Barry Arkles has been through a number of deals over the years. The founder of both Catemer and Gelest says generally when he’s involved, the business has virtually no revenue, which means it can be 10 to 15 years before there is an exit. But when it does come time to bring in an investor and rolling over is the preferred option, he says it’s important when it’s a PE firm to look at where you are in their acquisition strategy.
“If you are going to be a platform company, I think it's one thing. If you're going to be a bolt on, it's entirely another,” Arkles said at the Philadelphia Smart Business Dealmakers Conference. “If you are a platform company, they undoubtedly are going to want you and your management team to stay on board. So, if you say you want to leave, you've probably taken the value of the company down 10 to 20 percent. If you want to sell and you care about the company and your legacy, you probably want to stay in and you know it's going to be a higher valuation. So, the question, what is the appropriate amount, both in terms of a percentage roll over and how many years you want to spend with a company, I would say if you want maximum valuation, you've got to be in there for two years.”
He says it’s also important to look at the board structure and ensure you have some say in board-level decisions. Otherwise, he says, there are always differences in philosophy. Owners who roll over and have a say at the board level are going to have more sway than if they have no board seats.
“The things you really have to consider is what you want as your legacy, what you want as a maximum valuation, and where you are in the corporate management structure — that you have a place on the board,” he says. “And those are all critical aspects of it.”
In his experiences, he says the people that are doing the acquisition have generally been strategics, they've generally been international companies, and all pretty big. He says what owners really have to the understand is that there's going to be more of a demand for escrow and concern about possible tax liabilities. These are an important part of the negotiation.
“What you realize, and it's not because of malice of forethought but by the way large multinationals work, is there's nobody that's going to be in your corner, so to speak, if there's a tax audit that comes in later,” he says.
So, he says, owners really have to look forward. The acquirer is going to look for assurances and owners need to make sure that they are negotiated appropriately.
Something else owners should expect is that there will be a change in the management team.
“There will be, at the rollover at the time of exit, there will be a change in leadership because working with a multinational at that level, there's a lot of compliance, a lot of things they just have to do — inevitably they have to do,” he says. “They can't change their stripes.”
When you lose part of your leadership team, he says you have to look at whether that's going to have an impact on any reps or warranties. Just being aware of that lets you know how to negotiate it, and find ways to minimize the risk there. But, he says, there is an inevitability that the way the company runs, when you have the second exit, is absolutely going to change.
And when the time for that second exit rolls around, he says it’s important for owners to have their say.
“It's just absolutely critical that when you do that second exit, where you still have a voice in it, that you make sure that you've got the terms that are going to protect you going forward,” Arkles says.
