David Costa prefers to move fast when making acquisitions.
“We’ll go from offering memorandum to letter of intent to the first draft of a purchase agreement in seven to 10 days,” says Costa, president of Ontario-based Windsor Industrial Services. “For some people, that’s kind of scary. For other people, like me, if I can’t do that, I probably don’t have a transaction. I probably don’t have a guy who is truly selling.”
It’s an approach built out of hard lessons learned as Costa grew tired of putting in all the time and effort it takes to make a deal and walking away with nothing.
“I've negotiated some deals where we spent seven or eight months with the guy and we spent $50,000 in legal fees and $40,000 in banking fees and the guy was never a seller,” says Costa, who is a practicing attorney as well as business owner. “You need to make sure your seller is a seller and always be closing.”
Costa has three portfolio companies — two in Canada focus on sophisticated metal fabrication, building assembly line equipment for domestic and European automotive OEMs in North America, and a U.S. portfolio company that provides structural steel to the residential and commercial construction industry in Southeast Michigan.
Smart Business Dealmakers spoke with Costa about the importance of defending your own interests in a negotiation and one deal that took a turn he never saw coming.
Defend your interests
Costa’s preference has always been to focus on smaller transactions.
“What really separates what I do from larger, more sophisticated and better-known private equity firms is that private equity gets a management fee to shop a deal,” Costa says. “That's not something that guys in my space have the luxury of. We have to be very cautious and careful with our money. I have clients that I counsel and if we get a good book — or deck, as they say — I have been known to go right to letter of intent before I meet the person or see the facility. I want to know that if I put myself into this, that I have a transaction.”
While he wants to keep the process moving forward, Costa prefers that the deal not become about himself.
“It's as if I'm teaching somebody to write the letter ‘E,’ which is this vertical line and these three horizontal lines,” he says. “That's the ‘E’ and they must connect. When I tell people I'm doing the transaction, I'm telling them that we're doing here is not about Dave Costa. I'm trying to make this ‘E,’ which means I need this piece here and these pieces here and they must be in this place in order to make this deal.”
Bottom line, you need to stick to your guns and defend your own interests in order to make a smart deal.
“Whatever your original parameters are for making a deal, do not sway from the original parameters,” Costa says. “I've had sellers tell me, ‘Dave, your bank won't fund this transaction at my level.’ I tell them, ‘If you think the numbers are wrong, let's get your bank to the table.’ Chances are they told their bank the same BS they are telling us. None of it is subjective. Everything is absolutely, 100 percent objective. I maintain that all the way through. Your transaction is not marketable if you're adding back your salary, adding back the salary of the bookkeeper and then looking for 10 times EBITDA and not giving me the proper protection against those addbacks. No one's going to buy that transaction. And if you think you can find someone who will, go shopping. Unless we're desperate, which we never try to be, we don't need to do that transaction.”
Always be closing
When you’ve confirmed the seller’s intentions, be sure that every step you take moves you closer to closing the deal.
“Everything you do should be about closing,” Costa says. “Every conversation, every phone call, every discussion should be about how close are we to closing? And to that end, get your banker involved immediately. How can we fund this transaction? What do we need to fund this? What do we need to get you to do this deal?”
Again, with Costa, it’s not about being desperate or pushy. It’s about making efficient use of your time and money, as well as identifying a person who wants to close the deal as much as you do.
“I had one seller who was desperate to sell,” he says. “He was old and tired and his employees were old and tired. We were all doing everything we could to get this the deal closed, but things just weren’t happening the way they were supposed to. So he calls me out to the shop for a private meeting. Then he walked his employees outside.”
Costa will never forget what happened next.
“He said, ‘Hey guys, I'm selling the business and this is your new purchaser. I'm sure we'll close soon. Dave Costa, here are the keys. I have complete faith you'll do a better job than I've done the last 10 years, but my wife wants me home,’” he says. “And she was standing right there. She said, ‘Yeah, we've gotta go home.’”
While it was certainly a unique circumstance, it fit the bill for Costa as someone who clearly was motivated to make a deal.
“I try to buy businesses from people who are true sellers,” Costa says. “Whatever is driving them, they want out. So they need me.”