AM&AA Winter Conference 2016 - Important Trends on Banking: How Bankers Approach the Sell

We wanted to talk about sell-side investment banking and some of the trends that are going on in the market today. It seems like valuations are up, things are exciting. We're not sure if the market's really topped off or not. But we're trying to find more opportunities. Today I've got a panel here that I'd like to introduce. Before I get to them, I'll tell you guys a little bit about myself. Symmetrical Investments is out of Philadelphia. We do sell-side investment banking, and we also do principal investing, and the majority of our work is with business owners, and it's getting transactions done. So they'd asked me to come here and do this panel today because A lot of the conference has gotten into value growth, and that's a positive thing, but the AM&A was started based upon transactions. So we wanted to bring transactions here for you folks, and we wanted to get deals out there for the market. So before we keep going here, I've got some questions, and I wanted to start down here at the end. And Brent, maybe you could introduce yourself and flow right through.

Sure.

My name is Brent Rippey. I am the managing director at RKCA. We're a middle market investment bank and merchant bank. and a broker-dealer that directly invests in a number of deals.

So Stephen Silverman, the firm is Kings Point based in Houston, has had a very successful 11-year run with prior firm Dornmayhew Capital Advisors. I have an ex-partner on the panel here with me, Claudio Collado, and ended up going, going out solo to provide provide a lot more flexible solutions to our entrepreneurs and be able to assist on a different stage of the cycle of the company, from raising some capital, folks that might have great thesis but might not be ready to go to market. And so we are up and running as Kings Point. We're going to be doing sell-side, buy-side, and some cap raise support.

Anthony Citrollo, managing partner of Strategic M&A Advisors. I'm a CPA and we are, I'd say, 70% sell side, 30% buy side, typically $5 to $20 million in enterprise value and located in New York.

Good afternoon. My name is Claudio Collado. As Stephen indicated, I'm managing director of Dornmayr Capital Advisors. We're a middle market investment bank with offices in New York, Detroit and Houston. We typically facilitate transactions from $10 to $500 million, and we focus on industrials, energy, chemicals, business services, and healthcare.

Thank you, guys. To start out, Claudio, I'll stick with you for a second. When we were talking about putting this panel together, we started talking about valuation, and we all have some different views on valuation in different markets, but How do you see valuation today versus a few years ago?

Well, I think, you know, it's certainly without question that we can say that 2014 and 2015 have rather been exciting from the standpoint of an investment banker, but certainly also from the standpoint of sellers. I think valuations have certainly been increasing and certainly facilitated by favorable overall market conditions, I would say. The challenges, I think, as we go into 2016 and kind of looking obviously at market trends that certainly may influence valuations going forward, there are certainly some concerns. I think we can certainly, or at least get a sense that valuations from a market perspective are starting to be on a decline. However, the challenge certainly that we still face in the marketplace today, particularly as we approach business owners or particularly as we look at new opportunities, is dealing with their expectations, which clearly have been unchanged, possibly probably influenced and probably even increased expectations today. So I do, I do think going into 2016 there's going to be a gap in that we will need to deal with expectations by sellers and ultimately the market trends that may negatively influence those valuations.

Yep, and we talk about expectations, and Stephen, one of the things that you and I speak about quite often is the expectations of business owners and what type of value that they think their business is worth, potentially versus what fair market value is worth. Do you think that based upon what Claudio spoke about and where valuations are at, people expect something greater? And if so, how do you deal with that?

The key is, as Claudia alluded to, expectations. And you've got to obviously deal with it on the front side. You've got the country club conversation where somebody sold for a 10 or 12 times multiple, but they don't get in the details of what was that 10 or 12 times. Was it bought at a low and perhaps that's why the multiple is higher? We had a deal that was an 11.2 multiple and the buyer was sort of at the finishing line with us. Getting very upset, and we said, look, you know, you are paying an 11.2 on the TTM, but as we all agreed, it's a 4.5 times a 3-year average. So you can clearly slice and dice the valuations in different ways, but at the end of the day, it's a function of what the marketplace is going to bear. And so as a seller asked me what's the expected valuation, I typically say you're going to have somewhere between a 3.5 to a 7, short of, you know, special things happening in your space. Or unique differentiating items in your company. And obviously, you know, I'll give them some guidance within that range, but I try to highlight a pretty broad range. At the end of the day, the market's gonna speak, and at the same time, the market is ever-changing. It's a fluid, dynamic marketplace. Obviously, we're in Houston, the energy sector was obviously, uh, you know, pretty, pretty hot. And obviously now, whether you want to take a 2 or 3 or 5 times, what's the number? And so basically, you know, deals are not getting done in that space right now. So let them know that obviously it's a function of the marketplace, it's a function of timing. And at the end of the day, it's not so much the multiple, it's the dollars that end up in your pocket at the end of the day.

And now that we spoke about the dollars that are in your pocket and we spoke about their expectations, you know, when we spoke about this before, Brent, you talked about a couple of different things and it was really about process and what differentiates your group versus another group.

Sure. And I think that's really where we try to drive our discussion is, you know, We're not, you know, evaluators. We're not in the business of purporting value. It's really, like I said, the market to determine it. And so as we're pitching clients, as we're talking to clients, we're really heavily focused on, you know, our processes, what we're— how we're driving value inside of this speed of the acquisition, and, you know, the— how we run our deals. And so when we're selling on that basis, I think it's a much more productive discussion on You know, how do we really increase value in the company versus us being a purporter of what the value should be or might be?

And that's a good point, I think. And Anthony, to our continued discussion here, we talk about preliminary valuation and trying to put this range of value on a business before you start the process. Now, how do you guys see things when you, when you meet a seller and before you actually go to market?

We try to kind of find out where their head's at for the most part. And I think back to one of the points we talked about before about expectations. The person who's the business owner, let's say it's a family-owned business, is typically listening to a few folks. They may be listening to their financial planner, they may be listening to their CPA, their attorney, they may be listening to their brother-in-law Jim, you know, they could be listening to almost anyone. And sometimes we have a situation now, we have a technology company which is probably really a 4 to 5 multiple, and some of the people around her said that, you know, really it's a 7 or 8 multiple for a technology firm, and they really have no basis in fact. So what we try to do is say, listen, let's do this. Let's set the expectation by looking at what the value is of your business. Let's look at your financials. Look at, you know, perhaps get evaluation so we have some kind of basis to talk about. And we let them know there's 3 things I think that the buyer— what the buyer is going to look at. The first thing we tell them is we're going to look at net cash flow typically. The second thing, they're going to assess the risk in your business. They're going to see where you are, what kind of risk factors are there. You know, sometimes the owner is 74 years old and drives the whole process. Sometimes there's a management team, sometimes there's not. The third thing we look and say, you know, is your business scalable? So we try to set in their mind that perhaps their business is not necessarily as— we don't want to knock them down, but oftentimes, you know, we always subscribe to the fact that the policy that if you ask the business owner what their business is worth, sometimes we feel like we should cut it in half, you know, and, but we try to make sure that they're based in reality.

Yep, yep.

I was gonna just add, Chad, one big item is that we like to counsel our clients with is, you know, where you are on the curve and what does your curve look like, and as we like to say, it's the right buyer will pay the right price when the timing's right. And so obviously you want to be on the way up, you want to have some exciting news, you want to have some runway that folks can see that valuation that your client's hoping for.

Open question.

Go ahead.

I apologize. You know, just to Anthony's point, I think it's critical, as I said, as I started out indicating about expectations, but Anthony brought up a good point. I think you got to look at the underlying fundamentals of the business and ultimately how the business owner draws upon in terms of creating his or her expectations in that case. And by saying that, you know, we can certainly understand if there are business cases or they have a pretty good handle on their business on the market. I think more often than not, we tend to get terms of feedback and their expectations that they're a little bit more closer to the market. It's typically the ones that, you know, may not necessarily look at their fundamentals probably as the market would look at. Obviously, there are some emotions involved, as one could expect, as we look at the middle market. So I think that's certainly a point that Anthony made that's certainly critical to understand. And I guess the challenge for us as we approach, you know, these prospects and trying to support or trying to offer our assistance and take them to market, is ultimately to try to gap or bridge those expectations that may or may not necessarily reflect markets.

Good.

Good.

Maybe we could start at the end and, Brent, come down this way. You know, how do you guys classify a good assignment? Is it based upon valuation, or is it the readiness, or, you know, for you guys, what's a good assignment? Maybe we could go down the line here and talk about that.

You know, I don't know that it's dependent on one thing. There's obviously a lot of factors that lead into that. That question. And, you know, I think Steve's point is well taken in the fact that, you know, having the right company at the right time with the right owner who's looking at the, you know, the transaction from a realistic standpoint and, you know, wanting to really be vested in transitioning the company is the companies we obviously love to work for. And so, you know, there's situations where people are somewhat ambiguous with regards to how they want to run their process or whether they even really want to be in a process and they're kind of fishing. You know, those are transactions that are obviously very tough to do because, you know, you've got to hit a certain expectation to certainly close a deal. And you might say that's the case with any buyer or any seller. But needless to say, we think that, you know, just having a seller who's really, really vested in the process, really, really driving at the goal is, is I'd like to say that the stars are aligned for us to go to market.

Back to the timing and where they are, also where the marketplace is and how they're going to be perceived. And you obviously, you know, want to align expectations with regards to value. But, you know, as I say, when the stars are aligned, then it's time to go. And, you know, at the end of the day, we go out to market. You don't have to take the best deal or any deal that we're currently looking at because it's a fluid process. Your business is going to be ebbing and flowing along the way, and we might take a timeout. We might revisit it 6 months or a year later. And back to the timing, I think that's the way you kind of align expectations. And you obviously want to go out with a company that's going to be well received in the marketplace. And so take the time to, you know, get the stars aligned.

I think part of it's a mindset in terms of where the owner is in terms of— sometimes we'll ask them, what do you see yourself doing in the next few years? And if they kind of haven't thought about that, then we probably think sometimes they're not ready because we've all faced cases where you have seller's remorse, where someone goes to market and really is not really interested in necessarily exiting. So I think we try to get into their head a little bit after looking at the financial and financial qualifications and the management structure, assuming all of those metrics are there, then it's really about where the management, the existing owner, assuming they're active ownership, active management, sees themselves and what they're doing, if they're mentally ready. And so sometimes it's not a good assignment because either they're not ready or perhaps it's someone that we don't think we can work with. So I think unfortunately many of us probably turn down a lot of assignments, because they don't really fit into the— not just the box, they just don't fit into a possibility of success. If we don't really think we're going to have success and the outcome is going to be good, we probably think that it probably wouldn't be a great assignment.

I think from our perspective, certainly, I think some of the key factors have certainly already been touched by the panelists here. Certainly the decision. That we ultimately approach someone, you hope and expect that there is already a decision that is set. They had given it some thought. They understand obviously what the next steps would be in terms of them effectively transitioning out of a business. So that would certainly be very important. You know, the irony is, is you look at a lot of the activities activity that's going on right now, and as we're basically brought in to provide guidance or even to assist if the timing is right for a company to go to market, if I think back to, you know, 2 years ago or maybe even further behind, a few more years ago, we typically got invited into a process, meaning that we weren't the only investment bank that was invited by this by the business or by management team to kind of make that assessment and it was really very competitive. I mean, we knew we were one of the investment banks along with 3, 4 others. So from that standpoint, it was a completely different approach because effectively you had to establish obviously what your competitive advantages were compared to some of the other investment banks. Whereas today, more often than not, you get the opportunity to sit down and they're starting to include you a little bit more into that process and they're trying to understand what the market dynamics are and trying to be a little bit more strategic in terms of making that decision. So we kind of see that certainly a little bit of a change in terms of how the process as a whole works and in terms of how you can position yourself as an investment bank to be successful and ultimately securing that possible mandate, more often than not, given where market conditions are, becomes patience. And I mean that because, again, I think that overall middle market, obviously, sophistication has been significantly enhanced and greater. So from that standpoint, patience is certainly one, and other factors as we talked about, industry knowledge and knowing where to place it, and again, trying to maximize the value alongside other conditions that may be important for a seller.

We talk about differentiation and what differentiates you in a type of process like that, and earlier today we had talked about some preliminary due diligence on the business or reverse due diligence. Are you guys seeing that very often, or is that something that's not quite as common yet, or does anyone see that?

It's certainly a trending tool that's being used in more and more deals that we get involved with. But I think, you know, at times it's hard to sell some of the, you know, lower— especially lower middle market business owners on, you know, going through and paying for that full due diligence packet prior to— as a part of the sales process. I mean, a lot of times they're trying to force that onto the buyer and say, okay, well, that's a problem that they got to resolve. But I You know, I mean, it's— I think more and more of them are starting to realize that, you know, speed of the process is, you know, so critical that they're saying, hey, you know, if it's— if I've got to put a packet together and put, you know, some money down to make that packet really effective, then, you know, that's money well spent.

For us, we typically— back to Anthony's point, you know, obviously we want to align ourselves with their success. If we're not going to be successful, then there's really no point in, you know, trying to entertain the endeavor. And so from our perspective, it just comes down to looking at the fit and making sure that there's a, you know, a good chance of success from both sides.

You know, I think when you talk about due diligence, and most folks have not gone through the process ever, so they really don't know what to expect. So what we try to do is give them kind of a laundry list of what the expectations will be from a buyer of you, the seller, in terms of what kind of due diligence they're going to do. This way, if there is— there are different steps necessary to get that business ready. We realize that— that they realize that these are really value drivers and that ultimately you may shortchange yourself or put yourself in a bad position or cause yourself a lot of expense if maybe we don't go through a preliminary kind of due diligence process. And most folks, you know, they're always worried about how much money they're going to spend, but, you know, if we can hopefully show the value proposition on the back end, a lot of times they'll move forward a little bit, you know, kind of meet somewhere halfway so that we have a marketable business.

Yeah, in terms of, I guess, as we approach it from the standpoint We actually make it part of, if you want to call it, of our pitch and ultimately trying to understand obviously what the value drivers would be. Typically, I mean, the expectation is there are obviously adjustments which could be significant for purposes of even garner an estimate or garner an assessment, if you will, as to what the valuation is. So we actually incorporate the concept of seller due diligence into, into our presentation or into our pitch, if you will, simply because, again, the market conditions and ultimately trying to fulfill expectations. We want to be as thorough and diligent as possible to understand what the true value is. And so this goes back to the statement we made earlier about the fundamentals. So given my background and, you know, some of the deals that that we have done to be cross-border. You know, in Europe, seller's due diligence is basically part and partial of an investment banking— of an investment bank planning a process. And you typically try to get one of the established accounting firms or, you know, Tier 1, Tier 2 accounting firms, if you will, and it becomes part of the process. And so as such, the way that they ultimately then take it to market is ultimately in support of hopefully vetting and evaluating letters of intent or even offers that are coming to ultimately evaluate. So we're trying to kind of leverage that a little bit, understanding how that process works. So we definitely make the suggestion before making a final determination as to what the value is to undergo a seller-type due diligence, with the caveat that we would still disclose, obviously, because of a lot of reasons, I guess, in the US. One not being an established process in and of its own. The other one probably, quite frankly, being liability concerns that you won't use this seller due diligence, if you will, for actively marketing the company afterwards. But it at least gives you an indication and puts you a little bit ahead of the game when, when you anticipate that you're gonna have— that you're gonna run the process and you have a couple of buyers or 3 buyers coming in and ultimately doing due diligence. So there is a level of knowledge that you're trying to garner, and we actually consider that to be very pertinent at this point.

We continue to talk about innovation in the companies that we represent, and we're looking for scalable businesses. What about, what about investment banking? Talk about innovation and technology. Things have really changed in the past couple of years. Have you guys seen any new technology that, or any kind of new software that you've been using that you wouldn't have otherwise used? Maybe 5 years ago, or something that would change your, your processes?

You know, one piece of technology is obviously the fact that we're connected globally. For us, we happen to use Capital IQ, which is a strong product. Not plugging Cap IQ necessarily, but they have, they have good coverage. And I guess it just helps you get there faster to find the right party, to make sure you're turning over the right stones. And technology has clearly made it a lot more efficient to, you know, handle all those communications and discussions and find the right people to have those discussions with.

And I think—

sorry, you got obviously LinkedIn too and some various other sources where you can obviously, you know, figure out the landscape pretty quickly.

Sorry, Rick.

And I think more and more, this is something we're constantly raking over and debating inside of our firm is that, you know, what do we want to own and what do we want to outsource? I mean, with the way technology is set up these days, it's, you know, you can leverage a lot of resources outside of the firm to handle non-critical, you know, applications or initiatives for a set, set deal and, and really address the critical ones yourself. And so it really allows you to leverage yourself, you know, by multiple if you can effectively set up the different components in a proper way that, you know, certainly satisfies the need, but, you know, you don't have to deal with it directly and run it directly.

I think years ago, I mean, we would have kind of a binder full of material from financial statements to all sorts of material that we would gather, and I have a partner who still likes to gather things that way and not necessarily make it electronic, We've kind of gone in that direction, I think. The big change is because of this, so much web-based, web-based applications, web-based organizations out there, it's made it a little bit easy for us to really connect buyers with our opportunities. You know, one of the things we ask when we start with any client is we look in the mirror and we say, who is the buyer? And we ask the seller the same question. We say, who is the buyer for your business? And we're just curious for that answer. But the web has kind of helped us find some of those. And of course, we use, you know, using a CRM program and having ShareFile and all that, all those kind of programs have made kind of our business a lot more accountable in terms of that. So, you know, my accounting mind likes that. Good.

You know, information is critical. I think information is critical as you prepare your pitch. Pitch. I think it's critical as you obviously look to establish a valuation range for your clients. So as such, obviously, you know, the way that we are approaching it probably more now than we would have done in the past, we actually are dedicating and doing a little bit more research in terms of offerings that are out there by various service providers. I won't name one specifically here. I think Steven mentioned certainly one in that respect, but there is obviously continuously improvement in terms of these service offerings via these providers. So from a management standpoint or administrative perspective, you know, I do find myself actually placing a lot more emphasis on valuing and assessing what these new service offerings may provide in terms of advantages or even just to supplement, I think, overall our process. So we do think it is certainly critical. It is a changing environment. Obviously, it impacts and affects a variety of industries. And, you know, I think even at the State of the Union address, you know, it was basically denoted that there is a fundamental change that needs to be at least considered. Considered, and ultimately you can support it and ultimately try to adapt and ultimately find a way how you can incorporate into your process, or ultimately, you know, you risk the fact that you may not have all the critical data at the— to your avail that, you know, may effectively determine if you're going to get an engagement or not.

That's great. It's interesting the way technology has changed, and we talked about this before So a lot of groups are really outsourcing anything that's not value-added, and value-added being meeting with business owners, meeting with trusted advisors that are providing referrals, and really doing anything that's deal-related— speaking to buyers, negotiating, things of that sort. So if we go backwards and we talk about this, the way that we're getting business, we're going in and there is a process and there's multiple folks there. We've had a couple debates about this. On our calls. Do you guys think that it's better to be a generalist going into the seller meeting, or is it better to be a specialist? And how do you guys operate your businesses or your pitch?

You know, I think each party, you know, whether you're a generalist or a specialist, you're probably going to make— you can probably make a pretty compelling argument one way or another as to why you you have chosen your set path. We are generalists, but, and usually when we're going in, we're talking to clients, we're talking about, you know, the potential conflict of if you've got a really, really deep specialist that's really solely focused in a certain area, who are they beholden to if they're so tightly connected to the heavy strategics involved in a particular industry. And, and the other question is, is are they looking outside the box and are they, you know, evaluating a broader, you know, set of buyers to a potential deal? Are they so focused on their kind of, you know, their small focus that they're missing a whole universe of people out there? And so we're, you know, I mean, as we're, you know, going in and pitching that, I mean, we're constantly, you You know, trying to basically sell on service and sell on the fact that, you know, we certainly have to have knowledge of the business, but, you know, that sometimes a specialist isn't, you know, may not be the right option.

Our firm actually employs the same approach. We're generalists even though we're in the energy capital of Houston, and, you know, 30%, 40% of the deals we touch are in the energy space. I'm not an energy expert, but I've I've done lots of deals in the energy space, and at the end of the day, every business is different, but every business is the same. Every business is chasing a profit. They've all got different models. They've all got different risk factors, and obviously once you get in there, you can quickly figure out whether it's contractual, it's environmental, it's employees. And so at the end of the day, we prefer that generalist approach for similar reasons that Brent alluded to. We don't want to get too too entrenched in one vertical and sort of trapped in there, if you will?

I think in a lot of ways, you know, we all want to be generalists because we really don't want to turn down any assignments. But so we, for years, that's the way we operated until we have a couple of folks who work for us now who have had specific vertical experience, so they are penetrating those specific areas because they have that expertise, one person in healthcare. Know the person in insurance. But when we approach any other assignment, if it is a general type of assignment and maybe perhaps we don't have expertise, we try to be as thorough as possible in terms of researching what the industry is about. Maybe a First Research report or IBIS report. This way we kind of get our arms around what's going on in that specific industry. And I think it sends a message to the potential client that even though we may not be experts in that area, that we're We're smart enough to know where to get that information and smart enough to know who the target market is for the acquisition. And I think for the most part they're satisfied. Occasionally you run into somebody who insists they have to have somebody in that specific industry who kind of knows the industry, and in which case, you know, it's probably not— we may not be the right guys.

So from our perspective, I guess, and not to be overly redundant, obviously, with what has already been stated. I mean, we're actually starting to take the approach of becoming somewhat more specialists. It goes without saying, in order to— as a salesperson, or in an effort to be opportunistic, of course you want to be a generalist. And, you know, I will be the first one to tell you we're not going to turn down an opportunity in the technology sector if we're being asked to participate as part of a pitch. I think that goes without without saying. But the reality of it is, and I think that's at least some of the thoughts that we've been given strategically and how we want to position ourselves in the marketplace, you know, the reality is with everything else, as you look at a business, it's a matter of to be efficient, to be effective, and to be ultimately successful to accommodate whatever the expectations of your underlying client may be. And that doesn't doesn't have to necessarily just be valuation. I mean, the complexities in terms of, you know, obviously businesses today, and I think some of the tie-ins that business owners bring, you know, there is a lot more at stake even for a seller rather than just getting the value and basically closing a transaction and moving on with his life. I think there is legacy that are certainly matters of concern. I think employees, structures, and so those are things I guess that need to be taken into consideration. So as a specialist, from our perspective, we do believe that we can bring in this industry knowledge. And besides, we do think that we would have, quote unquote, that target list that obviously would consist of strategic but also financial investors, and then we typically take another step and take pride or emphasize the fact that we may have already transacted with obviously a number of these companies or maybe strategic or financial that are on our target list. And I think it becomes critical because, again, you're trying to maximize and be as efficient as possible. And so if there's a relationship that's already existed, and I think that's— that kind of requires for you to be somewhat of a specialists to be kind of more focused. I think that certainly brings the advantage. But coming back, you know, if we are invited to, you know, pitch a little bit outside of our comfort zone, as I said, on the technology deal, you know, we will certainly participate. And I think as Anthony said, you know, our emphasis won't lie as much in terms of how we can add value given our industry expertise, knowledge, or experience in as such, but it's certainly going to emphasize more on the process and how we can separate ourselves from, I guess, our peers and trying to just, you know, outline the advantages in that regard. But admittedly, if I would have to be honest, we're not winning a lot of those. I mean, that's the reality. I mean, if I know there is an investment bank and obviously, you know, you have a lot of those already well established, that have done a number of deals in the technology sector, you know, the chances of us winning it, unless, you know, the management team and owner truly, you know, gets that sense of a strong relationship and that you are very capable in administering and managing the process and really becoming their quarterback, you know, the odds are very low.

[Speaker:DAVID_SHERMAN] So now we talked about getting a client, and now we've got a client and the sales go up, the sales go down, the earnings go up, the earnings go down. Stephen, we talked before about staying aligned with the seller and being aligned with the seller at the get-go, and that's part of the pitch. What happens when things are good versus when things are bad, and how does that affect your process?

Well, it's not a vacuum, clearly, and I mentioned energy space a couple of times now. We went out to market, a new firm with a client that followed us, and it was a client in the, in the energy sector, and they were, they were just growing by leaps and bounds in the midstream space, and they weren't, and they weren't slowing down at all through 2015. And lo and behold, right when we had our party showing up, they, they did slow down slightly from a pretty stratospheric growth curve. But at the end of the day, you know, whether it's the initial meetings, understanding the business and where the risks are throughout the process, you got to be understanding where the business's temperature is and what is, and what is coming down the pike. And so in this, in this business, we had some meetings on our process timeline in December, and our client actually came in and before these meetings said, listen, we're considering a lower valuation expectation than we had mentioned we were looking for on the front side. And I said, well, I'm delighted to hear that. Because at the end of the day, we want to get the right deal done for you. And we're going to have these meetings and we'll see what these guys have to say. But at the end of the day, once you start visiting with these parties— strategic, financial— you start to figure out where the fit is and where the synergies are and where the value is. And so we had the meetings. We're going to have more meetings at the end of this month, and they're going to have some projects hit. And so the timing is going to align for us to have a deal, hopefully this summer.

We talked about quality of earnings and we talked about understanding the business. Are you guys seeing things a little bit differently than before, whereas maybe it was the most recent year or the past 3 years as an average? What we've talked about is things now are TTM. How are you doing today? What's going on today versus what it was historically? Is that a new trend that you're seeing with buyers and how does that affect your business?

I think, you know, Just to kind of take a step back and to answer your prior question, you know, one of the things that we typically do in trying to anticipate obviously changes in the business performance or in changes in the financial metrics of the— as you're running the process, because if you're trying to maximize value, you're looking at a process that's anywhere from 2 to 6 months. So it's certainly a very extensive time period you're trying to cover. So we're actually trying to anticipate that, and as part of our pitch, if you will, as we put together, you know, the valuation range based on the various underlying methods, we actually take it a step further. We provide effectively as an add-on in every pitch there too a sensitivity analysis. And what the sensitivity analysis does, it basically gives the client a sense, if my revenues grow by whatever growth rate you want to assume. We typically use 2 to 4, and basically you take it all the way to 6%. We sensitize ultimately valuations as well on changes in gross profit, which inherently in some industries more than others would impact ultimately the underlying EBITDA. So we're trying to anticipate that. We're trying to be, you know, we're trying to give them basically this overview where they have a sensitivity analysis so that we can have this discussion on the go-in in terms of what's going to happen to value, or at least what we anticipated to happen. I mean, more often than not, and depending how the deal and the transaction is negotiated, it certainly typically depends on what the variables were and the key reasons why financial performance was either met or not. And so I think that is ultimately the detriment factor as to how to deal with it in final negotiations and how it impacts valuation. If it's a one-time effect and you could certainly demonstrate such, then, you know, you should basically be able to justify ultimately valuations to stay where they were in the end.

And I was going to just add, you know, at the end of the day, the art of the deal is that everything is negotiable. The 3-year average, the TTM, maybe you have a forward 12 months of earnings. We had a deal where I mentioned, you know, making sure you stay in your client's business, tour the facility, see what's happening. This was a manufacturer and we're 2 weeks from closing and he's got a very fancy machine on the floor. And I started asking about this fancy machine. It turns out it's a $1.2 million machine that he's paid for and he spent another $300,000 on top of that to get it in place. And this machine is obviously producing no EBITDA, but it's soon to produce EBITDA for the recipient. So you then enter the discussion of what's fair here. And as I said, I mean, everything has to be negotiable because at the end of the day, he was going to take the machine with him if we didn't find a way to cross that bridge.

I think Steve hit the nail on the head, which is, you know, we as advisors are— you're always looking to try to make a, you know, use historicals in whatever fashion they're in to make a case for what the future cash flows of the business are going to be that somebody's going to buy. And so, I mean, it's pretty— it gets down ultimately to be pretty simple, which is, you know, how am I making the best case for my companies? And, you know, based off of history, to make a presentation, a sales presentation to a prospective buyer as to why that's going to continue and what they can possibly do with it.

Chad, I think you were talking— your question too was about what, what what is more impactful, I guess, or what folks are looking at more often. I mean, we find, of course, the most recent financials are the most important, and I think sometimes you just have to, I think, you know, assume that the selling entity is, you know, of course, not been through the process, as I said before, but, you know, we try to tell them that make sure you don't take your eye off the ball. This way you're still in play, and What we try to do too is help make sure that the financials are monitored on a regular basis. This way we have an idea, there's no surprises. We just closed the transaction where right before the closing, the largest customer which accounted for 26% of the business, which was being structured as an earnout, and the seller and buyer who were old friends, believe it or not, were talking, and the seller told the buyer, well, you know, I wouldn't expect a whole a lot of volume from this customer in the first 6 months. You know, the guy almost had a heart attack, I think, when we did that. And— but it was structured as part of the earnout, so we had to remind the buyer that that's the case. But I think we have to have some conversations with our clients about those kind of things. And also, I think it's a function of you have to be flexible. I don't think most folks can predict exactly what their numbers are going to be next month. And if they can, that's a terrific business and I probably would take those assignments all day long.

And we talk about differentiating ourselves, but how do we get that business? Do we go out and do we search for sellers direct, or is it all referral? Or Claudio, your firm's a little bit different because you're owned by an accounting firm versus— everyone's a little bit different. So, you know, how do you guys, how do you guys get your leads? You know, how do you, how do you secure those opportunities?

You know, I think we're actively calling on financial advisor networks to hopefully solicit business because we're hoping that if they're smart, they're actively engaging with their clients to sit there and say, okay, you've got a huge part of your net worth inside of an asset here, and what are you going to do with it? And let's plan around it. And so we've started setting up consultative services on our front end that run out, you know, maybe as long as 5 years prior to sale. And what it is, is basically we're kind of quarterbacking resources that we've used inside companies that we own that have had successful outcomes and trying to marshal those into opportunities as needed, where needed, and building that relationship on the front end where it's not such a hard sell on, are you ready to sell your business? Let me, you know, let me do it for you, which is always a sensitive topic with, you know, business owners who built a business over their lifetime.

When we get invited into a bake-off, as we like to say, with 12 firms, we'll certainly put our best foot forward, but that's probably not the best fit for us. Somebody shopping purely on price, not on fit, not on aligned expectations, that's It's much more of a personal relationship. It's a very important decision for them, high level of trust, and with that comes, you know, obviously referral network that can introduce you and highlight that you've been very successful and you're the right party for the deal. And those are the kind of deals that we like to get introduced to, whether there's 1 or 2 or 3 parties that are all highly recommended, and then you can then have an opportunity to differentiate yourself as opposed to beating yourself down on price?

I think we have a few different— I guess we try to cast a wider net. I mean, we certainly get referrals from financial planners, CPAs, attorneys. Those probably would be the 3 centers of influence that we work with existing clients, I think. And, you know, we also— we do some general marketing. I mean, we'll do, for instance, after we have a closed transaction, we'll do a tombstone on it and make sure it goes out to that industry. We'll have some web presence as well. I'm still amazed at the calls we get from the family-owned business that calls us directly off the web without a referral and we actually get the engagement. It just, it kind of blows my mind. So we kind of, we've allocated some funds to actually marketing that way. The problem you have with it is that you get this bucket full of stuff and probably 90% of it's not really worth anything. So you just, you got to be willing to go, you know, kind of funnel through it, and our assistants do that. So I think, you know, our existing satisfied clients probably are great referral sources.

You know, as you mentioned, as you posed the question, Chad, we're probably a little bit different because one, we're certainly owned and affiliated with a large CPA CPA firm that has offices now throughout the United States. You know, the way I look at it, candidly, and I think the— I guess the inherent assumption is that, you know, we basically have an ability to draw prospects from the CPA practice, and that's certainly the case. I would probably venture to say it's starting to become more such the case than we probably seen it 5 years ago. But the reality of it is, you know, there's certainly a blessing and a curse, I guess, if you want to say, to be part of a CPA firm. So as with everything in life, you know, there's advantages and disadvantages that you've got to be mindful of. You know, there's independence issues on the CPA side. You know, you obviously have an annuity business effectively for some of these partners that have been generating revenue for them and for the firm for many, many years. And, you know, for that to kind of be disrupted certainly becomes a matter of at least a couple of discussions and a couple of quantitative assessments, if you will, which one to prefer. But, you know, just to kind of not to be repetitive, a nice anecdote that I like to say and which we were able to garner, I think it's really personal relationships. I mean, You know, we all have been in this industry for many, many years. There are certainly deals that you have done. There's refer— there's relationships that you build. And we're starting to, on the other side, because we have never really relied entirely on our CPA practice for that matter, I'm really trying to build connections obviously with C-level management team. And the anecdote is basically I ran into the president of automotive supplier which was generating about $150 million revenue. They were located in the U.S. and I ran into him in a grocery store on a Sunday. And, you know, I just— we hadn't talked in a long time. I knew from just from his past and we had assisted and worked with him in the past that he's certainly acquisitive and always looks at strategy from that standpoint. And upon me prompting the question what he was looking to to do on the strategic side. He's like, you know what, we're looking at a significant deal in Europe. You would be the right guy. Give me a call tomorrow. By the end of the week, we were basically retained and trying to acquire on their behalf an organization that was in insolvency in Germany, had 13 plants all over Europe, and a combined revenue of about €450 million. So I kind of reflected on that and said, wow, what would have happened if I wouldn't have ran into the President, which I had a very good relationship with, we probably may not have gotten the deal. They already had locked down and already retained a law firm to kind of give them guidance as to the insolvency process overseas itself. So our efforts and certainly we look to kind of focus a lot more on C-level management team and trying to do those relationships. One thing I guess I'm going to do, I guess some commercial here, you know, LinkedIn is a very good tool. It's something that I probably underestimated for the lengthiest time. I've been on LinkedIn, I don't know how many years now, and it wasn't really until again that occurrence happened, but more importantly until I realized how, how efficient it can be to track down relationships that you had in the past. And to kind of understand, you know, ultimately to kind of reconnect with them and give an opportunity. The one thing I will point out though, you know, there's the ones that basically say you reach out to someone you've known from your prior past, they're obviously in a good C-level position at the moment. You hear the critics where they say, well, you reach out, you connect, and then you ask, can we exchange thoughts and can I tell you about my business? Interested to learn about your business. And there's critics that say, why would you do that? Well, I think I come to the realization that's what LinkedIn is. It's not a social platform. It's not to basically— it's not Facebook, right? I mean, you're not trying to create a— so you're not trying to reconnect just from a social perspective. It's really more tailored towards business. So we actually realize more often than not that people are more susceptible, and we're connecting with people that we have either transacted with, worked with, you know, many, many years ago, and it's becoming effective to staying in touch with those.

Now, we've seen in other panels that there haven't been a lot of questions, so I'd like you to get your questions ready before I ask this last question of the panel here. We talked about referrals. You're associated with the CPA firm. We talked about referrals from wealth advisors, attorneys, and the like. We talked about valuation and this explosion of valuation that If you went to the state of the market panel this morning, they said the valuation may be kind of leveling out. How do you manage the expectations of those folks that referred you the business that they're telling their seller, now's the time, it's at a peak? And how do you, how do you manage that relationship?

Well, so we, we have a couple evergreen topics, and a lot of times we're going in trying to educate them as much as we can so that way what what they're communicating to a prospective seller is accurate and is dovetailed with what we would otherwise tell them or try to set the expectation of. And so, you know, certainly, you know, a well-educated referral source goes a long way in making sure that, you know, you don't start out, you know, under the gun with regards to expectations.

You know, other than that, And it's like the age-old question about the stock market. We all want to sell at the high, but we hardly ever do. It's usually the inverse. And so, you know, it's impossible to time the absolute peak for your sector. You know, the stars might align that you get out before the high, but it's really very difficult to, you know, go back to a historical timeframe and say that those market conditions are still valid today. Educating your referral sources is key, but educating your client, even more key.

I think it depends on what the relationship is of the referral source with the person they referred. So, for instance, if it happens to be that person's financial planner, perhaps they would be involved, not involved in the process, but be alerted in terms of what is happening, as long as the client agrees. But I think once we have a referral that's in-house and we speak to the person, we try to find out what, you know, is it that person's attorney, for instance, and do they need to really know what the expected valuation of the business is? Do they really need to know anything other than the fact that we're dealing professionally with the referral and we're touching them on a regular basis and maybe we'll let them know when if in fact we have an engagement agreement signed and we start the marketing process. So I just think we'll take it on a one-by-one basis just to make sure, and make sure we clear it with the client in terms of how much information we release to the person who referred us the business.

You know, in terms of, I guess, from the standpoint, obviously, as you see market conditions currently, and I think we would probably all agree I agree that on the middle market you start to kind of get a sense that valuations are certainly tapering off. So from our standpoint, as we basically approach pitches or we're getting opportunities to get in front of new prospects, admittedly we see that as the single most critical aspect right now in terms of not only securing the transaction but ultimately trying to be successful in completing it thereafter. If elected, to obviously the satisfaction of the client because as every business, this is a cycle that's certainly dangerous for investment banks because of the fact that, you know, there is still some information asymmetry in the middle market. That's just the nature. So the skill set for anyone truly becomes effectively trying to anticipate where the market is is going to be, let's say, 3 to 6 months from now. You know, admittedly, my biggest concern is that we put out an evaluation range and, you know, the typical lag of credit market volatility, equity market volatility, you know, impacting the middle market, I guess, much more rapidly than it happened in the past. And what that ultimately means to the detriment is that you're positioning your client, the mandate for a sell engagement, and you find yourself that the market has turned on you rapidly. I think needless to say, it's certainly not a position that you want to be in. I'm not trying to explain, you know, ultimately to the client. So the question that you raised to me probably should be the single most critical aspect of every investment banker today going into securing a mandate. The nice thing is obviously these things on the middle market don't happen overnight and aren't as volatile as you see on the equity markets, but the reality is with the level of information that is out there and upon, you know, people's expectations either being influenced or changing by that information availability, it's bound to happens certainly in the middle market where you find yourself in the middle of a process and the valuations are tapered off and worst-case scenario completely implodes on you.

In putting the panel together and being on a panel like this, you know, the hope is that everyone can take home one tidbit of information that they can put into use in their practice. What questions do you guys have out of all the things that we've discussed? I tried to put a plug in there in the beginning so you guys would think of some questions.

We've got one?

Thank you.

So one of you made an interesting observation at the beginning of the presentation about EBITDA multiples, the averages of the last 3 years. And the one thing that I see over and over again, and we saw this in this morning's slides, is, you know, these multiples, but is there a definition underlying this work, for example, that GF Data does. Is it trailing 12 months? Is it the previous calendar year? Is it the average of the last 3 years? Or is it the current year budget? We have a company doing $25 million in EBITDA in 2015. Their budget is $30 million in '16. Obviously, we're trying to negotiate at the $30 million number. Their EBITDA was 12 in 2012.

Mm-hmm.

So this is, this is the country club sit around the table.

I sold my company for 11.2 times EBITDA.

Times what, right?

What is that?

Yeah.

Is anyone from GF Data in here? I wish I had the exact answer for you, but I'm sure we can link up with Graham or any of the GF Data guys after this because I don't know How— that's a great question. I don't know the answer to that.

Well, if I may attempt to kind of provide some guidance. I mean, trailing 12 months is becoming, I would say, the more pertinent concept when speaking of multiples. And I think as you speak with your peers, I think that's probably going to be inherently assumed. But in terms of, you know, in your case and in your scenario, I think this is really where the challenge— and this is really where investment bankers add value for their clients. It's basically understanding the fundamentals of the business. The scenario you mentioned, from my perspective, if you have booked business which ultimately supports— you've got the contract secured, it supports the revenue growth, you know, by $5 million year over year, I would certainly encourage you to attempt, obviously to incorporate those projections as part of your valuation because ultimately if you want to look very simplistically at a deal, it's really pre versus post closing and who brings what to the table. So if in your case, in your scenario, if those contracts have already been secured and it's a matter of simply execution, which you then have to assess what is the execution risk, there is a line to it, and if you assume it's part of the ordinary course of business that they've been doing it for, I, I would probably tend to agree with you. We would probably put a greater emphasis on the future, and that's typically a perfect scenario where you say to a prospective buyer, I recognize you don't want to necessarily buy on a projected EBITDA multiple, understood, but that's where I think we can build in, call it, uh, earnouts where you can basically successfully, you know, still get some return for what ultimately your client put in place. So that's where I think, you know, it's really a matter of assessing what the underlying fundamentals and the facts are. Obviously, if you have projections like we always like to see them, right, they have 10-15% growth and there is no fundamental underlying support for it whatsoever, I will venture to say the argument of trying to to even negotiate an earnout or, you know, or even trying to, you know, incorporate into your valuation anything on projections will be certainly a difficult discussion to have.

Said a bit different way, I would say, you know, again, it's company-specific. So again, it's just all driven at the fact of what is the best indicator for the future performance of the company. And buyers are going to buy on that and sellers are going to, you know, I mean, us as sellers are We're going to be trying to make the best case we can with regards to, you know, using the historical past for what's going to happen in the years to come. And so, you know, if that's 3-year average or if that's a trailing 12-month number, we've got to be, you know, prepared to say why that is the number that we need to peg to and multiple off of.

I would venture to say that that's probably the most recent year that that multiple is based upon though. I think we should figure that out and maybe let everyone know.

We actually do use GF data and I think it is based upon the TTM, is my recollection. And TTM, I agree with Claudio, has pretty much become the standard grading mechanism because it's obviously known. But at the end of the day, the buyers are buying the future. Make no mistake about it. And that's what we educate our sellers on. We also educate our sellers to continue to drive the business. This is the last time to take a timeout before we get to the finish line because we're all focused on the future, which is where the buyer's focused.

Questions?

Cue up the music. I think we're done. Thank you guys. I appreciate it.

Thank you. For me. For me. For me. For me.