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.”