In market in which buyers are paying higher prices for businesses, deal success can hinge on using deal structure to create an arrangement that works for the seller and the buyer.
“A lot of that takes creativity around deal structure,” says Hartwood Point Founder Ben Rizzo.
Beyond the industry standard EBITDA multiple, that can mean insurance —both on the buy-side and sell-side.
“If you're buying, the most important thing to insure right now is people,” Rizzo says. “As a buyer, I found it's very much worth my while to overpay or over incentivize key people because if you don't, you lose them because the talent market is so hot right now.”
When selling, Rizzo says there’s a benefit to layers of incentives.
“So, there's a standard price, there's an earn-out tied to specific financial performance, and then as a seller, it's what do I know about my business that the buyer doesn't know that I'm willing to insure for them?” he says. “Where can I sell that insurance that they’re willing to pay for it, whether or not that's project-specific risk or customer retention? I see a lot of deals right now that have a base pay, an earn-out to total financial performance and then an additional earn-out based on customer retention, project performance or something more specific. And getting to that granular level allows you to get to the highest price but also have a seller and a buyer that are comfortable with that high price.”
RDX/Navisite Chairman Buddy Flerl says it's the people-side of a deal that deserves the attention.
“Regardless of where you are in a labor market cycle or an economic cycle, people are always the biggest ingredient, the biggest risk and the biggest dynamic part of any business interaction or business acquisition for that matter,” Flerl says.
On the buy side or the sell side, one thing that he says he’s always done is to identify some of the “keepers” who may not necessarily look like economic participants in the preferred part of the transaction — key employees who would otherwise just be in an incentive pool or being granted profits interests — and find ways either get money in their hands or encourage them to save money.
“I've actually put them on the cap table, investing side by side with me as a buyer in acquisitions, or in my case recaps,” he says. “And while those individuals are beneficiaries of that, it's the multiplier effect and the audience under those people that see that and aspire to be that way.”
Continuim Equity Partners Managing Partner George Pilafas says something that private equity has had wrong for quite some time is treating the seller as an opponent rather than a partner.
“The seller has the keys to the customers that they personally developed over decades,” Pilafas says. “They have the keys to the employees. These folks are extremely loyal to them. Companies can have a very patriarchal or matriarchal structure where these folks will bend over backwards for the seller. It's important for a buyer to recognize that you need to have the buyer like you, not just because you're buying his business or her business.”
That's something he says he’s seen go poorly in the past. Deal professional are trained to agree to a price and analyze everything to get the best possible deal for the client.
“On the surface, that can end up being a worse deal for you if you whittle the seller down too much and ultimately loses his trust,” he says. “You need him or her to hand over the keys to you as the buyer.”
Everyone has different pain points, he says. It's not always about the purchase price.
“It is important to recognize certain things that you care about as a buyer that they might not care about as a seller and vice versa,” Pilafas says. “And that's the art of closing a deal at the 11th hour when you're finalizing all the agreements, to be very cognizant of those pain points.”
Rizzo, Pilafas and Flerl spoke at the Pittsburgh Smart Business Dealmakers Conference, sharing best practices in winning the deal.
