As he prepared his panel for the Pittsburgh Smart Business Dealmakers Conference kickoff session, held in March, John Lewis, a founding member of law firm Metz Lewis Brodman Must O'Keefe, says it quickly became obvious what the area of focus should be: preparing for a sale. And central to the story the panel looked to tell what someone who represented something of an M&A anomaly: Joe Warnagiris, president of Paragon Asset Recovery Services.
Warnagiris didn’t hire an investment banker to prepare Paragon for a sale in 2020. He says he recognizes the value they bring to a deal — they help tell the story of the company, market the company, pull together financial reports, and open the company up to the universe of buyers — but the costs, particularly in time and money, gave him pause.
Time was also an element because the sense was that tax rates would rise out of necessity as governments looks to pay for the costs of the pandemic. And Warnagiris felt there could be a significant impact to the sale proceeds if tax rates change.
“So, we just didn’t feel there was time to interview multiple investment bankers, get them up to speed on our business and get the deal done by the end of the year. All those things went into our decision to go it alone.”
Given that the company works in a niche market of the property and casualty industry, and Warnagiris had been with the company 20 years telling its story, he felt he was in the best position to be the spokesperson.
The company, however, was no totally on its own. He says he leveraged a long-term relationship with a local PE firm, and engaged with the team at Metz Lewis as well as an accounting firm to get support on the legal and accounting sides.
“We tried to bring in expertise for insight on the state of the M&A market, overall valuations, etc., to really replace what we thought investment bankers would bring” Warnagiris says.
More than imagined
Warnagiris says many people counseled him on just how much work the due diligence process would take, and to not underestimate it.
“I believed them and we went in feeling like we were prepared, but my advice is to anyone who is considering selling a business, whatever you’re thinking the due diligence process is, both in terms of volume and depth of the requests, it’s more,” Warnagiris says
Chris Snider, CEO of the Exit Planning Institute, says it can be like delivering shock therapy to owners to get them to understand how difficult the sale process is. Even people who have been though a sale, he says, find there are things that they need to learn to make the next deal go better. So in deals that he gets involved he, there’s an emphasis on the concept of attractiveness and readiness.
“Attractiveness is how a business looks from the outside, in,” Snider says. “It’s the way most of us would look at a business if we’re looking to buy the business — the buyer’s point of view. Readiness is how ready the business and the owner are to transition — it’s an inside-out view. It’s having all the due diligence together, it’s having your personal plans together, understanding your profit gaps, value gaps and wealth gaps and getting yourself ready.”
And Rob Carskadden, managing partner at 3 Rivers Capital, emphasizes the importance of support through a sale process. He says that investment bankers are useful not only because they can get into the company pre-sale and identify holes in its story and find ways to address them, but because the sale process can be grueling — investment bankers take some of the pressure off of owners so they can keep their eyes on the business during what is an incredibly distracting process. That’s important because an owners’ lack of attention could lead the business to struggle, which could result in a drop in value during what is often a long process.
Trust or fall
Certainly there are many technical aspects to address in a deal — taxes, building a data room, valuations, etc. But there are also softer elements that are just as critical. Trust, Lewis points out, is also a significant part of a deal process.
“If a seller is prepared, they can get the buyer to trust in them,” Lewis says. “And at the same time, the buyer has to work very hard to develop trust on the part of the seller from a standpoint of being willing to go through the due diligence process.”
Carskadden says trust is often built through goodwill, and requires a buyer to establish a personal touch.
“This is an emotional decision for the sellers,” Carskadden says. “And so they really need to get to know you. They want to know about your family, they want to know some of the history. They really want to know about you.”
Snider says as much as a buyer tries to manage trust through a transaction, toward the end of a deal all parties must make a leap of faith. He says there’s a lot of effort invested in trying to manage that gap, but not everything can be uncovered through a process. That’s created significant 11th hour-issues, after significant time and money have been invested by both sides in a process.
“That level of trust, no matter how good the economics are, if it gets to a point where you lose that trust in terms of the fit and the relationship, you could lose the deal,” Snider says.
Catch the rest of these experts’ insights by watching the full panel conversation in the video above.