Even if a seller has audited financial statements, or a sell-side quality of earnings, Bunker Hill Capital Co-Founder and Managing Partner Rufus Clark’s strategy remains the same.
“We're going to do a buy-side QofE as well,” Clark said at last year’s Boston Smart Business Dealmakers Conference. “Even if you've done the sell side, we don't always trust you, so we'll have somebody else look at that. We'll do our own due diligence regardless. It certainly makes it easier if a seller has everything pulled together, but it's not required. We don't mind digging in and going through that work to make sure that everything ties out.”
In situations in which the seller isn’t surrounded by the same types of advisers that he might have, and might not be best positioned for a process, Clark finds often there are more opportunities in companies like that. While it may mean getting comfortable with the risks, a plain dealer might be a hidden gem.
“Founders are amazing people. And they're great at getting a company started. But at some point, all their money's tied up in that business,” Clark says. “They may underspend on that. They may not have the experience that's needed to take it from $10 million in revenue or $15 million in revenue to $50 million in revenue. And that's where we can help out. So, if a seller is honest with himself or herself, honest with us about where the opportunities are, where there might be opportunities to spend more, bring in new people, bring in resources and accelerate the growth with a partner, those are the types of opportunities that we look for. I don't think perceived or unperceived weaknesses are necessarily a bad thing for a buyer, if you find the right buyer that wants to partner up and help you take it to the next level.”
In most of the transaction he does, the founder or the owner is sticking around and he’s partnering with that person going forward. So, the aim is to have a good partnership post closing. But because issues can arise through a process, he says there's always going to be a little contention on the pre-closing as they try to work through them.
“At the end of the day, you have to trust each other or the partnership post closing is not going to work very well,” he says. “In developing that trust, a lot of that can start to be developed in that due diligence process. If you're each honest about how you're thinking about things and how you want to try to resolve them, and you resolve them in a fair way, then it's going to bode well for post closing. But if somebody's hiding it — if an owner is hiding something, or tries to sneak something by — and we find out about it post closing, that's not going to play well. And if we're jerks on the front end, and we don't try to resolve something in a fair way, that's not going to work either. So, that process starts during the due diligence process.”
Something that can create trust issues is when a seller elevates or promotes people internally ahead of a sale in order to try an ensure they have a position in the business post close.
“Post closing, we're going to figure out whether that employee deserves that or not,” he says. “So, if the if the seller has tried to do that — to sneak it through or to protect somebody that doesn't deserve protecting — that doesn't help the relationship at all.”
If they find out post closing that the employee isn't qualified, it’s clear what needs to happen next.
“Generally, the seller has reinvested in the deal. Generally, the seller likes money, and wants to maximize the value of that rollover. And so we're, in most cases, in agreement on what needs to happen there,” Clark says. “But we're pretty honest upfront that there's going to be changes post closing. It'll be a collaborative decision. But at the end of the day, generally it's pretty clear what needs to be done.”
