Interview – Bill Welch, Director of Business Development at E&A Companies
I recently spoke to Bill Welch with E&A Companies. With some minor edits, the text below captures our conversation.
E&A Companies is not a private equity firm. We consider ourselves primarily as business operators. Our Founder and Chairman started the business 40 years ago to acquire, actively operate and grow businesses. We don’t have any outside investors. We have no limited partners. The money we invest in a business (along with conservative bank leverage) is one hundred percent the personal liquidity of our two Partners – Alan Hubbard and Devin Anderson. In that regard, there is close to perfect financial alignment when we enter a deal with an existing business owner that might be interested in rolling in a bit of equity, staying involved and getting another bite at the apple. We are not high tech financial engineers. We are not going to try to make money on the transaction itself. We do not need to exit in some prescribed three to five-year timeline. We enter a business exclusively for long-term value creation. And that’s the lens through which we look at everything.
What does an ideal target acquisition for E&A Companies look like?
We look for companies with $500,000 to $5 million in EBITDA that are already successful, or have some sort of foundation, and are poised for growth. There can be a little hair on the deal – it won’t necessarily scare us away.
As for industry preference, we love branded opportunities in both the consumer and B2B spaces. Ultimately, as an industry agnostic investor, we will look at anything, with a few exceptions – nothing too tech heavy, software or a close derivate to the construction and oil / gas industries. Nor would we be interested in anything that is heavily project-based that requires selling a sizeable contract to keep sales smooth or moving on a recurring basis.
What is E&A Companies’ draw for business owners?
For a business owner that needs an involved partner capable of providing operational help, E&A Companies is a really attractive investor. A financial investor is not going to be as hands on as we are.
Our partners, Alan and Devin, haven’t invested in a single bad deal throughout their entire careers. The ultimate result may have been a single, to use a baseball analogy, as opposed to a homerun, but nothing has ever been a strike out. An example of a homerun is Udi’s, a gluten free bread company. When we bought the company in 2010, Udi’s was doing $6 million in sales. Two and a half years later, we sold it with a $100 million run rate to Boulder Brands. The original owner had retained 40% of the business. His second bite at the apple was significant.
Using the baseball analogy, what type of acquisition would be a “walk”?
A walk would be a cash flow opportunity that has some decent proximity to where we are. In this instance, we wouldn’t be entering into a transaction with a true belief that there’s a whole lot room to grow the business. There might be, but the business is established, it’s successful and it generates good cash. The price would need to reflect that position.
Perhaps this would be like buying an established business with potentially significant customer concentration where we would put some effort into sales and marketing, which we believe is one of our biggest strengths. That’s why we like branded things in B2B or B2C. Maybe the management has gotten a little sleepy because they have an existing customer base and they are making good money. They don’t want to take any risks because risk would mean investing money back into the business. They like the money they are making. There’s obviously potential there. We could offer the opportunity to get out to first base if we do some things right.
Is there a formulaic approach to improving the operations of a company?
Devin is a very good judge of talent. As a firm, we are focused on the human capital component. We try to leverage an existing management team when possible, but augment where needed.
Often, we are working with owners who have been successfully growing a company. They love the idea of the business and being creative, but they are tired of running the day-to-day operations or putting out fires, all of which keeps them from focusing on further growth. Our approach is to ask – if you are going to stay involved, what do you want to do? What do you really enjoy about the business? Let’s put you in a position where you can get back to doing that and we’ll take care of the rest.
On the sales and marketing front, we are very experimental. We are not afraid to take risks, but everything is data and process driven. We track and analyze literally everything we do. If we are doing something that works, we don’t mind pushing on the gas a bit to see how far it will run. If we are doing something that doesn’t generate a return, we will pivot away and try something different.
Unfortunately, many business owners are throwing money at SEO and AdWords but aren’t doing the best job of managing the process and measuring the actual return. It can be incredibly complicated, which is why we have a part of our team doing just that.
Is being located Indianapolis an interesting play for your firm or does that just happen to be where you are located?
It just happens to be where we are. That said, it does provide us with some convenience with respect to logistics. For example, we moved Lyssé’s warehousing and logistics to Indy, the crossroads of America, which is quite an advantage. However, we have not moved the HQ of our last two companies – Lyssé and Escape Campervans.
What does your deal pipeline look like?
Typically, we close a transaction every 18 – 24 months, but we are trying to ramp up that speed to two deals per year.
Last year, we looked at more than 2,000 deals, primarily sourced from intermediaries. We didn’t close anything even though we found some opportunities that we liked. It’s a very competitive market that anyone would describe as a seller’s market. It’s a good time to be selling a business. Correspondingly, it’s a tough time to be on the buying side of the equation.
Frankly, price is an issue. There’s a lot more competition than there used to be 15-20 years ago. There are more fundless sponsors, small private equity funds and larger private equity funds targeting the lower middle-market space. There’s just a lot more people involved.
When you’ve got to make sure that you can generate a return, you might chase a deal a little bit more and run up that valuation. Which, again, is great for the business owner and the intermediary representing that business owner, but it puts us in a position where we have to be a little more patient.
Are you noticing any significant industry trends effecting the buyside?
Food is really hot right now. With the Udi’s success, we tend to look at a lot of branded and non-branded food opportunities. The space has gotten really expensive and competitive. For example, for a four-flavor frozen food product opportunity, I was told I was not going to get a management meeting for under 13x EBITDA!
We’ve noticed, particularly in the food space, a lot of the large established food businesses, the Conagra’s of the world, are starting venture funds or incubator funds to develop smaller brands. If the brand gains footing or staying power, they will funnel it through their distribution networks and pipelines. It is very expensive to develop new products internally. Augmenting their efforts with these venture initiatives only makes sense. For a firm like ours that focuses on helping companies grow from $6 million to a level where a larger strategic would be interested, we now find ourselves competing with those larger strategic players.
Looking forward, do you have any projections or a thesis on what may happen in the near- to medium-term?
I would say that a group like ours does a bit better when the economy is not chugging along as well as it is now. I can’t tell you we are projecting there will be a downturn, but we are in what’s effectively the longest extended period of economic prosperity in modern, recent history. I think it’s reasonable to wonder how long it’s going to last.
We are going to continue to be opportunistic both in the consumer space and the B2B space. We would really love to be in a position where we are buying a couple of companies over the next 12 – 18 months. We really want to, but we are also conservative. We know what we are good at and we know what we are not good at. We are not going to reach for something because we’ve got to put the money to work. That might put us in a position of waiting, but we will continue to be as active in the market as we possibly can.
Contacting E&A Companies with Deal Opportunities…
We provide really quick feedback and there’s no board level review. There’s no senior lender review. We’ve got great relationships with our banks. This is a bilateral, two-partner approval system and we can be very, very quick and agile when it comes to moving forward or passing. In either case, a comprehensive reason will be provided.