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  • Drew Caylor | Making a Difference in Private Equity
    POSTED 5.26.20 M&A Masters Podcast

    Drew Caylor, managing director, and the rest of the team at private equity firm WILsquare Capital have a passion for helping lower middle market companies grow bigger and better.

    He says it’s all about the leaders at these companies and their commitment to making a difference to their people and the communities they’re in.

    At WILsquare, they help create value through hands-on work with carefully selected businesses. It’s a level of service you won’t get at “brand-name” PE firms.

    We take a deep dive into that topic, the post-pandemic M&A scene, and…

    • The first place they look for future investment in a business
    • 3+ questions they ask about every company they work with
    • Why they view Representations and Warranty insurance as imperative
    • Their management philosophy and how it differs from other PE firms
    • And more

    Listen now…

    Mentioned in this episode:

    Transcript

    Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here, that’s a clean exit for owners, founders and their investors. Today I’m joined by Drew Caylor, managing director of the private equity firm WILsquare Capital. Based in St. Louis, WILsquare was established by private equity and operational executives dedicated to provide financial capital and operating experience to lower middle market companies in the Midwest and South. Drew, thanks for joining me. Welcome to the show.

    Drew Caylor: Yeah, thanks a lot, Patrick. Appreciate you having me too.

    Patrick: Before we get into WILsquare, let’s start with you. Just give our audience a little bit of a context. How did you get to this point in your career at Wilsquare?

    How Drew Ended Up With WILsquare Capital

    Drew: Great question. So my path to a career in private equity is not one that I think many in the industry would consider typical. You know, I think a lot of people begin their careers and fields like ibanking or public accounting and make their way to private equity. Instead, I started my career in football. My first job out of college was playing for the Pittsburgh Steelers.

    And after a short stint in the NFL, I ended up moving to St. Louis and working for a wealthy family that was making direct investments in lower middle market companies. Along the way, was asked to be president of one of their portfolio companies. And at the age of 28, I suddenly had 65 employees and had no idea what to do. At that point in my life, I was really better prepared to read defensive friends that I was to manage people.

    But after six years of operating the company, we lucky enough to sell the business to a strategic acquire and all things had a happy ending. So, you know, that experience of operating that business has provided a really nice foundation for me when I think about my career in mergers and acquisitions. Following the sale of that business, I resumed my career making direct investments in lower middle market companies. And in 2019, I was lucky enough to join the talented team at Wilsquare.

    Patrick: Well, let’s go on to WILsquare. By the way, as we record this, we just completed the draft for the NFL and I can’t let this go without asking you. So you were drafted by the Steelers. Where were you drafted?

    Drew: So I was drafted in the sixth round. And I always like to tell people that I was selected a few picks before Tom Brady. He was drafted in a different year, but I was drafted slightly higher in the NFL Draft. So that’s something I suppose,

    Patrick: Well, there, that’s something a lot more of us cannot say, so good for you. Tell me about a WILsquare Capital. Before we get into that, I always like to learn a little bit about a firm by how it’s named. Because if you’re in the legal community or insurance, you’re boring. You just name your firm after yourself or the names of the founders. Tell me about WILsquare and, you know, its focus and so forth.

    How WILsquare Stands Apart From Other Private Equity Firms

    Drew: Yeah, so, you know, WILsquare’s name isn’t that innovative, but it’s really the first syllable in the two founders’ last names, Wilhite and Wilson, hence the name WILsquare. But, you know, more important than the shared syllables of the name is really, I think the values and the commitment to the lower middle market that I think everyone on our team shares. You know, we just really love this space and we do for a number of reasons.

    You know, for me, I had the opportunity to operate a lower middle market business. And that gave me a profound appreciation for the challenges that leaders of businesses in this space face. It also taught me that, you know, value creation isn’t really achieved through simply buying low and selling high. It’s really more about rolling up your sleeves and doing the things that are necessary in order to build bigger and better businesses.

    And so, you know, I really got to experience firsthand the responsibility that I think leaders of lower middle market companies have for their people and the importance that stewardship, when it comes to selecting the right partner for your business has. And so, you know, I just decided early in my career, this is where I wanted to spend my time. These are the businesses where I think there’s talented people and all kinds of opportunity. And I think everyone at our firm has a story like mine for why they fell in love with the lower middle market and the people in this industry.

    Patrick: Well, I’m not a millennial, but there’s no doubt the belief of a lot of millennials is rather than just going out and finding a career and contributing, they want to make a difference. That’s a big focus for them. And when I think about that, if you really want to make a difference out there in American business, I think you’ll look to the lower middle market because there’s a vast number of these organizations out here. They are the biggest employers in terms of overall aggregate number of employees.

    They are oftentimes the soul of a community that, where they serve. And it’s a shame because if you’re in the lower middle market, you’re not involved with mergers and acquisitions on a daily basis. You don’t have in house court dev facilities and resources. So when the off tuning comes or the idea comes to think about an acquisition, and everybody thinks about acquisitions either to be acquired or to acquire. They default to the brand names and the institutions out there.

    They don’t know any better because they haven’t been around. And so unfortunately, when they turn to the larger institutions, what ends up happening is they’ll go to an institution who will overlook them. So they won’t be as responsive. The institution’s nothing wrong with them, but they don’t have the bandwidth to order, deliver a variety of different solutions that fit those little lower middle market companies.

    And they may not be able to just roll up their sleeves and get in on a day to day basis and so forth. So they’re not going to be served there. But on the contrast side, also, the lower middle market company is going to end up either losing money or spending a lot more going to the institutions. And I think where they really get the true value is going to be with organizations like WILsquare, where you’re focused on that.

    That is your passion and it’s where the best fit is. You have the resources available. The more the companies are aware of the great access to solutions that are provided by you that they didn’t even know existed, I think they’re better served. So any way that we can go ahead to promote and highlight organizations like WILsquare Capital that serve this community, I think is a win-win. So I really do appreciate that. Drew, tell us a couple of things on how WILsquare provides solutions on that lower middle market. What can a lower middle market company get from you that they couldn’t get elsewhere?

    Drew: Great question, Patrick. You know, I think what they get from WILsquare is really a diverse set of perspectives. You know, our team is comprised of, you know, not only finance experts, but, you know, also people with operating backgrounds like myself. And I think there is a collective willingness to roll up our sleeves to actually add value to these businesses. We’re not financial engineers. Most importantly, I think cost is not our focus. You know, we look for opportunities to play offense and opportunities to invest in these businesses. We just think philosophically, a focus on costs is not an enduring strategy.

    You can only cut so much cost. What is an enduring strategy is focusing on growth and that’s what we do. Sales and marketing is the first place we look for future investment in a business that we buy. We think about what new products, what new capabilities should this company have? How can it access new markets? And then, you know, we are lucky enough to have a pool of capital to put to work and so we also contemplate, you know, what acquisitions for a particular company could make sense?

    And is there a value-creating combination that can be formed? And, you know, I think the other thing that’s important is a lot of operators of lower middle market businesses like to operate their business. And they don’t want to do it with someone looking over their shoulder. And I think that’s not what we’re about. I think we’re really about being a resource for these operators. And, quite frankly, we think if something makes sense to do in a business, we just ought to do it. There shouldn’t be a lot of bureaucracy. If it’s for the benefit of the business, we just ought to do it.

    So when you think about private equity firms, I think there’s really a spectrum of firm involvement. There are some that are heavily involved in the operations of a company. There are some that are not involved at all. You only hear from them, you know, once a year. And then there are those who are somewhere in between. You know, I think we’re probably in that middle portion. We’re somewhere in between, who we think it’s important to invest in the management teams and ultimately let them run the business that they are the experts in. Truly, we simply aspire to be a resource for these management teams going forward,

    Patrick: So you’re not fund it and forget it and you’re not micromanaging. So two extremes. You’re in the middle. And I’m sure it just varies from company to company, right?

    Drew: Yeah, I think that’s right. I mean, I think we would never buy a business without having some sense for what we can bring to the table. So I think our swim lanes are generally well defined going in and we try and communicate that well with the management teams that we seek to partner with.

    Patrick: Tell us what’s your ideal profile for a target company?

    WILsquare’s Target Company Profile

    Drew: Sure. So as a firm, we focus on businesses generating between three and 10 million of EBITDA. And we like businesses that are situated in markets that are less cyclical and in industries that are growing, I would say we’re simply not a turnaround shop. You know, we’re not out there looking for bargains. We’re truly looking for healthy businesses that are growing and businesses that we can help continue to grow.

    One of the variables we think is truly important is human capital. You know, it’s just a key variable in unlocking the value in any company. And so chemistry really matters to us. We found really great companies that are run by people where there just wasn’t a chemical fit and we opted to move on. But we just think it’s important that we all be able to row the boat in the same direction with the management team. And so we call ourselves a firm with Midwestern values because that’s the truth.

    We don’t view ourselves as very fancy people. We really probably rather eat in a sports bar than a steak house. And I think we really feel a shared responsibility for others and humility to know what we don’t know. And to us, that’s just a simple way of characterizing people in the Midwest. And so that’s how we market ourselves. That’s how we think about ourselves. Are folks that care about others and have a humble sense about them along the way.

    Patrick: That personifies the view I’ve always had had when I first came into M&A on my front was that it’s not Company A buying Company B, it is a group of people over here choosing to work and combine forces with a group of people over here. And to the degree that they can successfully integrate, get along, get their culture moving and handle those human skills, they’re going to successfully move forward. And the ideal is one plus one equals three. The whole is greater than the sum of its parts.

    So it always comes down to people. And I think that anybody that overlooks that aspect and just focuses on either the financial or the technology is really missing something. Drew, tell us what experience have you had one of the tools that we use out here for mergers and acquisitions from the insurance world is a product called rep and warranty insurance. That has gained quite a bit of traction in the last couple of years, driven largely by private equity. And so I’m curious as your thoughts, good, bad or indifferent. Your thoughts on rep and warranty for deals.

    Drew’s Take on Rep and Warranty

    Drew: You know, it really only takes one experience to make you a believer in rep and warranty insurance. And I was lucky enough or perhaps unlucky enough to have that experience quite early in my career. There was a breach wrapped in a small deal I was involved in where it led to a costly legal battle that distracted the management team and cost the business all kinds of opportunities.

    Yeah, I think it’s pretty easy for a lot of people to view rep and warranty insurance as expensive. It is relative to very small deal sizes. But even if you aren’t a believer in the value that these policies can bring, more and more I think providers are being pretty innovative and generating products and policies that are a lot more affordable and tailored to the lower middle market. So, as a firm we view rep and warranty insurance as imperative.

    Patrick: Now as we record this, we’re hopefully on the tail end of the Coronavirus pandemic sell in place process. We’re now beginning to start seeing states not only begin to open but having long-range plans for so. Hopefully, this will be over. But in light of how this is literally touched all the lives of people across the country here, give us your perspective on either for you or WILsquare Capital on deals you’re looking at or where you see the M&A environment going forward. Choose short-term long-term. Give us your thoughts.

    Post-Pandemic M&A Scene

    Drew: Yeah, sure thing. First, I have to acknowledge I don’t have a crystal ball, so I’m not sure I have a ton of insight into what the world will look like. But I can tell you the way that we’re thinking about it is we think that the health of an industry is critical to look at. And we’re focused not only on how long will it take these industries to recover. I think we’re focused on a more important question, which is, how will these industries change?

    What will be different? And that is where I think there is a ton of opportunity. It’s not about, you know, how long will it take people to get on planes again? It’s what will they be doing instead? Every industry has a has a different answer to that question. But that’s the question we’re focused on as we review new opportunities.

    Patrick: I agree that it’s just going to be different. I think the other thing that people are really accepting is that things can change from week to week and you got to be okay with that. And if you’re okay with that, then you’re less encumbered in looking at opportunities out there. And I sincerely believe there are going to be quite a few of them. There is going to be a much more buyer-friendly market going forward.

    And private equity firms have the dry powder. It never went away, to my knowledge. And there are firms like yours that have been most likely taking very, very good care of their portfolio companies and handling their concerns through this process. And the next step is going to be, you know, have an abundance mentality and look for opportunities out there. I think that there’s just quite a bit and just like you said, it won’t be the same, but it won’t be bad.

    So hopefully, all of us optimists will be proven right. Of course, I also projected a month ago that Disneyland would be open the first week of May, so I might have been, yeah, I might have been a little optimistic there. But, you know, we’ll see about some other times though. Drew, how can our audience reach you?

    Drew: Your listeners can find me at our website which is wilsquare.com. That’s WILSQUARE.com. Or you can reach me by email at dcaylo@wilsquare.com. That’s DCAYLOR@wilsquare.com.

    Patrick: Drew, it’s been fantastic. Thanks again. It was just a lot of fun talking to you and I really deeply encourage folks to look for WILsquare Capital. They are a firm out there in the Midwest, but they’re not stuck there. They’re looking at a lot of stuff and couldn’t be happier to have you with us today.

    Drew: Thanks a lot, Patrick. Appreciate it.

     

  • Trevor Crow | M&A Tips for Family Businesses
    POSTED 5.19.20 M&A Masters Podcast

    Trevor Crow works in the M&A space, specializing in what he calls an “underserved” area: lower middle market companies. He says bigger firms chase bigger deals because of high overheads and other internal costs.

    But as a boutique firm, he’s able to work closely with owners and founders of what are often family-owned businesses.

    Trevor says Buyers and Sellers at this level are savvy and smart – a pleasure to work with.

    He talks about the biggest benefits a small firm like his can offer companies, including quick response times. Tune in to get all the details on that, as well as…

    • The last person you should hire to shepherd the sale of your business
    • Strategies for balancing risk and the cost of appropriate insurance
    • One of the most “dangerous” potential liabilities for companies today
    • The biggest obstacle to closing a deal – and how to overcome it
    • And more

    Listen now…

    Mentioned in this episode:

    Transcript

    Patrick Stroth: Hello there. I’m Patrick. Welcome to M&A Masters, where I speak with the leading experts in mergers and acquisitions. We’re all about one thing here. That’s a clean exit for owners, founders, and their investors.

    Today I’m joined by Trevor Crow, founder of Crow Legal, a Denver-based law firm specializing in the purchase and sale of businesses, private securities offerings, tax, and other transactions for the lower middle market. Trevor, welcome to the podcast. Thanks for joining me today.

    Trevor Crow: Thanks, Patrick. Looking forward to it.

    Patrick: Before we get into your practice, and you’re focused on the lower middle market, let’s get a little context for our audience here. Tell us what got you to this point in your career.

    Trevor: Okay, yeah, so I grew up in Denver, for the most part, and bounced around a little bit on the East Coast when I was really young but grew up in Denver and went to the University of Colorado at Boulder for undergrad with a degree in finance. And after that, I worked for three years before going to law school doing several different jobs.

    But most notably, I worked at an auditing firm doing the consulting side of an auditing firm. And then I went to the University of Denver law school. Which it was, if those of you who remember 2009, it was not a great year to be graduating law school or really coming out of school anywhere.

    It was right at the downturn. And so the firm that I was at, or I had clerked at, at that point, you know, I was doing just transactional work, getting a lot of great experience, but a lot of transactions died in 2009. And so the firm I was supposed to go to kind of said, “Well, you know, we don’t really have transactions going on, but if you want to do litigation, we’ll bring you on.”

    And so, you know, my start in my career was actually in litigation, commercial litigation, which was an interesting place to start and, you know, good experience as well, I think, because I was able to see how contracts blow up. And prove with arguments that people can make in court on what a contractual provision says when it seemed clearly written the other way, in my mind, but so that was one experience.

    We found out pretty quickly I didn’t want to do litigation and, you know, I kept working towards doing more deal work at the firm I was at. Leaving there, I went to a couple other firms doing just transactional work, M&A work. These were all mid-sized firms in Denver. So most of our deals were lower middle market deals.

    And so that’s kind of where I cut my teeth and kind of grew to love that area. I started this firm in February of 2018, after I had made partner at another firm in town, another mid-sized firm. And, you know, I just wanted to strike out on my own and develop more of my corporate practice. The firm that I was at did a lot of real estate work and so I was kind of the corporate guy to the real estate firm.

    And it was harder to develop the M&A business. And so I started my firm in 2018. And now we have a couple of attorneys working here as well. And just been kind of doing mid-market M&A deals, lower middle market M&A deals, private securities offerings, and that sort of work. So we’re kind of a boutique transactional firm.

    The M&A Mistake the Lower Middle Market Makes

    Patrick: Well, tell me why you focused on the lower middle market as opposed to other segments. What is it about the lower middle market you like?

    Trevor: The lower middle market is a unique area in my mind because, for one, I think it is underserved. There’s not a lot of… Big shops don’t chase those deals, they’re chasing the bigger deals because they have high overhead and a lot of other things that they need to cover so they want to chase the bigger fees. And so this lower middle market is underserved.

    I also like it because you get to deal with sophisticated buyers and sellers. Really smart people who build businesses, a lot of family-owned businesses. So you get to hear, you know, the interesting stories on how they’ve been built up. There’s a lot of smart people that you’re working with, but they’re also the type that are gonna roll up their sleeves and get involved.

    It seems like a lot more than these, you know, higher ticket deals. And so I like that. There’s usually less ego and each deal is unique. And so those are sort of the, what’s kind of attracted me to this market.

    Patrick: I agree with you that the lower middle market is underserved. I mean, there are thousands and thousands of these companies out there. And because they don’t deal in M&A transactions on a daily basis, they don’t have in-house corporate debt. They’re not used to the services that are available out there.

    So what they usually do is they default to going to a brand company or Big Four accounting firm or the major top 10 law firms. Nothing wrong with them. It’s just you’re not going to get the value with those organizations. They may have tons of resources. But those resources are built and designed for major-size deals.

    And you know, the lower middle market members, they’re going to get shortchanged. Not only are they going to get less response time and get overlooked, they’re going to pay a premium, and they’re not going to get solutions that are really fit for them.

    The larger firms don’t have the bandwidth to have multiple solutions, whether it’s on a quality of earnings, whether it’s on some legal diligence or other services out there. They don’t have a lot of solutions or a wide enough variety of solutions out there. So you end up paying more and getting less.

    And I don’t think that’s fair for a lot of these owners and founders who, you know, took it upon themselves to create something where nothing existed and just build tremendous value. It’s just not as large as Walmart. Okay, so that’s where I passionately feel about wanting to serve that community.

    Now, Trevor, explain what a boutique firm like yours can do for the lower middle market. What are the types of things that they’re looking for that you deliver that possibly the other larger firms aren’t going to be able to satisfy?

    Trevor: Yeah, so I think you kind of hit on a couple of them there with response time. I mean, when you’re a small fish in a big pond at some of these larger service providers, they don’t provide you the time and attention, typically, that you need in an M&A transaction. As anybody who’s involved with M&A knows, time kills deals, and so you want to be efficient, and you need to turn around, be able to turn around, documents from a lawyer side.

    That’s what we can do is turn around documents quickly, we answer the phone, you know, so when somebody calls, whoever our client is called, somebody’s going to answer, and we’re going to be able to schedule a time to talk, and we’re going to prioritize, you know, those deals that we have in our shop and that we’re trying to get through.

    So I think response time is big. One of the, you know, my pet peeve is seeing people not hire the right team. And that happens, not at any fault of the people that are the buyers or sellers. So a lot of times it’s usually just because they don’t know, and so they either end up hiring people that are not specialists in this area, or they’re going to the big shops and not getting treated well.

    And so that’s kind of a pet peeve of mine and I, you know, it just breaks my heart to see when these companies have built a lot of value. You can see deals die because of it, either because it’s a, you know, a family-owned shop or family-owned business that has grown up with an attorney when they were nothing that was kind of a general practitioner, and they helped them with some commercial contracts, maybe some employment issues and that sort of thing.

    And then that’s just who they know and so they try to use them for an M&A deal and it can lead to a train wreck, and sometimes it can kill the deal honestly, and I’ve seen deals die because of the counsel, and that’s a problem. You know, you can also hire those big shops and then they can totally over-lawyer, you know, a $5 million deal.

    And we’ve dealt with that plenty of times on the sell side representing sellers to, you know, private equity companies and things like that. And so that, I just hate to see that. And so we strive to be, you know, the firm that we come in, we don’t have an ego on the documents, you know, we take a practical approach to it.

    These are M&A contracts or an allocation of risk, right? Which you know very well, Patrick, and how that works. And so these, with allocating risks back and forth, you’re not going to get an agreement that takes all your risk away. And so you gotta, at some point, I think a good attorney who’s experienced in this area is going to be able to come to their clients and say, “Hey, here’s where we’re at. Here’s the risk of going this way. Here’s the risk of going that way.”

    And there are certain things that I would consider are more legal, but there’s… Ultimately, a lot of it becomes business decisions, and it’s navigating the client through those. “Alright, here’s the risk of this way, here’s the risk of that way. You know, what do you think? How do you feel as far as taking those risks?” And helping them guide to that as well as, you know, telling them what kind of market is out there, what do you see in typical deals.

    And I think we’re uniquely positioned to provide that sort of counsel to clients. We have, you know, I’ve worked on at larger firms, I’ve worked on $200 million deals, you know, I’ve been on these larger deals, and it’s, so I have the experience and, you know, the other attorneys here now have developed that experience as well to deal with these M&A transactions. And I think we’ve just kind of been laser-focused on it, which has allowed us to do them efficiently and help deals actually get closed.

    Balancing Risk & Cost

    Patrick: With what you’re doing there, as you were talking about this, a thought struck me because the parallel I would have is with insurance. When you see startups, startups need insurance, a variety of policies, but the thing is, you can bankrupt a fledgling company by over-insuring them, getting every possible line of coverage out there where you have to go ahead and balance and there’s an exposure here, we’re not going to insure it today, such as Directors and Officers Liability.

    Let’s wait until you get funding. Okay, when you get some outside funding, when you get some outside person that’s going to sit on your board, then we will think about a D&O policy, but you’re privately held, let’s get you up and running first, you just, you’re not that big a target, so why lump you up with it?

    So I see where you try to find that balance, where you don’t want to under-represent them, but, you know, they’re not going to be taken to the Supreme Court for, you know, a nine-figure, you know, penalty.

    Trevor: Right.

    Patrick: Yeah. And so–

    Trevor: You’re absolutely right. You gotta fit the market and the deal, and again, I think, you know, there’s just not, there’s not a riskless transaction, so at some point, there’s some risks allocated to you in that contract, and you just gotta take it with your eyes wide open. And that’s what our job is, I feel like, is to educate the clients on here’s the risk you’re taking. And if there’s a business risk you’re going to do or that you’re willing to take, then let’s move forward.

    Patrick: Yeah, and you’re not going without a net here, there’s going to be some stuff that they’re going to need and just the expert weighing all… prioritizing the exposures out there and then addressing those, I can imagine that you also have a network of other resources. They’re not in-house, but if they need a quality of earnings report, or they need some other diligence documents, you’re not directing them to the Big Four accounting firm, you can find things that make sense.

    Trevor: That’s right. Yeah, we have a set of resources, you know, a network of resources that we can direct clients to, whether they need to queue up, you know, they need valuation experts to come in, they need a regulatory expert. You know, we’ve done deals where patent portfolios have been an asset.

    And so we’ve had to bring in, we don’t have any patent lawyers in-house, but we know them. We know patent lawyers that can come in and evaluate those patents and whether they have value or if they’re defensible, that sort of thing. Or if there’s other regulatory issues, like, you know, we did a healthcare deal where there were certain Medicaid issues that we needed to have looked into.

    And so we brought in another attorney who was a Medicaid expert who could help with transferring those licenses over. And so yeah, we just, you know, part of the problem with M&A is that there’s so many issues that can come up, and so from an attorney’s perspective, you really can’t be…

    Your M&A attorney needs to be like a quarterback in some senses from the legal side to say, “We need to talk to this person here. You need to talk to this person there. Or we need to bring in an expert on this piece.” Because there’s just so many things that can come up in a business or in an M&A transaction that may require an expert in another area. And that’s why the, you know, the team is so important, I think, in an M&A deal.

    Patrick: Well, let’s provide some context here because we’re talking about lower middle market or almost micro middle market. In terms of transaction value, what’s your range of your typical client?

    Trevor: So our typical clients, most of our deals are, you know, in the 3 million to 15 million range, I would say. And so that’s, you know, it depends how you define it, but I thought people would define that as the micro middle market or even just, you know, lower market.

    And it’s, you know, it’s not quite mainstream deals, like, you know, selling hair salons and things like that, but we’re, you know, we’re doing businesses that are 3 million and you know, the big shops really don’t want to touch those sometimes. And we get referrals, actually, from larger law firms that say, “Hey, you know, this one, this is probably a good deal for your firm, but we would charge too much on fees to handle this one. So we’ll refer it over to you.”

    But yeah, that’s the market. I would say if a $25 million deal or a $30 million deal came in, we would probably take it and be able to handle it very well, depending on, you know, the industry and what other needs that the client may need for that transaction. But I would say the bulk of our deals are in that 3 to 15 million range.

    Patrick: Well, now, our focus on the insurance side for M&A is using rep and warranty insurance. And even though rep and warranty insurance eligibility thresholds have come down, so now you can have deals that are as low as $10 million transaction value, where it can be insurable for $2 to $5 million in the full $10 million transaction value when the fundamental reps can be there.

    Rep and warranty isn’t always a fit for everybody. There are other things that can be done where, like you said, you can’t cover all the exposures. Well, let’s value which ones are there. So there are rep and warranty light type products out there that are available. What kind of insurance problems do they run into?

    Trevor: A lot of them. D&O insurance is a big one, a lot of them just don’t have it. And so we have to talk to them about that and getting D&O insurance because we also do private securities work where we’re helping companies raise money and then, you know, a lot of times that’s when it pops up is, you know, where you got either large angels who want to come in and they want a seat on the board or sometimes VC funds are coming in and they want a seat on the board and they’re gonna require it.

    And so, you know, a lot of times we’re talking to clients about the D&O insurance so that’s a big one. Rep and warranty insurance is something that we’ve looked into and, you know, you and I have talked about it a bit.

    And so that’s, you know, I’m glad to see that those prices are coming down and can be a fit for some of these transactions that we’re working on now because it’s a huge [inaudible] attorney standpoint in that it makes negotiating the reps and warranties provisions a lot easier and that’s the heart, you know, that’s the biggest negotiated section of a purchase agreement is typically the reps and warranties and indemnification. And so, you know, to the extent we can make that simpler and get us to that closing table quicker, that’s huge.

    Patrick: Anything with cyber, is that becoming an issue with what you’re saying?

    Trevor: Cyber insurance, you know, we recently had a client asking about cyber insurance, and, you know, we had trouble finding it honestly. And maybe I needed to talk to you about it. But that was about, gosh, a year ago when we were looking into that, and we were having trouble finding it, at least one that fit.

    And so, yeah, that’s, I mean, data privacy and protection is becoming a huge issue right now. It’s, you know, all the continuing legal education providers out there are doing events on this, there’s no specialist in this area, because, you know, GDPR, you got California, just, you know, passed new laws on it.

    And it’s kind of a, given how the internet works and how it goes, you know, across state lines easily, you kind of got to comply with the most stringent requirements. And so this is becoming a big issue and more and more it’s something that, yeah, more and more clients are asking about. So we’ve run into it. And you know, now I’m glad we have a connection with you that they could talk more about that.

    Patrick: Yeah, that’s one of the things with the lower middle market is you’re allocating resources because everybody’s got finite resources. And so you’re not necessarily going to be buying a multitude of insurance policies.

    Whenever you start getting and realizing new exposures, it’s usually not until you get to, you know, a transaction, and then all of a sudden, you have to start taking inventory. And so now you’ve got these new developments. And there are a lot of policies out there that suddenly you now need to just check the box.

    And you don’t want to spend a ton of money on that. But at the same time, you want something that is viable, that, post-closing, is going to respond to a claim, and you’re not going to get a call in the middle of the night saying, “Yeah, that policy bought for a thousand dollars.” Yeah, that’s not valid for what you have, I mean, you need something that’s gonna be there.

    But it’s very important, particularly for the smaller organizations out there where, again, you don’t want to bankrupt them with buying too many policies for every exposure, but then when they need coverage, you’ve got to get itemized specific things.

    There are some real laser, finite, purposeful documents and products out there that can provide the coverage and at a good value, I mean, less than what having a policy for ten years would cost. So there are things out there, and it’s important that everybody is aware of that.

    Trevor: Let me ask you this, Patrick, if you don’t mind. I don’t mean to turn the tables on you here but they, you know, in any M&A deal nowadays, there’s going to be a rep and warranty about data privacy and that you’ve got laws and, you know, any buyer is going to push for that in there and obviously, you know, from my standpoint, if we’re representing a seller, we’re trying to push back on those and make carve-outs to the extent we need to, but how does that work with say, you know, you have a seller who doesn’t have cyber insurance, they have that rep and warranty in there, but they want to get rep and warranty insurance. Will that cover that or is that carved out?

    Patrick: Yeah, a lot of times, the rep and warranty policies are now trying to carve out the cyber, what they will prefer doing is encourage the seller to go purchase a standalone cyber policy, liability policy. Those usually are anywhere from $3500 in premium to $10,000 in premium depending on the size of the company and how your records look.

    Okay, that’s purchased. Then what if that is in place and the seller has to have cyber policies and procedures just for protecting data, they have to have, you know, basic firewalls? They have to have policies and procedures among their team, that, you know, that information is weak.

    And there’s a protocol so they have to have some things in place similar to employment issues where you’ve got to have an employee handbook if you got fifty employees, okay, you can’t just, “I have an insurance policy, but we have no handbook.” Okay, so you have to have some common-sense policies and procedures in place.

    If you do, and you have a cyber policy, a rep and warranty policy will just literally sit on top of that cyber policy. If the rep is breached, and this does happen quite a bit, is post-closing, you don’t know about a breach until months after it happened. And you have no knowledge of it at all until something erupts six to twelve months later, and then you’ve got people coming after you.

    Well, if you’ve got a cyber policy in place, they will respond to those claims. The rep warranty policy will then just sit as an excess policy right above it. So those damages usually can be contained within the rep and warranty policy, within the cyber policy primary, and then the rep and warranty.

    Keep in mind, rep and warranty insurance policies usually have a deductible that’s 1% to 2% of the transaction value, so you could have a minimum retention of $150,000 on your rep and warranty policy. Cyber policy might only have a $10,000 retention. So you want that early attachment point at that, you know, three to seven thousand dollar premium item, then you’re gonna have the rep and warranty supplement. So that’s how they’re addressing those.

    Trevor: Well, that’s good. That’s a good point on the deductible piece, you know, to have that and a good reason to have that cyber policy.

    How COVID-19 Will Impact M&A

    Patrick: Yeah. Now, as we’re sitting here right now, as we’re recording this, we’re midway through the COVID-19 settle-in-place. At least I hope we’re on the latter half of it now. And I usually ask my guests what they see trend-wise for M&A or their particular specialty.

    I’m just curious from your perspective on the lower middle market. Let’s say we get back and up and running, we start opening up in late June, early July. I mean, we’re from California. So we may be shut down until August. But for the rest of the country, probably getting out May into June. What do you see trend-wise for you? How fast or slow? Do you think activity is going to pick up for you on the transaction side?

    Trevor: I’m hopeful that things are picked up and going like they were in June. I think that’s hopeful. But I don’t know if that’s going to be the case. And I think, you know, it’s tough to predict now, how it’s going to go, but I know that we had a bunch of deals that were in the process in early March, and those deals have been put on hold.

    Actually, one did go through and closed. But the other, you know, four deals are either on hold or they may be dead, I’m not sure. As of now, I think that my hope is that there is a quick recovery. I think it’s gonna affect different industries differently. In other words, there’s a lot of talk about, you know, is this going to be a U recovery, is it going to be a V, is it gonna be a W, you know, a lot of letters thrown out there.

    And recently I heard somebody say, maybe it’s gonna be a Y. And I think that’s kind of what I’m thinking it might be, whereas there’s going to be an uptake, I think, hopefully, a quick uptake on certain industries, whereas other industries are probably going to stay down for a while, you know, retail, restaurants, things like that.

    I think we’re gonna have a tough time managing this shutdown and coming back, you know, there could be others, but there’s other industries that I think are going to pop back in, you know, start doing deals again.

    And so I’m hopeful that that’s how it, you know, at least as part of the economy starts coming back, certain industries come back and deals start going again, I think that, you know, there’s obviously a lot of private equity money out there, and there’s, you know, reports of a ton of private equity money out there ready to buy and so, you know, there could be some, a lot, of shoppers out there looking to get good deals right now, you know, they can push on valuations and hopefully pick up some good deals.

    And so that could help get the M&A market back, I think, quicker as well. So, hard to say, hard to have a crystal ball here. But my hope is that by June, certain industries are going again and M&A is picked up.

    Patrick: Trevor, how can our audience find you?

    Trevor: Find us on our website: crow.legal. Or you can email me directly, it’s just trevor@crow.legal and so there’s no “dot com” it’s just a “dot legal.” And you can catch me there or, you know, call me directly (720) 230-7123.

    I’m happy to talk to anybody who’s out there in this market–service providers, buyers, sellers, anybody. We love doing deals here, and I think that we provide a lot of value to the lower middle market. So if you need anything from me, please send me an email or give me a call.

    Patrick: Fantastic. Trevor, I appreciate it. Great talking today, and we’re going to talk again real soon.

    Trevor: Sounds good. Thanks, Patrick.

  • Michael Butler | An Optimist in Today’s Crisis
    POSTED 5.12.20 M&A Masters Podcast

    When it comes to M&A, lower middle market companies often get overlooked and overcharged by big institutions. But Cascadia Capital is an investment bank that specializes in working with this underserved market.

    Chairman and CEO Michael Butler explains how they help “stage the house” for a company about to go to market, including the financial, legal, and operational aspects, among others.

    We also talk about Michael’s unique take on the current financial crisis, including the key differences between what’s happening today and what happened in the Great Recession of 2008 and 2009. He says he’s optimistic about a quick turnaround… including a significant increase in M&A activity this summer.

    We go into depth on the reason for that pickup, as well as…

    • The underlying factors that make the quick upturn in the economy likely
    • Personal financial planning an M&A deal – and how to minimize tax obligations
    • What companies should be doing right now in the downturn to spot opportunity
    • The role of Representations and Warranty insurance – and why it’s become a must-have in deals today
    • And more

    Listen now…

    Mentioned in this episode:

    Transcript

    Patrick Stroth: Hello there. I’m Patrick. Welcome to M&A Masters, where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders, and their investors. Today, I’m joined by Michael Butler, Chairman and CEO of the investment banking firm Cascadia Capital based in Seattle.

    Cascadia Capital is a team of transparent, client-focused, trusted advisors with deep expertise in a broad range of industries. Michael came to my attention following an article he posted in response to the coronavirus pandemic just a week ago, with the title “Opportunity Does Not Go Away, It Only Changes Form.” We’ll link to this in our show notes. Michael, thanks for joining me today. Welcome to the show.

    Michael Butler: Thank you, Patrick. Thank you for having me.

    Patrick: Before we get into Cascadia Capital and the article you posted, let’s give our clients a little bit of context. Tell us how you got to this part in your career.

    Michael: Sure, Patrick. I’m a Seattle native. I went to the University of Washington, then went out to Philadelphia to get my MBA at the Wharton School. And then after that, went up to Wall Street and worked on Wall Street for eighteen years with Lehman Brothers and Morgan Stanley. And then in 1999, with two small kids in New York City and a wife who didn’t want to raise a family in the city, moved back to Seattle and co-founded Cascadia Capital.

    Again, that was in the middle of 1999. All was good for about a year, year-and-a-half and then we hit the internet bubble burst. So not good timing on my part, but I think you’ve got to make the leap at some point, and I did so in 1999.

    Patrick: Well, at least now you and I can both say that we’ve gone through three… Now, this is our third real big shock to the economy because we had the dot com issue there, then follow that with the banking crisis in 2008/2009, and the one that we’re going through here.

    Michael: Yeah, I agree, we’ve seen a few. I think it makes it easier. You know, you’ve seen this movie before. And if you’ve seen the movie, you kind of know what’s coming next. You kind of have an idea of how the movie is going to end, and it enables you to be proactive and look at the opportunities rather than just focusing on the challenges. And that’s what we’re trying to do here.

    Patrick: Yeah, I completely agree. I mean, that’s the thing is that, unlike some other people in the society right now, if you’ve gone through this, you know, the lights will go on. And so you have to have that in your mindset that this isn’t Armageddon and we’ve got a long way to go.

    Now, tell me about Cascadia Capital. I always like finding out how you came up with the name. And then talk about what the focus is because you’re not agnostic being a generalist. You guys are very specific on a couple of specific areas.

    Michael: Sure. So Kevin Cable and I co-founded Cascadia in 1999. We couldn’t decide whether to call it Cable and Butler or Butler and Cable. I bought a house on Cascadia Avenue in Seattle, Washington. And Cascadia is kind of the name for the region that encompasses Vancouver, BC, Portland, Seattle, and Boise.

    And so I said to Kevin, look, maybe it’s a good omen that I moved to Cascadia Avenue. Why don’t we just call the firm Cascadia Capital? We thought that was a great idea. And that’s how we came up with the name. It was no brilliant thinking. We didn’t hire a, you know, marketing firm. It was kind of a coincidence of me moving to Cascadia Avenue and that being a name that just got to describe this region that we live in.

    Patrick: It’s also helpful nobody took the name ahead of you.

    Michael: Absolutely. Yeah, sometimes you got to be a little bit lucky. What Kevin and I originally tried to do was focus the firm exclusively on the Northwest. You know, our thesis was the Northwest was going to become a great region, and we were focused on the Cascadia region. That plan worked well for about fifteen months until the internet bubble burst.

    And then we quickly realized we had to broaden our footprint and we became a national firm over the years. We also determined that the day of a generalist was going away and that you had to have domain expertise and really understand the industries you worked in to add value to your clients. So those were a couple of the big lessons we learned from the internet bubble burst.

    M&A Experts Who Will Prioritize You

    Patrick: And your commitment, in terms of the sector of the industry that you’re looking at, in terms of size, is lower middle market, the middle market?

    Michael: Yes, our client base tends to be at least 75% non-institutionally backed. So entrepreneur-owned businesses, family-owned businesses that typically have an enterprise value of between 50 to 500 million. I would say our sweet spot is 75 to 200 million. Again, we’ll do deals bigger than that and smaller than that, but that’s really the sweet spot for the companies we work with.

    Patrick: I think that sector is a great sector and some people may think it’s on the larger side, some think it’s on the smaller side. I sincerely believe that that lower middle market, under $70 million transaction volume, is a vast and underserved market. And so the more people who find out about specialists such as Cascadia, I think it’s nothing but helpful because, unfortunately, a lot of these organizations, if they’re not doing M&A all the time, they’re not aware of organizations like yours.

    And they make the mistake of defaulting to the big institutions and the brand names. And what ends up happening is they get underserved. They get overlooked. And they also get overcharged. And a lot of times, there are solutions for the middle and lower middle market that are out there that the big institutions just don’t provide.

    And it’s in the interest of the lower middle market members to really find out the specialists like yourself because you’ve got solutions that are beyond the bandwidth of the larger organizations that would alternatively just go ahead and pull out some stuff off the shelf canned product for them because they just don’t have the bandwidth to handle that one service.

    Michael: I completely agree, Patrick, what we found is, there’s a different set of circumstances that impact lower middle market companies compared to larger companies, you know, typically they don’t have the infrastructure that a larger company will have. They might not have the CFO or the processes or procedures.

    So when we work with a company, a lot of times it takes months and months to get them ready to go to market because we have to help them think through their infrastructure and their people and their processes to kind of get them ready to be able to go to market. That takes a lot of patience.

    It takes experience. Having done it before, I think the larger firms just don’t have a business model that allows them to spend that amount of time with a company.

    Patrick: Give us a couple examples of what you did with clients like that where you literally have a face to house before it went on the market.

    Michael: Yeah, exactly. So what we try to do is put together a team to help a company. And that means bringing in the proper accounting firm, it means bringing in at least a temporary CFO, if they don’t have a CFO that is up for the task. And it also means bringing in a good law firm.

    So it’s going through the various contracts that they have with suppliers or customers to make sure that those contracts are in a form that will be acceptable to a buyer. It’s making sure that they have the right checks and balances in their financial function. And robust books that can withstand the diligence process don’t need to go through.

    It means making sure that their strategy, their operations, and their financials all tick and tie, right, that the financial model reflects the operational model that reflects the strategic direction of the company. And so after you’ve done this, you know, the number of times we’ve done it, you kind of know where to look for issues. And once we find those issues, you know, we know who to bring in or how to help them solve the problem.

    Patrick: That avoids surprises during the diligence phase or during the negotiations, doesn’t it?

    Michael: Exactly. What we tell our clients is, you want to take as much time as needed to get ready to go to market. Because if you go into the market and you’re in diligence and the buyer finds a problem, they’re then going to look for the next problem, right? It lessens their confidence in the company being a clean company, so to speak.

    So we spent a lot of time making sure clients can withstand the diligence process. The other thing we find, Patrick, with our client base is a lot of them have not done the personal financial planning that they need to do to minimize taxes or to maximize, after tax, proceeds.

    And so we also recommend that they work with, you know, a financial advisor or personal attorney to make sure that their own personal house is in shape. So that when they go through this process, they can maximize the after tax return to them. And that might mean gifting shares to their children, it might mean setting up trusts. And that all takes time to do.

    Patrick: That’s nice because you’re caring about the people, not just making sure the deal gets done and then that’s, the owner or founder, that’s their business. We’re not going to touch that. I mean, that could be everything.

    Michael: Yes, it absolutely can be. The amount that an owner of a business can save by having the right tax structure in place is immense. And these clients become our friends. We realize that, in many instances, this is somebody’s life’s work. Or it’s several generations of their life’s work.

    And we take that pretty seriously. And so we make sure that we spend the time to get to know them, understand the objectives, and make sure that they’re well-positioned to maximize the returns for what for many is the biggest financial decision of their life.

    Patrick: I always think of M&A, ever since I got into it a few years back, was I always thought about the people aspect myself, just as you do, where it’s not company A buying company B or merging with company B. It is one group of people deciding to trust and combine forces with another group of people.

    And in an ideal situation, the new whole is greater than the sum of its parts. That’s where it’s “win win win” out there, and it comes down to trust when it comes down to people.

    Michael: It always does. Every time.

    Why Representation & Warranty Insurance Is a Must-Have

    Patrick: Yeah. With this, you mentioned the financial impact for owners. As an insurance person, we always look also just on how can we reduce mitigate risk which is very, very boring. But it can be the key to having a successfully executed deal.

    And that’s where we ensure the transaction itself through rep and warranty insurance. A product’s been out there for years then very, very popular recently. If you could–good, better, and different–share with us any experiences you’ve had with rep and warranty on your deals.

    Michael: So we look at reps and warranties as the new quality of earnings. So about three, four years ago, buyers demanded quality of earnings reports, which are basically a Good Housekeeping Seal of Approval from an accounting firm around a company’s finances, and they become just part of the transaction.

    Almost every deal we work on has a quality of earnings. And what it does is it gives the buyer comfort in the seller’s numbers. And it’s a risk mitigation strategy for the buyer. And it’s something that every seller needs to do. We think rep and warranty insurance is on the same trend. We think really every deal is going to have rep and warranty insurance, the cost-benefit is immense.

    The cost is really minimal. When you think about the benefits that the insurance provides, it means less money has to go into escrow. That means more goes to the seller on day one, it allows the buyer to have comfort in case something goes wrong because they have the insurance.

    And so it’s going to become, in our view, standard for every deal we work on. It makes so much sense. It just makes too much sense not to become the case and it, you know, again, from a cost-benefit analysis it’s, in our opinion, a no-brainer.

    Is a Quick Upturn in the Economy Likely?

    Patrick: Now as we record this, we’re hopefully, you know, who knows from week-to-week, but we’re hopefully on the downside of the shelter-in-place environment with COVID-19. And that we are, you know, with the term of your article there, you know, there’s going to be an end to this and we’re going to go forward.

    Just to put this in a little bit of context for folks, in your article, you talk about the comparison contrast between the great banking recession of 2009 and the current environment we’re in right now, and you have a unique take on it. So if you could summarize to share that with us. I appreciate that.

    Michael: Yeah, there are similarities, but there are a lot of dissimilarities. The Great Recession of 2008 and 2009 was due to financial weakness in the mortgage market, in the high yield market, and so there was instability in the financial system, which caused the recession.

    The situation today is different. The government essentially put a healthy economy on hold. And it was a choice the government made, not because of any underlying financial weakness, but because of a health issue. So our view is that there’s an underlying strength in the economy that will begin to show once we get through the quarantine, and even in the last week, we’re starting to see what we call some green shoots.

    Deals are moving along a little bit better than they were three weeks ago. We’re starting to see companies looking to potentially come to market in the next four to eight weeks. We have a couple new deals that are in market and received good bids. So I think there’s some green shoots.

    The biggest difference I see between 2008 and 2009 and the situation we’re in today is this feels like a movie that’s on fast forward, everything seems to be happening so much quicker today than it did in 2008/2009 or in 2001 through 2003 when we had the internet bubble burst, you know, it took time for those downturns to kind of cycle through.

    And today, what we’re seeing is, the things we saw that took six to twelve months to happen, and the last two downturns are happening and, you know, six weeks in this downturn, and it just feels like it’s on fast forward. So we’re going to move through this one, in our view, a lot more quickly than we did the last two.

    Patrick: Well, that’s the type of message, that optimistic message for a quick turnaround that we all want to hear and it’s not, you know, Pollyanna. This is fairly realistic, but, Michael, back, we spoke about what’s going to happen, when this does end, and it will. And you characterize the coming period as “July is the new January.” Tell us what you mean by that?

    Michael: Yeah, so I didn’t coin that. I can’t take credit. We are hearing that in the marketplace from investors and buyers. And there’s a view among investors and buyers that by the time July rolls around, things will begin to be back to normal, and then activity will peak and pick up.

    Typically, what you see each year is just kind of a rush to look at new deals in January because the period from Thanksgiving to year-end tends to be very slow. People put down their pencils, they don’t really look at new deals. So you get a lot of pent-up demand in January because people haven’t really done much the prior six to seven weeks.

    And I think the view is by July, the deal market will open up and buyers and investors will have pent-up demand because they haven’t done a lot of deals over the preceding two to three months. So the thing we keep hearing from, again, investors and buyers is that July will be the new January, meaning there’ll be a lot of activity, a lot of pent-up demand. And you’ll start to see the log jam break.

    Patrick: And you’re open for business and ready for anything that’s coming. Even now, you’re not gonna wait till July.

    Michael: No. So, you know, there’s a lot of things you can do. Right now, you can help companies think through strategy. You can help them think through operations. We have a couple of companies that were looking to go to market in March, and we advised them not to go to market, and now they’re looking to be buyers.

    They’re saying, look, this might be a great opportunity for me to buy some of my struggling competitors, integrate them, and go to market, you know, in a year with a business that’s one-and-a-half times as big then as it currently is now. And so there’s a lot you could be doing during this downturn to prep and get ready for the expected upturn.

    Patrick: Very, very helpful. Michael, how can our listeners find you?

    Michael: So I’m available on my cell which is (917) 865-0962. And the email which is mbutler@cascadiacapital.com.

    Patrick: Michael, it’s been very informative. And I really appreciate the optimistic tone we have here just because I’m getting a little tired of seeing all the COVID-19 warning emails I’m getting from all the law firms. So every now and then it’s nice to have a nice, sunny, happy report.

    Michael: Well, I can say I’m a realistic optimist. Let’s hope I’m right.

    Patrick: You and me both. Thank you very much.

    Michael: Thank you very much, Patrick.

  • Gaurav Bhasin | How Investment Bankers Play A Role In M&A
    POSTED 5.5.20 M&A Masters Podcast

    In today’s episode of M&A Masters, I sit down with Gaurav Bhasin, managing director of Allied Advisers– a Silicon Valley-based investment banking firm with team members in Irvine, Tel Aviv, and Mumbai. Allied Advisers specializes in M&A advisory services, or middle-market companies, particularly in the technology space.

    Gaurav and I met when he engaged Rubicon to provide rep and warrant insurance for a client of his that was being acquired by his commercial partner. Ultimately, the deal closed, but what stood out to me and the reason Gaurav is on the show, were the lessons on the role of an investment banker in an M&A deal.

    We’ll chat with Gaurav about what it’s like to work in the middle-market, the types of services he offers that set him apart, as well as…

    • The common themes of M&A processes
    • How he manages to reach out to 100+ people per deal
    • Gaurav’s ideal client profile, and how he narrowed it down
    • When to reach out to an investment banker in the M&A process
    • And more

    Listen now…

    Mentioned in this episode:

    Transcript

    Patrick Stroth: Hello there. I’m Patrick Stroth. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here, that’s a clean exit for owners, founders and their investors. Today I’m joined by Gaurav Bhasin, managing director of Allied Advisers, a Silicon Valley-based investment banking firm with team members in Irvine, Tel Aviv, and Mumbai.

    Allied Advisers specializes in m&a advisory services for middle-market companies, particularly in the technology space. Now a brief description on how we met, Gaurav, is you engage Rubicon to provide rep and warranty for a client of yours that was being acquired by his commercial partner.

    Ultimately, the deal closed, but what stood out were the lessons on the wall of an investment banker such as yourself and get a complacent buyer to take action and how important it is to have an advisor in your corner, particularly where there’s a massive buyer 1000 times larger than his target company and negotiations and I put those in air quotes, the negotiations between those parties at that different size can be, let’s say a bit one-sided. Gaurav, welcome to the podcast. Thanks again for joining me today.

    Gaurav Bhasin: Thank you, Patrick, for having me. Pleasure to be speaking to you.

    Patrick: Before we get into you and Allied Advisers, let’s set the table and describe the deal that we’re talking about that brought us together.

    A Lucrative Acquisition

    Gaurav: Yeah, Patrick happy to. So first of all, thanks for stepping in on that deal. I know our client was quite happy with the work you’ve done on the reps and warranties insurance for them. So how we got engaged with that company was they were a software company which was in commercial partner with the eventual buyer for a long period of time. Our client didn’t have a big sales team, so a lot of their revenue was coming from this commercial partner. The commercial partner had told our client that they would buy them at some point.

    But after several years of hearing this, our client got a bit tired and engaged us as advisers. When we got engaged, what we did is after talking to the commercial partners slash eventual buyer, we quickly realized that there was no sense of urgency on their behalf to move forward. So what I suggested to my client is we should reach out to other buyers in the sector and generate interest. We prepared some materials, we reached out to other buyers.

    And luckily for us, we got a couple of buyers interested in the company. And we got some offers as well. Once this happened, we let the commercial partner know that we have multiple parties interested and also let them know that some of these parties actually competed with this buyer and didn’t want to support them post-transaction.

    What this did is it basically got the commercial partner worried about losing access to the technology, which was supporting a big product line of theirs. And then we ended up getting a term sheet, which was a pretty attractive valuation and eventually got this complacent buyer to move forward and close the acquisition with my client on terms that my client was pretty happy with.

    Patrick: The interesting thing that I didn’t realize on that is you have an organization there where they had a situation where the target was attractive because it was something that they’d been outsourcing to, and they probably figured they’d get a more favorable economic outcome if they just brought them in house.

    But then I guess they had the feeling well, why buy the cow if we can get the milk maybe now for free, but we don’t spend as much as the cost to buy the cow. So it was a decision that they can put off as long as they wanted. And unfortunately, that leaves that private merging tech company kind of dangling out there. And that’s not a cool place to be. So it’s great that you came in, you got them out there got a highlight on them and definitely increased the interest level.

    Gaurav: Yeah, I certainly agree with you. I think, you know, the fear of missing out was what sort of prompted them to move forward. You know, they didn’t want to lose this partner. And a partner, frankly, our client also wanted liquidity. You know, they’ve been doing this for a long period of time. So it is, you know, good for us to get them to come to a conclusion that worked for our client.

    Patrick: Well, let’s define the market that we’re both actually targeting because you don’t want to be all things to all people necessarily because there’s a real true value that you can bring in particular segments if you focus on niches. Tell me, you know, about your target with the middle market with the emphasis on technology as opposed to all other, you know, flavors of business out there.

    Why Allied Advisers Focuses Exclusively On Technology

    Gaurav: Yeah, happy to. So Allied Advisers is hundred percent technology. That’s all we do is technology. One of the things better given in the valley for a long period of time and most of the exits that companies have is through m&a. In fact, over 97% of the exits over the last five years have been through m&a compared to IPO. Naturally, where we focus in is on m&a. I’ve done IPOs before at larger banks, but by and large for the last decade, I’ve only been working on m&a.

    The next thing we do is we focus on middle-market, a broadly speaking middle-market. You know, we target these below 150 million, I would say the bulk of our deals tend to be below the hundred million dollar range. If you look at the size of the market, you know, there were about 2500 tech deals annually below hundred million. So as you can expect and imagine there’s a lot of transactions which are happening in that space.

    And what happens in this 150 million dollar and below market is that it’s an underserved market. A lot of the larger banks due to their infrastructure and cost tend to go for bigger deals because that generates a bigger fee for them. But what happens is in this lower middle-market, none of the banks kind of lose attention or don’t pay focus on it. Or worse, you may have a young associate or a VP driver deal and kind of learn on the clients’ nickel.

    So we specialized in this space and I think in this space, you want to have experienced advisers and legal team on staff because the buyer on the other side have pretty experienced development teams and legal stuff. So, you know, us playing in the market, which is underserved, kind of helps our clients and entrepreneurs. So all we do is technology focused on the middle-market almost all m&a.

    Patrick: Another thing that I think you and I should emphasize here is just because of our passion for this segment of the market, where it’s the middle-market, lower middle-market, is that I, you mentioned being an underserved market, we really want to be there to support and provide services and value to the entrepreneurs out there who really aren’t getting the service that they deserve.

    And it’s just because there are so darn many of them. And that’s not a bad thing for us. There’s enough business out there for everybody. And when you got the smaller market and you can provide the attention that they need, hold their hands, bring in the great expertise and experience that they otherwise would have to pay, you know, multiples for, they really appreciate it.

    And you know what, a lot of what we do and why we enjoy doing the deals is that we get great favorable feedback and appreciation from these clients. So why not focus on the people that you love to work with, rather than working with the Apples and the Walmarts of this world? Let’s go out there and there’s no shortage of those clients. And the beautiful thing is they’re underserved. We’re ready to serve them.

    So that’s what we want to do. We do that on the rep and warranty, not only on the transaction side, but other insurance products that may be necessary brought to bear as we do your client. But in light of this huge underserved market graph, explain what Allied Advisers can do and what you bring to the table that the large institutional bankers, you know, aren’t doing or are reluctant to do due to cost.

    What Allied Advisers Offers That Large Banks Do Not

    Gaurav: Yeah, absolutely. You know, as I mentioned, the larger banks due to the overhead and cost, can’t serve the middle market clients like you and I can. So for us, you know, our clients’ success is our success. We are fully motivated to get them over the finish line, to provide an exit to them which they worked so hard to build a business. So, the things Allied Advisers can do is we can provide access to buyers and investors.

    You know, we work hand in hand with our clients and find out who the right seller-buyer is for them. Is it a strategic buyer or is it a private equity buyer? Or is it a strategic buyer backed by private equity? We have done deals with all categories of buyers and, you know, having this access to the buyer is helpful for them. You know, clients are busy growing and building their business, having a banker who can do the outreach on their behalf and get them in front of the right sort of buyers and investors is quite valuable.

    The other thing we can do is we can help them in positioning their company appropriately to each buyer group. You know, strategics will look for different things than what a private equity might look for. Even in private equity, there are some private equity firms that will look for profits and there’s some private equity firms that will look for growth. We know what the hot buttons are, what the buyers are looking for, and what are the valuation drivers for your company and sector.

    And having this kind of knowledge, we can help position your company appropriately to get the top valuation for your company. The other thing we do is we also entrepreneurs like our clients, we started our own firm, we’ve been at bigger firms. And we work with a client every step of the way. There’s a lot of twist and turn that comes during the process and we help you think through this. Think of us as a client, friend during the process. We are working hand in hand with them for six to nine months.

    And then, you know, where we add additional value is we help them negotiate in terms of the deal. You know, founders and the CEOs have worked so hard to build this business and in some ways, they are emotionally tied to the deal. Having an outsider who has kind of done this many times before can be very helpful. We can advise the founders what is market, what’s not market. We can push for things the founders and CEOs find awkward asking their potential future buyer and bosses about.

    They also know they will end up working for the buyer slash private equity firm for two to five years. And negotiations can sometimes be very strenuous and emotional. And you want to preserve your relationship with your future boss. So having a banker kind of manage that for you helps preserve your relationship but at the same time, you know, get your deals done which you may not have been comfortable asking for.

    And last but not the least, you know, you only know what your value for company is by talking to many buyers. I’ve done many transactions in my career. And I’ve seen for the same company different buyers value completely differently and pay value differently. So the only way you know you’re getting a fair value is by doing a proper market check and making sure you’re getting the best value for the company you and your team and investors have built.

    Patrick: Yeah, and I want to emphasize two of the points you made there is that this is very emotional for the buyer and to have the buyer and the seller, excuse me, but for the target company is unbelievably emotional and can distract them from their jobs. So, which is to run and grow their company, not to sell it.

    And so that avoids a distraction. And having that intermediary between the two parties is helpful for filtering out communications, getting, you know, discussions going and getting the process moving without taking things personally, because that, as you know, is part of the process. And the other thing I’d emphasize is there are very few, there are some but they’re very few first-time buyers.

    There are a lot of first-time sellers that haven’t been through this and so they don’t necessarily know what to expect. So to rely on somebody that can walk them through the process, as you said, step by step, be the sounding board is all the difference in the world. So give me some examples of, you know, the types of services and the case studies and what you did for these middle-market companies that set you apart. Just highlight how you do things because there are I’m sure listeners out there wondering whether or not this is a fit for them.

    What Sets Allied Advisers Apart From The Rest?

    Gaurav: Yeah, so I’ll give you two examples. And the interesting thing about m&a processes is no two processes are the same. They have some common themes, but they have variations. So in one case, one of my clients had received an offer from a former company and the company actually was the investor into this, into my client as well. So they had interest in acquiring the technology they had built. When this prospective client came to me, what we did is we did a look at the landscape of other potential buyers who could have interest in this company. And we quickly reached out to another set of buyers.

    Luckily for us, the technology was well received and there was a need for this technology in the marketplace. We actually got another bidder who wanted to buy this company and offered 70% higher than the initial offer, which came from the first buyer. And as a result of that, we were able to improve the initial offer from the buyer from where they started twice over the course of the process and sold the company 70% increase to the initial offer.

    So if you look back, the fees they paid for us was tiny compared to the increase in value they got for the company. And I think the lesson learned here for us was that, you know, companies if they really generally want a technology, they’re willing to pay more. The first offer is not the last offer, but you need to read competition for the buyer to sharpen their pencils. So, that was an example where, you know, the buyer had an inbound interest and we were able to use that to start a process and get additional value through presence of another bidder.

    And then, there was another company, which was a SaaS software company recently sold, it was bootstrapped. The owner and his wife had run this for several years. And the company had grown nicely, it was profitable, but all their eggs were in that basket in that, you know, they had essentially invested all the life savings into growing their company and building their company, but they had preserved essentially all that equity. In this case, they reached out to us and wanted to get some liquidity.

    And they were not even aware of, you know, the types of folks who will have interest in their company. We reached out to a whole bunch of strategic as well as private equity buyers and got multiple offers from both categories of buyers. There are benefits of going with strategics. There are also benefits of going with private equity firms. And then, you know, given they had multiple offers and multiple options, the owner was able to make a wise decision. And we sold that company at a pretty nice healthy premium of 10 x multiple of the trailing revenue. So that’s another example where the client was extremely thrilled about.

    Patrick: When we talked a while back on this second scenario, you mentioned that you were probably reached out to some 100 potential buyers or interested parties on this.

    Gaurav: Yep. That’s right.

    Patrick: I mean, who has Yeah, who has time to do that and keep all those relationships going and all those lines of communication open? You can’t possibly do that and run your company effectively. So

    Gaurav: Yeah, exactly.

    Patrick: I would also say, and this is not to say, we don’t mean to inject any kind of politics whatsoever into this. But it was interesting in your first example where the first offer don’t jump at that first offer. Not long ago, I was checking out the book, The Art of the Deal. And many of Donald Trump’s real estate successes came because he bought properties very, very low, artificially low because why? Because the properties didn’t go on the market. He managed to have relationships with the building owners and came in to step in and offer deals on the buildings without it going to market.

    Had the buildings gone out to market, he said he probably would have still been able to afford it, but he would have had to pay many, many millions more. So definitely in this market, whether you’re aware of your value or not, it’s always best to get, you know, more than one prospective buyer at the table, even just for a look, whether it’s a fit or not. And Gaurav, tell me what’s your ideal client? Give us a profile of that. And then with that in mind, given the time frame on when they should reach out and engage you.

    Who is the Ideal Client for Allied Advisers?

    Gaurav: Yeah. So our ideal client is ideally a company which is, you know, a SaaS software company or an internet company which is, you know, growing nicely in a large market. You know, I think for us, we are excited to work with middle-market founders who are creating businesses from nothing and, you know, getting revenue traction, customer traction.

    For us, we encourage founders and investors to get to know us early on. It helps us build relationship with you. It helps us advise you on market dynamics. And also when is the right time to exit. Is it better to exit when you are extra revenue or whether you need to improve your margins or your services? This allows us to take on more of an advisory role versus a transaction role. And also, we can kind of work with you hand in hand to find out the best way to maximize exit value for the company.

    So what we encourage is, you know, get to know us early on. There’ve been many times where we’ve gotten to know client three, four years ahead of them formally engaging us. We can keep you updated on market insights and address questions as they come up. And then, you know, as you mentioned, Patrick, anytime you have a bond with the company, you know, you should definitely check and make sure that they are, who else could be interested in your company.

    I think anytime you get additional offers, you want to do yourself a benefit in the exit value. And then there could be situations where, you know, we get to meet founders, investors that have grown a company to a certain level and they feel that they either need to get some liquidity, to cash in some of the savings, or they need some capital for growth where it could be better suited to be in the hands of a larger buyer. So those are some scenarios where, you know, a foreign investor can approach us, engage us and in front of you happy to meet with folks and give them my point of view.

    Patrick: So it helps for people even if they’re not planning on some imminent transaction or some imminent exit, is to maybe reach out and call you, get to know you a little bit, just some conversations, get some ideas, and then just have that dialogue on and off again periodically throughout the future. And then when some situations arise, you’re prepared with to have some intelligent conversation. You don’t have to start the relationship from square one.

    You could also tell whether or not I, Gaurav, you’re nice enough guy, whether, you know, there’s a connection there. And having a conversation here or there, always starts, takes 10, 15 minutes. And I think it’s a first step and it’s an easy step before there’s all this pressure on you where you have to do something now because you’ve got some need for capital or you got an unsolicited offer just landed on your desk and, you know, you don’t know what to do. Gaurav, how can our listeners find you?

    Gaurav: Yeah, it’s quite easy to find us. You are welcome to go to our website. It’s Allied ALLIED Advisers, ADVISERS. On there you can see the Contact Us button. You can fill out the form and one of us will get in touch with you. You can find us on LinkedIn. And we look forward to hearing from you and developing a relationship with you.

    Patrick: Yeah, if you go to LinkedIn it’s Gaurav GAURAV BHASIN, that’s the easiest way for some of us who are not as good at spelling on these things for LinkedIn. That’s how they can find you. And I would recommend, you just, it never hurts having a conversation. You never want to, you know, start talking to an attorney when you’re receiving a lawsuit. It’s always nice if you could meet a couple of attorneys, get some ideas just on what’s out there with the landscape, show interest in what they’re doing.

    And you’ll know whether or not there’s connections. You never know when you might need it. And if you’re an owner, founder of particularly a technology company, there’s definitely going to be the need. You may not think it’s now but down the road there’s going to come a time for a potential exit and you could do nothing more than help your situation with Gaurav on your side. Gaurav, thank you very much. It’s a pleasure speaking with you. We’ll talk again.

    Gaurav: Thanks for taking the time, Patrick. Really appreciate it.