One of the biggest hazards Brian Dobis sees with buyers is people being afraid to spend a few dollars on specialized advisers who can help them discover skeletons in the closet of a potential acquisition.
“All too often when we look at what went wrong with a deal, what we learn is that it could have been avoided on the front side had we leaned on the right people, whether it’s accounting, legal, insurance or technology,” says the executive vice president and managing director of commercial and industrial banking at S&T Bank.
It’s not that sellers are trying to hide something, but more a classic case of you don’t know what you don’t know.
Dobis shared his perspective on three pitfalls and best practices when acquiring companies at the 2019 ASPIRE Dealmakers conference earlier this year.
Assessing potential deals, from a bank’s perspective.
The very first thing we look at is defendable niche inside of the industry. What makes your business different than anybody else’s? It’s classic case of if somebody else can replicate it then the value or the ability to put leverage on that business becomes minimized. So we really need to understand the industry first and foremost, and the company’s positioning inside that industry.
(Buyers should) clearly define for us: ‘This is why this market position makes sense and this is why you can count on cash flow stability.’ Because that’s what the bank’s after, at the end of the day. Cash flow stability.
It’s not that easy to professionalize or re-professionalize a business.
Buyers tell us, ‘We’re going to come in and professionalize this business.’ But particularly in today’s market, one of the things we’ve found to be extremely prevalent is finding the next operators complicates and actually greatly limits the buying universe of who’s out there.
I can think of a number of deals we’re working on where somebody’s getting a below market multiple on what they’re buying because they know how to operate this particular business.
So, when a seller went to market, they found people aren’t that interested in buying businesses they don’t understand. There’s a void in the marketplace.
A lot of people want to own businesses, not that many people want to run them every day. Even though people claim they’re about to get their hands dirty by making an investment, what we find is they really would like to have somebody else do some of the hard lifting. They’d like to do some modeling and manage from afar. But there has to be an operator in there every day getting things done.
Sometimes buyers are in the mix with multiple parties pursuing the same deal.
We’ve seen parallel processes at times where we’ve obviously hitched our cart to a horse that’s competing hard on a deal.
A lot of times sellers who are running that kind of process alongside an investment bank have had some challenges or seen some things inside that particular industry where getting the business capitalized day one has become a challenge. They come to those potential buyers and almost want them to prove out: Can you really raise the capital to execute on a transaction? That happens most often if there’s the presence of an independent sponsor inside a transaction or somebody who has a non-committed fund.
Buyers are saying, ‘We’d love to acquire this business, but we’re going to have to go through a capital raising process.’ Maybe a seller says, ‘OK, great. That’s the highest bid, but what’s the execution risk here?’ Because when it comes with selling a business, it’s all about getting it executed. There’s some pain point where it’s just not worth the extra half a turn or turn. Selling a company fatigues a company; that’s a big factor. Keep in mind that people are looking for certainty — and certainly comes from being able to ensure the capital is there to close a deal.
In addition, when you’re building a capital stack that goes into one of these transactions, you’ve got to be prepared for that fatigued company. The first hiccup can’t cause more stress on the company because then we’re putting fatigue on top of fatigue. All too often, as a banker, we’re pushed hard to stretch the leverage, give as much cushion we can. I think we’ve found some ways to structure deals today where we’re trying to allow for this transaction period, whether it’s software initialization or something like that.
A lot of people push hard, expecting the company’s trajectory to continue to trend upwards. We caution people: “Look, we’ve seen this, more times than not, go the opposite way in the first 12 months, so let’s get a structure that works for everybody going forward.
