What Buyers Want: Business Success is better than Bottom Line

Looking to understand what drives successful business transactions? This episode dives into the priorities of buyers, exploring the distinctions between strategic and financial buyers and what matters most to each group. From culture fit and management strategies to navigating emotional decisions and retrading risks, we cover key factors that can make or break a deal. Whether buying or selling a company, you'll gain valuable insights to guide your next steps.

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TRANSCRIPT:

Welcome to Integrated Insights with ICCG. For more than 30 years our team has

partnered with small business owners to prepare for and navigate the business

transaction process. Pull up a chair as we share stories and insights from our

experience on all sides of the M &A table. Well, welcome back, both Grant and Dave,

thank you for joining us again today. I know we had technical difficulties last

time, but we did talk about what is important to a seller last time,

right? And we talk about deals. It's most, we're mostly on the sell side.

And so what's important to sellers is important to us. And, but we are also on the

buy side, right? And we know, even when we're on the sell side, we still talk with

buyers. And so we always have to know what is important to a buyer.

So that's what we're going to talk about today. And, and so I know that there are

a couple different types of buyers. Let me run through them one strategic buyer,

right? And that is your, you You know, Grant, why don't you give a little bit of

a short explanation of what a strategic buyer is? Yeah. A strategic buyer is

typically one that wants to integrate an existing business into or with the business

that's the target. And so it could be vertically integration, it could be just

adding customers to their own products or adding new products to the existing

customers. It could be geographic. In other words, right now, a lot of people wanna

be in Texas because it's boomtown compared to some of the other Midwest states.

And so it could be a strategic move to open up a business in Texas.

And so all those things, we would kind of couch into this broad heading of a

strategic buyer. I think one other differentiation for the strategic buyers is that

they typically would have a management team in place where that's very different from

an investment investing buyer who most likely did not is wanting the team to come

with them. Or the strategic may want the team to come with them, but They've

typically are wanting to have control over the operations. Yeah. Yeah, and and and

that at least a second Our second type of buyer, which would be the financial buyer

is what we call it you think he said investing type of investment type of buyer

and and Essentially that is a private equity Outfit right private equity group

venture capital firm or family office, whatever you call it.

It's a financial sponsor, if you will. And so, but they're most of the time,

they're not coming in to actively run the company,

most of the time, right? Would you say that's correct, Dave? I would say the

majority of the time. I think that oftentimes though, you're gonna find the financial

buyers coming in and turning maybe into more strategic buyers, because I mean, if

you use the PE groups as an example, and I mean, one of the things that most of

the groups are trying to do is they're going to buy a platform company. So they're

looking for a platform company, one that has got the quality, one that may have the

management in place. So as they start tucking in other ones, they may, they're going

to have their own management team most likely, maybe from a high level in place, or

looking for additionals along the way. So it's not quite as the differentiation

begins to and look, it's as one PE guy that we really respect has many,

many years in the said, you know, make sure everyone knows the motives are very,

very clear. Everyone's motive is clear. It's one and that's to make that's to make

money. And so, you know, so everyone's got that financial interest, even if they're

strategic buyer. Yeah, for sure. Okay, so strategic buyer, financial buyer,

let's let's focus on strategic buyer. What is, what would you say is important to a

strategic buyer? I think, you know, every industry is different.

I was having coffee this morning with a principle of a firm in an industry that

has different metrics than let's say a manufacturing company. And this was in

professional services and so we walk through some of the metrics that are important

to strategic buyers in that space. And they're different than maybe those that are

strategic buyers in a manufacturing or fabrication kind of space and so you know

strategic buyers understand the industry they're not just looking at the financial

statement they are they have specific requirements it might be product related it

might be revenue model related it might be customer related you know we don't want

to do that kind of work we want to do this kind of work. And so the buyer comes

with a paradigm that the seller needs to either fit into or it's not going to be

attractive to that buyer regardless of price. And I think,

you know, obviously the match between the Existing company and the target is super

important and sometimes the the strategic buyer is looking to diversify Sometimes

they're looking for exactly what they what they have already because they can put

their arms around it It just in a different geography They may be looking for a

strategic in the vertical as well. So perhaps they bought some some sort of

construction company now They want to start Maybe it's the material supplier that

they're that they're that they're using specifically in that construction or whatever

or Something that's going to be used in the future in that same industry. So we're

right now We're seeing a lot of home services being bundled together So the

strategic the strategy they have is to not just by a heating and air conditioning

company But to buy the plumbing company and by the electrical. So they've got all

the home services in one I know up Where I live I was just researching one of

them was family owned a few years ago. Now it's I mean It's been pulled into a

big conglomerate. So I started digging in and kind of wanting to find out what they

did That's a that's a big kind of strategic right now so so you guys In you've

previously kind of mentioned that you you kind of did a towing roll -up right a

towing service roll -up And so what was important to you when you were looking at a

towing company, what was really important to you when, you know, when you're looking

at buying this company? So just to make things clear for those who are listening, I

called these guys, we were the white hats of towing, there were the white hats and

the black hats of towing. We weren't the repo guys, we weren't the guys who were

pulling grandma's car off the side of the road for, you know, parking three inches

in the red zone. That wasn't. It was all municipal contracts and things like that.

With that being said, I'll let Grant answer that question. Yeah, you know, any time

that you are doing a strategic buy, generally it's going to involve remote

management. And that is very difficult, both in your own location,

in your head office, basically, it's very difficult for people to, to remotely

manage. And then, and then on the flip side, some people respond to being remotely

managed differently, right? Rollups, if you want to call it that,

have failed consistently, because people are not used to being remotely managed.

They just, they, they don't like the people up in the head office,

and so they kind of go rogue. And so people are super important. And you have to

go in there with the very clear intention to create culture.

And I would say, in businesses like that,

where it's so capital intensive, you're looking for equipment that'll enhance your

offering across the board. And so we've faced that in manufacturing companies just

recently where there's a lot of robotics. And so a company who has a great customer

base but not the latest robotics equipment could be bought by somebody who has that

capability and be able to serve those customers way more efficiently and not have

the problem that everybody faces today, and that is the lack of skilled labor. And

so I think those kinds of things were super important to us,

but at the end of the day, we realized pretty

are important. I think what I think what Grant's getting at here is is I think

successful buyers have a lot of wisdom and they know when to do something when not

to do something they know when to mesh cultures and I we that was a great example

of cultures we tried to put literally two different companies together in a dispatch

situation from two different parts of the Metroplex And they were so culturally

different, they'd been run so differently that it just didn't work. We had to

finally, instead of trying to make culture happen, we had to honor the culture that

was there and kind of work around that. So we ended up dividing it back up and

letting the two cultures handle it. And it was much better. It was more expensive

to do it that way, but it's more than about saving money. It's about, in the long

run, it made money because we... Yeah, I think Dave, if you remember, we struggled

with the emotion in those purchases and here's the reason because you want to grow

really badly. You see that the other company across town, let's say,

has something that you really want, and sometimes buyers make mistakes,

making an emotional purchase rather than taking care of the right due diligence

processes and making sure that it's a really good fit.

Emotion goes a long way in, I mean, in a buying decision. And you just got to

make sure that you that it doesn't rule a day that you are not overlooking some of

the red flags just because, oh, look, I'll be twice the size or I'll have this

much equipment or I will be able to dominate and be the number one guy in town,

you got to be really careful that you don't make an emotional purchase. Hmm.

Interesting. Okay. So one of the key things is people and culture, right?

So that was important to you. Now in, I know Dave, you and I talk most of the

time in our deals, we talk to the buyers for the most part. And so I know that

that doesn't always come out and it also may come out and it may not be true.

And so a lot of times we just focus on the financials. So how do you tell that

that's important to them, truly important to them? - Part of our job is

intermediaries is really asking those questions and asking those hard questions. When

we interview buyers, we're looking for a couple of different things. And I think

it's important for potential sellers that are listening to understand is, there's a

lot of different motives out there. And I think we're seeing a lot of really,

really smart buying groups out there. And I think that there, I think there's really

been a shift. I think people really are starting to care more about people and

families and not so much about the bottom line, although those are out there. And I

think there's a, I think you, we try to flush out in these interviews with buyers,

things like, you know, have you re -traded deals a lot? What's your, you know,

what's your record on re -trading deals? We're very specific. They don't like like

that question and retrading for those who are listening may not know. Retrading is

just simply coming back later in the deal after diligence is done and just trying

to renegotiate the price based on, and oftentimes we've seen in certain circumstances

where it's, it was, it was planned to be retraded the whole time. I think that's

what gets irritating to both us and, and aside, we'd rather walk away from this

kind of buyers, honestly, you know, rather than try to go through that. Now, a lot

of times it's very legitimate and we've been on the buy side before and we've

retraded deals, but it was fully understood and we get into, you know, we start

looking at certain metrics and we let those be known in the letter of intent and

we get into the diligence and it's not so much that way, then I think there's an

expectation that it will be. But that's a little different than just, you know,

people signing a whole bunch of LOIs and hoping one sticks and then start

retraining. Yeah. Which you see a lot, unfortunately. I think, you know, even when

we represent buyers and sellers, when we represent sellers, the seller is also

interested in what the business is going to be post -closing. I know they're

interested in what they take home and all those kinds of things, but there is a

desire that the business succeeds. And I And I think for it to succeed,

as intermediaries, we have to talk to buyers and make sure that it is a culture

fit for that business, because we've spent a lot of time getting to know the

seller. And we kind of know, hey, this buyer is not going to be a good culture

fit. And so we kind of warn the buyer or we warn the seller.

And those conversations are not always easy. But, you know, our job is to make sure

that the deal succeeds, not just to close, but after close. That's interesting.

And I think one of the things that that's stuck out there, and it's so key for us

to dig into the historical record of the buyer, right? And just to kind of see

what's, what's your experience, you know, what, how, you know, how have you dealt

with, you know, this problem? I know we had a, I remember having a deal with the

big fence outfit, we, you know, going with a permanent, with a private equity group

that we had asked them, hey, asked them, "Hey, there's kind of an issue or not

issue. There's a dynamic here with a couple of employees. How have you dealt with

that in the past?" And they kind of gave their record and that,

I think, really gave us a little bit of a comfort level. Okay, they care about

these things. That shows a little bit more of what's important to them,

right? Yeah, and they didn't make such a big deal about it. I mean, they said,

yeah, that's an issue, but we can make it through that issue. And I think the red

flag for me is we're dealing with a buyer and everything that comes up that may

not be a positive that may be seen as a negative, they start really punching on

that. And that's when you know a re -trade's coming, right? Right, yeah. rather than

saying, oh, yeah, we dealt with that in one of our other companies. This is how we

handle it. That's just not a big deal. That's an experience. That's an experience

buyer, right? That. But I think, Dave, you've always said bad news doesn't get any

better with age. And so just painting a realistic picture,

not an aspirational one, is super important parties to the transaction.

You know, the seller doesn't need to promise that everything's going to stay the

same. I mean, and the buyer doesn't need to promise the same thing. I mean, things

are going to change. And, you know, it's just those are the kinds of things that

the earlier you get it to get it on the table, the easier it is to predict the

end result. Because if there is if there is hair on the deal, getting that hair on

the table from the beginning creates a less likelihood for retrading.

Right. And a seller thinks they're never going to be able to find someone if they

do that, but it's totally the opposite. I think buyers appreciate knowing the hair

on a deal up front, and that's part of our job is to get that. What isn't fun, I

will say this is when a seller doesn't tell you something and they know it's there

and they find it out in diligence or whatever that's when it isn't fun because it

says all the sellers that are possible sellers are listening it's better to disclose

early on because it's going to be found out right and the buy when we represent

buyers and we go in and we find something out that they have not told us what do

we do we look for the second thing right we're what What else are you hiding?

Yeah, it's I think it's it's safe to say that it's it's I mean it is critical I

mean even more so than just important it is critical to understand the as you say

the hair on the deal, right? The the the things that could go wrong It's important

to understand them and put them out in the open Pretty pretty early on is that

right? right? Oh yeah, absolutely. Andrew, before we sign off here on this episode,

I did want to say this because we may have people that are listening that are

possibly going to sell, maybe they're looking at, we've talked to a lot of people

going, "Well, I might sell, but I might buy a couple more first or I might buy a

couple local people that I want." We've really, I mean, we did a lot of that last

year. And That's kind of fun because it's it's different than just representing the

seller But we're it's when we're representing A buyer who's who's just a one -off.

They're not a PE group They're just they're just a really good company owner and

they just want to they just want to get bigger through acquisition And those are

kind of fun because we sit down with them and we we talk to them This is this is

what we need it from you as a buyer And this is help us be strategic with this

and then we go and we search and we find and we and we become that person

And I said, well, you know, the one way to get an increase in purchase price is

to increase the bottom line. But another way is to make the bottom line cross one

of those thresholds when the multiple is greater. So we know that a $5 million

EBITDA is going to sell for a greater multiple than a $2 million EBITDA. We know

that. And so how do I get there? - Well, I know that we could talk for days about

what's important because there are a lot of things that are important and we can

get really into the weeds of things, right? Into the details and get lost in it.

So I know we're always happy to sit down with anybody to talk about those details

and answer any questions. So, but that's what we're in today and so thank you for

joining us and we'll see you next time.

And that wraps up another episode of Integrated Insights with ICCG. Be sure to

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