Interview – Michael Parham with Sheridan Mezzanine, LLC
Michael Parham, the founder of a boutique sell-side M&A and investment firm, Sheridan Mezzanine, LLC, focuses on Energy, Industrial, Retail, and Consumer Products in the US, Canada and Northern Europe. With 25+ years of investment banking experience, Michael offers advice on how to build value through patience, preparation and integrity.
Although the average deal size at closing for my firm has been around $70 million, most clients engaged our services while in the $25 million range. That’s a big difference with a little bit of care taking! We’ve driven valuations up in large part because we took the time required to get the best deal done for those shareholder groups. In a few cases, we prepared the marketing materials, and then shelved the deal for six months (or longer) waiting for industry events to culminate before we struck. That’s proven to be a smart move for our clients. Many larger banks will do whatever it takes to get a deal done in the short-term including assigning junior people to run the deal team. I felt that was not a fair way to represent a client. Companies for sale really need an advisor with the experience to recognize threats and opportunities and one that has the ability to act when the timing is right.
A lot of people think the theoretical stuff behind valuation is so critical when really, it’s not. You can learn everything there is to know about DCFs and comps and other ways of valuing a business, but at the end of the day, it comes down to the horse trading that goes into closing a deal. This is especially key in non-public transactions where there’s no market value for the shares.
In addition to smartly timing when to go to market with a deal, it’s also important to prepare the business to maximize value operationally. For example, I once represented a Canadian manufacturing and distribution company. One of the client’s biggest customers was a distributor that represented 70% of their business. I knew that a lot of potential buyers would critique that concentration and discount the valuation. So, we decided to buy the distributor before going to market. As it turned out, the distributor was a division of a much, much bigger company that was willing to sell the division for a transfer price (no cash) because of the working relationship the two entities had. By acquiring their biggest customer, we removed the customer concentration hurdle and the client was able to go to market fully owning their distribution network. That changed the game and was important in getting the deal done.
I would advise a company owner to run their business as they would assuming no deal is going to happen. If you need to hire someone, or if you need to buy equipment – do what you need to do to ensure the longevity of the value of your business. If the buyer realizes that the hire or purchase was smart for business, then they’ll appreciate it.
Don’t try to game the system when selling your business. Most investors are savvy and will see right through it. It’s really about a relationship and the little things matter a lot.
I once had a client, in the middle of a walk-through management presentation, stoop down to pick up a gum wrapper that was on the shop floor and throw it away. Those things matter. The buyers later mentioned it to me that here’s a guy who cares enough to stoop down and pick up garbage. In fact, the guy made sure everything was washed down every day. Those are the things that matter. The guy who does that probably takes care in a lot of other ways that buyers ultimately want to see.
Financial buyers, like private equity funds, add a lot of value by acquiring, building and professionally systemizing a company. In other words, they get rid of the personal airplanes and the extra people on salary that don’t need to be there. The private equity funds do a good job cleaning up house so that when they sell a company to a strategic buyer, it’s truly professionally run. Although strategic buyers do quite often pay more for companies because of synergies, for smaller deals, a financial buyer might be the better option. More importantly, I think the strategic buyers don’t really want to spend the time on a smaller deal. It doesn’t move the needle. They’d rather complete a couple of big deals than a lot of small ones because the integration is really difficult. Because of this, I think we are going to see more and more private equity going down market, buying and building and then selling while the strategic buyers wait to take a look until the targets get to the $200 million threshold.
If you look at the private equity universe, in the small cap market, you have small funds that buy and build up and then sell to a bigger fund. The bigger fund might then trade for a second time to an even bigger fund. Once a company is sold to a billion+ dollar fund, it’s ready for prime time with a strategic exit.
As the private equity funds look to investment bankers for deal flow opportunities, I would encourage the funds to seek out advisors that are not looking for the larger deals. Seek out the guys that just want to get the best deal done in their target market. In my case, I’m not trying to impress the buyer, the lawyer or the big bank. I’m trying to impress my client with sound advice and patience. Whether my client is a mom and pop or a $500 million fund – my job is to make them happy and get them the best deal.