During his company’s transition to private equity, American Roller CEO Dan Cahalane says he talked to a lot of founder/owners who might join the new platform. And the first thing he would start with is asking, What do you really want?
“Because if you can find a good operator, and you want to run this for a lifestyle business for a long, long time, that's OK," Cahalane said at the New York Smart Business Dealmakers Conference. "But are you ready to give up control and have new influences help you drive that business?”
Ultimately, he says owners should sell their business when it’s healthy, which is a broad term. He says he learned through his company’s process in 2019, that the health of a business is determined by aspects such as whether its IT infrastructure is ready, if the company’s house is in order with regards to infrastructure, if the management team in place and is ready and skilled, and if there are gaps that can be filled before a process begins. But there was another important point he learned back in 2019.
“Because we were the No. 1 platform in the industry, even though I wasn't the owner, I was pretty emotional at that exit," he says. "Because I'm like, you don't understand. We're American roller. We're No. 1. Like, we are it"
But, he says, at the end of the day, cash is king. So, if a company is healthy, it's going to help with the multiple, EBITDA, and that trailing 12 months.
"When you're ready is when you're healthy," he says. "And there's a lot of things that go into what is the definition of healthy.”
Because an owner or operator can have blinders on when it comes to the state of their business, having partners that come in during different periods of the company can open an operator’s eyes to other possibilities. He says though he had a really good team, a private equity partner helped the company improve that team even more.
“So, you're never going to be perfectly healthy or perfectly ready," Cahalane says. "But you want to have those major things out of the way so that you can focus on that incremental gain.”
Having done six acquisitions in five years, he says the six owners of those companies all had different reasons for selling. From his experience, he says he can offer advice on what not to do, and that is not to wait so long that the seller’s company has a lot of deficiencies in the business — from the quality of the equipment, to the happiness of the employees, to the financial results.
“I see way too many owners wait way too long," he says. "And by then it's a tough pill for me to say, ‘Look, it's just not what you wanted it to be worth in your retirement.’ So, that's the one thing I would say is don't wait too long.”
Near the end of a sale process that had as many as 50 potential buyers, he says it ultimately came down to two people to pick from. He says the valuations and the terms from each were basically identical. So, at that point, it came down to trust, relationships, and reference checking.
“The reputation in the industry, which you guys probably don't always realize if somebody's doing their homework behind the scenes, that sometimes gets somebody over that final, ‘Hey, I am going to partner with these guys. I've heard from these two constituents that they're good people. So, let's get going,’" he says. "Never underestimate that.”
He says it’s important to talk with owners early in the process about whether they’re really ready to sell, and not have that conversation at the ninth hour.
“I've had stories at the 11th hour, they're ready to pull the plug after all this effort," Cahalane says. "So, for me, I tend to vet that pretty hard. And then, just prepare mentally for the change, because it's more emotional than people ever realize, especially when you're a founder. For me, it's not as much; I wasn't the founder of American Roller. But when you're that founder, it's a pretty emotional process.”
Often sellers are in their late 70s, even early 80s when they make the decision to sell. When that’s the case, they’re often concerned about how quickly they can exit. For others, the motivation to sell was that they were tired of all the burden the business put on their shoulders. But there isn’t a common reason why people sell.
“It's so person dependent and what's motivating them and not that you cannot give a recipe for everybody to follow," he says. "You've got to ask questions and learn."
He says as long as he knows the seller's motivations, he can manage around it.
"We can put processes, people in place, to augment it," Cahalane says. "It's when you don't know, and you don't ask enough questions, that you get surprised. That's when the stuff isn't so good.”
