Because of the conditions in today's market — namely interest rates — there's an expectation, at least from LUXIT Group CEO Stephane Vedie, that more companies will be coming to the M&A table.
"If you're a business owner, an entrepreneur, and you pay 13, 14, 15 percent on the cost of money, this is a tremendous pressure on your cash flow," Vedie said at this past year's Detroit Smart Business Dealmakers Conference. "And this puts you under pressure also on the covenant side. Typical liquidity covenants it's EBITDA, minus capex, minus cost of money, minus servicing the debt. So, the cost of money has a big, big impact. And I think this is pushing some companies that are leveraged right now to the M&A table. So, we see more opportunities. On our side, as a buyer, we typically close the transaction and refinance on the same day, or very shortly after. On one of our last deals, we decided to wait a little bit, see how things go. We don't have really a huge appetite right now to borrow money at 14 and 15 percent. So, we have the luxury to have access to the fund money. We can wait. But it's not everyone's situation."
When it comes to bank lending, he says it's all about the conditions and the type of governance that they impose on the borrower. But those with a good business, who can give a lender confidence in the business plan, can access the money, even though it's not cheap.
However, especially in the middle market, those active in M&A deal with founders and business owners who believe a company is not a P&L or a balance sheet. It's part of their life, of their family. And the people within the company are part of their family. So, even though when doing an M&A transaction there's a lot of focus on the financial numbers, there should be at least equal focus on the human side.
"It's important to build a relationship with these owners," Vedie says. "They don't want their company to get in the hands of anybody. The way to build a relationship is not easy. You need time, you need to invest, you need to build trust, you need to be consistent, you need to be humble — it's not always easy to find humble guys in our space — and you need to listen, you need to communicate, you need to be consistent. That's a lot of work that you put into this. And very often the difference between the deal that's closing and a deal that's failing is the relationship side. You're going to get roadblocks, you're going to get obstacles along the way. If you don't have this relationship, you may lose the connection, you may lose the contact."
In one deal, he says the business owner got deal fatigue towards the end — something that's not uncommon given that the owner has invested their life in the company and a deal is a lot of pressure and stress, especially close to close. In this case, the owner decided to pull the plug and stopped communicating with the deal teams. However, Vedie says he knew the owner and had a relationship with him for several years. Vedie gave him a call, connecting with him and arranged to meet him at his home. In that visit, they were able to clear up the issues that were blocking the deal, which closed a few days later.
"Without the relationship, I don't think he would have picked up the phone," he says. "Without the relationship, I wouldn't have known where he lives. And I don't think he would have opened the door. But that's an example that it makes the difference."
Vedie says there are five lives of a deal. Though not scientific, he says it's a rule he's developed. In the middle market, deals aren't always done with experts in M&A. Sometimes, it means dealing with a business owner that's doing one deal in in their life. So, it's a lot of stress on that person. Everyone involved, from the buy side to the sell side, needs to feel the other part during a deal process.
"You want to push the boundaries, you want to understand what are the limits of each side," Vedie says. "So, this is sometimes what's causing the deal to die one time, to die a second time. And this is why the relationship is so important. That's going to be the glue that keeps you together, that keeps the communication flowing and say, 'Let's go back to the kitchen table or let's go back to the negotiation table and close this.'"
