Interview – Matt Andersen, Westlake Securities
“The entire industry has the wind at its back. Public equity market valuations are high. The cost of debt is low. Cash and funding of private equity funds are on pace for one of the best capital raising years since pre-financial crisis. It’s a good time to be out there doing what we do.”
Westlake Securities was established in 2003 as a FINRA registered investment bank serving the capital and M&A needs of privately held companies and small companies between $10 million – $250 million of total enterprise value throughout the Texas Region (although we do work with clients beyond the immediate area in areas like Chicago, New York and Florida).
In general, we do sell-side M&A representation for financial buyers, private equity or strategic buyers. On the capital raising side, we are helping companies find senior debt, junior debt and various types of equity for different stages of growth. We have approximately 15 professionals that are experienced investment bankers. Our managing directors, over their careers have completed $20 billion in transactions across multiple industries. We are headquartered in Austin, but we have offices in Houston, Lafayette and Palm Beach.
There are three things that we pride ourselves on. The first is essentially are relationships with capital providers and different types of buyers and decision makers. We’ve found that tends to help our clients throughout the process. Secondly, our backgrounds. Several individuals at the firm have owned companies, run companies or run divisions of large publicly traded companies. They have been involved in multiple transactions, both as investment bankers as well as owners and senior executives. Another thing that we do exceptionally well is prepare middle market private companies typically for their first institutional capital. We coach them on the things that it takes to get the company ready for sale and presentation. We get the books together and help them put their best foot forward throughout the process.
Typically, we will do 5-10 transactions per year depending on market conditions. That said, this third quarter has been one of the busiest in our history. We currently are working to capture 10+ new engagements.
Although our focus areas are consumer products, oil and gas, manufacturing, technology and business services, we are open to a more generalist approach for those clients located in Central Texas.
A Success Story
One of the fun things that we do is educate people on what their opportunities are. One of the transactions that we did, started off with a client searching for a low seven figure line of credit. We started the conversation discussing what their options were. It turned out that what they were really after was liquidity to buy out a couple of the shareholders, to invest in the business and to start taking some chips off the table. The client’s needs were much more varied and deep than the original ask. We spent several months working with them and coaching them on different opportunities that could exist. We brought them through our process of getting ready for institutional capital. We ended up doing a recapitalization of the company to help them take chips of the table, move some shares around and ultimately provide capital to invest in the company for its growth. What started off as $1 million credit line conversation ended being a $50 million recapitalization with a uni-tranche provider.
Generating Deal Flow
Throughout the firm, everybody works slightly different, but our common thread is strong networks and relationship building / maintenance skills. We keep our ear to the ground so that we find new opportunities in the marketplace. Basically, it’s a lot of hard work. There aren’t a lot of ways to cut corners. The personal and emotional dynamics of selling someone’s business are significant. You need to have a solid reputation.
General Trends for 2017
I think people are really waking up to the fact that the combination of a strongly-valued public equity market with low interest rates and credit spreads has led to an opportunistic time. If they are considering them at all, we see people considering strategic capital transactions in the short run. There is a window being created by the equity and debt markets to take a look at these things a little bit sooner. Correlating with these external forces that are speeding up the decision process, are slightly higher valuation expectations.
Preparing to Sell Your Business
There are three important things that need to be done when preparing your business for a sell-side transaction. First and foremost, the financials should be organized in a systematic way using proper software. Secondly, provide operational clarity so that an outsider can easily understanding the business. Lastly, the seller needs to mentally and emotionally prepare themselves to let go of the business and/or allow someone else to have a seat at the table.
Managing Valuation Expectations
We provide clients with data around recent transactions and we talk to them about accepting what the market might tell them. For example, if after running a process, we get three offers between $12 and $14 million, the reality that a seller might have to come to is that their company is actually worth $14 million and not $20 million. If the market speaks, we listen.
If a client still has trepidation or hesitancy in regards to our recommended pricing, then we would adjust our risk/reward profile for the deal. Typically, we would increase our retainer to better match the deal probability ratio and account for risk that an actual deal may not be had.
A client’s business is usually their largest asset and they are very emotionally tied to it. That said, using our relationship built network to generate deal flow paired with reasonable pricing typically puts us in a situation where we are not competing against other investment banks for a deal. If we do compete, the pricing schedule has not been a significant factor.
Deal Surprises – Red Flags & Client Communication
The red flags are better known and dealt with up front instead of during the marketing process. During one engagement, a client failed to notify us about a pending lawsuit with a former employee. We failed to discover that during our due diligence process. The very first potential buyer immediately asked us how we planned to resolve the lawsuit issue. Ultimately, the client agreed to put the sell process on hold while the dust settled. Happily, the client did settle the lawsuit, we could explain it well to potential buyers and the company was successfully sold.
We had an instance where we dealt mostly with one of several shareholders. The second person down the line on the share count list did not fully appreciate what it meant to have institutional equity involved. After getting deep into the engagement process, we realized that the 51% shareholder was very comfortable with process, but the 25% shareholder had not been kept up to speed. We had to quickly retrace steps to clarify what it would mean to have someone else on the board or very involved in the running of the company post deal.
When a Client Brings the Buyer
We are definitely interested in those scenarios. We’ve done that type of work for private equity owned portfolio companies. We’ve done that for standalone companies, even on a senior debt line where clients were looking for us to prep the material and negotiate with the bank. Pricing was set accordingly, which was lower than if we were hunting for the buyers. We balance risk and reward with retainers and success fees. On a case-by-case basis, we may recommend that the seller still go to market even if it’s just to have a plan B or C.
The entire industry has the wind at its back. Public equity market valuations are high. The cost of debt is low. Cash and funding of private equity funds are on pace for one of the best capital raising years since pre-financial crisis. It’s a good time to be out there doing what we do. I hope that we are figuring out ways to harvest and to be mindful of creating revenue streams with a recurring nature to them. Great things don’t last forever.
Recurring revenue could be created by focusing on more consistent and predictable income coming into the firm monthly. We need to think about how to spread that revenue out over time. Perhaps, value-added consulting a few years before the client plans to go to market or changing the way success fees are structured or post transaction work since we know so much about these businesses.
For boutique investment banks across the board, the expense and complexity of maintaining technology are increasing. You could easily get to a six figure a year budget in terms of maintaining some of the basic technologies and databases that are needed. We have a homegrown CRM system on our server. You’ve got to have everybody putting good data in to get good data out. Even the most expensive CRM system will fail without good data. You’ve got to have a culture that is on point with the technology, the cost needs to fit your budget and the ROI needs to be almost intuitive before you break out the spreadsheets.
About Westlake Securities
Westlake Securities is a middle market investment bank, founded in 2003, with offices in Austin, Houston, Lafayette, and North Palm Beach. The Firm’s principals come from diverse backgrounds, including investment banking, owning and operating businesses, private equity, securities sales and trading, corporate operations, securities law and venture capital.