Scott Bastian of Gilbert and Pardue joins me today to break down a recent white paper released by their team entitled: "5 Strategic Solutions for Middle Market Privately-Held Businesses in 2024". During our conversation we cover different trends that Scott and his team are seeing in the middle market space as well as steps business owners can take to proactively add value to their enterprise.
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JOSH KLOOZ, CFP®, MBA
WEALTH ADVISOR
Phone 281.719.0036
Text 281.699.8691
Fax 281.719.0156
jklooz@carsonwealth.com
1780 Hughes Landing | Suite 570
The Woodlands, TX 77380
Music by bensound.com
Scott Bastian of Gilbert and Pardue joins me today to break down a recent white paper released by their team entitled: "5 Strategic Solutions for Middle Market Privately-Held Businesses in 2024". During our conversation we cover different trends that Scott and his team are seeing in the middle market space as well as steps business owners can take to proactively add value to their enterprise.
Please check out and subscribe to my Youtube Channel and Newsletter!
JOSH KLOOZ, CFP®, MBA
WEALTH ADVISOR
Phone 281.719.0036
Text 281.699.8691
Fax 281.719.0156
jklooz@carsonwealth.com
1780 Hughes Landing | Suite 570
The Woodlands, TX 77380
Music by bensound.com
Hello and welcome in again to the Wisdom of Wealth podcast. Today's conversation is going to center around a recent white paper put out by Gilbert and Pardew Transaction Advisors. The name of the paper or the title of the paper was Five Strategic Solutions from Middle Market Privately Held Businesses in 2024. And today I've invited Scott Bastion onto the podcast from Gilbert and Pardew to walk through that white paper and give us a little bit more color around what they're thinking about for the year ahead. Scott, thank you so much for joining us and welcome into the podcast.
Scott Bastian:Thank you, josh, appreciate the opportunity.
Josh Klooz:Thank you again. So, scott, before we dive in, could you tell us just a little bit about yourself?
Scott Bastian:Sure, we'll start with the easy one first. My name is Scott Bastion. I'm part of the leadership team of Gilbert and Pardew, primarily focused on what we would call the relationship development component of the business for looking at mergers and acquisitions within what we call the low to middle market framework of what we would refer to as maybe family owned or entrepreneurial owned businesses here in the region.
Josh Klooz:Excellent. And so you know, I know that Gap or Gilbert and Pardew focus a lot on the accounting side of things and in the CPA side of things, and so where do you fall in that line of support?
Scott Bastian:So, from my personal perspective and my past background, I come from what we would call very strong M&A side.
Scott Bastian:I've worked and held several positions at a leadership level for private equity and from that experience I've been able to kind of take those best practices along with my Christian upbringing and background and mold that together and to be kind of what we would call a servant leader in this period of expertise.
Scott Bastian:Well, again, if you take a look at where I came from being working for a Fortune 100 to Fortune 500 type of organizations, taking those best practices and still instilling them down to where they can be both applicable as well as organizational efficiency for the small, low to midsize cap companies Again very similar capabilities, from whether you're running a small, middle or low medium sized company being family owned, to all the way to running a billion dollar business A best practice is a best practice, but really all you're doing is adjusting those best practices based upon the current structure you have in place. In regards to the financial piece that you had asked very familiar with the financial acumen of the M&A process but my area of focus has always been more on operations as well as what we call turnaround and then the other pieces. Acceleration through either growth or what we call bolt on activity, which would be referring to mergers and acquisitions.
Josh Klooz:Thank you. Thank you for that clarification. So the white paper started out that I'd referred to at the beginning as kind of the thing that people have focused on quite a bit going into this year and it's just economic uncertainty. Could you give us just a little bit more of kind of your perspective of where the market's at for your sector of the market right now?
Scott Bastian:Sure, I think, josh. As you know, there's never a time in the world where there's not some form of economic uncertainty. It's really depending upon what side of the situation or what side of the equation you're on, but no matter whether we're in a boom or bust, there's always at some point going to be some sort of economic uncertainty. So in our business some of that does in tune, become noise. But I think what you're referring to is, with some of the recent economic uncertainty, the activity with the Fed, the increased rates, capital has become a bit more difficult to obtain. So if you looked at a year, a year and a half ago for somebody who was trying to get into buying a business for their first time, they would be able to go in with a low sum of money, get a small business loan and be able to acquire maybe a first time business and become a business owner like themselves.
Scott Bastian:Nowadays, with the higher interest rates and also the lower availability of capital, you have to bring more money to the table to still qualify for those small business loans, and then on top of it you might also have to bring other forms of finance to the equation. In the past you might be able to keep that with the Small Business Administration. If you were in that $5-10 million mark Now, you may have to bring in also an outside investor or capital along with your own money to still qualify because, again, the availability of funds today aren't as great as they were 12 to 16 months ago. But I would tell you the amount of deals that are out there in the deal activity is still much the same.
Josh Klooz:Yeah, and so you know. I think the White Paper focuses on this a little bit too. Just, people are having to get a little bit more resourceful as far as their revenue stream and maybe even expanding their reach as it comes to new offerings, just because you're not able to grow in the same, in the same ways that you were previously. One of the other things that we've seen Scott to I know, I've witnessed it and I hear it from time to time is just the amount of focus on talent retention in times like this, and even talent acquisition, and when you couple that with a subset of the market that typically is having a succession issue or is looking for successors, what are you witnessing from your vantage point when it comes to talent acquisition and retention?
Scott Bastian:I would tell you, believe it or not. When people were acquiring businesses as far back as two, three, four years ago, they were looking typically at geographical expansion, portfolio expansion and then the other pieces possibly their share of wallet or maybe looking at additional capabilities or adjacencies. Right Nowadays, when we meet with whether it's family wealth, private equity rollups or even other businesses that are looking to grow, the first thing they're looking for is the manpower piece, because there truly is a shortage of labor out there. Whether you talk to somebody who's running an HVAC business, a glazing business, an environmental business, a healthcare practice, roofing, flooring, almost any of the services business primarily even in construction as well, everybody is struggling to bring on more business, not because the business isn't there, but because they don't have the labor or manpower to take on those additional jobs.
Scott Bastian:Give you an example this week, matt and I had a conversation with a client we're working in the glazing space, resides in the Northeast. He's actually got a portfolio or book of business for this year that's greater than $20 million, but because of the labor issues and what we would refer to the war for talent, he's probably only gonna be able to harvest 10 to 12 million of that. Again, nothing that he's doing wrong, but having the manpower to be able to take on those extra jobs, as well as be able to execute them in a timely basis, has become a challenge in many of these segments. So what we're seeing is now one of the biggest motivators for people to grow is the people acquisition and, more importantly, not just acquiring the business and the people, but putting something in place to make sure they retain those people, that they don't lose them after 12 months, 24 months, 36 months, because the asset now is people, not the equipment that people or portfolios people were chasing 24 or 36 months ago.
Josh Klooz:So I'm curious and this may be a bit too far adrift but are there any creative retention strategies that you've seen put in place by different acquirers as time has gone on?
Scott Bastian:Sure, I mean the one that's pretty common during murders and acquisitions is some form of retention bonus. Right, that's usually given to that what we call the top 10, 20, maybe up to 25% of those key employees in the organization. There's other means in which they'll do not just the financial piece but they'll do some form of equity. And then there's typically where they'll do a combination of payout as well as equity, again the equity piece being tied back to the longevity of the program. So typically we'll see those be in that three to five year range when they use equity, sometimes even longer. That can be in a form of an earn out payout or some sort of buy out at a later date. It varies from all three mechanisms, but that's becoming much more common today, whereas that was the exception in the past, because you didn't give up equity until you really had to, and that was usually for mostly family members were really really critical key employees.
Josh Klooz:And so the other piece I wanna shift just a little bit is to the succession piece. What are some of the most common Speed bumps and or hurdles that you're seeing in the marketplace right now? From a succession position, if somebody's listening to this podcast and they know they have a succession issue, what? What are some of the creative alternatives that you've seen out there, and what would your message be to those folks that maybe listening to this?
Scott Bastian:The first thing I would tell them is, whatever they do, they want to have a succession plan because the higher multiples and the pool of buyers increases when the buyer or perspective buyer or whoever buying it whether it's a competitor or roll up private equity when they can visually see the succession plan, because that takes the risk off the table.
Scott Bastian:Where things get a little bit complicated in valuations drop and value diminishes is when you have what we call the legacy owners doing everything right and then the new buyer comes in and fears that they lose that history, they lose that continuity and, more importantly, they don't have the experience to carry forth that current business value or even what we call the run rate of book of business from a backlog standpoint. And then when that happens, typically those businesses are devalued or the multiples lower in the business, transact at a lower multiple or value because the inherent risk. So, as I would share with anybody who's looking to position their business for sale, make sure you have that succession plan not only implemented and mapped out but, more importantly, illustrating such a way that a buyer can see it, feel it and understand the value and when that's there they will actually yield a higher multiple and a higher value when it comes upon their transaction.
Josh Klooz:Scott. The next piece of the white paper that I would like to dive into is from a tech perspective. We hear a lot about tech disruption. There are tons of buzzwords in the marketplace. What are some just practical considerations that you believe, you know that small to mid market or middle market business should take into consideration in the year ahead? That would set the market, you know, ahead of their peers.
Scott Bastian:I think the thing that's probably being most overlooked because of, again, the entrepreneurial success, is how fast things are moving, as you had said, from a technology perspective. If you think about it, nowadays, if you and I were to purchase something, we can look on our phone and we can get three references almost immediately, right? If we're looking for an item again maybe it's a Christmas gift, a birthday present or something unique that we're buying for ourselves we do a quick Google search and we've got a bunch of solutions in front of us, right? You have to think in that same mindset when you're running a business. Whether it's a plumbing business, hvac, glazing, environmental flooring, roofing, construction A lot of the new generation does everything from their phones and they don't pick up the phone like they used to.
Scott Bastian:So all these businesses that were built on referrals and word of mouth, they still exist and they will still be successful.
Scott Bastian:But keep in mind that population that made those business is successful is slowly aging out and there's new streams of generations coming in when they look and do business differently and they really rely on that digital aspect. Whether it's for a review, a reference, customer service, they're really all about the experience and you will find a lot of these new Businesses that are evolving and it have what I call quick successes because they're able to make the customer experience be good, there's a social presence available, people can go and inquire about it very easily and it's what I call easy to do business right. It doesn't mean the old businesses that are successful today won't continue to be successful, but the more that they evolve and use that digital footprint and become a bit more what we call use of social media whether it's through getting reviews, ratings, ideas, feedback will only make them more valuable as they grow. But I think you will see they will tend to experience a higher growth rate versus the ones that won't adopt the technology.
Josh Klooz:All I'm hearing from you, scott, right now is, if you're listening to this podcast, please go like rate and subscribe to the podcast. Just kidding. But no, I mean the. It occurs to me a lot of these businesses are what were built by a generation that wasn't afraid to knock on doors to build their business right if they had to, just to build awareness. You're knocking on a different door. These days it's a digital door. So when somebody does work at my house or in my neighborhood and they ask for that review, you know I I used to not take it as seriously, you know, pray, maybe ten years ago, but now it's, it's almost part of the currency of the transaction. Your point, like a giving them a positive review and spreading word of mouth, you know, within a neighborhood can be a huge deal deal maker for some of these businesses, depending on what they do. Are you seeing anything from a cyber security perspective At this? You know, at this market space at all?
Scott Bastian:You see it, it's no different at any size business. Obviously, the stuff we hear on the news is always the big stuff. For the big companies that get you know whether they're locked down or they've got some sort of ransomware. But the same risks apply to to load a mid cap companies. Just the same right, no different than you and I. Somebody can steal our identity and try to get into our bank accounts and get to our personal information. So, absolutely, I think this, the low or what we call the mid cap companies are a bit slower to the draw on that because, again, they've not been probably the target of that, as as maybe some of the large organizations. But I think it's critically important that they embed that into their systems because, again, a lot of people are not going to be able to access.
Scott Bastian:Your knowledge is power and access to your knowledge is power, right? So if you don't think of it that way, you're basically it be no different than you not lock in the front door. You might as well leave the door open and just let people to come in, you know as they want to. That's really the same way, but most people don't look at that way. They look at it that I've got a security code or I've got a firewall and I'm safe and being. That's probably the case. But there's a lot of sophisticated people out there that know how to get around those things. So again I use the analogy. It's much like just not dead bolting the front door or latching the front door. The access is still much the same.
Josh Klooz:Yeah, so, scott. The other piece that the white paper covers as well, moving on to the next topic, would be ESG considerations, or even expectations for this subset of the market and, I know, for a lot of our audience. It can be hard not to become cynical about some of the ESG considerations just because we've seen at certain levels where whether you called it greenwashing or whether it was just lip service was given to this topic. You still need to deal with it, because a lot of these practices are just called good business, right, and so what would be some of your Wisdom that you'd be willing to share with? You know folks in the, the, the family-owned space, to consider In and even ways to market themselves To their advantage for practices that they're already they're already taking, they're already implementing in their day-to-day Sure, I'll just use some real-world examples where people Probably 10 or 15 years ago didn't think this, this was going to take hold, but it has.
Scott Bastian:Whole foods right was Organically produced food. Nobody thought that they were going to give H eb or Kroger anybody a run for the money. But there is a group of people out there that are focused on health and wellness, so whole foods appeals to them and people are willing to pay a premium for that, and whole foods commands a premium for that it's. It's very much the same for the people who are in the lawn care business. Years ago, people just used whatever pesticide or fertilizer that they needed to keep their grass looking weed free and green. Today there are actually pockets of landscape companies that are offering alternatives that are safer for the environment, and people who are environmentally conscious are willing to pay the premium for that service. So when you think about it, from a small to to mid-sized cap business, there's a whole new Type of customer coming in, and I, my kids, fall into this.
Scott Bastian:This phase is that they are all about the environment and Sustainability and they're willing to pay a premium To help the world be a better place. My kids don't buy water and plastic bottles. They have a polycarbonate bottle that they refill Over and over again. The generation I came up one was you just went out, bought a new bottle, drank the bottle, dispose of it and you start again. So it's a learning, but you're seeing a paradigm shift over time that people are Are seriously becoming more environmentally focused, focus on sustainability and and that's becoming a governance in how people run their business.
Scott Bastian:So, again going back to that digital piece, yeah if comments are in there about the, the company being either environmentally driven or providing a sustainable solution, or it's focused on making the world a better place. Again, that's going to attract those type of customers and that becomes a value add for them when they make that decision.
Josh Klooz:Yeah, and again, I think no one would ever want to be in a situation. A lot of this is just simply being a good neighbor, and that's something that's woven into the DNA of your culture, and so it's like when you, when you simplify a lot of what ESG is and say, hey, here's where we are Meeting expectations of ourselves, and in here, here's where we could improve, that's something that's just probably I would imagine it at your level a lot more inviting as people come to the Deal table you bet I'll give you a real-world example where somebody who did something right during a difficult time has yielded Great benefits.
Scott Bastian:If you look back to Hurricane Harvey, mattress Mack Opened up his two furniture stores and said I don't care about the furniture. If you need a place to hibernate during this difficult time, you can stay with me as long as you want. I Can tell you that Almost everybody that I see in church, or the people I know in my neighborhood, if they need a piece of furniture, where do you think they go? They automatically go to gallery furniture based on the kindness Mattress Mac implemented back in 2017. We're now in 2024. People are still talking about it, so people do recognize that and there's dividends that are paid for it, and in his case, the payback is continuing seven years later.
Josh Klooz:Yeah, to be sure, and such a neat story, never, never grow tired of it. So you've been so generous with your time today, scott, but I do have one parting question before we close today. Are there two things that are catching business owners by surprise that you have seen as a trend in the last, say, two or three years?
Scott Bastian:I think the first thing that caught people by surprise is the COVID hangovers done right. So there was this big precipice from when COVID went through, where, no matter what you did, you were successful. People were just living on such an adrenaline because our lives were kind of coming back to some sort of normal that no matter what you needed, whatever you had to do, you just did it and every business thrived, every business grew and everybody just looked back, as that was a point in time where you couldn't you almost couldn't do anything wrong, right, josh? I mean because the demand was high, supply was low, you could get price. It was just the perfect environment as a business owner.
Scott Bastian:Now, as things have subsided, the two things that came out that we kind of talked about is the mindset of the workers changed, right, they want to have the ability to not necessarily be handcuffed to a work location. They want to have a blend between remote and also working from home. That works for some businesses but it may not work for, like, a landscaping business or construction business. You just can't work from home for some of those jobs. So you've got that. That's come into play. You've got the piece for the war for talent.
Scott Bastian:But then I think when you tie in that along with some of the digital piece the piece we haven't talked about that's becoming really critically important to whether you're trying to increase your share of income, increase your share of wallet.
Scott Bastian:You're trying to grow from a geographical perspective, and this goes back to the social and digital pieces.
Scott Bastian:The voice of the customer rules right now and you really have to have your ear to the ground, to what the customer is saying, because a good review can make you but a bad review can really break you as well. And I don't think some of the what we would call the older owners really understand that component of the piece and don't realize how just one or two bad experiences and that becomes on a social platform can devastate you. Right, that piece is real new for for the old, older owners who aren't really familiar with the impact of social media. And then again, the also pieces the war for talent, right, having the people to be able to do the job. The business is out there, the volumes out there, the demands out there, but you have to have those key people, which are now your assets, for the business to enjoy or be able to capture that, otherwise it's it's like going in the store you see a lot of things you want, but you can only buy what you have in your wallet.
Josh Klooz:Scott, thank you so much for your time today and thank you so much for joining us. You know, just walking through the white paper, further detail Any any parting thoughts before we conclude today.
Scott Bastian:I think again, as a business owner, anything you can do to attract and retain talent is going to only benefit you in the future. And then my last parting words would be embrace the digital revolution, because we are becoming an e-commerce type of world, and the sooner you embrace it, the more you can capitalize on it.
Josh Klooz:Thank you, scott. We really appreciate your time and wish you and your family and team nothing but truth, beauty and goodness in the road ahead. Have a great day, okay.