John Bly - Cracking the Code to Mergers & Acquisitions (G1817)

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Welcome to the Exit Coach Radio show, the show for baby boomer business owners who are looking for cutting edge information as they plan their 3 to 10 year business succession and exit. Every week we interview top professional advisors for. Their best tips, strategies, and precautions so you can be well planned. And don't miss our one minute exit coach tip of the day on exitcoachradio.com. And now here's your host, the exit coach, Bill Black. Welcome back. Thanks so much for joining us. You know, it's always a pleasure to have guests who return to the show to go deeper on some of the subject topics. And my next guest is John Bly, who's joining us again from LBA Haynes Strand PLLC in Matthews, North Carolina. And we're going to talk about cracking the code to mergers and acquisitions. So John, welcome back. Thanks so much for joining us again. It's good to talk with you again. Bill, thanks for having me. Looking forward to continuing the conversation. Yeah, last last time was so interesting. We talked about a lot of things that are going on and ways for business owners to get ready for the sale of their business and what the current environment is like. Just give us, fill us in, in case they didn't hear that, a little bit about you and LBA Haynes strad and what you all do. Sure, absolutely. We are a 65 person CPA firm with 3 offices in North Carolina, and we've grown our own business through mergers and acquisitions, having done 11 now in the last 11 years. It's something that not only are we passionate about helping other people do, but we also are doing it ourselves. It's, it's a big opportunity for growth, and it allows people to, to grow in an alternative growth strategy than just hiring the next person. And John is an author, his book is called Cracking the Code, available on Amazon. So, uh, we're gonna talk a little bit about that, but let's talk about the uh the current M&A environment. What's it like, John? Ah, you know, it's interesting just at the end of May, middle of May, the latest first quarter numbers came out and the first quarter of 2015 was the largest merger and acquisition activity. In 15 years of any quarter, so it is really, really hot, to say the least. I mean, the highest quarter in 15 years is surprising. It's going to continue to be that way over the next 2 to 3 years, and you know, a lot of that is baby boomers, a lot of that is just wealth transfer and people that survived the down economy are now ready to move on to something different. I mean they're, they're through the downside and they're, they've gone through all the hard fights and they're ready to, they're ready to make a change. I can sense it out there. I can sense it in my own discussions with business owners that the pent, they've had this pent up demand since 2008 that kind of when I, when it gets back, I'm getting out and now they feel like it's getting back. So that's pretty huge that M&A activity has picked up that much is in any particular sectors or sizes of businesses. You know, it's interesting there, it is happening in all sectors and all industries, but there are, there's an increased demand as private equity groups and hedge funds and wealthy investors are coming significantly downstream and playing in areas that they just didn't play before. I mean right now we're helping one of our clients exit and they're being bought by a public company. This is a company that's only doing 10 or 11 million in revenue and they're being bought by a public company, so. There's big companies that are looking for opportunities. They see entrepreneurs who have done great things with great things with their company. But yet haven't been able to take it to $100 million or to $50 million and they and the public companies have the dollars to be able to invest to say we can take this company. It's got a great platform, it's got a great client base, and we can take it from here to the next level. And so that's happening with private equity groups and private investors and and people are coming downstream significantly where they wouldn't touch companies under 50 or 100 million in the past. There's just so many quality smaller companies that they're coming down to play in that space. So as part of this, it's kind of like the house flipping market of, you know, a few years ago where they look at businesses as on the rise in value and there's money that needs to be redeployed that's not making very much interest. Is that where it's coming from or where is the funding for these deals coming from today? Yeah, it's a combination in in the public companies and private equity groups, they're just sitting on so much cash, the numbers in the trillions of dollars that is sitting on the sidelines that's been, to your point just a few minutes ago, sitting on the sidelines since 2008 and 2009. I mean that they need to deploy this capital and and to be able to return shareholder value. I mean the shareholders are demanding that they that they do something with these dollars and so your choices are to, you know. Invest and grow the company and one of the ways to do that is through acquisitions for for larger companies or it's to declare a very large dividend and and people are, are not doing that as much because tax laws have changed a little bit and they're not quite as favorable and so they're not returning that equity to shareholders. They're instead trying to increase stock price by coming downstream and, and interest rates are really low and the companies that are buying, you know, in the 5 to $15 million dollar company range that are buying smaller companies, whether that's a million dollars or $2 million or $500,000. Interest rates are so low. You're exactly right, and they see that rates are going to rise. I was just in a banking presentation. I'm on the advisory board of a of a community bank here in Charlotte, and they, they did a presentation yesterday about how rates are expected to rise almost 2% in the next 18 months. So with that in mind, that means your dollar goes not quite as far afterwards. So, so if you can buy a company now and get a fixed rate over 10 years, you can. Get a rate of 4.5 or 4.75 or something like that. The uh it makes it really economical for a small business. So you've got kind of a perfect storm for the small businesses these days. The business values are on the rise in a lot of cases because they're they're they're recovered or they're, you know, they're they're back to where a reasonable level of revenues, but they're on the rise and then you've got cheap money out there that needs to be deployed and a lot of it and a lot. People again looking for what how can we deploy that money, buy a business on a financial basis, and maybe flip it on a strategic basis down the road, you know, as things, as things improve even more or as they add efficiencies to it or band them together, it's a very interesting time, isn't it? It is in your last sentence there about, you know, ad efficiencies or or deployed in a different way is exactly right. I was talking to a company in Louisville yesterday and they were talking, they were just asking questions they'd gotten a copy of the book and had read it and they were asking questions about a competitor that they were looking at acquiring and it was a small company who hadn't been able to turn a profit, but they projected, uh, they were a $10 million dollar company looking to buy a company that wasn't even doing a half a million dollars in revenue and They projected that within 12 to 18 months they could turn it into a half a million dollar profit division for their company because of the uses of it plugging right into their core infrastructure so they were going to buy it for a really low number and be able to turn it really quickly into something that was generating a lot of profit for them and so that's a continued opportunity for people uh as they use businesses in different ways. Now, are a lot of the businesses out there, um, I know that there's, there's a lot of numbers out there about how many businesses are owned by baby boomers between age 52 and 68, and I've heard numbers like uh uh 5 or 6 million. Do you do research in the area? Can you speak to that number? Yeah, you know, I, I don't do a lot of research on the specific number. What I do research on is the percentage of businesses and the latest percentages I've seen is between varies on the, on the study, but it's a little bit different. It's between 68 and 75% of all businesses are owned by boomers. And that's a large transition. A huge transition. It'll say in the next, here's what I've heard and tell me if this makes sense to you in the next 10 years, let's say there's 5 million. Let's say there's 5 million baby boomer own business owners and 10% of them want to sell per year. That's about uh 50 or 500, what is it 500,000 per year. Now the M&A world only supports at its at its height, maybe, maybe 50,000 business sales per year would be a lot. Does that sound right? Yeah, yeah, in that multitude sounds about right. I mean, we might be missing a 0 on one side or the other, but yes, that's exactly right. In that multitude we have that issue which is the community is people are having to do a roll up like never done like has never been done before. I mean there's going to be 2/3 by most estimations at least of all businesses are going to have a transaction in the next 10 years. I mean they're going to go on to the next generation of owner or the next. A buyer, it's it's going to happen because people are going to exit permanently for the workforce. Well, my, my point there is if there's 500,000 businesses for sale and 50,000 sell, that means that's 90% of them that aren't getting to market to the outsiders. So they really have to plan for these insider and roll up strategies to to push it down the road a little bit, grow their business, and then maybe. Enter into another marketplace and the middle market more. Um, uh, am I making any sense with that with those numbers at all? Is that, I mean, I'm trying to paint a picture for our listeners. Yes. Yeah, absolutely, and you're right, there are, there are the smaller the business is, the less it's likely that it's going to transact because there are going to be so many sellers that you're gonna have to have a good business that's in good shape at the right size, and it doesn't have to be huge, but it's, it's going to be harder to transact. You know, a $200,000 business because there's going to be so many that are selling for a million dollars that people aren't even going to get low enough to get down to the $200,000 level and so there's going to be a huge opportunity. So if you're that smaller business, it's the time for you to look at some of your smaller competitors and maybe try and roll them up a little bit and and be a buyer for a couple of years to then have a bigger business that's ready to exit in 3 or 4 years. That great point. So the real point there is for our listeners is, is you really need to understand what's going on in the big marketplace and figure out what's where you are, where you fit in, and what your strategy might be. And that's where you get to talk to people like John Bligh and and learn, you know, hey, have you thought about this? Have you thought about that? There's some ideas you need to open your eyes up to. So tell us more. Why would a small business want to acquire other companies? What what's the reasoning? Yeah, you know, one of them is exactly what you exactly what you talked about, which is that they can become more attractive. I mean, the smaller a business is, the less it's intrinsic value when it goes to market, and it's going to be harder for somebody to spot. And so if you can acquire 2 or 3 of your smaller competitors, let's say you're only worth 3 times earnings today or 3 times cash flow, if you can buy a couple of your smaller competitors and sort of roll them together just by doing that, and you may buy them at 3 times. Just by doing that in a couple of years, you might, your total entity might be worth 5 times. So there's a huge strategic value in sort of the roll up strategy. I mean, private equity groups and public companies have been doing this for a century, but small companies really have missed the boat here and this is a huge opportunity for them to become more noticed, uh, if you will. And then, you know, another reason to potentially acquire is. Over 90% of all businesses that are acquired are still in business 5 years later, whereas businesses that are started, we all know those stats, so many of them fail in those 1st 5 years. And, and if you're gonna start a new division or you're gonna start a new location or you're thinking about getting. Into a new niche. This is a great way. Why not go out instead of starting it from scratch? Why not go acquire something in that new market you want to go to? Why not acquire something in that new niche that way they've already got proof of concept. They already have revenue. They already have some profitability. They already have some people. It makes it a lot easier to start there than it does to start at zero and build something from scratch. Good point, great point. And so when you're thinking about that, the concept of buying smaller businesses to create a bigger business that moves you up the uh the scale of, of prices that buyers will buy and noticeability, what are some of the first questions that businesses should ask when they're looking at a smaller business? What matters? Yeah, first, the most important thing I have found in my experience is culture. It's really not even close. I try to tell my clients and we try to do it as well when we're buying. Don't even bother looking at the numbers to start with. Look at the look at the people and look at the culture and in small business, go to lunch with the other owner. If you can't sit through a 1 to 2 hour lunch discussing business and being open and transparent with this, with the potential seller. You probably aren't going to like who's back at their office either. And if you can't spend 2 hours with somebody and feel like, you know, that was a good conversation or or I don't want to ever spend time with them again, you're probably not going to like their people and if you and if you combine offices and combine firms, you're not, you're going to have a culture clash. It's very likely and those 1, those things tend to turn into bad mergers, bad acquisitions that a few years later everybody's upset and the whole team's gone. And so culture by far is the number one and Honestly, in the small business space, it's the thing that's overlooked the most. People are paying attention to the financials, they're looking at the legal aspects, but they don't really think about the culture aspect and it's, it's really critical. And that's, I would argue that's why almost all deals fall apart and people complain later about a deal is because they never really paid attention to culture and how it would fit. Uh that's a wonderful tip, John. It really is. It's, it's a great way for people to look at things a little differently and think about do I like what I see in the culture. Um, what else as far as uh the meshing of processes and systems and things like that, is that important? Oh yeah, for sure, after you get past culture, then you start to look at, you know, do they, do they use the same technologies? How is the integration of the technology and the back office support going to be? Are we going to combine locations, you know, are we both in Charlotte and we're going to be able to combine locations? You know, there's a lot of strategic savings opportunities when you can combine locations, combine. Uh, staff look at, we use the same software so we don't have to pay the fees twice anymore. All of those sorts of things are really important to do your due diligence on, not just looking at 3 years' worth of tax returns and 3 years of financials, which of course you definitely want to do and spend a lot of time on that and speak with your banker and your CPA and make sure that that you're getting the right value in this acquisition. But you've got, but beyond that you have to look deeper and say what are we going to do with this business? Are we going to be able to You know, take a $500,000 business and turn it into a million dollars in a few years by adding those core clients to our product base, or are we going to be able to cross sell them some of the additional services that we already offer and trying to line up that process and how you're going to integrate them are, are very important because you don't wanna, you know, just focus on financial due diligence and then you close the transaction, the bank loans you the money, and you, you never really thought about integration and so the integration process from day one goes very poorly. Great point. So 1st, 1st, do you like, do you like what you see? How's the culture? Is it going to be a good people fit because it's not it's gonna be miserable. It's gonna be a bad marriage right out of the gate. Second, technology, how is it all going to fit together? How are the pieces of the puzzle going to fit together? And are there efficiencies that are going to make even more profits? That's what the smart buyers look for, right? Is how do we, how do we take what they do integrate it into what we do, maybe, maybe replace a couple people that were overlapping. meld our systems together and gain efficiencies. That's great, great. That's right. And and in some cases those numbers can be substantial. I mean, if you're in the same market in the same industries, those numbers can be substantial. The savings can be significant for people. I mean they sometimes can add 10 to 30% to the bottom line of the company they're acquiring. Yeah, an example, I just had a company that wanted to buy another company in the same industry, and they found that that other company was paying about 3 times the workers' comp costs that the acquiring company was paying. So there would be built-in efficiencies right there that were significant based on the number of workers. So that's just one example, right? Yeah, that's a great example. It is and, and, and IT costs and infrastructure and overhead and two rents and all of those things really add up because when you look at your costs, some of those costs are duplicative and, and they're big numbers for small companies. Great information. We're, we're running short on time, John, but I want to give you a chance to talk about your book and uh cracking the code. What's it about? Why should people buy it and, and what will they learn? Sure, the book was written. I didn't, I couldn't find anything out there on small business and how to acquire other companies. That was really what it was written for was for the small business owner looking for alternative growth strategies. There's certainly things in there for the seller as well, but it was written was written for the purpose of informing small businesses that there's something else out there besides just hiring the next salesperson or growing the next niche, and you can have substantial growth, whether that's 25% or 200% by acquiring another company in your industry. And how to do it and so I really tried to lay out a blueprint in really simplistic terms. I like to say it's a sort of thing you can read on a 2, 2.5 hour flight and be able to actually implement 90% of it yourself. That's what our listeners need is great ideas quickly delivered and succinctly. And again, alternative strategies. You hear the same old stuff out there about, you know, increasing sales, whatever, but there are alternative strategies that help get you over the wall and you need to listen in on expertise from people like John Bligh. John, what's the best way for people to get in touch with you? Sure, absolutely, uh, you can visit us at our website www.lbbahs.com or you can email me at johnBli@lbbahs.com. Also, I'm on Twitter and LinkedIn, uh, so you can look me up John Bligh is my handle. I'll certainly be doing that. I look forward to reading the book and, and remember, if you're a, a business coordinator for a visage group or another business owner type of a group, John is available to speak, and you can tell it would be a fascinating discussion for business owners about how to really grow their business and open their eyes to a lot of things that are going on out there today. Great topic. Well, well explained, John, thanks so much for joining us again. You're welcome back anytime, my friend. Thanks, Bill. I really appreciate being on the show again. We're gonna take a short break, we'll be right back after this, so please stay with us. Business owners, if you came back from lunch and there was a resignation letter on your desk, which employee would you really, really not want it to be from? What are you doing to prevent this from happening? At Exit and Retirement Strategies, we design plans that attract, motivate, and retain key employees. For a free consultation, called Bill Black, the exit coach at 866-370-3774. Call today. Just thinking about what will happen to your business if you're gone keep you awake at night? Will you get the price you need from your business to carry you through retirement? The BEI Network of Exit Planning Professions is the world's leading advisor network with the power to help business owners transition out of business on their own timeline and terms. Ask your most trusted advisor to create a BEI plan for you, or visit us at exitplanning.com. That's exitplanning.com. Thank you for listening to Exit Coach Radio. This podcast is sponsored by TalkSpace. 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