An investor in manufacturing and distribution companies across the country, Craig Korte of Industrial Opportunity Partners says their last seven exits have been to corporate acquirers.
“We think very hard as we are preparing the business, strategically operating every day, where the potential good homes are for that business,” Korte, Director of Business Development, said at the St. Louis Smart Business Dealmakers Conference.
Going through a process means talking to a lot of buyers. And it’s the buyers that have that strategic alignment who reveal themselves over the course of the process.
“It's pretty rare that you're going to be selling at the highest valuation to someone who isn't in perfect alignment with where you've taken the business over the years,” he says. “And I would flip it around and say, because we’re also an acquirer of businesses, the question of alignment is absolutely critical.”
So, when he gets a call about a potential deal, he says he’s going to ask what the owner is trying to accomplish and do those needs fit with the skills that the business being sold brings to the table? And even if he really liked the deal, the company, the industry, but the alignment didn't exist, he says he’d have to pass.
“If, for whatever reason, there's not an alignment on values, or we can't see ourselves actually working with the entrepreneur or the management team over time, that's an easy pass,” Korte says. “No matter the valuation, no matter how much we'd like the business, if you can't see yourself working together, then that's an easy way to say no.”
Even though he has sold some 25-30 businesses over the years and many in the company come from investment banking, the sale processes don’t always go smoothly. They try to bring resources to bear throughout the life of the deal to get their CEOs and CFOs ready. One advantage the company has is they know that at some point, they're going to be exiting. So, there are processes — the nuts and bolts — that are institutionalized. But even so, he says they still look for other ways to help get everyone prepared to meet the self-imposed benchmarks that must be met to trigger a sale.
“Even with us at IOP around to support our management teams, we almost always hire additional help, especially the CFO (who) tends to take the brunt of the work,” he says. “And so we will get temporary help, engage good advisers on the banking side. But it's a discussion all the way through. And I think that the key discussion we have is, when's the right time? We're not necessarily trying to time the market at all. What we try to identify is milestones in the business, accomplishments that we want to have as a team that we've said up front when we initially made the investment. And once we've gotten those things in place and we're beyond those, we started to think about that exit.”
The most successful deals that they have done are not because they drove the last quarter turn in valuation multiple. They happened because the strategy made sense and there was an alignment with the team and the founders.
Given that most middle-market businesses eventually go through a transition, he suggests owners start having conversations with potential investors and buyers in a very informal way, much earlier than waiting until they are in the thick of a process.
“For a lot of folks who don't hang around with investors, with private equity guys, there really is a difference in cultures and capabilities among prospective investors,” Korte says. “And getting a sense for that earlier on makes a lot of sense. So, I would absolutely make use of your networks to get to speak to folks who are investors and just understand what makes them tick, what they're going to want to know about your business, and how you can best utilize an investment firm as a tool.”
