepreneur who only recently experienced M&A for the first time, Michael J. Lewis has learned a lot quickly. In four years, the CEO of Quick Med Claims has gone through two sales and initiated five acquisitions.
Now, he’s interested in passing along that knowledge.
“My passion going forward is working with small owners — the people in the $1 million to $15 million to $20 million range who have never sold their company before and have no idea what it looks like,” says Lewis, who co-founded the revenue cycle management company with Harry Sichi in 1991.
The partners sold Quick Med to a private equity firm, Five Points Capital, in 2015, after which Lewis stayed on as CEO — buying smaller companies to help grow the business. In October, another PE firm, Perella Weinberg Partners, bought the company for a 7x return.
This week, Lewis shares his unvarnished opinion of today’s deal market.
What trends do you see driving deals in the current market?
My personal experience is that people are paying a premium right now.
My other observation on that is they are probably doing deals faster. In a down market, people will allow banks to get involved early. They bring them to presentations. They allow them to be involved in the process. In a really flush market, like we’re having right now, the lenders are getting involved a lot later.
Do you anticipate a slowdown on the horizon?
The only reasons some people may be mentioning a slowdown is because there’s a lack of deals.
We sold five months ago for a multiple that was unheard of. We probably did 16 or 17 times go-forward EBITDA. I don’t think that it’s slowed down in the market. What I have heard is that there are private equity groups struggling to find good businesses to buy.
You’ve done some strategic buys. What’s your experience been like?
I’m considered a smaller deal, and I was doing deals even smaller than me. There’s a lack of knowledge — people don’t know how to sell a company.
Customer concentration has a tendency to be a big deal with smaller deals. That’s one of the things that will drive value down. Concentration of clients, like your business is just in New Jersey, is another thing that will drive down value.
I got to see all the people who are involved when you’re trying to buy a company, the different people that they bring to the table, and it was just amazing, the lack of sophistication. Everybody thinks they can use their country lawyer for acquisitions, but then you start to work with them and it’s like, ‘These people have no clue,’ which is bad.
How do you approach dealmaking with small business owners?
I’m really careful about it because these people do what I do. I have a fiduciary responsibility not to pay them any more than I have to, or that they’re looking for. But, it’s just my personality that I’m going to give people a fair deal. If somebody has a $5 million EBIDTA company and they want $1 million for it, I’d tell them to go get better advice.
On the other side of the spectrum, you might have somebody who’s got $1 million EBIDTA who thinks their company is worth $15 million. And it just isn’t going to happen — unless you’re some crazy software company. In my business, if you’ve got a traditionally historic company that’s 10, 15, 20 years old, and they’re doing 25 percent margins and they’ve got a $1 million EBIDTA company, there’s no reason to pay that. I can do the same deal with somebody else for $3 million to $5 million.
Does talent play a big part in value?
There’s no question. We’re at the lower end of the middle market now, or the high end of the small market. They want the team. This isn’t IBM or Microsoft or something. It’s typically niche companies or specialized businesses where the owners, founders and executive teams are the people who are best poised to run those organizations.
The first time, my private equity guys were paying about a third more than the strategics. And for me, early on, I found out if I was going to maximize the value of my organization, I was going to have to sell to private equity; and they wanted me to stay on. So, I think talent plays a huge part in lower- to middle-market organizations.