Insights

  • Christie McFall | Upcoming Trends In M&A Post-Pandemic
    POSTED 6.30.20 M&A Masters Podcast

    On this week’s episode of M&A Masters, we speak with Christie McFall, Business Development Director of Great Range Capital. Based in Mission Woods, Kansas, Great Range Capital brings a unique combination of institutional-grade experience and Midwestern values to middle market and lower-middle market firms in the Heartland.

    “Our whole goal is to take a successful business that has a strong management team that is looking for some sort of succession plan, if it’s taking equity out of the business and slowing down, or just growing that business to the next level because they can’t. That’s one of the things that I find appealing from these businesses in the Midwest is you get to find somebody who’s talented, took an idea, and grew a successful company. But when they can say, I just don’t know how to get to the next level, and I need some help, those are the types of relationships we’re looking for,” says Christie.

    We chat more about Christie’s career and Great Range Capital, as well as:

    • Helping already successful businesses in the lower-middle market grow to the next level
    • Rep and warranty insurance
    • Upcoming trends in M&A
    • The importance of acknowledging the emotional aspect of selling a business
    • 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 Christine McFall, Business Development Director of Great Range Capital. Based in Mission Woods, Kansas, Great Range Capital brings a unique combination of institutional-grade experience and Midwestern values to middle market and lower-middle market firms in the heartland. Christie, thanks for joining me. Welcome to the program.

    Christie McFall: Hi, thanks for having me. I’m excited to be here.

    Patrick: Well, before we get into Great Range Capital which we’ll short to GRC, why don’t you tell us about you? What got you to this point in your career?

    How Christie Got to This Point in Her Career

    Christie: Yeah, so I’ve always done business development and marketing. And prior to the firm, I was at a company called UBM. It’s based out of London. You won’t find that name anymore because over the last three years it was bought and sold three times. I think it went from UBM to Informa to a company called NJH Associates. My role was when I was hired was to grow the company through M&A.

    And I was able to do that. I bought a couple of data firms and a few media companies to round out my portfolio. But in the process, they were buying and selling my group at the same time. So although I learned a lot and enjoyed the process, I wanted to stop being on the receiving end of the acquisition and be on the buying side. I really enjoy the process and I enjoy, you know, meeting new people.

    And that’s one of the biggest benefits of the role that I have is getting out into the marketplace and meeting business owners and influencers and deal brokers. And I like that a lot. I don’t necessarily love the integration part of being bought and sold, where you’re trying to figure out a new process, procedure, email capabilities, integrating your finances into a new business. So more of the operation side. I like being on the business development side.

    Patrick: Lots of ironing out the wrinkles. GRC has a real pride where they’re strong in the heartland in the region. Briefly, though, for you personally, are you originally from the Kansas area?

    Christie: I’m originally from Iowa, Des Moines, Iowa.

    Patrick: Okay. As a Californian would say, same thing. But

    Christie:  Yeah. Close enough.

    Patrick: So your travels have brought you around now. Now you’re here in Kansas. So tell us about Great Range Capital.

    What is Great Range Capital All About?

    Christie: We’ve been around for 10 years. It was founded by two gentlemen, Ryan Sprott and Paul Maxwell. They grew up in Kansas. They went to KU. They’re brothers in long so they’ve known each other since they were teenagers. And after they graduated, they both went to the east coast to learn the business inside and out.

    Worked for major firms, you know, did the billion-dollar deals. But along the way, they always knew in the back of their mind that they wanted to come back to the Midwest and felt strongly that the Midwest was underserved from a private equity standpoint as well. Yeah, a lot of people fly in, but not a lot of people actually live and work right here with the companies that are based here.

    Patrick: Huge competitive advantage.

    Christie: Very much so. And it’s really where we win. So our thesis is similar to others. We’re looking at lower-middle market companies, three to $15 million in EBITDA. Manufacturing is our sweet spot, but we’ll look at pretty much any company that doesn’t play an oil and gas or has some cyclicality to it. But the difference is we can sit down at a table and have that connection and that chemistry that a lot of folks who fly in for the day cannot have. We are, we drive there. You know, we only really look at businesses in the Midwest.

    So typically, the seven states that touch Kansas. And then we’ll go outside those seven states, but they have to be in the Midwest for the portfolio company. Add-on opportunities we may look outside of that geography, but really tightly looking at the Midwest. We drive there, we’re there in a day, we didn’t fly in our private jets. We are raising our families here. We understand the emotional decision that this is for an owner rather than just a financial.

    Listen, if it’s just a financial decision, meaning I want the highest multiple for my business, we’re probably not the partner. If you are looking, we want owner-operated businesses that are healthy and strong. Those folks usually stay involved at least for a time period and roll some equity in alongside of us to help grow the business. And we understand that that business is important to them. Their families usually work there. Lots of the people in the town or there. It’s a very big employer usually, so we are comfortable having conversations about how to maintain that business.

    We aren’t coming in to put in 10 new executives, sweep out the management team and start anew. That isn’t, our, we aren’t operators. We don’t want to run the business. We want them to run their business. We might bring in somebody who can grow it from a strategic level, either a CFO or CEO, some board members, but we don’t want to run the business. We want them to do what they do best. So it’s a chemistry conversation and it takes years, a long time to earn the people’s trust. But that’s our differentiator, which really are, we understand where they’re coming from. We can speak their language.

    Patrick: You guys have a commitment to the lower-middle market, middle market as a market segment, okay? Is that a choice? Or are you restricted just because that’s all that’s there in the Midwest?

    Christie: Yeah, absolute choice. There are so many businesses, valuable businesses here in the Midwest, we choose to focus on the lower-middle market, middle market range. for a few reasons. Obviously, you know, we like to say that we can drive to your business within a day. We don’t fly in from the east coast.

    We’re here in addition to Ryan and Paul being from KU, everyone else in the firm is from Kansas except for me, so they really went out on a limb hiring an Iowa girl. But we all are from here. We grew up here. We’ve all spent time either in Chicago, Milwaukee, Minnesota or Minneapolis, sorry. And East Coast, I was in LA myself. And we’ve all come back here to raise our families and focus on the businesses. So when we sit across the table from a business owner, you know, when we talk about shared values, we can say that honestly and mean it.

    We’re a firm based in the Midwest, we drove to visit you today. You are listening to and talking to folks that understand the value of your business. We understand the value of the employment here to the town, to the folks that work here. And we understand that this is mostly an emotional decision and not just a financial decision. And we find that that sets us apart. You know, the businesses that we target are, you know, within three to $15 million of EBITA range. We believe, you know, most of these folks are owner-operators that want to stay involved or help the business grow in some way.

    Maybe they just want to slow down and let somebody else come in and help them continue to grow that business. But it’s an emotional decision. And we focus on that size and that type of owner-operated business where we can sit down and have those relationship-driven conversations. That’s where we win and that size seems to be the most effective. We’re also wanting to be a majority owner first in on capital raise and so that seems to be the size where that’s really a typical arrangement.

    Patrick: You said a couple of things that stood out to me. And it’s the power of having focus in a particular market and enjoying that market that you’re in. One of them was that personal aspect that you’re, you’ve got boots on the ground and it supports the philosophy that I share is that mergers and acquisitions are not the combination of Company A buying and Company B, it is one group of people choosing to work and combine forces with another group of people. And when you put those together in an ideal situation, the intent is that the whole is greater than the sum of its parts.

    And so if people get together, cultures mix, interests mixing and align, it all works. And that’s usually the remedy for success. And so there are others out there, and I’m sure you’ve come across this where there are other competitors that are probably offering a lot more money than what you’d be offering but you just don’t have the fitness. One thing that’s just critical and you can’t overlook. I think the other thing is essential is that the lower-middle market is a lot bigger than people think it is.

    And the crying shame out there and the reason why we wanted to talk to you today and introduce GRC out there was that the lower-middle market is large, but it’s really underserved. And I mean underserved in a big way because if you don’t have in house core dev or you haven’t gone through a lot of transactions and you’re a founder, you don’t know where to turn. And by default, they’re going to pick the brand names, large institutions and go in that direction to seek help. And, you know, they’re going to find out that they’re going to be overlooked because of their size.

    They’re going to be underserved. They’re going to probably have somebody who’s condescending to them. And the large institutions, while they’re very large, they don’t have the bandwidth to handle the solutions or deliver an alternative to a smaller client. And so the lower-middle market company ends up getting some prepackaged solution. And so they’re not only overlooked and underserved, they exit poorer, I’ll put it politely, not as rich as they would otherwise if they partnered with a firm like GRC. So give us an example just of one of your deals where you guys added value, where that connection worked.

    Grand Range Capital Offers Honesty and a Personal Connection

    Christie: I mean, it’s hard to pick just one. I’ll highlight two. I, you know, all six of our portfolio companies are based in the Midwest. They were all owner-operated and relationship-driven deals. In Mountain Valley, Spring Water-based and Hot Springs Arkansas was owned by the JB Hunt family. All were relationship-driven.

    Met with them still to this day we, you know, we own, we just sold that company I guess a year and a half ago. still connected to that group, still send them opportunities when we see, you know, add ons for them that might look good. Fair Bank Equipment in Wichita, Kansas is owned by the Rei family. Cody Wright is the President and CEO. He’s been with that business for 20 years plus. He’s the grandson of the founder. And I think he eats Thanksgiving dinner with our two founders as well.

    I mean, these have become family members of ours talking about what we’re looking for from an owner-operator relationship. You know, it takes a few courses, you know, a few of these folks are looking to slow down. Well, they say they’re looking to slow down, they really do. They say they’d like to retire or slow down over the next three years. And the fact is, once we get in there, and the business starts to grow, half the time, they’re reinvigorated in the business and spend more time.

    So apologies to their families who they told that they were finally going to go to that lake house or that beach house in Florida and slow down because that’s rarely the case. Usually, it invigorates them to get back in the game and somehow find the energy to keep going, which is impressive. And that’s the case with most of our businesses. What they’re really looking to do is maybe take that second bite at the apple, and that’s really what we offer, you know, from our perspective. I think you’ve mentioned exiting poorer than when you started or not as rich as when you, as you’d hoped you’d be.

    Our whole goal is to take a successful business that has a great strong management team that is looking for some sort of succession plan, if it’s taking equity out of the business now, slowing down, like I mentioned, or just growing that business to the next level, because they can’t. You know, they’re very honest about that. And that’s one of the things that I find appealing from these businesses in the Midwest is you get, you find somebody who’s certainly talented, took an idea and grew a successful company.

    When they can say, I just don’t know how to get to the next level and I need some help, those are the types of relationships we’re looking for. And that’s really, when we can bring some value, and aside from just the capital, we can bring in a next-level CEO or CFO or strategy person that can grow that business. And then three, four years, five down the line when we sell that business, again, which we have, Mountain Valley, Springwater and Heartland Landscaping we sold again and those owners get another, you know, bite of that apple.

    They get another opportunity to financially benefit from the growth of their company. And that’s truly what it’s all about. We are not, you know, we’re not flying in for the day. We are here. We live here, we drove to visit you, we want to see you successful, we want to see your business grow. We all benefit from that. And it seems to be a win-win all the way around. We are connected to these folks. We deeply understand their business.

    And I would say that over the last, you know, six weeks as we have turned inward as a community and as a business, we have focused solely on keeping that business healthy and the employees that are healthy and how to see everyone through this time. I’m not on the, you know, quote-unquote investment team side. I’m on the business development side. So while they have really turned inward to focus on those companies, I have strengthened my relationships, looking to network and grow our deal flow. And people are hungry for interaction and talking. So it’s been an interesting time on both sides of the coin there.

    Patrick: With the number of deals that are going on with you, I’m curious as to what experience you guys have had with a product called rep and warranty insurance and whether or not that’s impacted you as it has. For those of you who don’t know, rep and warranty is an insurance policy that ensures the seller’s representation.

    So in the event the seller reps are inaccurate or breached, despite the due diligence of the buyer, and the buyer suffers financially rather than the buyer pulling funds from an escrow or trying to carve back money from the seller, instead they have an insurance policy that will pay the buyer their loss. Buyer gets certainty of collection, seller gets A, no escrow or very tiny escrow, and they get a clean exit from the deal. And so I’m just, it’s been a very exciting growing product throughout M&A, largely on the mega-deals. I’m just curious what experience you’ve had.

    Christie: Yeah, absolutely. I had a chance to talk to Ryan and Paul about this as well. And we’ve used it on our last two sales. We feel strongly that it’s great product. The cost is much more reasonable than it has been, you know, 10, maybe 15 years ago. So we expect to use it much more going forward. And we think the usage in general across private equity and M&A is going to just continue to increase. So we’re excited about it. It’s a really good product. Cost-effective and makes a whole lot of sense for us.

    Patrick:  Now, as we record this, we’re getting near the end, hopefully, the beginning of the phase of the reopening of America from COVID-19. Could you give us your best guess as to, or what trends do you see either globally, in the US or with GRC for M&A in the next six months to fall?

    The New Norms of COVID-19

    Christie: Sure. So I think there’s a couple of things. I think the biggest impact I see on it is truly on deal terms, specifically due diligence issues and the time it’s going to take to get a deal done. And what’s, and by no means were these deals ever quick. They take quite a few years, you know, weeks months. But I think that’s going to continue to take quite a bit of time as new modeling has to be done and things that we’ve never considered in the past are taken into consideration.

    So that’s going to have an impact. I think that the way these transactions are developed and negotiated are going to change. This is a business where getting everybody in the room literally has been a big part of the process. And I’ve spoken about it today. The relationship-driven aspect of our business is sitting across the table from somebody and making a connection.

    So that’s, we’re gonna have to do that different. That looks different. It’s technology, it’s how you and I are, are talking today. You know, the Zoom, the WebEx, the virtual meetings that, you know, not shaking hands when we can meet in person. There’s just going to be some changes that people will have to embrace. And so that looks different. From a Great Range perspective, we have a very focused investment thesis that we have followed for 10 years.

    You know, we don’t forget our roots. We don’t forget that thesis, even if something looks really great but it happens to be based in California, it’s just not a part of our investment approach. So we’ve been lucky in deal flow and continuing to see nice deals. We have based all of our time in networking and relationship-driven, not only from a deal perspective on with the owners, but also with influencers and brokers. So we’re still seeing those opportunities because we’re honest and straightforward and we’ll tell you right away, this is for us, this isn’t for us. We won’t beat around the bush.

    So we’ve been lucky to see deal flow continue. You know, and I think that’s because we have a tightly held thesis. You know, we’re only in those seven states. We only invest in the Midwest. We’re only looking at companies that are healthy, owner-operated. The size three to 15 million in EBITA. You know, those things are pretty tight and we’ve held true to that. So we continue to see some deals. So for us, it’s been okay. You know, we’re continuing to look at a few businesses we had under LOI prior to going into COVID-19.

    And we hope to continue with those businesses and close those deals, you know, within the next 90 days. So, I think It depends. I think there’s some larger private equity groups, global groups, where deal flow has come to a halt. People have backed out of some deals that were, you know, newsworthy if you will. But we’re chugging right along in the Midwest and we hope to continue knew to deploy capital. There is money to invest, and we have it and we would like to continue to see those good deals.

    Patrick:  I think that discipline, plan your work, work your plan has served you guys well. And so you’re not immune from the environment out here but you’re definitely protected against that. That would make you just a strong, vigorous, active and a solid partner for owners and founders out there.

    Christie: Absolutely. You know, we didn’t invest in distressed businesses before and that isn’t where we’re headed now. The industries we like to look at are, you know, manufacturing and distribution and business services and healthcare services. Those have been impacted certainly, but hopefully, will you know, rebound and stay strong, typically usually do. So that sets us up for a nice, hopefully, a nice future.

    Patrick: Well, I don’t think there’s gonna be any shrinking in manufacturing in terms of new ventures. And if there’s any place for manufacturers, it can be in the middle of the country, just cost-wise. You know, so I think that bodes very, very well. Christie, how can our listeners find you?

    Christie: Well, they can reach me a number of ways. So they could go to our website, which is greatrangecapital.com or they can email me at christie.mcfall@greatrangecapital.com. And my name is spelled CHRISTIE.mcfall MC F as in Frank, ALL, @greatrangecapital.com. Or the easiest way is probably my cell phone, which I don’t mind giving out. I’m in new business so I expect phone calls and I answer them even if I don’t know where the number’s coming from, strange. 913-952-3037

    Patrick: So if you can’t find Christie, that is your fault. Christie, thanks very much. I recommend everybody take a look at Great Range Capital. And thank you again.

    Christie: Thank you

  • COVID-19 Is Not a Black Swan – and Here’s Why
    POSTED 6.23.20 M&A

    You’ve no doubt heard of the best-selling book from author Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable.

    In it, Taleb denotes “black swan” events as those that are unexpected or unpredictable. Examples include the 9/11 terrorist attacks, World War I, the rise of the internet, and the fall of the Soviet Union.

    However, despite the worldwide, devastating impact on society, economies, entire industries, healthcare infrastructure, and more, the COVID-19 pandemic is not a black swan.

    Taleb himself says so, noting that many experts, including Bill Gates, who has closely studied and funded epidemic research, have long said a global pandemic like this happening was a matter of when, not if. Taleb says this is actually a “white swan.”

    This is not a black swan, despite the tumultuous times we’ve had in the face of this crisis, including economic downturns, widespread unemployment, travel bans, and more. We won’t go into the details here as to how this might have been prevented or who holds the blame, if anyone.

    We’re concerned with the results and what happens moving forward.

    As far as COVID-19, as countries see decreasing cases and are exiting government-mandated lockdowns, we can now see we are at the beginning of the end.

    Economic activity is set to return, as people go back to work and those businesses that survived, large and small, start up again.

    As I wrote previously, expect M&A activity to resume, but in a different form due to impacts of this crisis. We’ll see:

    • A shift to a Buyer-friendly market
    • Dropping prices of target companies due to declining valuations

    This strong M&A market is also a result of previously existing conditions, such as:

    • The amount of dry powder to inspire continued deal-making
    • Financing costs that continue to be low

    This is a recipe for PE firms to come in and find low-cost but high-quality gems to invest in and turn a profit, in many cases, faster than pre-COVID-19. Private Equity has the capital, resources, and expertise to take on the challenge of many struggling companies out there right now.

    This is not to say that the economy will not experience a downturn due to the pandemic. Its impact will be felt in many sectors for a long time, including companies, investors, and consumers.

    But there is opportunity. And this is very different than the 2008 Crash, at which time M&A activity slowed considerably for the most part.

    As Sander Zagzebski, partner with Greenspoon Marder LLP, put it in a recent article for C-Suite Quarterly:

    “Shrewd dealmakers will sense opportunities by purchasing discounted debt and providing debtor-in-possession financing packages. Smaller debtors may seek to take advantage of the new Subchapter V Small Business Debtor Reorganization provisions, which as drafted provide a more streamlined process for debtors with less than $2.725M in debt. As part of the recently passed CARES Act, that limit was increased to $7.5M for the next year.”

    Sander likens this opportunity to that which a select few savvy investors took advantage of in the 2008 crisis.

    “While capital market and traditional M&A transactions slowed significantly during the financial crisis, distressed investors became presented with numerous attractive options. Howard Marks and Bruce Karsh at Oaktree Capital were later lauded by The New York Times for their timely $6B bet on corporate debt during the height of the financial crisis, as was Leonard Green & Partners for its timely $425M minority investment in Whole Foods.”

    “Overshadowed in the media by high-profile, pre-crisis bets on the overheated real estate market by the investors profiled in Michael Lewis’ 2010 book The Big Short and others, these blood-in-the-streets bets at the bottom of the market later proved to be enormously profitable.”

    There are similar prospective valuable deals out there now… for those that can recognize them.

    As Sander writes:

    “Many investors are starting to view the world today as Karsh viewed it in 2008 and are seeking those unique buying opportunities.”

    Still, there is plenty of uncertainty surrounding deal-making, as future impacts of the ongoing pandemic are unknown. Watch for Representations and Warranty (R&W) Insurance, which had already been enjoying a renaissance amongst lower middle market deals, to be a strong presence in deals going forward.

    To discuss R&W coverage with a broker with hands-on experience with this product, I invite you to contact me, Patrick Stroth, at pstroth@rubiconins.com.

  • Impact on R&W Policies From COVID-19 
    POSTED 6.16.20 Insurance, M&A

    The COVID-19 pandemic has changed trade, commerce, and business in so many ways already… with more changes to come. The world of M&A has reacted as well. But as I noted in my previous piece, No Significant Drop in M&A Activity During This Recession, we won’t see the slowdown happening.

    Instead, we’ll see a shift to a Buyer-friendly market. Also, watch for PE firms with plenty of cash to look for opportunities – and bargains… struggling companies they can turnaround.

    The pandemic will impact a key part of M&A activity: the due diligence process and the use of Representations and Warranty (R&W) insurance to cover breaches of reps in the Purchase and Sale Agreement.

    Just as with any insurance product, COVID-19 must be addressed with R&W policies. And expect pandemic-related questions from Underwriters in the due diligence process.

    Not every company, of course, has been affected by COVID-19 in the same way. For example, a software company that already had a largely remote workforce is in much better shape than a retailer forced to close brick-and-mortar locations.

    But overall, insurers are closely monitoring the impact of COVID-19 on operations of any acquisition target. This is how I expect it to impact R&W coverage moving forward:

    1. Expect all R&W policies to have some form of COVID-19-related exclusions.

    As a worldwide pandemic affecting billions, nobody can claim that COVID-19 is an “unknown” prior to a deal being signed. And R&W policies only cover breaches that were unknown, “historical,” or related to issues that were not disclosed by the Seller.

    The impact of the virus on the workforce, including layoffs and supply chain disruptions will be the focus on enhanced due diligence in particular, and not considered breaches. Claims related to a drop in revenue are right out the window. These will be excluded, but perhaps covered in another M&A related policy, such as business interruption insurance.

    That being said, you can limit exclusions for specific things related to the pandemic, not just anything COVID-19 – that exclusion would be too broad. Despite its seriousness, the pandemic can’t touch every rep. So expect very careful language.

    Since R&W policies are largely written for each individual transaction, a broker has the ability to identify the right Underwriters and products and make the exclusionary language in a policy as favorable/narrow as possible for the policyholder.

    Take the Fraud Exclusion for example. Fraud is absolutely excluded in virtually every insurance policy because it’s a moral hazard. However, savvy Brokers and Underwriters can create wording in a policy to provide legal defense of a policyholder accused of fraud until the alleged fraudulent behavior is proven. If there is no proof of fraud, the exclusion cannot be triggered, therefore, a policyholder benefits from the protection provided by the policy. Depending on the rep in question and the amount of diligence shown to Underwriters, a Broker can negotiate wording that can lessen the scope of a COVID-19 related exclusion.

    2. A close watch on lengthy interim periods.

    With some M&A transactions, there can be a long period between signing the Purchase and Sale Agreement and actually closing the deal, especially with large and complex deals. For example, it took months for Amazon’s acquisition of Whole Foods to win regulatory approval and close.

    Imagine if a deal like this had been done recently, and COVID-19 swooped in during that interim period. Remember, to be considered a breach, the issue must be unknown and/or result from failure to disclose a harmful issue by the Seller.

    But a change in the overall economic environment or the industry such as this pandemic, can’t be considered an “unknown” and therefore would not be covered.

    Thankfully, this is not much of an issue with lower middle market companies because interim periods between signing and closing are rare, and if there is an interim, it is likely measured in days, not months.

    3. Pricing and retention levels.

    One last thing to watch out for. For now, R&W coverage pricing and deductibles haven’t changed. They should be increasing as more claims are coming in in this time of crisis.

    The previous trend had been for consistently falling prices and its use in ever-smaller deal sizes – down to $15 million, which was one of the factors in its growing use by middle market companies. It’s something to watch out for.

    To discuss the impact of COVID-19 on R&W and other M&A-related insurance, I invite you to contact me, Patrick Stroth, at pstroth@rubiconins.com.

  • Moving Forward in M&A After COVID-19
    POSTED 6.9.20 M&A

    Many people are concerned about the state of M&A when we get on the other side of the COVID-19 pandemic. Understandable. But as I pointed out in my previous article, “No Significant Drop in M&A Activity During This Recession,” I don’t believe M&A activity will be going south, post-crisis due to:

    • A shift to a Buyer-friendly market
    • Dropping prices of target companies due to declining valuations
    • The amount of dry powder for PE firms is still there, waiting to be deployed
    • Financing costs that continue to be low

    Now, a new report from Deloitte has shed some new light on the situation and reconfirmed my insights.

    In “Opportunities for Private Equity Post-COVID-19” they discuss how in these uncertain times and ongoing economic crisis, the organizations ideally positioned to help out the economy and business, and even countries get back on their feet, are PE firms.

    Why?

    They have plenty of cash, and they are willing to go the Island of Misfit Toys, so to speak, and find gems to invest in. They have the patience to get in at a low cost and turn a company around.

    PE firms are unlike other investors in that right now, they have the capital, resources, and occupational experience to turn struggling companies into high flyers. That’s simply what PE firms do in good times… and have a unique advantage in these bad times to keep working their magic.

    A lot has been said in the poplar press about how PE firms swoop in on broken down companies then turn around and sell them for 10 times more. The perception is that they pulled a fast one or took advantage.

    I think this misconception goes back to the movie Pretty Woman and other depictions in pop culture. In that movie, Richard Gere plays an investment banker who buys companies and sells them off in parts after loading them with debt… in the process ruining peoples’ lives.

    What PE Brings to the Table

    Contrary to popular opinion, that’s NOT what PE’s do. They’re closer to house-flippers. They’re turnaround specialists. They do the good work of creating value where there was none before.

    In this crisis, I believe PE firms will be the heroes and instrumental to a broader economic turnaround. They do good work, and it’s needed now more than ever. And nobody else is going to do it, with Strategic Buyers biding their time and holding on to their cash.

    Companies struggling right now, and there are a lot of them, should not expect a government bailout. Most companies, even if they secure some of those funds, will not get what they need to move forward.

    Another issue is that employees are getting laid off and collecting more in unemployment and other benefits… and that employers are concerned they won’t be able to get their experienced people back.

    These are certainly uncertain times, and I think the attitude you should have moving forward is one espoused by Warren Buffett:

    “Be fearful when others are greedy and greedy when others are fearful.”

    We can also base this assumption of the rise in M&A activity tied to PE firms by looking to the past, specifically to the economic crisis of 2007 and 2008.

    Back then, PE firms, along with other investors, sat on the sidelines. There were many opportunities that were not taken advantage of.

    They’ve learned their lesson, and this time they will be aggressive in going after the low hanging fruit. PE firms are generally well ahead of public opinion on these sorts of things. The smart money gets in early, which, in this case, gives them a nice window in the next two years to get some great deals.
    Lower middle market companies, those most at risk and vulnerable in this downturn, in particular will see lots of activity. These smaller businesses are easiest to make a quick investment in, without many other suitors.

    The Role of M&A Insurance

    For investors buying distressed assets, Representations and Warranty (R&W) insurance becomes more important than ever. This coverage makes deals clear, smoother, and more affordable.

    For Sellers, not having the burden of a large escrow is a key benefit when they need cash to do other things.

    For Buyers, R&W insurance is a “back stop” for risk. If they are buying assets, they won’t get a remedy otherwise if there is an issue post-closing and the escrow is not enough to cover the loss. With R&W coverage you get certainty of collection if there is a breach.

    The great news is that R&W policies are now at the most favorable pricing they’ve ever been, and deal sizes as low as $15 million are eligible.

    If you’d like to discuss coverage, pricing, or market conditions, please contact me, Patrick Stroth, at pstroth@rubiconins.com.

  • Ben Mimmack and Andy Waltman | How Founders & Owners Can Benefit From Private Equity Firms
    POSTED 6.2.20 M&A Masters Podcast

    On this week’s episode of M&A Masters, we chat with Ben Mimmack and Andy Waltman, Director of Investor Relations and Director, respectively, of private equity firm Baymark Partners.

    Ben got his start in banking in London before coming to the US to attend SMU in Dallas. After completing business school, he went on to work in finance at American Airways before ultimately being brought on at Baymark Partners. Andy got his start in accounting, earning a CPA before moving into private equity at Energy Spectrum. He also went on to attend SMU, where he earned an MBA before being presented with the opportunity to work with Baymark.

    We chat about private equity and working in the lower middle market, as well as…

    • What a private equity firm can do for an owner-founder
    • How rep and warranty insurance is changing
    • Opportunities for minority investments
    • How Baymark is going about navigating the uncertainty imposed by COVID-19
    • 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 Ben Mimmack, director of investor relations, and director Andy Waltman of Baymark Partners. Baymark Partners is a Dallas-based growth-oriented private equity firm acquiring growing middle market companies, providing owners with liquidity and resources to accelerate growth. Gentlemen, welcome to the podcast. Thanks for joining me today.

    Andy Waltman: Thanks for having us.

    Patrick: Now, before we get into Baymark Partners, let’s set the table and get a little context for our listeners. We can start with Ben here, but Ben and then Andy, tell us what led you to this point in your career?

    How Ben and Andy Wound Up With Baymark Partners

    Ben Mimmack: Well, Patrick, I grew up in the UK. You may be able to tell from my accent. Although I’ve been in the US for 10 years now. So I feel like it’s starting to disappear, but I did grow up in the UK. I went to university and law school. I was very briefly a practicing attorney. And then I worked in banking in London for several years before I came to the US and went to business school in Dallas at SMU. You’ll find there’s a very strong SMU presence at Baymark Partners. And in fact, when I was at business school, I interned with David and Tony at Baymark Partners in the early days of the life of the firm.

    After business school, I went and worked in finance at American Airlines and spent the last five years of my time at American in the investor relations team there. And then when I was looking to do something a little bit different than big company, public company investor relations, the guys at Baymark called me up and said would you be interested in doing some work for us? And I jumped at the chance and I’ve been in Baymark since November of 2019. So I’m still relatively new to the PE space, but I think it’s fascinating. The kind of work we do is really very interesting. And I’m delighted to be on board.

    Patrick: So it was a safe change from loss of airline miles you were getting to having your feet on the ground.

    Ben: Yes, it’s more like real life, I would say. But given what’s happening with the airlines right now, you could say it was a very lucky escape.

    Patrick: Very good. Andy.

    Andy: Sure, sure. So, I would say I have a not a very typical background for private equity. I started my career, I came out of Trinity University about 11 years ago now. I came out with more of a typical accounting degree. Went down the Big Four path. I started at Price Waterhouse Cooper. Spent two years there in the audit and tax departments. Got my CPA, but I realized that public accounting world was just not for me. I was very fortunate. I got an opportunity early with an oil and gas private equity firm, Energy Spectrum here in Dallas, which was a fantastic firm.

    I was there for five years. That was a smaller, about a billion, about $2 billion of assets under management, smaller firm and employee size. So I think we had about 20 professionals and I was in the financial reporting group there, but because of the size of the firm, I was able to do a lot there. And after a good again, five years there, I decided I kind of wanted to get out and do a little bit more of a wide range of investments rather than just purely midstream oil and gas.

    And so I also went to SMU while I was still at Energy Spectrum. I got my MBA there. And then I went and found the opportunity with Baymark. And I’ve been with Baymark now for just over four years at the director level and I’ve been helping from everything from due diligence, acquiring companies to continue to work with those companies and our kind of portfolio development process.

    Patrick: One of the things that I like to learn about what I’m meeting private equity firms is the founders are a lot more creative than in other industries such as the law or insurance. In those companies, they usually name their firms after the founders. It’s very boring. No creativity whatsoever. You can tell a lot about a firm by how they named itself. So, you know, tell us about Baymark Partners, how did it come up with its name. Give us a quick profile.

    Ben: Sure. Well, Andy and I had to go back to our founders, David Hook and Tony Ludlow and ask them because we weren’t around when the company was named. You know, I think the true process might even be lost to history. They had to think about it for a bit, but I think it’s connected to the fact that David Hook, one of our founders grew up in Bay Village, Ohio.

    So that’s probably where the bay came from. And he spent a lot of time in the Bay Area when he was a VC investor in the 80s and 90s. So it’s kind of a reference to those two. And I think, you know, they just wanted to make their mark when they set out. So you know, that’s where Baymark came from.

    Patrick: And then the area that you guys are focusing largely is middle, lower middle market. Tell me about the area that you target there?

    Baymark’s Primary Market Focus

    Ben: Yeah, I mean, I would say we’re a middle market firm. Probably if you want to refine it further, more of the lower middle market side then true middle middle market. But any company that two to $10 million EBITDA ranges is really in our sweet spot. We like margins of north of 10%. And, you know, really in terms of what we’re looking for in industries, we love services companies, we love tech-enabled companies, distribution companies, light manufacturing companies, you know, health care, anything in that kind of region.

    But really, we’ve pretty industry agnostic. I’d say the only things we really want to take a look at our hospitality, restaurants and brick and mortar retail. Everything else we’ll at least take a look at. And I think, you know, certainly, David is very much a deal-focused individual. There’s no company out there that he at least at first glance doesn’t think he can make something interesting or do something interesting with. so we look at a lot of potential transactions, we throw them back and forth to each other and spitball whether we can make something happen.

    And that’s, for a lot of us, probably the most interesting part of what we do. And, you know, we like the lower middle market for a number of reasons. You know, the companies that are populating in the middle market really are the bedrock of the US economy. You know, these companies that just provide 10, to, you know, 20 to 30 jobs in their communities that that do very interesting work to fill, you know, unheralded niches, a lot of times that you don’t even think that companies are required to fulfill. They do this work and in many cases, they’re entrepreneur-owned businesses that are looking to take the next step.

    The people who run these companies, they know that they need to expand and grow and diversify, but they just don’t know how to do it. We love those. We love those kinds of companies because they have a lot of potential. And in many cases, they’re small enough that the inflation, the valuations are not as inflated as they are in other parts of the market. So we feel our knowledge and markets we look at, we can get some very, very interesting and good deals in the segments that we plan.

    Patrick: Well, and there’s also a lot more lower middle market companies and unicorns out there. There are a lot more unicorns that people think.

    Ben: That’s very true.

    Patrick: I sincerely believe, and the reason why I reached out to you specifically is because if you want to make a difference, okay, the place to do it is in the lower middle market. And it’s sizable and it does as you say, it’s filling a lot of needs out there that otherwise wouldn’t be filled. People won’t even know they were there.

    But they play key roles in their communities. They play big contributions for the lives of a lot more people than you realize. And it’s just not fair because if these smaller firms, they hit a ceiling, they don’t know where to go. And what happens often is they’re going to default and pick up the phone or reach out to a brand name or the institutions out there. And that is just a recipe for failure for them.

    And, you know, and I mean that in a big way, because what happens is the larger institutions are scaled up, they’ll have limited solutions for smaller clients, they’re going to overlook them, they’re not going to be responsive. Whatever solutions they do provide may not be a fit because they don’t have the bandwidth to offer multiple solutions that could help fit a smaller firm’s individual needs. On top of all that, they’re going to overcharge them.

    And so they will get less and pay more. And I have a real passion for the entrepreneurs out there and the people that started with nothing and created tremendous value. So anybody that’s out there to help get them to the next level and make them multiples of where they wanted to be, that does nothing but good. And the more that we can go ahead and highlight the presence of organizations like Baymark Partners, all the better. And so we’re both on the same page there. Let’s talk about some of the things that a private equity firm can do for an owner or founder versus what a strategic perspective suitor might bring.

    What Sets Baymark Apart From the Competition

    Andy: Sure, sure. So this is, again, this is Andy. To talk about that, you know, we’re usually, I’ll kind of talk about what Baymark can bring and, you know, each private equity firm is going to be slightly different. And I think where Baymark is unique in relation to other private equity firms is our background. We just have for such a small firm, we have a very eclectic group of different backgrounds. I think we might have mentioned one of our founders, David Hook, had a lot of success out in the venture capital world.

    He spent 25 years investing in companies out there. I think he invested in about 50 startup companies from sometime around the mid-80s to the mid-2000s, the OSS, I guess they’re called. And about 14 of those ended up going IPO and going public. So he has a lot of experience of, you know, those are even earlier than, you know, lower middle market.

    Those are even smaller, you know, startup venture deals. And so he has a lot of experience, you know, growing companies, looking at the big picture saying, Hey, we’re here now, you know, how can we quadruple that in five years? And so, you know, we’ve had, you know, one company that had a great management team in place. We’ve had, you know, some companies that really need some other pieces, but we had one company we bought that had a really great management team in place. We don’t really have to make any tweaks there. The big thing that was missing there is just the vision.

    They just didn’t have the imagination. We bought this company, they were about, you know, 12, 13 million dollars in sales and $2 million of EBITDA. And today they are closer to 60 million in sales and six and a half million of EBITDA. So I wish I could say all of our deals look like that. But that was an instance where they would say, okay, what’s the plan? What’s the vision? And now let’s actually go out and execute that. And while I’ll give David and Baymark credit for helping with the vision, I will say that company had a great team and they executed it very well. So that’s one example.

    Our other founder, Tony Ludlow, he has a very eclectic background he has, he was an attorney for some time. He’s also a CPA. I think what really made him ideal for this world is he has a lot of operational experience. So he knows what it’s like to have a team of people working for him. You know, what it means to, you know, have to fire people whether they deserve it or not, whether it’s just something that has to be done, we have to cut 10% even if they don’t deserve it, you know?

    So he’s had to live through that. He really has had that hands-on experience that a lot of entrepreneurs face on a day to day basis. And so he doesn’t have that just kind of pure spreadsheet mentality of like, Okay, this is what the spreadsheet does, we’re going to do. He knows, he understands that there’s a human element to this. And so I think starting with those two guys, that’s kind of spread through the culture of our firm that we don’t just have a spreadsheet mentality.

    That we really try to understand what these entrepreneurs are trying to do and help them achieve those goals. But back to some more about kind of what the, what we can bring as a private equity firm, I think it depends on the company. We’ve had some companies where, a lot of the companies we work with we see this, where we have an entrepreneur who’s trying to wear every single hat in the business.

    You know, when we want to talk to the accountant, we talk to the owner. When we want to talk to the operations manager, we talk to the owner. When we want to talk to the CEO, it’s the owner. And so, you know, we try to come in and say okay, what are you passionate about? What are you good at? You’re obviously a sales guy. You know how to sell. You love working with customers. And every time I talk to you about the accounting you, I can see you pulling your hair out. So let us help you.

    We’re gonna bring in an accounting person, a CFO, you know, someone that can augment you, help your company, but we’re not looking to replace the entrepreneur. We’re not looking to bring in a whole bunch of people to kind of replace what he’s trying to do. It’s more of a, let’s take some things off that entrepreneur’s plate and really, you know, build out his team so he can focus on what he’s good on and we can have other skilled people in position to help build that company. Some of the things we’ve done with companies, we, you know, we obviously have kind of some of the typical benefits.

    We have, obviously, access to financing, we have good relationships with banking. And Patrick, as you mentioned, you know, while we’re not a big firm at Baymark, we do work with I think, right now we have about nine portfolio companies in total that we work with. You know, we have scale in that regard, right? If we’re trying to negotiate new insurance terms we say Hey, we, you know, we’re looking to make these changes for a lot of our portfolio companies. And so that’s something, you know, we can get better deals because it’s not just a single small company doing it.

    Sometimes it’s a whole portfolio companies who are looking to make a change. Or also act as an outsourced m&a department for our companies. We think the best way to grow a company if the owner thinks that we need to go out and make some acquisitions, we go out, we work with the brokers. Our network of brokers, business intermediary, then try to go find those acquisitions that fit the goals that we’re trying to do with our company. So each company is different, depending on what that company is, we try to help fill that hole, whether it be us or with adding people. So

    Patrick: What I see there is you’re flexible enough where the portfolio company, particularly if they’ve got good management or whatever, if they need some day to day help, you’ve got resources there, or if they just want to be left alone, just get him some capital so they can execute more and then find other targets for growth. You can do that?

    Andy: Yes, yes, while we do have operational experience and we’re comfortable in that role, that’s never what we’re looking to do because we have such a small firm, you know, our goal is to kind of set the plan and, and have the management teams execute that plan. But we do have the comfort to go in and be more hands-on if that’s what’s required. But again, it’s usually the ideal if we can, you know, help with the vision, help with the strategy, get the right people in place and then we try not to micromanage and let the companies execute the plan.

    Patrick: Describe your ideal target. What are you looking for either, you know, as a portfolio company or for, you know, a partner to exit one of your portfolio companies? Either way.

    Ben: Yeah, I mean, I can take this one and I think I addressed it earlier a little bit when I said, you know, we like the services, tech-enabled, distribution, manufacturing part of the world. You know, I can kind of go into a little more depth on that, but we like what everyone else likes. We’d like established and recurring revenue streams, we like to diversified customer base and higher retention rates and a competitive advantage, a nice moat, company based in part of the world that’s easy to get to. So all the usual requirements that everyone wants, but certainly I think we are willing to look past perhaps some issues that other firms may not be.

    We certainly, as David is certainly more than once, we like companies with a little bit of hair on them for a couple of reasons. One, I think, as Andy mentioned, we have the expertise in our firm, I think to deal with issues that maybe other firms aren’t comfortable dealing with. And second, you know, you can often buy a good company for a very reasonable price if there is some issues that, you know, other people have been a little bit scared of. So, you know, and we’ll look at any of those companies that we think we can do something interesting with.

    And I think one of the things that Baymark does a little bit differently than other companies and one of the other reasons we play in the lower middle spaces, if you can buy a company with a good multiple, then you don’t have to load it up with a huge amount of debt and then spend your whole time trying to pay the debt off before you exit the investment. We like to grow our companies. And it’s a lot easier to grow a company if you bought it for a more reasonable multiple and haven’t had to load it up with debt. So we’re certainly always looking for companies we can grow.

    That’s how we like to make money is to increase revenues, increase profitability of our portfolio of companies. And then, you know, we like to send out companies on the way into the world, in better shape than we bought them. We’re not interested in buying a company that someone has spent years and years building up and then, you know, taking all profit and leaving it in a bad state. We want to buy a company, improve it, grow it and then sell it. And if we can make money doing that, then we’re very happy and if the company is better for having been owned by us, then that’s great.

    Patrick: One of the big trends that’s out there nowadays is deals are now being, the rest is being transferred out through the use of rep and warranty insurance. I’m just curious because now the eligibility requirements for rep and warranty have come down from middle market down to lower middle market deals are now eligible. Tell me good, bad or indifferent, what kind of experience has Baymark Partners have with rep and warranty on any of their deals?

    Where Rep and Warranty Can Be Beneficial

    Ben: So we’ve used it on one occasion with a deal that we did actually quite early in the life of Baymark. And the reason we used it is because there was a kind of an asymmetric risk profile between the sellers, one of the sellers was going to take a lot more risk with the representations and warranties. And he wasn’t comfortable kind of being point man for some of these reps. And so we use the insurance as a way to kind of even the playing field amongst all the sellers.

    So, you know, in those circumstances where you have a kind of asymmetric risk profile, then it works out very well. One of the other reasons we like it is, you know, it removes the escrow requirement. So that can be a way of getting a deal done that can be something that stands in the way otherwise. So, yeah, absolutely. We think there’s a place for it, where appropriately, we absolutely will use it. And certainly, you know, have had positive experiences with it in the past.

    Patrick: Now, that was my second deal I ever did. That’s the exact scenario we had. We had a tech company that was being acquired by a publicly-traded company. And the tech company, you had one investor that had the lion’s share of the risk and you had 10 other investors, but their shares were so much smaller that that one lead investor, he was the deep pockets.

    And so he was directing that. And fortunately for us, we had a very affable working buyer that agreed to go forward with rep and warranty to help out the seller because they wanted to make them happy. And, you know, it was simple. The seller paid for the premium, was happy to do it, the buyer was happy to not have to cover that expense but had a very happy acquisition target and the team came over. And it went very well.

    So we can see that was been fortunate. The development that we’ve seen come through is not only is rep and warranty available for the sizeable deals but now it’s gotten to the price point where it’s not a bad idea for add ons. And so now as more frequent transactions are happening with add ons, if there’s that tool for an add on and that brings, you know, some cost benefits there’s another usage for it. So we like to trend as it’s going and we expect to see it become about as common as title insurance in real estate.

    So as we record this today, we’re hopefully on the downside of the COVID-19, settle in place. You’re based in Texas and you’re on the verge of opening up. We’re in California. We hope to open up sometime next year, the way things are going. So give us your thoughts in the next 60 to 90 days and next quarter, what do you see is M&A trends either for Baymark partners or you guys, you know, getting yourself all geared up to get, you know, hit the race, or get out and start unboxing sprint or wait and see. What are you seeing out there?

    Navigating Uncertainty

    Andy: Oh, that’s a good question. Right that, we’ve heard that question a lot. And we’ve been asking ourselves. We kind of talk about it weekly. And I would say it’s still early. We’ve actually had we’ve had to had kind of some deals in all parts of the pipeline that have been affected by this. And so we’ve had a couple that we were pretty far along in the process and we’re still trying to complete those deals, even with some of the uncertainty, we’ve been trying to monitor the company’s performance in this time and just trying to get an understanding of the core business and what, and how it’s, you know, how it’s navigating these times.

    And so I would say right now, a lot of the lenders have been slow to react, or have been kind of, I guess, getting a little tense and a little tighter, which is understandable and something we would expect to see in this market. But we are working with some lenders who are still doing deals.

    And another thing that slowed down some of the lenders we work with is obviously some of the banks we work with have been kind of underwater, trying to process some of these cares, PPP loans. So a lot of factors that have been, I would definitely say slowed the process down. But we still have, I would say pretty good visibility on a couple opportunities that we think will close over the next few months. You know, as far as new opportunities that we’re looking at, we do see some sellers who are still very interested in selling. They’re very confident in our business.

    And I think the private equity firms that are going to do the best are going to have the ability to get a little creative, you know, build relationships in this time. I think, starting a deal from today and trying to buy it, it’s going to take a little more time than it normally would, but it’s important. You know, we’re really trying to build relationships with the companies, with the owners, try to keep expectations in line and do what we can to, if the company does go off and has a blip because of this, because of the Coronavirus, we try to do what we can to say, okay, we’re going to give it some time, see if it comes back.

    Or, you know, develop some kind of creative structure where, you know, the seller’s still getting kind of what they wanted for their business even if they’re being slightly affected by what’s going on. So, you know, I think for now, it’s going to be a little bit of a slower process, but we’ve definitely been talking with again, other firms, other lenders. And deals are still going through, deals are still happening, just a little bit of a slower pace.

    Patrick: With the result of this pandemic, it wasn’t a situation where we had a structural fiscal problem or something with the banking and the financial infrastructure here as opposed to 2008, 2009. So I think that even though you’ve got this headwind of all this activity for lenders right now, I think eventually they’re going to get back to what they usually do. They’ve got the resources to do it. I think that the one thing that’s been said about private equity for the last four years is they’ve got their stack of dry powder and it hasn’t gotten any smaller.

    So I think as target prices start coming down and valuations come down a little bit, there could be some opportunities to move quickly if organizations are clear in their thing and what they want, and they’ve got a willing partner on the other side of the deal. I think we could see an uptick in activity. Maybe not immediately. However, I think as things start coming back to normal, there are some that are going to lead the trend and lead the activities and then others are going to be needing to catch up. And so that kind of activity can kind of build upon itself and get us a little momentum. So that’s an optimistic side from my perspective.

    Ben: I know for one Baymark is very, very keen to continue doing deals. So, you know, we certainly see, you know, an opportunity in the next few months.

    Patrick: Well, there are people out there that maybe wanting to reach out you to have that kind of conversation. Ben, Andy, how can our listeners find you?

    Ben: So we’re on the web at baymarkpartners.com and we’re very easy to contact by email. I’m ben@baymarkpartners.com. Andy is Andy@baymarkpartners.com. So, you know, we are always available to chat, to have an email exchange if you are interested in what we do and want to learn more. We’re happy to talk.

    Patrick: Gentlemen, thank you very much. Absolute pleasure meeting you. And ladies and gentlemen, please look out for Baymark partners.

    Ben: Thank you.

    Andy: Thanks a lot, Patrick.