M&A Investment Banking with Stuart Moss

Today we are joined by M&A investment banker Stuart Moss, a managing director with Keystone Capital Markets in San Diego.  Keystone is a team of M&A professionals dedicated to providing high level investment banking and strategic advisory services to middle market companies (with revenue typically between $10 million to $200 million). Stuart has over 30 years of transaction experience as a member of company management, a private equity investor, and an investment banker in industries including consumer products, manufacturing, business services, wholesale distribution, healthcare services, and technology. He provides insight about the successful ways to prepare a business for sale, market it to the right buyers, and structure the best transaction.

SHOW LESS

Selling a business is the American dream, the pot of gold at the end of the rainbow, the reward for years of hard work. Successful entrepreneurs make countless sacrifices in hopes that they would someday reap the benefits of their labor and live a new life of vacations, recreation, and prosperity.

You only exit your business once, so you should feel confident passing this milestone. A successful business exit reflects the preparation done beforehand. Failing to plan is planning to fail.

The owner of a privately held company has several alternatives on how to exit their business. In the absence of an exit strategy, events will inexorably dictate the final exit plan. A costly involuntary exit may be caused by death, disability, divorce, disagreement, or distress.

Selling Your Business with David King will help you take control of the sale process and make it positive one.

Transcript

Speaker 1:

Welcome back to selling your business with David King. I'm David King, and I'm the author of selling your business begin with the end in mind. It's available on Amazon today. I am joined by Stuart Moss with Keystone capital markets. Uh, Stewart is an M and a investment banker and he works in lovely San Diego, California. Welcome Stewart.

Speaker 2:

Thanks, David. Great to be with you.

Speaker 1:

Yeah, thanks for joining us. Well, Stuart let's dive right, right into it here. Tell us about yourself. Tell us about your, uh, education, your work background, how you got to be where you are today.

Speaker 2:

Sure, sure. Thanks for having me. Um, so I, you know, I'm from back east, I moved to, uh, Southern CA California about 20 years ago, uh, went to school at duke and the university of Virginia business school, uh, and then really jumped into about 20 years stretch of running manufacturing technology businesses. And within those roles, I was responsible for not only running the businesses, but also doing the M and a making acquisitions, selling off, uh, you know, businesses that didn't fit the strategic need anymore. Uh, and I did that work for either large companies, private equity groups, as well as worked alongside private company founders. Um, I decided about, uh, 15 years ago that frankly I enjoyed M and a more than the day to day operating businesses. And it was also a little bit easier than running a day to day operating business. So, um, I move, you know, exclusively into this type of advisory work, uh, and I really rely on my operating experience, historical operating experience to better appreciate the challenges facing business owners. And I think to better understand how potential investors or buyers view different types of companies.

Speaker 1:

I see. What, what level of management were you, were you C-suite management, mid-level management. How big a companies were you typically working for?

Speaker 2:

Right. Good, good question. So for the big companies, I was running a business unit and, you know, sometimes that was the division manager. Some of the time there was some other terminology, uh, with the private equity group. It was, you know, president of that individual business and side by side with the private business owners. Again, it was, you know, a presidency role.

Speaker 1:

I got it, got it. Well, that's, that's an invaluable perspective to have been on the other side. And I'm sure that that clients really appreciate that. You've, you've seen it from their side, been in the trenches and know how hard it is. Those numbers just don't appear outta nowhere. <laugh> you gotta go out there and plant those seeds. Yeah, yeah. Yeah. Well, tell us today, what type of work do you do at Keystone capital markets?

Speaker 2:

Uh, so I'm, you know, I help business owners really do one of two things, either develop and execute growth strategies, and that might involve raising capital to grow the business, take it from, take it to the next level, maybe acquire complimentary businesses again, that will really supercharge growth. Uh, and the other pieces, helping them develop and execute exit strategies that, you know, enhance the company's value prior to, uh, some type of transaction. And that transaction could be to a third party or could really just be a generational transfer.

Speaker 1:

So you work both on planning, exit strategies, and then I guess also you fulfill your role as an investment banker in doing deals with your clients.

Speaker 2:

Yes. Although I'm not a exit planner per se. You know, those people have very long, you know, complicated, um, processes that they go through and there's a significant value in what they do. Um, my focus is more on the critical parts of a business that need to be, uh, enhanced in order to develop a more valuable organization in terms of a third party sale or a more resilient organization, uh, in the context of a generational transfer. So I will often I'll often work with an exit planner and focus on those two things and bring a little bit more, uh, insight into those things while they work at, you know, at a, at a broader level.

Speaker 1:

Okay. I see the difference. So the, the exit planner will work, work with an owner or a group of owners. H how do I look at my whole financial picture here and, and get out of this business, your advisory services are more focused on more like business consulting. Here's how you need to grow more profitable or have a long term trajectory, so that you'll have more value, right. Is

Speaker 2:

Fair. Exactly.

Speaker 1:

OK, perfect. Let's dive into the investment banking. What type of deals are you working on? What, what's your typical mix of transactions?

Speaker 2:

So Keystone I'll really talk about Keystone in total because the, the collaborative nature of our organization really, uh, takes the focus off any one individual's experience and really puts it, uh, to the company as a whole. Uh, we work with companies that are generating anywhere from 10 million to 200 million in revenue. And I know that's a pretty big range. And I'd say within that, most of our work is companies with revenue between 20 and a hundred. Um, from an industry standpoint, we're pretty focused on companies providing business to business products or services typically related to either consumer products, healthcare, manufacturing, um, media and technology. Uh, I, I think as I was saying before, you know, I've got my own areas where I've done more deals kind of in the food and beverage and the healthcare and the business services. Uh, but we work collaborative collaboratively as a team at Keystone. So we'll put a team, we'll create a team for each client to make sure that one of the two senior people on that team has direct transaction experience in that client's industry.

Speaker 1:

So how many people do you typically, uh, staff a deal?

Speaker 2:

So I think we're a little bit different than some, uh, most of our peers, at least mm-hmm, <affirmative>, we're very top heavy. So we have a dozen individuals in our firm and eight of them are senior, you know, 15 to 25 years of deal experience. Um, we'll typically put two of those senior people on a deal and one junior person. So as a result, we really have to get much more in the weeds. Mm-hmm <affirmative> on these deals and are working much more closely with, uh, clients than a lot of firms that would really farm that farm. A lot of work out to the junior people.

Speaker 1:

Understood. So let's take on a typical deal here. Uh, H how much time, how much advance notice do you typically get, you know, T minus whatever to get to the closing date of the sale of a business, whatever form that's going to be.

Speaker 2:

Yeah. So I guess the,

Speaker 1:

When do we see steward on the scene?

Speaker 2:

Yeah, <laugh> the, our preference is two or three years, cuz that will really give us an opportunity to work with business owner to really tweak the business in ways that will enhance value down the road. Um, on the other hand, on the other extreme, we also get business owners that show up with a letter of intent. Um, now we hope that letter of intent is not signed. Um, and in those cases, you know, we'll, we'll, we'll run a very quick process if you will, kind of a market test just to make sure that the business owner has confidence, that the deal that they've been offered is market.

Speaker 1:

Let, let me jump in at just one helpful tidbit, everybody get at your pen and write this down. What he just said is the, the, the letter of intent is not signed. Take no comfort with those words, non-binding it does mean that you're not bound to do the deal and they're not bound to do the deal, but it's never, ever, ever getting any better than that. Fair

Speaker 2:

Enough. And, and to that point, David, most of those letters of intent have exclusivity periods. So it includes the, the business owner from even talking to anybody else for what is typically a 90 day period.

Speaker 1:

It, it, it is disappointing how many people can be smart and trued about their business, but then this major step comes along and, and, you know, anyway, we just, everybody make note of this, never sign the LOI until you've talked to somebody, okay, now we'll move on. We've got an LOI. What, what do you typically do with those clients? What, what's the next step to get them ready for a sale?

Speaker 2:

So if we go to the K kind of the more typical scenario where they're not coming in with an LOI mm-hmm, <affirmative>, um, you know, we'll work with them again. If we have a two or three year runway to help them enhance their business, giving them advice on a variety of things that might be customer concentration, it might be, you know, finding a successor to the business who can carry on for them, if they don't wanna stay with the business after they sell it. Uh, there's other industry specific, uh, metrics that business that, that investors and buyers really care about when they look at a business. So we'd like to make sure that the business owner is, uh, track measuring and tracking those types of metrics, cuz it just comes across as being a much more sophisticated operation with respect to buyers. And that means lower risk to buyers.

Speaker 2:

And at the end of the day, buyers are all about mitigating risk mm-hmm <affirmative>. So when, when a company is ready to kind of take the market, we'll spend, you know, a fair amount of time a month or two, really trying to understand the business and trying to put down on paper, reflecting that business business in the most favorable light, we'll put together a list of, uh, buyers we think would be, uh, might be willing to pay a premium for the company. Uh, and then we'll go to those buyers and try to drum up enough interests so that they'll make some initial offers, uh, that will bring to the client client will, uh, you know, decide which of those offers are interesting enough to meet with those prospective buyers. We'll set up those meetings, help them prep for those meetings. And then after those management meetings, we'll go back to, uh, those buyers and ask them to submit letters of intent.

Speaker 1:

OK. So take taking just a small step back before you package those companies and take them out to the market and do your job of making a perfect marriage come together. What, what are the key indicators of the companies that you're gonna be able to get out relatively quickly versus the ones that are gonna take a little bit more time, uh, polishing on the shelf?

Speaker 2:

So financial performance is first and foremost mm-hmm <affirmative> and, and I'll use C as an example. Um, there's a lot of companies that really suffered during COVID and there's also some companies that did extraordinarily well during COVID. Um, we need to be able to communicate to buyers in a very clear, concise, uh, defensible way, how those experiences either are sustainable in the case of a business doing well or, uh, not sustainable with respect to a business, that's suffered some significant performance issues during COVID it's it's easier now because if a business has recovered or started to recover, let's say at the end of last year, we're now eight months into a new year in kind of a new normal and buyers, uh, or investors are much less concerned about what happened during COVID they're much more interested in what's happened since then.

Speaker 1:

I understood understood it's COVID is definitely picked the winners and the losers and, you know, just have to, everybody is taking account of that. So, you know, you, you help your clients pick a, a good structure for the deal, or at least you're gonna try to push for what's in their best interest. Mm-hmm <affirmative> knowing that the, the, the buyer is certainly, <laugh> gonna have a big say in this. And then you also, uh, work with them on the range of potential buyers, a strategic, a financial, a range of different buyers. Um, can you describe those two processes and, and which typically comes before the other or did they kinda interplay?

Speaker 2:

Um, well I think we start with the business owner's objectives, both on the financial side and the personal side, and I'll call it the legacy side mm-hmm <affirmative>, um, cuz different buyers, uh, are gonna look at their, uh, their company very differently. They're gonna have different expectations about what's gonna happen to the company post close and what the role of the business owner might be post close. So that helps determine kind of where we should focus. I I think, think in general, there's really, as you said, there are strategic buyers, there are financial buyers and, and then they'll, there are what we'll call hybrids. Um, so if I just take them very briefly, you know, a pure financial buyer, typically a private equity group or a family office, uh, they're gonna be very focused on either the business owner staying on or the business owner, having a really top flight team that has demonstrated the ability to perform without the help of the business owner.

Speaker 2:

Um, those, you know, the, the valuations for companies that are bought by financial buyers are gonna be lower because that financial buyer really doesn't have anything they already are, uh, uh, investing in that they can leverage or create any synergies. It's kind of a standalone what we'll call a platform company mm-hmm <affirmative> um, on the far other end of the extreme, you have large standalone operating companies when they make acquisitions, they're less concerned about the owners staying on because they have existing people that are in that, that, you know, that do his job or her job. Um, they're also a little bit less concerned about the depth of the management team, cuz again, they'll have department heads that are doing the same type of thing and they would just absorb the, our clients' business into their existing, um, operation, uh, that may or may not play well for business owner.

Speaker 2:

One of the advantages is that those strategic buyers are gonna see some synergies by adding capabilities or adding markets without all of the, uh, administrative costs, uh, and potentially get into new markets, maybe plug a hole in their product line offering, and they're willing to pay a premium for that more so than a financial buyer. And then somewhere in between are what I'll call, uh, the hybrids, which are really, uh, operating companies that are backed by private equity mm-hmm <affirmative>. And there can often be some of the same synergies which will create the same type of strategic valuation. Um, but also give the business owner an opportunity to stay invested or at least stay partially invested and really take advantage of what the future growth of the combined business might be.

Speaker 1:

Mm-hmm <affirmative> do you typically see, uh, a higher evaluation, uh, coming from a strategic buyer that that may not be in the exact same industry so that they're just buying market share, but they're in a related industry so they can branch out a bit and there may be some overlapping personnel and some cost savings, but it's an expansion of their business, not just grabbing more market.

Speaker 2:

Absolutely. Absolutely. I I've had clients who, the business, uh, the, the, the individual running, uh, my client's company after the acquisition by, uh, private equity backed strategic, if you will ended up running the private equity groups, larger company mm-hmm <affirmative> um, and you know, there's a lot of opportunities there for growth. This is, this is what, you know, there's a lot of cash on the sidelines chasing deals, and it's all about how, what the return on that investment would be. So the more opportunity a buyer sees in boosting their operation in whatever way, shape or form, the more interested they're gonna be in a transaction and the more they're willing to pay for a transaction.

Speaker 1:

And when you have a financial buyer, you typically see a more structured financial deal, little more complexity to what they're doing, often more pieces of the puzzle for tax savings that they're trying to shuffle around. Is that fair?

Speaker 2:

Yes, absolutely.

Speaker 1:

Okay. And you personally worked in private equity, you worked on the other side of the deals, right?

Speaker 2:

I did. I was, I, I was recruited actually out to California to run a private equities platform business. Um, I didn't know it at the time, but that business was struggling. Mm-hmm <affirmative> uh, and my job really was to get that business to a point where it was sellable. And then I went through the process, uh, you know, the sale process and ironically enough, I ended up joining the large strategic that bought that platform company and stayed with them for another four or five years.

Speaker 1:

Okay. So among investment bankers that are in your sector are, you know, that are filling this, the middle market investment bankers that do M and a, um, do you think that that a majority of them have some experience working on the other side of the, of the defense when it comes to private equity and financial buyers, or is it kind of a better even split of those who haven't?

Speaker 2:

Uh, I think most have not. Uh, you know, I look at my colleagues at Keystone and I'm really the only one who's really had that direct operating experience. And that's what I love about Keystone. We have, we all, we have diverse backgrounds in terms of experiences and, you know, me teaming up with somebody who's, you know, done a hundred different deals over the last 20 years. Uh, I'm gonna learn something from them and they're certainly gonna learn something from me as we're working on a deal and, you know, to better understand what, you know, the, the dynamics around operating companies and the potential value of them.

Speaker 1:

It seems as though it would be a big advantage when you're working across the table from a private equity, uh, buyer to have to have spent some time in their space. So it's gotta be helpful. Yeah. So when you're working with companies as kind of general advice to businesses is they're planning for, for an exit planning for an acquisition, what are some things they can do to make themselves more marketable versus the things that are just deal killers?

Speaker 2:

Yeah. So I think it comes back to this concept that buyers are looking for what I'll call a risk adjusted return on investment mm-hmm <affirmative>. And so you can do, you can work both sides of that equation. You can reduce the risk, you can increase the return. Um, I think business owners oftentimes are, I mean, they're successful because they're really good at running their business. Mm-hmm <affirmative>, um, the risk side of it is something that they're entrepreneurs, you know, they, they, they take risks. That's how they got where they are. So, um, we spend a lot of time trying to identify those risks up upfront, and if they can be addressed, they, you know, we try to, you know, help them get addressed if they're just inherent to the business or the industry or the company, uh, then we'll work with them to try to position those issues in the most favorable light

Speaker 1:

Mm-hmm

Speaker 2:

<affirmative>, uh, on the other side is the return side. Look, you, you, you know, best case scenario, your business is getting more profitable and getting larger while it's getting more profitable, uh, over time. And certainly as we're running a process to try to sell a company or attract investors, that type of momentum really excites, um, the other side. So to the extent that there's things that a business owner can do to, again, explore new markets, get into new products without creating undue risk, right? Mm-hmm <affirmative>, that's the trade off. Yeah. Um, they can do that as well. You know, there's some other things that I had mentioned, you know, customer concentration is a big deal. Mm-hmm <affirmative> um, how much customer concentration, um, is okay, depends on the industry. Some industries 20 or 25% is normal in other industries. It's, it's a deal killer. So that's kind of the work we do. It's not a one size fits all. We look at the specific industry and we come back to the business owner with these are the three or four things that buyers or investors in your space really care about. This is what they wanna know. Mm-hmm <affirmative>, if you can focus on these and track your progress, you're gonna come across as being a much better alternative in investment than other companies that are out there.

Speaker 1:

And the, the owners can help facilitate a sale by grooming their management team so that they can be more of an owner and, and not an operator. And, and that the, the management can carry on without them. Is that

Speaker 2:

Absolutely. If, if the, if the business owner doesn't wanna re you know, remain in the business post close, what we generally say to them is when you're talking, when you're in a meeting with potential buyers or investors, mm-hmm, <affirmative>, the more your management team says, the less you'll have to be involved post close. And frankly, the less invested you'll need to be post close mm-hmm <affirmative>. And so sometimes, you know, we'll just put it in terms, depending on the size of the deal. We'll tell, 'em look, every time you open your mouth in this meeting, you're probably, it's probably costing you half a million dollars in enterprise value in purchase price. Mm-hmm <affirmative> you have to make yourself as dispensable as possible.

Speaker 1:

Right? Right. So let's say this Stuart, if you're sitting down next to a, someone at a bar, you got one beer to share together, and he turns and says, I'm gonna sell my business in five years. And just in the time you're gonna drink just one beer. You're he's, you're willing to give him some freebie advice. He's not gonna sign you up right then and there. Sure. What would you say to this guy five years out that make this business, or this woman, um, more sellable for the most value and, and what to look forward to? So they're not blindsided by this process they're gonna go through.

Speaker 2:

Yeah. I would say every business has, as the movie says, the good, the bad and the ugly mm-hmm <affirmative>, um, I would tell business owners to not hide from the ugly and really, and, and to embrace it and try to figure out how to address it. The more time you have to address it, the easier it will be. Um, I'd also say that, you know, <laugh>, if you don't wanna be a part of the business, post close, go take a vacation in some other continent for a month and see how your business does. If, if it can, if, if it performs well, then you're ready to try to market your business without you playing a meaningful role. After that transaction occurs,

Speaker 1:

Those are, are great bits of advice. I've heard the, uh, the good, the bad, and the ugly stated it's like getting married. They will discover your defects before the closing date. So they're going, no, you can't hide them, but you gotta make, 'em fall in love with you before they find your defects. So get that love going. And then here's the bad news, you know, <laugh>

Speaker 2:

Right. And, and not to get into the weeds, but yeah, you wanna, you want to tell them, um, the, the, the, the bad, hopefully there's no ugly by the time you're in the, you know, in a, a sale process. Yeah. Um, you wanna tell them the bad before they issue the letter of intent.

Speaker 1:

Okay.

Speaker 2:

Right. Cause you want that baked in to what they're offering you. You never want to get into a situation where they don't know it. They give you a great LOI number, terms, everything, and then they get into due diligence. And then the bad shows up. That's, that's just a recipe for disaster. Everybody ends up feeling badly about having to reprice the deal or restructure the deal, um, is just not a good situation.

Speaker 1:

But if a business retains Keystone capital markets and, and Stewart, he will make them the buyer fall in love with you first. That's your job, right?

Speaker 2:

Absolutely. And it's not just one buyer. We want a lot of buyers falling in, in love. We want them, we want you to be the prettiest girl at the dance. If you will, right. We want people pining over you and willing to really sharpen their pencil and come with their best offer so that you get the best, the best way to meet your objectives.

Speaker 1:

Piece of cake. I'm sure the expectations are always pretty high for what you can do. Well, Stewart, this has been great. Uh, you're such a wealth of knowledge here. We're absolutely gonna have to have you back on.

Speaker 2:

I would love to. Thanks. I enjoyed it.

Speaker 1:

Okay. Well, everybody have a great holiday weekend and we will see you again on selling your business with David King.