In his new book, The Messy Marketplace: Selling Your Business in a World of Imperfect Buyers, Brent Beshore, founder and CEO of adventur.es, takes what he’s learned through years of experience buying small and midsize businesses to write the ultimate insider’s guide to the acquisition process. We sat down with Brent to explore the views in his book.
Brent Beshore is the founder and CEO of adventur.es, a family of companies that acquires family-owned companies in North America with $2M to $14M of owner earnings. Based in Missouri, Beshore’s firm has applied first principle thinking to private equity capital structures, resulting in Permanent Equity I, a $50 million fund with a 27-year term. Adventur.es’ current portfolio includes 6 companies in construction, manufacturing, consumer products, and business services. Beshore is also an Outside Director of Tandy Leather Factory, Inc.
TOUCHPOINT: Brent, you call the marketplace for selling small and midsize businesses “messy”. What do you mean by messy, and do M&A advisors have a role to play in helping to clean up the mess?
BB: In buying or selling a home, you can find licensed realtors, comparable houses and their transaction values, and every listing recorded via MLS. In public investing, each available company has a stock symbol, a uniform investment process, and required disclosures following GAAP. By comparison, the lower middle market for private companies is the Wild, Wild West.
Who should an owner call when they decide to sell? It depends. How many private lower middle market investment opportunities exist? The Bureau of Labor Statistics provides tax data-based figures, but there is no master database to review. It’s a mess to navigate for both sellers and buyers.
While fragmentation is frustrating, what makes the marketplace particularly messy are the people, me included. We all have conflicting goals and a range of emotions. A seller will want all cash at close, no risk moving forward, and to stop working within three months of the sale, while also wanting upside in the deal and to continue being consulted on decisions. Buyers want low risk and high reward, and for everything to be tied up with a bow, which is impossible.
The role of a great intermediary is to sit between the buyer and seller and facilitate bridge-building between communication, information, and expectations gaps. They make themselves available. They are transparent and truthful. And they keep everyone focused on creating the best possible outcome – a win-win-win deal for all three parties (seller, buyer, and company) that actually closes.
TP: Choosing an M&A advisor is one of the most important decisions an owner will make when exiting a business. In your experience, do owners do their homework before they get in touch with an advisor?
BB: Not often, which is a shame. The better the advisor, the more that advisor should want every prospective seller to do their homework. We encourage sellers to treat signing up with an advisor like a deal in itself. They should spend considerable time doing research and background checks. They should get to know the advisor, or team, over a period of time.
This dramatically increases the likelihood of a good outcome for everyone, the buyer included.
TP: What should owners/entrepreneurs look for in an advisor?
BB: It’s the same things you should look for in any professional relationship — relevant experience, integrity, and reliability. With those three things, it’s hard to go wrong.
TP: Firmex and Divestopedia recently published the annual M&A Fee Guide 2018-19 to promote transparency about what M&A advisors charge and why. Is there an aspect of M&A fee structures (e.g. engagement fees, success fees, break fees) that owners balk at or find particularly difficult to understand when negotiating fees?
BB: I’m not sure there’s a particular fee type that repels owners. Rather, I usually find that owners don’t understand how formulas will likely manifest in the context of offers.
As an example, sellers often agree to deliver a percentage-based success fee on the full transaction value to a sell-side intermediary at close. If the offer includes a significant amount of deferred and success-dependent compensation, they may be shocked at the proportional value due out of their cash proceeds. It’s the same with tax consequences. The devil is in the details.
Good intermediaries are worth paying well, as I outline in the book. But as with deals, structure matters as much as price. Aligning incentives takes a lot of thought and foresight, and a good structure will yield benefits for both the intermediary and the seller.
TP: Which words or phrases do M&A professionals most overuse?
BB: “EBITDA.” As Charlie Munger said, it’s BS. M&A professionals are best served by delving into the financial metrics material to that specific business and industry, rather than relying on a metric that ranges in usefulness from spot on to completely useless.
TP: Are you positive about the outlook for middle market M&A in the coming year?
BB: For intermediaries and buyers, things look pretty good. The tsunami of Baby Boomer sellers is coming, it’s just a matter of timing. This will inevitably push down valuations as more supply enters the marketplace and demand lags. We’re starting to see some of this happening, but it’s in pockets. Sellers seem to get triggered by others selling around them.
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TP: What is your greatest fear when you’re in the midst of a deal?
BB: Our greatest fear is that we’ve set up the deal for a win-lose outcome, which is ultimately unsustainable. We always aim to craft an outcome that is good not only for the seller, but also for the leadership team, employees, vendors, customers, and their local communities. If you nail it, it feels magical. If you don’t, friction quickly builds.
TP: Selling a business can be a lengthy and emotional process. With so many moving parts, how do you keep deals moving and avoid bottlenecks and deal fatigue?
BB: We try to balance patience and urgency. We tell sellers and intermediaries that we never want to be the bottleneck, but also never want to push so hard that it harms the people involved, or the company. Time kills all deals, but overly stressing the company also creates a challenging situation post-close.
TP: It’s called the IKEA effect – the tendency to place a disproportionately high value on things that you build yourself. How do you manage unrealistic valuation expectations from sellers who have spent years building their business?
BB: Expectations are the most elastic force in the universe and we’re all guilty of inflating the value of things we own. So we have empathy, but try to demonstrate reality through data. If we can’t reach an agreement, we try to keep the door open and let them explore other avenues, then come back if they discover reality to be different than their expectations.
TP: Tell us about your biggest deal disaster (everybody’s got one)?
BB: Early on, we became partners in a firm that was owned by a husband and wife with very different goals and styles, who were in a bad place interpersonally. Within weeks, we realized it wasn’t going to work and were able to negotiate an exit that worked out ok, not great, for everyone. The lesson was that people are everything and a deal that looks good on paper is only as good as the people involved allow it to be.
TP: Get out your crystal ball: What do you think the M&A advisory space will look like in 50 years? Will it even exist?
BB: Businesses can’t be standardized because they’re collections of people. The M&A advisor is a manager of people, which will never go away. Perhaps the market will become more efficient, but there will always be a place for helping people manage expectations and go through an important and often one-time transaction.
The Middle Ground: a reference site for deal professionals to outline the purpose and “middle ground” of each section of a purchase agreement.