2015 – Strategies for Maximizing Your Business Valuation in M&A with Sierra Pacific Partners’ Scott Weavil

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1:05With us right now, it's Scott Weevil. Scott, you are a mergers and acquisition advisor, and you are the managing director of the Sierra Pacific Partners. You're found on the web at sierrapacificpartners.com. Scott, it's great to have you. Great to be here, Josh. Thank you so much for having me. And I know Sierra Pacific Partners is a mouthful, so no worries there. Excellent. Excellent. Well, tell us a bit about your work and kind of the space you're in and what you do? Yeah, for sure. So I'm a lower middle market investment banker with Sierra Pacific Partners, and we're mainly focused on sell side mergers and acquisitions or M &A advisory services.

1:42Basically, I'm like a real estate agent, but I sell businesses rather than buildings. We sell businesses across the United States and in most industries. We're largely focused on that lower middle market space, which is probably companies doing from around$1 to$15 million dollars in EBITDA, something like five to a hundred million dollars in purchase price. Wow. So give us, since this is what you do, you know, and here we are listening and we may only hear occasional headlines here and there. What has been going on in the M &A world? What's hot? What's not hot right now? Give us just a state of the union.

2:22Yeah, for sure. I mean, I think coming into 2024, folks had very, very high hopes for the first half, which maybe did not materialize, at least from the first quarter. But I think what you have to realize is a lot of the stuff that you'll read or see about in the news is concerned with mega deals, Wall Street style, Wall Street size public company transactions, and even higher up in the middle market, 500 to a billion dollar transactions are pretty large. I think what we've been seeing down market in the lower middle market has been pretty robust and in the main street market too. I think there's been not a lot of hesitation there.

2:59I think there were interest rate concerns and things like that with individual purchasers last year. I think folks have largely gotten accustomed to what are historically normal rates. But I think we're seeing robust activity. And anecdotally, I mean, it's early for that, but we started seeing a bunch of buyer and seller interest as soon as we got to July. And I don't necessarily think that that's any kind of economic thing. I think it's just folks thinking, hey, if I want to do something here in 2024, I better get started. Yeah. And so what types of deals do you typically oversee? You know, and maybe how it's structured?

3:38I mean, these just kind of complete buyouts? Or tell me, I'm speaking about my pay grant. I don't know what I'm talking about. No, no, no problem at all. If I start talking in jargon, just stop me. This is what I do every day. So sometimes I can use terms that may make sense to me, but not you and your audience. That's definitely not my goal. But generally, we are looking at buyout transactions. I am not a capital raiser, which means I don't try to go out and raise, you know, venture financing and things like that, or recap, particularly minority recapitalizations. Of course, sometimes we go out to do a 100 % sale transaction and instead we get a private equity firm that wants to buy 51%, things like that.

4:17So we definitely do with those deals, but by and large, our goal is to sell the company as a whole. Yeah. Any particular industries that you're particularly strong in? No, we're generally industry agnostic. I think right now we've sold a SaaS company this year. I've sold a group of restaurants this year. I've got a specialty contractor, construction contractor in the pipeline. We've got a healthcare technology company in the pipeline. So sort of all over the place, which, you know, frankly, it keeps it more interesting for me, for us to have varied clients. But we also see things that happen in one industry and can sort of cross-apply them to deals in another industry sometimes as unique solutions.

4:57So that's a little bit of the benefit there. Yeah. Well, Scott, let's kind of advocate now for our friend that's listening. and they might be on one or the other side of the equation. So I always love getting this advice. So for existing business owners and leaders, and maybe they'd like an exit in the next three to five years or so, what are some of those really important things that you would recommend right now to increase overall valuation? Yeah, for sure. I mean, generally speaking, valuation tends to be a function of a multiple times EBITDA. That's grossly simplifying it, but let's say that that's the case.

5:39Usually that multiple though, it depends upon the size of your company. A$10 million EBITDA company is going to be perceived as less risky than a$1 million EBITDA in command, a higher multiple. But really where a lot of the action happens is within the range. So maybe you have a$10 million company and we pull up comparable transactions and see that that range is 4.2 to 6.8, right? That's a huge range. So where are you located in that range? And that's where a lot of qualitative factors come into play. So things like your financials, how clean are they? How much risk does the seller perceive in your financials?

6:15If they think that your financials are somewhat can't fully be trusted, they're gonna price lower on that range. Similarly, how dependent is the business upon you as the owner? The more it's dependent upon you, if you're not staying involved post-closing, the more risk they're going to perceive. So with those qualitative factors, you can really start to influence that range. Now, obviously, on the other side, if you can grow your revenue and your profit, your EBITDA past certain thresholds too, that can obviously influence the multiple, but that tends to be a little bit more difficult to do, particularly within a short window.

6:49Yeah. And on the other side, I've talked with some guests who have talked about, if your goal is growth, acquisitions can be such a great way to achieve some of those goals. I know, having gone to the Inc. 5000 conference a few times, there are a lot of growth through acquisition companies there. For sure. I mean, that's one of the main theses that you see for M &A, right, is inorganic revenue growth. And we see that all the time. And basically, a lot of our sellers, because of where they are in the market, they're going to be add on acquisition. So in other words, you have a landscaping company in South Florida that does 5 million in revenue, or something like that, you're likely going to be bought by another landscaping company, maybe from North Florida that wants to expand into the Miami area.

7:44So we see a ton of that. And what they're really trying to do, like I said, the more EBITDA you can drive, the bigger, the bigger your multiple. So if you can put together five businesses, each doing 5 million in EBITDA into one business that does 25, even without extra growth, your multiple is going to be much, much higher. So that's the play that we're seeing a lot, multiple arbitrage. Yeah. And so tell me a little bit about Sierra Pacific yourself. So, you know, in this space, I think it can be sometimes daunting or confusing, you know, you know, you know, in terms of like who to work with.

8:23So I guess, what would be the strength of partnering with Sierra Pacific if you're looking for to make an exit eventually? Yeah, like you said, we generally focus on businesses with above five million in revenue five to, you know, whatever, 150, something like that. So our specialty is sort of past the business broker market for Main Street transactions. But we're below where true investment Bankers Act. And that's sort of a little bit of a no man's land. If you've got a deal, depending on the bank, that's between 500 and maybe on the low end, 50 million, you can get investment bankers interested.

8:58And then most business brokers sort of top out around 5 million. So our goal is to fill that gap. We're pretty experienced in this. I've been an M &A in some capacity for my whole career. I started as an M &A lawyer on Wall Street and got into this from that. We're a little bit unique in the middle market space in that we only charge success fee based pricing. That's pretty typical for business brokers. But once you move up market, most bankers will charge monthly retainers, marketing fees, startup fees, and stuff like that. We tend not to do that if our seller's committed to selling. We take just a few engagements on at a time so we can give our sellers a lot of focus.

9:38I think that's a little bit different. And then I think One thing that is interesting is I do have a FINRA securities license. So we can do any transaction anywhere in the country, which is not the case for most business brokers. You know, you and I were talking about partial sales earlier. You know, somewhat questionable whether the business broker license may cover that. So that's something we can absolutely do with the investment banking license. Yeah. And then, Scott, at what stage of kind of the business life cycle should someone begin having a conversation with you? Or if they say, look, I'm nowhere being ready yet, but I have a goal.

10:20And that goal is, you know, such and such date when I turn 55, you know, whatever, you know, it's like whatever their goal may be. when should they start having conversations with you? And what does this preliminary conversation sound like? Yeah, I think as early as possible. And I talk to a lot of owners about that. And I want to be clear that I am, and I don't mean this in a bad sense, but I'm a transactional person. I like doing deals. That's my professional focus. So if you call me five years early, I am more than happy to educate you about the process and what you can anticipate and what the current levers are sort of in your industry that you can pull on to get to that valuation you want to get.

11:00But most likely, I'm going to refer you out to somebody called an exit coach, who's actually going to go much, much deeper into that and hold you accountable for actually maximizing whatever those factors are that we identify. And then three to five years from that point or six months, however long you have, then we'll circle back up and we'll talk about a transaction. Yeah, yeah. Any trends over the next 6 to 12 months, 18, 24 months that folks might want to keep an eye on in your world? I think overall, it feels like for the last couple of years, folks have been waiting for the economy to quote unquote stabilize.

11:44And I think that happened. And folks were generally thinking that the economy was stable. But now, you know, we had a stock market drop yesterday here at the time we're talking and we've got the elections coming up, which are always a wild card. So we're sort of back in that period of instability. But I would say generally speaking, I mean, even yesterday's stock market drop, we're still the stock market is still very, very strong on absolute terms. So I think the market is going to continue to be strong. I don't want to sound like, you know, a broken record. You heard us all saying this at the end of last year.

12:18But the truth is, these private equity players, they have so much overhang, so much committed capital that they have not deployed. They're going to have to start doing deals. And one thing I definitely want to mention is in the lower middle market, private equity is what fuels transactions. Historically, where we've been, these companies are too big for individuals, but too small for really big strategic players to be interested in. And private equity has really stepped in and filled that void. And I think that's going to continue even more and more as we see that those somewhat larger deals are harder to get done.

12:52We have a lot of PE influence in the lower middle market these days. Last question I wanted to ask you, I'm sure you have seen deals that have fallen apart. How can one approach a deal so that it doesn't fall apart? Yeah, I mean, we see deals fall apart all the time. Candidly, that's just part of the process. Nobody likes it, but dead deals are part of the game. I think the more you can iron out upfront, the better. I think identifying key go or no go issues early on versus spending time and money, money on lawyers, money on financial due diligence is very, very helpful. The more you have an understanding upfront, the better.

13:34And then the next thing I would say is speed. And speed is on both ends. I've definitely had sellers get fatigued by never-ending buyer diligence, which we do see happening. If there's not competition for a deal, buyers will take a long time to get to closing in some instances. But similarly, on the sell side, you've got to realize as a seller, I'll take the reins, but this is going to be a pretty full-time job for you as the CEO, CFO. And we've got to get those diligence responses back very, very quickly because we don't want the buyer to get deal fatigued. Yeah. All right, Scott, your website is sierrapacificpartners.com.

14:14You have a really good knowledge center here. Do you mind maybe sharing some resources that you have available for folks and then kind of what next steps might look like? Yeah, for sure. So, you know, one of the things that we talk about in those early conversations, as you mentioned, is what the process looks like and what the timing is. And we for sure have in our Knowledge Center on the website, a whole series of videos, I think there are 12, that basically breaks down the typical limited auction, as we call it, M &A sales process. We also have lots of information on valuing your business, timing to get to sale, things like that that can really give an owner, you know, a few years in advance or even right now if they're looking to make a sale, some visibility into what the process looks like.

14:57Excellent. The website, SierraPacificPartners.com. You can click on the white box. It says Let's Talk. There's also you can click on Knowledge Center, and there's a lot of really good resources there as well. So, Scott, Managing Director, it's been great having you, Scott. Weevil, again, M &A advisor as well. Scott, thank you so much for the conversation. Yeah, Josh, absolutely. Glad to be here.

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