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Chris Parisi | Why M&A Isn’t About the Numbers
POSTED 8.24.22 M&A, M&A Masters Podcast

M&A is never just about chasing numbers….
It’s about the people who trust you with their business…
A business that represents generations of hard work—and a family’s legacy.
My guest Chris Parisi knows this well. At Carl Marks Advisors, which has been around since 1925, Chris secures clean exits for lower middle market business owners.
In this episode, Chris shares some of Carl Marks Advisors’ storied history and reveals how he fights for the best outcomes for his clients.


Mentioned in this episode: ● https://www.carlmarksadvisors.com

Transcript

Patrick Stroth: Hello there, I’m Patrick Stroth, trusted authority in executive and transactional liability and president of Rubicon M&A Insurance Services. Now a proud member of the Liberty Company Insurance Broker Network. 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 Christopher Parisi, partner of Carl Marks Advisors. Established in 1925, Carl Marks Advisors is a New York based investment banking firm specializing in providing integrated, end to end financial and operational advisory services, with expertise in lower middle market mergers and acquisitions transactions. Chris, if I can call you, Chris, great to have you. Thanks for joining me today.

Chris Parisi: Yeah, Patrick, thanks for having me. Thrilled to be here. You mentioned in your opening about clean exits, and I’m excited to hear and do my first clean exit because none of them seem to be clean, but we always got there.

Patrick: Well, that’s that’s the goal always as as we get along from from all that. Now, Chris, before we get into Carl Marks Advisors, which that’s a unique name, obviously. But in this day and age, but before we get into the your firm, let’s talk about you. What brought you to this point in your career?

Chris: Sure. And I’m just gonna go back to our name, you know, one of my partners, likes to open up every discussion with a prospect or a client and he says, you know, we’re Carl Marks Advisors, capitalists since 1925. It is a unique name, but we spell it a little bit differently. Yes. So, you know, thanks for the introduction. And, you know, as far as what got me to this point in my career, you know, back up to the very beginning, and I was actually an accounting major in college, small, little Catholic College in Pennsylvania, called the University of Scranton. And I, I started out as an accounting major, because when I was in high school, people said, you know what, you’re, you’re interested in business, you’re good at math, you should be an accountant.

Patrick: Everybody needs one.

Chris: And everybody, and everybody needs one. That was fine and well. And I started my career at Ernst and Young as an auditor. And what I quickly figured out is that I was okay in math. I did like business, but I was a terrible auditor. So I wasn’t much of an accountant. But it did help me define kind of what I was interested in. And I was working as an accountant on M&A transactions. So I got to observe the the bankers, the lawyers, the principals. And when I went to college, I probably didn’t know what an investment banking was, but that that world first introduced me to what it was, and I certainly, you know, loved what I saw, and wanted to move to the transaction side. So, you know, eventually, that’s what I did. I do use more accounting now than I probably ever did as an accountant. And, and you know, that’s, you know, almost 30 years later, here we are. So, that’s how I got to this point.

Patrick: Yeah, I consider it’s probably the most exciting of business events is mergers and acquisitions. Just that whole transaction. It’s not sales, you know, or other things is kind of, you know, one of those situations where, because it arises with a liquidity event for somebody and getting to the next level, anything you can do be part of that to facilitate it, it’s very exciting. It’s life changing one would argue.

Chris: Yeah, and you know, it’s a good segue into kind of how I got here. Because earlier in my career, I worked at Jeffrey’s, great middle market bank, and you kind of get to straddle some, some smaller public deals with some larger private transactions. And when I thought about all

those deals that I worked on, the ones I really liked the most were the private transactions when maybe you’re working for a founder, rather than you know, working for a board of directors of a public company. So I started to, you know, really key in on okay, I like seeing that satisfaction of that one individual or that one family. To your point that you’re, you’re, you’re working with an actual person, an actual history of blood, sweat and tears. And in some small way, I get to help help them realize a lifetime’s worth of work.

Patrick: You know, we’ll talk about you do more than help. There’s quite a bit that you guys are involved in. But let’s segue over to Carl Marks Advisors, okay. Dedicated toward the lower middle market, let’s talk about it. Because I mean, it’s got a storied past, because it’s been around before private equity was around. And so they are among the pioneers going into that. So talk about the transition. And you know, you don’t have to go back to 1925. But let’s give us the pathway for Carl Marks. And you know, how they set along working with lower middle market?

Chris: Yeah, well, it’s, it’s a great history, obviously, that we have. And, you know, we still operate as a true merchant bank. So you know, where I sit, I head up our M&A group, which is one of three groups that we do in the advisory practice. We also have a special situations group that does transactional work. And then we also actually have an operations, almost consulting like group, that goes in as a chief restructuring officer, for companies that are looking to do a turnaround or some type of restructuring. But that is, you know, that’s the Carl Marks Advisors that still sits within the larger Carl Marks platform.

And we do, you know, we’ve got a couple of different principal funds. So you know, we we’ve got a lot of different tentacles into a lot of different areas in corporate finance. And because we’re still small, I mean, the whole firm has probably less than 100 people still, there’s a good interaction between the principal side, the advisory side, and it really creates a good holistic view for us as advisors, because we can walk down the hall and talk to the principal group and, and see what they’re seeing on the principal side or the fundraising side. So, you know, we’ve operated like that for decades, we still operate like that. And we continue to to stick to our niche.

Patrick: Well, and your niche when you’re talking about lower middle market, you know, is that I know you have that preference, because of your personal experience being there around owners and founders, corporately, is that just a conscious decision to stay, you know, there because a lot of organizations, they just started getting bigger and bigger and bigger as success is built.

Chris: Yeah, I think that, you know, we’ve certainly taken a look around at, you know, who we are, what we like to do, and where we think we can provide the most value. And each time we do that, it does come back to sticking to that lower middle market. You know, we are well, while we’ve got a lot of guys like me, who have sort of traditional Wall Street backgrounds, we’ve had a lot of operators, we’ve got people who have run their own businesses, sold their own businesses.

We’ve got some pretty good technical people that can get into some of those lower middle market businesses and add more value than just a transaction, that they can really be helpful in rolling up their sleeves and doing some of the dirty work that, frankly, is required in lower middle market deals. And we just tend to have people who are good at that, and who are unafraid to spend time doing it. So, you know, every time there is that temptation to, as you said, you know, grow bigger or go out up market. We do come back to you know, this, this is where we are especially good. Yeah, I

Patrick: Yeah, I think that’s essential. Because first of all, the lower middle market, I like it as as an area just because it’s a lot larger. So there’s, there’s more opportunity out there for

everybody. But you guys are filling a need because a lot of owners and founders when they want to go and they get to that inflection point where they’re, you know, they’re too big to be small, but they’re too small to the enterprise. If they want to get out there and move to that next level. You know, if they don’t have any experience, they don’t know who to reach out to they’re going to default to an institution or they’ll default to possibly strategic.

And you know, they’re they’re good and bad in all those but, you know, a lot of times they’re not getting the attention and the service they deserve. Now, they are getting the fee charges that, you know, come with that. But I think that you know, by not knowing about organizations like Carl Marks Advisors, they’re going to go elsewhere. And that’s why I really wanted to make a point of highlighting, you know, not only that you guys are capable, but this is where you want to be. And you know, when you get to a certain point that you want to work with somebody who wants to work with you?

Chris: Yeah, well, you know, and I tell my team all the time that life is too short to be working with people who you don’t want to be around. So whether it’s our employees or our clients, not only do we want to work with them, but we want to spend time with them.

Patrick: Yeah. I mean, I like to say, when you compare us with the National, big, big publicly traded companies out there, I mean, I look at it like, you know, somebody’s got to insure Disneyland. I’m glad it’s not me, you know, I’ll put that out there. We’ll deal with the other things out there. Now, Chris, tell us what does Carl Marks bring to the table for the lower middle market? You mentioned, you’ve got operators, you’ve got experience. What are some of the things tangibly that you guys are bringing?

Chris: Yeah, I think probably the best thing that we can offer our clients, and, you know, just just to put a finer point on it. Most of our clients are family owned businesses. They’re private partnerships, they are entrepreneurs. In almost every case, they’re pre institutional, meaning that are not backed by a private equity firm. They probably don’t have a large credit facility with a big money center type bank. You know, these are more bootstrapped type companies. And sometimes they’re doing accounting, you know, today, it’s on the accrual basis, tomorrow, it’s on the cash basis. So all of our clients are focused on cash, right?

And when but when you go to the market, you know, all that’s got to be tidied up and put a bow on it. So I think we’re, what we’re especially good at is, first of all, explaining what that process is going to look like. Some of the, the upfront work that’s got to be done. And then, as I was mentioning earlier, we’ll handhold them through that process. We’ll roll up our sleeves, you know, get down with our clients, and really dig out that information. So sometimes, when we get engaged, sure, we’d like to be in the market six weeks after we’re engaged. But sometimes we realize it might take three months to get to market, because we’ve got to do a lot of the legwork to get these guys in shape for sale.

So I think that, you know, there’s a bedside manner that comes with that. There’s patience, and there’s a willingness to do that work, you know, and but we’re not getting paid any differently than any other investment bank. So we’re not getting paid hourly, or, you know, we’re, we’re not getting paid monthly. We’re still almost entirely contingent fee based. So I think it’s, it’s that willingness, it’s that, you know, handholding that I, you know, probably some other investment banks are, are, you know, are not willing to do.

Patrick: Yeah, and that’s, that’s a great approach that you have also is, you know, you’re almost like part therapist, part counselor, as well as well, we got to clean this up. Can you give any examples of any kind of aha moments with your clients where you said, well, we’re gonna do this, and they just look at you and say, you could do that, really? And it really had a big impact on their valuation.

Chris: Sure. So a lot of our clients, they are extraordinarily good at what they do. They understand exactly, you know, how important they are to their own customers. But they don’t always understand how much value that translates in into the capital markets or in the M&A environment. So I had a client last year, who probably thought they were worth $20 million. You know, that sounds like a good number to them. And we went in there and said, we looked at at kind of where they, where their position in the market was, who their customers were, the types of margins they had, the growth rate. And we said, you know, we think your business is worth about $50 million dollars. And that was an aha moment.

Patrick: That’s an aha moment. Wow.

Chris: And, you know, it’s one of those moments where I actually, I think it’s over Zoom, right? Like, did you say 15 million? I said no, five zero. And, you know, it’s so, yeah. And one on one hand, it’s an aha moment. You know, on the other hand, they’re like, are you sure? You know we’ve done this a long time. We’re sure. And you know, then then you walk them through it, and you help them understand why we think that. And but they hired us and allowed us to bring them to market. And sure enough, we sold them for over $50 million.

Patrick: Wow. And we’ll disclaim it ahead of time, past performance is not going to predict future behavior at all. So we’re not going to strap it into that. But that I mean, that’s the value you bring, we’re I mean, that’s, that’s in any other world other than California and New York, okay, 20 million is a lot of money. But when you’re bringing something to that next level, I mean, that’s, that’s multigenerational impact. And it’s just, that’s just fantastic. And it’s the things that you guys can bring, because, in my opinion, just myself, I’m not as creative as those entrepreneurs to come up with that. But anything I can do to help them, get it get over the line and get that, you know, after they’ve created tremendous value, when nothing was there before, I think I think that’s just a fantastic gig.

Chris: Yeah, and, you know, and again, I think, you know, it is we get a lot of, you know, personal satisfaction from it. And, and I do remind my team all the time that, you know, we’re not just chasing a number, you’re these people that barely know us. For some reason, they’ve entrusted us with their entire life’s work, possibly two or three generations worth of work. And if that doesn’t give you incentive every day, to go out and fight like hell for them, you probably need to check your pulse. Because, you know, when that day comes when they get that money, and you know, that our clients are not, they’re not chasing money for the material side of it.

They want the recognition, the validation, and then they want to do something special with the money. Whether it’s, you know, philanthropy or, you know, other things that they can do in their community, or with their families. So, you know, these are, these are good salt of the earth, people who are, it just feels really good when, like I said, we can help in a small way, you know, help them realize what they’ve been working for.

Patrick: Well, Chris, tell me, give us an idea. What’s the profile of your ideal client? Who are you looking for?

Chris: So we work across all different industries. But given you know, what I just said, kind of, you know, the family owned private partnerships, entrepreneurs, they tend to be a lot in both consumer and industrial spaces. So we’re not working with a lot of companies that are three or five years into their existence. We’re more working with companies that are, you know, 20 30, 40 years into their existence. I’ve got a client right now who’s 53 years in multi generational private partnership.

So, you know, that’s, you know, and again, because they go back a ways, you know, we do do

technology deals, but they tend to be more consumer, more industrial, you know, business services, certainly. But they, you know, the common thread, outside of industry is, you know, that ownership structure, the capital structure, when, you know, when I sell a business for $50 million, it’s likely going to have $50 million of equity or it might $2 million in debt, and $48 million of equity. They’re not highly levered, you know, risky type businesses. These are just good, stable businesses, important to their customers, you know, growing at a good rate.

And I’m sure you see it as well, clients like ours, their customers are asking them to, to do more things for them. So they get to this point of, you know, we’ve got to get bigger to just satisfy our existing customers, and then they have that moment of, okay, maybe I need a partner to get them to the next level. Or maybe I don’t want to be, you know, the bank for my own company anymore. And maybe it’s time for somebody else, whether it’s at a private equity firm or a strategic to bank roll this and take it from a five $50 million company to $500 million company.

Patrick: Gotcha. Well, then I’d say you’re here to serve legacy companies or companies with a legacy but a good legacy. When we think about it in Silicon Valley, legacy systems are not positive. Okay. But this is you’re serving legacy. So that’s something. What percentage are your clients where they’re looking for the exit, or they’re just looking for transition and they want to stay on?

Chris: So I would say that probably about 80% of the time, they’re looking to continue in some capacity. So a lot of our deals, we call them sales or exits, but they’re really majority recapitalizations. They’re gonna sell 80% of their equity and rollover 20%. You know, and then they’re going to take that 20% and, you know, kind of grow with the, yeah, the next owner.

Patrick: Get that second bite.

Chris: Second bite of the apple. And again, you know, and in a lot of the cases, it is a family owned business, there’s, you know, there are multiple generations. So, you know, maybe the, you know, the patriarch or the matriarch is looking for the exit, but the next generation is looking to gain some more equity. And willing to take the reins, grow to the next level, and then have their own exit. So I would say about 80% of the time, there’s some type of continuation.

Patrick: Okay. All right. And now when we talk about exits, and we talk about just the growth of mergers and acquisitions, in general, just in terms of size, scope, number of transactions, and so forth. You can’t turn away from or you can’t ignore a key catalyst to that. And that is having insurance on these transactions. Because when you can lower the risk to both sides of the deal, it facilitates deals happening, faster, smoother, cheaper, all that wonderful stuff. And one of the biggest products out there is is reps and warranties insurance that protects both the buyers and the sellers and as being is almost ubiquitous in private equity. But you know, don’t take my word for it on on its effectiveness. Chris, good, bad or indifferent, what’s been your experience with rep and warranty insurance?

Chris: So I’m gonna, I’m gonna take the long road to answer this question.

Patrick: Take all the time you want.

Chris: So I’ve been doing this work for about 25 years, and there’s probably not a single biggest difference in how deals are structured then the introduction of rep and warranty insurance over that time. You know, when we first did deals, you know, when I was first doing deals, 25 years ago, you know, a large part of the definitive contract a large part of the negotiation, were all the caps and baskets, and everything else that went along with negotiating some of the exposure in the reps and warranties section. And you could have a 50 page definitive agreement, and you’d spend a week negotiating, you know, 40 pages of it, and then you’d spent another six weeks

negotiating reps and warranties.

And so, you know, and it brought deals to the to the brink, some deals would fail because of it. And then, you know, the reps and warranty insurance concept was introduced, you know, probably, I mean, really in earnest, I would say, you know, 10 to 12 years ago. And, yeah, it’s been a game changer, because in almost one fell swoop, you, you took this highly contentious issue, that, you know, you knew you were going to bump up against. You kind of dread the conversation every time, and you’re almost completely eliminated it. And in a lot of transactions it is completely eliminated. So you went from negotiating all these points to pay who’s going to pay for this? Is it gonna be a 50/50 split? Buyer, are you’re gonna pay for it?

But it’s a conversation that now lasts a couple of hours sometimes. So from, from my standpoint, when trying to get through a contract, trying to get that agreement in place, removing the biggest impediment through the rep and warranty insurance concept. Like I said, it’s been the single biggest thing that’s allowed transactions to move more swiftly, and it gives my clients, the sell side clients, the ultimate peace of mind. You know, I, I would always tell my clients that when you’re negotiating your definitive agreement, you know, when that transaction closes, you want it to stay closed. Your biggest concern, post deal is that transaction stays closed. And with rep and warranty insurance, it it almost guarantees that it always does.

Patrick: Yeah. And it’s been, it’s a great tool, what the news development is, I’m very proud of it. And when you do insurance, we’re always conscious that there’s a little skepticism with a product, where you buy this policy and then it’s well, are they actually going to pay a claim? And unfortunately, there are instances in personal insurance and auto insurance and things where that can get a little fuzzy. Not so in rep and warranty. They’ve really honored the promises they’ve kept and I’m very proud of of their performance that way. What’s been great now is there’s a development and this is why, you know, we’re doing a lot of time with sellside representatives, is that there’s a new product out there for smaller deals.

These are sub 30 million dollar enterprise deals, that it would be a sell side policy. And so some of the sometimes these deals are just too small where rep and warranty makes sense. Because the cost of diligence is high, the premiums are a bit higher, they’re definitely, you know, worth the value that they give. But when you’ve got an add on or other small transaction, it may not meet the criteria. Sometimes it just is too small. And underwriters aren’t going to agree to insure it for any money on the rep and warranty side. There’s a new sell side program out there and it is less expensive.

There’s no underwriting fee, there’s no huge underwriting process, which accelerates things. And it’s really assisting, you know, situations where sellers really want to pay for it, they want the protection, but the buyer is not going to get the buy side policy. And so they’re left with nothing. And so we’re very proud of that development out there. And it’s again, for companies or enterprise value, 30 million and under. And we can insure quite a bit of those and at a significant discount, and so very proud to talk about that.

Chris: That’s great.

Patrick: Chris, as we’re going forward, and I really appreciate the comments he had on reps and warranties. As we’re going forward. Now we’re already just past the halfway point of the year. And it’s it’s blinked and is going right by, but it’s, the second quarter has been much, much better than the first. What do you see, what trends do you see going forward into 2023? I mean, either on Carl Marks Advisors’ side, or just M&A in general?

Chris: Yeah. So I think on M&A in general, in the private transaction side, not too different than public markets, right? The the, the worst scenario is uncertainty. And, you know, we’re coming

through, we’re still in a period of uncertainty. But each day that goes by, we are becoming a little bit more certain, right. We see, you know, things are becoming a little bit clearer to where the economy is headed, and how that’ll affect deals.

So, you know, for instance, I know with some of my clients, were identifying that some of the slowness is attributed to an inventory glut, you know, so we can see that there’s a little bit too much inventory in the system. So is there some softening of demand at the consumer level? There is, but it’s being exaggerated, I think, at the manufacturing level, because the softening demand is still chewing through heightened inventory levels. Now that we’re understanding that what’s going on, at least we can say, okay, demand is softening, but it’s not falling off a cliff.

Patrick: Yeah, good, yeah.

Chris: What’s falling off a cliff or had been falling off a cliff a little bit, is the the new order books, because we’re working inventory through the system. But that doesn’t last that long, right. So we can say, okay, we might be in a six month period from here, you know, through the end of the year, where that’s gonna have to get reconciled. But then that gives us a lot of confidence for what ’23 will look like. So we’re seeing the softness, but we’re not seeing the apocalypse. And so, as we’re beginning to understand what’s driving it, buyers are getting a little bit more certain of what it means for them and, and their hold period post transaction. So we’re seeing people get a little bit more optimistic. Now, even as, you know, inflation numbers are still very high. And credit rates are still rising. It’s, it’s not, it’s not the complete unknown, that it was even you know, a month ago.

Patrick: That’s, that’s very encouraging. Also, because you’re you’re taking a level, you’re looking deeper at these situations, you know, and you’re just ruling out, okay, this is a real systemic, you know, critical danger in the, in the macro, that’s going to affect us. No, there’s just micro, you know, incidents here, incidents there, they’re unique to each situation. So I think, you know, as as we look forward, I mean, I just keep thinking, you know, everything ends. I mean, challenging times, no matter what, it’s gonna end. Winning streaks they end too. So as as we’re going forward, I think it’s more encouraging that, you know, the sky hasn’t fallen, and I appreciate your approach on that. Because you, you’re looking under the, under the under the surface and getting to the root of a lot of these things and it’s you know, very, very positive.

Chris: Hopefully, you and I are sharing an eggnog in a few months and we’re saying yeah, we were right.

Patrick: Yeah, Absolutely, yeah. That in between more deals coming through, which I think is is another thing that’s not going to slow down in the lower middle market anytime soon. So, with that, I think we’re gonna have a lot of conversations that way. Now, Chris Parisi from Carl Marks Advisors, how can our audience members find you?

Chris: Well, the easiest way to find me is, is via email. So they can call me I mean, they can email me at cparisi@carlmarks.com.

Patrick: And it’s c a r l m a r k s.

Chris: Thank you, Patrick, for the, for the qualification there. Yeah.

Patrick: We got to make sure we got that on. Yes.

Chris: Yeah, if you use a K and an X, you’re probably not going to find me. Or, you know, certainly give me a call at the office 212-909-8405. So, either those or you can go to our website, carlmarksadvisors.com. In any of those ways, you know, I’ll be sure to get back in touch.

Patrick: Yeah, what is wonderful with your website, too, which is excellent is you know, 10 years ago, good luck finding people you know, on a company website at all. Now, it’s all intuitive. You can find them, contact and everything. I think that very user friendly. You do not want to be the best kept secret in investment banking.

Chris: No, no. You know, we’re not quite on Tik Tok yet, but you know, we’re, we’re, we’ve got we’ve got a decent web presence.

Patrick: Yeah, I think this is the extent of my social media. We will save. Chris Parisi from Carl Marks Advisors, thanks to having you. It’s a pleasure talking to you, and I really appreciate it.

Chris: Yeah, Patrick, thank you for having me and welcome, you know, that future discussion, but certainly, really appreciate the opportunity to be on your show here.

Chris Parisi | Why M&A Isn’t About the Numbers