September 21, 2023 • 15 mins
Do you ever wonder how the world of mergers and acquisitions operates? Have you thought about how a company's worth is determined or what the process of bringing on a new client entails? If so, you're in luck. Join us, Russell Cohen and Jeremy Wolf, as we pull back the curtain on the intricate, complex, and fascinating world of M&A. From the initial meetings with potential clients to the final stages of engagement, we break down the journey. We share how we get to know a business, its industry, and competitors, and how we gather and analyze crucial financial documents to determine business valuations.
But that's not all. We dive into the delicate art of pricing, the influence of the economy and interest rates on multiples, and the detailed process of setting expectations for business owners. Understand the importance of the owner staying on post-acquisition and the necessity of providing working capital for the new buyer. We also discuss the engagement process and why a retainer is essential for producing an executive summary. Discover how we prepare a buyer list and the tools we use to find potential buyers. Prepare for a rich, insightful discussion which serves to illuminate the many facets of this intricate field. Whether you're an investor, a business owner, or simply an intrigued listener, this episode promises to unravel the complexities of the M&A process for you.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Welcome to the South Florida M&A Advisors podcast,
your trusted M&A team.
Here's your host, Russell Cohen.
Jeremy (00:14):
Hello, hello and welcome everyone to episode number two
of the South Florida M&AAdvisors podcast.
I'm your co-host, jeremy Wolfe,and I'm joined with none other
than your host, russell Cohen.
Of course, russell, good to seeyou again.
Hey, good to see you again,jeremy.
Yeah, so what I thought wewould do, being this the second
episode, I thought we would talka little bit about the mergers
(00:38):
and acquisition, the M&A process.
Obviously, it's a detailedprocess and there's a lot to
unpack there, so maybe we couldbreak it into little pieces,
more digestible components, soyou could share some insights
and some nuggets and tips forlisteners.
So why don't we start with, Iguess, onboarding of a new
(00:58):
client?
Like, how does that processwork?
Talk a little bit about that,if you could.
Russell (01:04):
Great, thank you.
So obviously, a lot of times weget invited into a potential
client via referral.
Sometimes it's all differenttypes of marketing.
How are we able to generate ournew clients?
Once we actually get in frontof the client, it's very
important that we start learningabout the business, get
(01:28):
familiar with the history of thebusiness, the team, what makes
the company unique and stand outamongst the competitors in the
industry.
So that first initial meetingcould take a couple hours and
leading up to, I would have tosay, probably three to five more
(01:52):
meetings before we're actuallyselected to get the engagement
process.
So you know, during those threeto five meetings, you know we
are starting to gather thefinancial documentation.
You know digging into thebalance sheets, p&ls.
(02:12):
You know the back side of thefinancial side of the company.
So we can either recommend avaluation, a business valuation,
or we can also put together abroker opinion and value which
will let the seller know wherethe business value could land.
(02:38):
Now in the M&A process, you know$5 million or less, you're
probably going to come out tothe marketplace with a price.
But as we exceed $5 million,more, $10 million, $20 million,
$100 million, you know, withEBITDAs of, you know $2 million,
(03:02):
you know to maybe, let's say,$15 million.
That's where our niche is.
You're not going to put a priceon it.
You're going to have kind oflike a structured transaction
where no price and we go tomarket and we let the
marketplace determine the price.
So the seller has a coupleoptions set a price or not set a
(03:26):
price.
And that's where we have theability to get better multiples.
Now, economy drives thatmultiple too.
We're in a period of highinterest rates, so the multiples
are going down as a result ofhigher interest rate.
Yeah, so the market is stillvery hot right now, but
(03:51):
multiples have a higher tendencyto go down, as I mentioned
before.
So once we give the seller akind of like a potential landing
spot, if they feel good aboutit, there's potential to go to
the next level.
So we really don't have to seta price.
So that's very important.
So when we get past thatprocess and we know we have a
(04:18):
seller that is ready to sell,there's a real reason to sell
retirement or they just reallyroam the business to a level and
they need help to get to thenext level.
A lot of business owners,entrepreneurs, self-finance
their business.
You know credit lines and theyget to a point where they hit
(04:42):
the wall I call it the wall andthey've taken it as far as they
can.
They don't know how to breakthrough that wall and get to the
next level and they might be intheir 50s and great time to
take some chips off the table.
But bring in a partner, let'ssay like a private equity group
(05:03):
or private company in theirindustry that is already at that
higher level and they can letthem run the company and guide
them to that next level thatthey just can't seem to break
through.
So those are your life-changingevents are great, but a lot of
(05:25):
these buyers of M&A companies,they want the owner to stay on.
So we have to set theexpectations.
You're probably going to stayon from a year or two and you
have to be part of the team Veryimportant if you're in it for a
cash-out position just notgoing to happen that way.
(05:48):
So that is, we have to set theright expectations when we're
meeting with the business owners.
That this is not about.
It's great to have, you'regoing to get a great multiple
for your business, you're goingto get a very large sum of money
, but it's not going to be acash deal where you should
(06:09):
expect all the money all at once.
So setting proper expectationsas we go through that early
process with the business owneris extremely vital.
We also have to setexpectations where they are
providing working capital fornew buyer.
(06:32):
So the business is a machine.
You built up this company doing25, 50 million, 100 million,
and the buyer is not coming into recapitalize the business.
So we have to set the.
(06:52):
This is probably one of the keyfactors for our success is
explaining to the seller that abuyer is going to dig into 18
months of balance sheets andthey're going to determine how
much money needs to be leftbehind, either via accounts
receivable or cash, justdepending where you negotiate.
(07:14):
More likely accounts receivable, so that working capital leave
behind is probably one of thestumbling blocks in a M&A
transaction.
Earlier we addressed that, thebetter success that we will have
getting to the finish line.
(07:35):
So setting the rightexpectations early, yeah.
So moving forward in theprocess, once they have the
expectation of the workingcapital, we have a general idea
of the multiple and they'reready to go to market with our
(07:58):
company.
And this could take, you know,three.
You know the signing process,the engagement process can take
a few months and one day.
On board us, we typically havea small retainer.
Jeremy (08:14):
I was just going to ask how that works with the retainer
.
It sounds like you do an awfullot of work on the front end in
terms of discovery andbackground, you know.
So how does that typically workin terms of the retainer?
Russell (08:31):
Yeah, so you know a lot of M&A firms might charge 25,
50 grand retainer front.
You know we're going to, youknow we might.
Our range could under 10,000.
Certain cases, smaller dealswill probably go under five.
We need that retainer becausewe're going to put together a
executive summary.
(08:53):
We outsource that executivesummary to a company called
ValueCraft which is aprofessional sim writing firm
and what they do, and thiscompany is based in the United
States.
They have a team that willcompletely take you from start
(09:14):
to finish from writing thatexecutive summary.
So there is a cost associatedwith that and there is a seller
interview and it goes intotremendous amount of information
.
You were talking about 25, the40 pages information about the
business.
So when we provide thatexecutive summary to a potential
(09:37):
buyer, they already know quitea bit about the company at that
point and the financials andthey're at a point where
sometimes they move right to aletter of intent and sometimes
they would want to talk to thebusiness owner and other times
they would combination, talk tothe business owner or and review
(10:01):
the data room that we puttogether of the financials.
But you know, so like if we'regoing to be start using like a
structure transaction, where weare taking offers, where we're
trying to get the highestpossible price.
Then what we're doing is we arepreparing a buyer list.
(10:22):
You know 100 to 200 ofpotentially the best buyers out
there who can buy your company,and we're utilizing tools called
private equity info, which isbasically all the private equity
companies in the United States.
We're able to go into thissoftware, plug in certain
(10:43):
keywords and we will be able toget which private equity firms
are actually have a platform inthe industry.
For example, if I was trying tosell a plumbing company, I plug
into the platform plumbingcontractor.
You know all the differentkeywords and I will be able to
(11:03):
get a list of all the privateequity groups that have a
platform.
You know main investment inplumbing and I will be able to
get maybe 30, I'll make up anumber 30 to 50 private equity
groups that have already have aplatform or are adding on.
They wanna add on to theirexisting platform and in certain
(11:26):
cases, if you have a highenough EBITDA, your company is
then the platform and that'swhere the multiples get very,
very lucrative.
And then there's also privatecompanies.
We use private companydatabases.
That allows us to researchbased on many different
(11:49):
criterias revenue, number ofemployees, ebitda and we can
pull a list of private companiesthroughout the United States
and our databases go worldwide,of course, but let's say United
States and we're able to add tothat list.
(12:10):
So once we have this buyer listokay, and it could be 30 people
, it could be 200, it could be500, we will then reach out more
than likely via email and senda like an introductory teaser, a
one page information sheetabout the company and it's
(12:32):
fairly quickly a yes or no ifthey're interested.
Because a lot of times, likefor example in plumbing, if
you're doing new construction, alot of companies don't want you
construction, they want servicework, they want commercial
service work.
So for, like, new constructionthat's not a sexy word in the
(12:53):
plumbing world of for privateequity, you know what I mean.
So once we reach out to allthose firms through the list,
then they're gonna sign an NDAbut they're gonna get the
executive summary and thenthey're gonna express interest
to either get into the data roomeither they're gonna make an
(13:14):
offer the letter of interest,letter of intent, you know or
you know, if it gets a verycompetitive situation, we're
gonna set a date where we'regonna ask for a letter of intent
by a certain date.
And if we get a bunch of them,you know we're gonna pick the
(13:37):
top three and do a managementmeeting on Zoom.
If they're not local one likelynot local and then we're gonna
pick one and we're gonnanegotiate and then obviously try
to maximize because we havethree offers, hedge each one to
(13:59):
get to the best top line priceunless the seller feels certain
companies are better like aculture fit and feels certain
companies are might be betterfit for their employees or most
capable of getting to the finishline.
So sometimes price is not thekey factor that drives the
(14:24):
business owner.
It's, you know, can they do?
They have the funding, are theythe right fit?
You know, is there a rightunderstanding between the owners
?
So it's a very complicatedprocess and you get to that LOI
signing and your work has justbegun.
Jeremy (14:48):
I mean, yeah, it sounds certainly like a complex
transaction to deal with thesale, structuring the business,
and I think we just tip theiceberg touching on some of
these topics here.
Moving on, we can get into infuture episodes like deal
structuring, negotiation, talk alittle bit more about pricing
and all that, but I certainlythink that's a good place to end
(15:11):
for today.
Russell, always a wealth ofknowledge, definitely a master
at your craft, so it's alwaysnice being in your company,
brother.
Russell (15:20):
Thank you very much.
I appreciate it, lookingforward to the next episode
Absolutely Everyone.
Jeremy (15:26):
Thanks for listening and we'll catch you next time.
Take care.
Speaker 1 (15:33):
Thanks for listening to the South Florida M&A
Advisors Podcast.
For more information, visitsouthfloridmacom or contact
954-646-7651.
Welcome to the South Florida M&A Advisors podcast,
your trusted M&A team.
Here's your host, Russell Cohen.
Jeremy (00:14):
Hello, hello and welcome everyone to episode number two
of the South Florida M&AAdvisors podcast.
I'm your co-host, jeremy Wolfe,and I'm joined with none other
than your host, russell Cohen.
Of course, russell, good to seeyou again.
Hey, good to see you again,jeremy.
Yeah, so what I thought wewould do, being this the second
episode, I thought we would talka little bit about the mergers
(00:38):
and acquisition, the M&A process.
Obviously, it's a detailedprocess and there's a lot to
unpack there, so maybe we couldbreak it into little pieces,
more digestible components, soyou could share some insights
and some nuggets and tips forlisteners.
So why don't we start with, Iguess, onboarding of a new
(00:58):
client?
Like, how does that processwork?
Talk a little bit about that,if you could.
Russell (01:04):
Great, thank you.
So obviously, a lot of times weget invited into a potential
client via referral.
Sometimes it's all differenttypes of marketing.
How are we able to generate ournew clients?
Once we actually get in frontof the client, it's very
important that we start learningabout the business, get
(01:28):
familiar with the history of thebusiness, the team, what makes
the company unique and stand outamongst the competitors in the
industry.
So that first initial meetingcould take a couple hours and
leading up to, I would have tosay, probably three to five more
(01:52):
meetings before we're actuallyselected to get the engagement
process.
So you know, during those threeto five meetings, you know we
are starting to gather thefinancial documentation.
You know digging into thebalance sheets, p&ls.
(02:12):
You know the back side of thefinancial side of the company.
So we can either recommend avaluation, a business valuation,
or we can also put together abroker opinion and value which
will let the seller know wherethe business value could land.
(02:38):
Now in the M&A process, you know$5 million or less, you're
probably going to come out tothe marketplace with a price.
But as we exceed $5 million,more, $10 million, $20 million,
$100 million, you know, withEBITDAs of, you know $2 million,
(03:02):
you know to maybe, let's say,$15 million.
That's where our niche is.
You're not going to put a priceon it.
You're going to have kind oflike a structured transaction
where no price and we go tomarket and we let the
marketplace determine the price.
So the seller has a coupleoptions set a price or not set a
(03:26):
price.
And that's where we have theability to get better multiples.
Now, economy drives thatmultiple too.
We're in a period of highinterest rates, so the multiples
are going down as a result ofhigher interest rate.
Yeah, so the market is stillvery hot right now, but
(03:51):
multiples have a higher tendencyto go down, as I mentioned
before.
So once we give the seller akind of like a potential landing
spot, if they feel good aboutit, there's potential to go to
the next level.
So we really don't have to seta price.
So that's very important.
So when we get past thatprocess and we know we have a
(04:18):
seller that is ready to sell,there's a real reason to sell
retirement or they just reallyroam the business to a level and
they need help to get to thenext level.
A lot of business owners,entrepreneurs, self-finance
their business.
You know credit lines and theyget to a point where they hit
(04:42):
the wall I call it the wall andthey've taken it as far as they
can.
They don't know how to breakthrough that wall and get to the
next level and they might be intheir 50s and great time to
take some chips off the table.
But bring in a partner, let'ssay like a private equity group
(05:03):
or private company in theirindustry that is already at that
higher level and they can letthem run the company and guide
them to that next level thatthey just can't seem to break
through.
So those are your life-changingevents are great, but a lot of
(05:25):
these buyers of M&A companies,they want the owner to stay on.
So we have to set theexpectations.
You're probably going to stayon from a year or two and you
have to be part of the team Veryimportant if you're in it for a
cash-out position just notgoing to happen that way.
(05:48):
So that is, we have to set theright expectations when we're
meeting with the business owners.
That this is not about.
It's great to have, you'regoing to get a great multiple
for your business, you're goingto get a very large sum of money
, but it's not going to be acash deal where you should
(06:09):
expect all the money all at once.
So setting proper expectationsas we go through that early
process with the business owneris extremely vital.
We also have to setexpectations where they are
providing working capital fornew buyer.
(06:32):
So the business is a machine.
You built up this company doing25, 50 million, 100 million,
and the buyer is not coming into recapitalize the business.
So we have to set the.
(06:52):
This is probably one of the keyfactors for our success is
explaining to the seller that abuyer is going to dig into 18
months of balance sheets andthey're going to determine how
much money needs to be leftbehind, either via accounts
receivable or cash, justdepending where you negotiate.
(07:14):
More likely accounts receivable, so that working capital leave
behind is probably one of thestumbling blocks in a M&A
transaction.
Earlier we addressed that, thebetter success that we will have
getting to the finish line.
(07:35):
So setting the rightexpectations early, yeah.
So moving forward in theprocess, once they have the
expectation of the workingcapital, we have a general idea
of the multiple and they'reready to go to market with our
(07:58):
company.
And this could take, you know,three.
You know the signing process,the engagement process can take
a few months and one day.
On board us, we typically havea small retainer.
Jeremy (08:14):
I was just going to ask how that works with the retainer
.
It sounds like you do an awfullot of work on the front end in
terms of discovery andbackground, you know.
So how does that typically workin terms of the retainer?
Russell (08:31):
Yeah, so you know a lot of M&A firms might charge 25,
50 grand retainer front.
You know we're going to, youknow we might.
Our range could under 10,000.
Certain cases, smaller dealswill probably go under five.
We need that retainer becausewe're going to put together a
executive summary.
(08:53):
We outsource that executivesummary to a company called
ValueCraft which is aprofessional sim writing firm
and what they do, and thiscompany is based in the United
States.
They have a team that willcompletely take you from start
(09:14):
to finish from writing thatexecutive summary.
So there is a cost associatedwith that and there is a seller
interview and it goes intotremendous amount of information
.
You were talking about 25, the40 pages information about the
business.
So when we provide thatexecutive summary to a potential
(09:37):
buyer, they already know quitea bit about the company at that
point and the financials andthey're at a point where
sometimes they move right to aletter of intent and sometimes
they would want to talk to thebusiness owner and other times
they would combination, talk tothe business owner or and review
(10:01):
the data room that we puttogether of the financials.
But you know, so like if we'regoing to be start using like a
structure transaction, where weare taking offers, where we're
trying to get the highestpossible price.
Then what we're doing is we arepreparing a buyer list.
(10:22):
You know 100 to 200 ofpotentially the best buyers out
there who can buy your company,and we're utilizing tools called
private equity info, which isbasically all the private equity
companies in the United States.
We're able to go into thissoftware, plug in certain
(10:43):
keywords and we will be able toget which private equity firms
are actually have a platform inthe industry.
For example, if I was trying tosell a plumbing company, I plug
into the platform plumbingcontractor.
You know all the differentkeywords and I will be able to
(11:03):
get a list of all the privateequity groups that have a
platform.
You know main investment inplumbing and I will be able to
get maybe 30, I'll make up anumber 30 to 50 private equity
groups that have already have aplatform or are adding on.
They wanna add on to theirexisting platform and in certain
(11:26):
cases, if you have a highenough EBITDA, your company is
then the platform and that'swhere the multiples get very,
very lucrative.
And then there's also privatecompanies.
We use private companydatabases.
That allows us to researchbased on many different
(11:49):
criterias revenue, number ofemployees, ebitda and we can
pull a list of private companiesthroughout the United States
and our databases go worldwide,of course, but let's say United
States and we're able to add tothat list.
(12:10):
So once we have this buyer listokay, and it could be 30 people
, it could be 200, it could be500, we will then reach out more
than likely via email and senda like an introductory teaser, a
one page information sheetabout the company and it's
(12:32):
fairly quickly a yes or no ifthey're interested.
Because a lot of times, likefor example in plumbing, if
you're doing new construction, alot of companies don't want you
construction, they want servicework, they want commercial
service work.
So for, like, new constructionthat's not a sexy word in the
(12:53):
plumbing world of for privateequity, you know what I mean.
So once we reach out to allthose firms through the list,
then they're gonna sign an NDAbut they're gonna get the
executive summary and thenthey're gonna express interest
to either get into the data roomeither they're gonna make an
(13:14):
offer the letter of interest,letter of intent, you know or
you know, if it gets a verycompetitive situation, we're
gonna set a date where we'regonna ask for a letter of intent
by a certain date.
And if we get a bunch of them,you know we're gonna pick the
(13:37):
top three and do a managementmeeting on Zoom.
If they're not local one likelynot local and then we're gonna
pick one and we're gonnanegotiate and then obviously try
to maximize because we havethree offers, hedge each one to
(13:59):
get to the best top line priceunless the seller feels certain
companies are better like aculture fit and feels certain
companies are might be betterfit for their employees or most
capable of getting to the finishline.
So sometimes price is not thekey factor that drives the
(14:24):
business owner.
It's, you know, can they do?
They have the funding, are theythe right fit?
You know, is there a rightunderstanding between the owners
?
So it's a very complicatedprocess and you get to that LOI
signing and your work has justbegun.
Jeremy (14:48):
I mean, yeah, it sounds certainly like a complex
transaction to deal with thesale, structuring the business,
and I think we just tip theiceberg touching on some of
these topics here.
Moving on, we can get into infuture episodes like deal
structuring, negotiation, talk alittle bit more about pricing
and all that, but I certainlythink that's a good place to end
(15:11):
for today.
Russell, always a wealth ofknowledge, definitely a master
at your craft, so it's alwaysnice being in your company,
brother.
Russell (15:20):
Thank you very much.
I appreciate it, lookingforward to the next episode
Absolutely Everyone.
Jeremy (15:26):
Thanks for listening and we'll catch you next time.
Take care.
Speaker 1 (15:33):
Thanks for listening to the South Florida M&A
Advisors Podcast.
For more information, visitsouthfloridmacom or contact
954-646-7651.
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