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M&A Value Creation with Mark Sims
Introduction
Hey, everybody. Have you been part of a merger or an acquisition, either on the buy side or the sell side? You know, there’s a heavy lift to make it optimize the value you hoped for. So today we’re going to talk about many of the aspects of these kinds of transactions. My guest is a gentleman named Mark Sims. He’s been in that space for quite some time, and I’ll let him describe some of his details. But Mark, welcome to the show.
Doug, thanks so much for having me.
Yeah. Give us a quick flyover mark of your background before you got into transaction advisory.
Meet the Guest: Mark Sims
Sure, yeah. You know, first half my career worked in management consulting, one of the big four, primarily driving at the time, what we call business process re-engineering, which was, you know, now we would call it digital transformation because usually we were typically, I should say, we were, doing any of that re-engineering transformation on the top of some kind of systems implementation.
Right. So we were consolidating systems, modernizing systems. And again, to date myself, that’s, you know, 20 plus years ago, but a lot of it was was really foundational. And companies were looking to leverage and get a lot out of, you know, get a lot out of their data and their systems and try to standardize. went to work for one of my clients, Scotts Miracle-Gro, spent about 15 years at Scotts, had a variety of roles, led some large, transformations for them. And in Europe, I was the chief information officer. And then I also led their strategy and M&A group, which is really where I, you know, started to get into more the transaction and M&A side of the business. And then, you know, kind of fast forward to now I’m back into consulting lead, part of the leadership team for a boutique advisory firm where we we focus on transaction advisory as well as transformation for our clients.
Why the Hard Part Begins at Closing
Yeah. You know, I’ll I’ll opine for just a minute. My experience in merger and acquisition, when there is a decision, particularly on the acquiring side, you’re trying to add to your spread, your asset base, or maybe you penetrate a market you didn’t have or add a product you didn’t have. And you know, you can you can do all you want during due diligence and you can crunch all the numbers in the world. But when you you go day zero at closing and now it’s yours. There’s a whole lot to be done to optimize and realize the value you expected, and hopefully even improve it if possible. So I think that’s where the sausage making really starts happening.
Yeah. No, 100%. You know, there’s a quote and I probably can’t recall who would it but it’s you know, there’s it’s one thing to stare up the steps, but at some point you got to step up the stairs. Right. And so from that perspective, you know it. You bought it. Right. And you know, I’ve told this to many clients, like we get to the end of the line and we finally close.
Right. And it’s it’s a very kind of difficult process a lot of times where through the due diligence process, you know, through kind of ups and downs and negotiating the, the purchase agreement, etc.. People want to let out a big sigh of relief and like, oh, we’re done. And it’s like, no, no, you just started like you just bought it. Now you need that whole value creation plan you developed, now you need to execute that, and you need to execute it as at the same time, you’re not like messing up the business. And to your point, if it’s a strategic acquirer or if it’s an add on acquisition for a business, you also need to figure out how to integrate it at the same time, you’re trying to run kind of that value creation roadmap.
The Five C’s Framework
Yeah, I know what I’m getting ready to ask you is a very oversimplified question, but I want to ask it any way to kind of launch our discussion here. Are there a handful of common denominators that you find as your sort of pressure points when that integration step begins? And things that people struggle with the most in making these deals successful?
Yeah. And maybe I’ll kind of rewind it even, you know, kind of talk it more during the deal stage. I call it what’s the the five C’s. And this could be, you know, if your listeners are either kind of thinking about selling their business or you’re thinking about buying your business. Kind of the five seeds that I think through is, you know, the first. See is competitive positioning. Right. So understanding again either as a buyer or seller being able to articulate and or really being able to understand where does that particular business sit in their marketplace. Right. So are they the it’s a roofing business. Are they the high cost? You know, they’re the premium roofer or maybe they’re the most responsive. Are they commercial? Residential. Like where do they compete. Why haven’t they expanded to other geographies. But really understanding kind of the competitive positioning of that business, that cash flow cycle. Right. So if you’re buying a business, do you really understand the cash flow cycle and kind of how how much you need to, you know, really understand kind of the ups and downs of that.
Is it a cyclical business. Do you need to buy a bunch of inventory in advance, you know, whatever that might be? Make sure you really, truly understand that the next one is kind of a clean and trusted set of financials and KPIs. so if you’re again buying a business and they can’t, they tell you how they make money, but they can’t show you how they make money in terms of, you know, the financials as it relates to product by product line, by customer, whatever it might be. That can be a real challenge because they know the business they’ve been in, they’ve been running it. If they now hand it over to you and you don’t have that, you know, kind of the knowledge and you don’t have good data to to help guide the, the decisions, that can be a challenge. The fourth one, I’ll wrap it up here. The fourth one is related to I call concentration free. Right. So if you’re buying a business, do you understand? Kind of you know what the concentration mix is either on the supply side or the or the demand side as it relates to your customers, you know, and could one single customer canceling an order or severely decreasing their, you know, their ordering pattern? Could that impact or impair the business in a big way? Right.
So truly understanding kind of what that concentration level is. And then the last one and again I think this is important. And then I’ll wrap it back to kind of the value creation piece is capabilities right. And so do you understand. Or has someone documented kind of what are the core capabilities and or kind of the core contracts. ET cetera. Within the business. So if again, you’re buying the business and you’re saying, hey, they told me they’ve got a great supply agreement with, you know, vendor XYZ, well, can they produce that agreement? And if you know, if a the business acts, does that contract stand or are you going to have to renegotiate a new contract? are there SOPs that talk about how things actually operate and work. So again, if you’re buying this business, they’ve run it for years. But if you don’t know the industry and maybe you’re new to the business, you need to understand things, how things actually work. And so really having kind of, you know, it’s very basic.
And I love the name of your podcast. When you talk about Powered by Common Sense, a lot of these things are strictly common sense. But sometimes people get very wrapped up in the deal and aren’t thinking about kind of these basics. And so I’ll pause there and see if there’s anything, any area where, you know.
Scoring Due Diligence by Maturity
I like that, I like that framework. And then what was going through my mind, you know, your five C kind of framework. Certainly I would imagine it can really direct and guide a due diligence effort. You can you can plot all that out in kind of an almost a checklist form to ask the right questions, get the right data and make your assessment. What what I’ve seen, done and done myself is you take a list like that, but you also spread it out horizontally and, and maybe do a little bit of a grading in terms of maturity, you know, take a category and you grade how well developed are these things or are they, you know, just handshake, word of mouth kind of arrangements which are almost impossible to transfer, you know, in a transaction because it’s if it’s too wrapped up on a relational basis, you know, the seller has been doing business with his supplier for 30 years.
Seller’s going away. And what does that supplier feel about the new guy, the new ownership. So you, you you can almost score your due diligence. And ultimately, as most people may know, Where the deal lands. There still may be a valid opportunity on the table, but now you’ve got to negotiate the price for it and pay out on.
It right.
To. So if if three out of five are not very mature, but you really, really like the product, it’s pretty easy to see the pipeline on how it is produced. you might say to yourself, well, I know my sales guys can grab this and do okay with it, so I’m not worried about revenue continuity. You know, we’ll get that done. But maybe if they’re, you know, a high rated on production and supply, then, you know, you feel pretty good about that.
Yeah. No that’s absolutely right. You in the way I always think about it is you know, buyers should pay for value. They can see and value. They can transfer. Right. And so if it’s something that to your point, you know, it’s a it’s a oral agreement between, you know, two to long time friends. It’s probably not going to survive the transition of the business. Right? And so can you really. Is that value? You should you should pay for if it’s not transferable. And then, you know, kind of tying the five C’s back. And again I think it can work on either side. You know if you’re selling your business, you should look to make sure you’re buttoned up in each of these areas as well, because you bring up an excellent point. It’s not that someone’s maybe not going to buy your business. but what are they going to pay for it? Right. So the EBITDA is usually the EBITDA. But a lot of times this these things show up in in the multiple. Right. And what’s the quality of the business that I’m that I’m acquiring. And so again if you’re on the sell side, you just like if you, you know, as you use a real estate analogies and I’ve heard you use real estate analogies, right.
Like fix up the house before you have, you know, kind of potential buyers in. Right. And a lot of these things, as we talked about, are pretty our common sense. But as it relates to kind of the the original question you asked, can what are some things as it relates to, you know, kind of that value creation plan and kind of what’s that? You know, what should you do to actually drive value in the business? Again, I think kind of the five C’s are a good framework to to think through as well as others. But as it relates to okay, competitive positioning, are you thinking through is is this a play where, you know, currently they have a really strong business in a certain geography, and I want to now extend that extend that geography, you know, to another city or I want to send their services, excuse me, to another city. Right. Or if you really understand kind of their price point and their kind of the low cost provider, you may say, hey, I think they’re providing a premium service, but at a low cost.
I think where there’s actually opportunity to increase pricing. Right. Or maybe it could be the, you know, as it if you go down each of these the capabilities, maybe they’re really not buttoned up on the way they’re doing purchasing today. And I think I can get and negotiate much better discounts. And, or I can manage a supply chain more effectively as we talked about cash flow cycle. Maybe they’re not disciplined and kind of how they’re thinking about cash needs and cash receipts. And that may be a place where you can create value. So I think, you know, all these things stack up as it relates to, you know, why do you want to own the business? Why do you. And then how do you think you can create? Why are you uniquely positioned to create value? And so you really need to do that while you’re while you’re kind of contemplating and driving the business. And hopefully people you know are all doing that. If you’ve got a business case, why are you paying a certain price? You know, what’s your return going to be? But then, as I mentioned earlier, when the deal closes, you can’t kind of like, take a sigh of relief and then say, okay, now I got to do all these other things.
You really need to start to execute that value creation plan out of the gate. And so whatever changes need to be made, you know, you need to start making those changes and thinking through kind of what’s the right sequence. You know, there could be areas that you know, are, you know, kind of more sensitive than other, more complex than others. So you really want to think through kind of, what is that? what is that, you know, exact roadmap. And then you want to, like, hold yourself accountable, that every quarter you’re stepping back and you’re measuring, you know, what is your progress against that value creation plan? What were the assumptions that went into it? Maybe some of those assumptions aren’t aren’t true anymore. And so you need to kind of refine the assumptions and adjust. But all of it should be focused on kind of what it was, the original hypothesis of why you bought the business and then, you know, kind of holding yourself accountable and or the the team accountable for delivering those results.
A Real-World Price Adjustment Win
Yeah, I want to zero in on one of the things you said that that price adjustment opportunity. I was involved in a transaction, a home services business. I’m not going to divulge a lot of the details, but the the company was like a 30 year, you know, mainstay of the community. They were doing a high premium service in a high premium market. You know, gated communities and all of that. And when the buyer went in or and he knew that he learned this during due diligence, the hourly rate for these services was just ridiculously low. And one of the first things he did right out of the box was basically double his rate in a lot of his texts, got nervous and said, oh, you know, we’re going to lose a lot of business. Well, as time went on, the the real data was he he was given notice on two out of about 300 regular recurring users of his service. And you know what everybody else said? They said, we’ve been waiting for this price increase.
You’ve you’ve this company charged us the same price for the last ten years, and we knew that had to change.
It’s amazing. It’s amazing.
And they didn’t they didn’t balk at it. I mean, these were premium customers that themselves were involved probably in in good sized premium businesses, else their lifestyle wouldn’t be what it was. So so they knew the the logic. They and they were not afraid of it. So it was a, you know, giant win for him. I mean, you double your hourly rate on your text overnight and it goes straight to the bottom line.
Yeah, 100%. Well, and again, it’s a great kind of, perspective that, you know, kind of taking an outside in look at the business can yield those types of results. Right. And you know, did it ever occur to the original owner or again, where they may be too nervous and had the same mindset as the techs and weren’t willing to to take the risk?
Adding a Sixth C: Culture
Yeah. Well, let me ask you if I may be so bold, I may add a sixth seed to your your mix there. And it’s one that I’ve spent a lot of time focused on. And that is culture.
That’s fantastic.
Culture integration. And I learned that in real fire opportunity. The first big merger I ever went through was with a bank organization, and our Texas based bank was being acquired by a New York City bank. And, you know, the old jokes at the time, there was a chili commercial of old cowboys around a campfire go in New York City, you know?
Yeah, sure.
And there were some jokes about that. But when the New York folks started showing up and poking around during due diligence, it turned out we had an incredibly harmonious culture. Our view of the world the way we wanted and liked to do business was a perfect blend for the way they were doing business. And, you know, regional differences aside, the core business value agreement was almost automatic. And in fact, the chairman of the board of the bank that was acquiring us came and talked to us. And he said, you know, when it’s all said and done, we’ve decided we’re buying a franchise.
And he he he grinned and he looked around the room and he said, what do you guys say down here? If it ain’t broke, don’t fix it. He said, that’s that’s our attitude right now. You guys have a great track record. We love what you’re doing. We want to support what you’re doing and hopefully enhance what you’re doing with any horsepower we might be able to provide. And that’s what we did for the next ten years. And it was it was almost in many ways a non-event. And by the way, they didn’t even force us to change our name for those ten years. We. Yeah, we were. When you read the legal documents, it said our bank name wholly owned subsidiary of New York Bank. But you know that that was the only place you ever really saw it. And and we did get the benefit of some of their extra leverage and liquidity that we could tap into. So, you know, the size of our deals grew and opportunities we were providing our customers grew.
And it was a great fit. But come to the end of that ten year period, there was another opportunity when the bank that we were now part of wanted to go buy another bank. And when we did that one, the culture at the target entity was perfectly 180 degrees opposite of ours.
Yeah, right.
And it was a bloodbath. I mean, it was the deal happened and it went through. But in about a six month period, the senior officers of the of the target company were gone. They nobody survived the transition. Yeah. Largely because they dug their heels in and said, you know, no way we’re not going to do it that way. We’ve this is the way we’ve always done things. And our management said, no, not anymore. You know, it’s it’s going to be this way. Yeah. And there there was no willingness. So the culture clash became really evident. And at the top of the house from the target side, you know, they either voluntarily left or they were asked to leave.
Yeah, no, that makes 100 cents. And it’s amazing that you have kind of in one, you know, entity. You’ve seen both. You saw both sides of that, right?
I did, I did. And if and if you go back in my archives, folks, you’re going to pick out the story. I named names once upon a time, but it’s not important anymore to name them it. Trust me, it happened.
No, I really like that. And kind of where I’ve, you know, I guess previously had culture and have thought about it is, is sometimes in the, in the capability camp and you know why do I say that. Because a lot of times what, what we see in some of these businesses is that and these are kind of middle market businesses. But, you know, this can be true even in large companies. But, you know, how do things actually get done right in the business. Right. We talked about SOPs, etc. but something comes down to culture in terms of do all decisions need to be made by, you know, the CEO or the president? Right to.
And so nobody’s empowered to do anything. And where it’s really important to understand kind of what are those decision making processes within the business. Because again, if you buy the business and you’ve just given that founder owner a big check, even if they’ve said, hey, I’d like to stay on in some capacity, you potentially don’t have a team that that can actually opt to operate and run the business. And, you know, it kind of goes to your point of like, how do things get done? What is the, you know, the collaborative, collaborative nature or not, of the way that people operate within the business, as you called it, kind of that culture that those unwritten rules of how things get done. Trying to understand that again, I’ve kind of lumped it into capability, but I really like your thoughts on kind of it can be so important and impactful. Could be that sexy.
The Vacation Rule: Can the Business Run Without You?
Well, you’re right, it very much, you know, overlaps with the capability because in the in the classic entrepreneurial frame of business is, you know, gotten past startup. They’ve done a little bit of grow up and now they’re maybe in a scale up phase where the numbers are starting to show up in a nice, appealing way. And I’m talking about you might even get into the tens of millions of dollars of annual revenue, but it can still be closely held by the founder or the partners, and any decision making and any ability to operate without them is is none. You know it. And when I walk into some of those kind of deals, if I sense that I, I deploy what I call the vacation rule. Have you taken a vacation lately and does the company still operate without you? And when the answer is no, not really, then it’s like, no, then you don’t have a deal. And I know an owner of a good size commercial construction company who, when I first met him, he boasted that he had just returned from a 30 day vacation sailing the Caribbean. And I said, oh, really? That’s interesting. How’d the company do while you were gone? He said, we didn’t miss a beat.
He said, he he said, I’ve got systems. I’ve got people, you know, they know what they need to do. And the couple of things. And he stressed, couple of things I needed to formally delegate while I was gone. I did, and the person I gave him to took care of them while I was gone. And yeah, we didn’t miss a beat.
Yeah, no. And again, I think that’s so important again to understand that as a buyer. But also again, if you’re, you know, one of your listeners is sitting there thinking about selling their own business. And if they really do kind of the self diagnostic, to your point, could they leave on a 30 day vacation? Right. Because if if not, if they feel like, well, no, this place would fall apart if I didn’t come in one. You know, they maybe should, you know, really challenge that. Right. The the people there are probably a lot more capable than the person might think.
But at the same time, that’s. That’s not a good thing, right? Like you want to again, people are going to pay for value that can transfer. And if you’re not part of the value that’s transferring, if you’re if you’re going to exit the business. they need to feel confident and they will pay if they feel that there’s a team there that can just operate the business. So, you know, as, as people think about what’s there 18 month, 12 month, you know, type of runway to sell their business, or exit their business, they should start thinking about some of those things. How do I delegate, you know, more effectively? How do I start to build the team around me so that if somebody comes in, a buyer comes in, they they’re buying a business, they’re not buying, you know, kind of a founder owner who’s, you know, leading a bunch of individuals, to drive, you know, growth in revenue that that it’s a true saleable asset.
The Silver Tsunami: Where’s the Market Really At?
Let me ask you this, Mark. I’m going to shift gears just a little bit. I’m going to ask you if you will put your futurist forecaster hat on. for several years now, I’m thinking back in my own experience, I’m going to call it for years we started talking about the silver tsunami, all these businesses that are owned by baby boomers. They were created, founded and owned by baby boomers. And those guys are getting old now, and they want to exit and they want to go. But in my humble opinion, we haven’t seen the numbers on the on those trades balloon like I thought they would. And there, there seems to be this tremendous pressure for all the reasons we’ve been talking about, that these owner founders maybe didn’t do what they needed to do, building those sustainable businesses without them. And so I say all that to ask you, what’s your sense of the market right now? Where do we stand? I know there’s a lot of world economic concerns going on swirling around us, but do you have any kind of position statement on where you think the market is right now, compared to maybe years past?
Yeah, and I probably all my evidence would be anecdotal, but I would agree with you. I would have thought, you know, we should see a lot more of these businesses transacting and, you know, kind of a personal angle about three years ago when I kind of, you know, left, I’ll call corporate America. I was looking to potentially buy a business. Right. And, you know, in, in I’m in northeast Ohio and I think there’s like, you know, 7000 manufacturing businesses that are kind of headquartered in the 18 county area that makes up northeast Ohio. So that’s a lot. Right. And, you know, the challenge is getting at these folks and right, and, you know, I think there’s a couple things. One is, you know, have they really thought through kind of what the succession plan is for the business. Right. So that’s kind of a big piece. And if succession planning or sorry if exiting or selling the business is part of that succession plan I know of again, in some conversations, I’ve had some of the challenges around people don’t understand what their business would trade at, right? They have some potentially inflated value that because it means so much to them, they built it.
I wouldn’t sell it for less than X. Maybe a buddy told him like, oh, your business is surely worth X amount, right? And as we know, business is trade at, you know, different different valuations for lots of different reasons. And so there’s got to be an education component to say, no, these people aren’t trying to steal your business. Right. There’s a there’s a method as to, you know, how people value businesses. There’s kind of the long way where you can discount it for cash flows. And then there’s shorthand way, which is, you know, kind of multiples. And those are published and you can see those things. So I think there’s a component of, of education that, you know, kind of sellers need to take on themselves to make sure they truly understand, you know, what is the value of the business. And then to your other point into our earlier points is if it’s a tool and I shop and you’re kind of the master person that’s executing on all the jobs, you know, you you’re not going to be able to sell that business, right? It’s it’s unsellable if you’re such a core component of that.
But there’s plenty of those businesses that are really solid businesses. And to be fair, I think we’ve seen a little bit in the marketplace where the bid spread between buyers and sellers has just been too great. People maybe wish they had sold in 21, 22, kind of. When we saw some frothy valuations, interest rates were low that that I think there’s there’s still some of that overhang where the bid spread is just, you know, sellers just don’t want to transact at the current multiples and, you know, are hoping that interest rates will reduce and kind of the the market will pick back up and they’ll see kind of a higher, higher exit price. Yeah.
The Barbershop Valuation Problem
Yeah I agree with you. And I do agree. For clarity’s sake and disclosures sake here to everybody listening. You know, everything Mark and I are talking about is more anecdotal than, than market authority. But I have the same basic challenge that I’ve seen by sellers. They the take I use is, you know, they go to the golf course or the tavern with their buddies and they start talking about the business and everybody tells them, oh, you, you know, you can easily get eight digits out of that, you know.
And when you go to a valid market valuation exercise, no it’s not, you know, if you thought you were going to get ten, you might be lucky if you got five. And you know when the real numbers are crunched, right. And, and I, I do see that as a major roadblock because people hear this and, you know, even in a few cases, I have no stories of financial wealth managers telling them that their business should be worth X. And that wealth manager hadn’t even really looked at the business. Yeah. And and it it’s unfortunate that these numbers get fixated and and sellers then when they’re given a viable offer they turn it down because it’s, it’s half of what they expected.
Yeah.
And you know, it’s it’s sad but true.
Well I think there’s, you know, kind of another aspect of this is, you know, if there’s not a succession plan in some kind of event happens where, you know, kind of that, that founder, owner leader cannot, you know, kind of run the business day to day. And now it’s left to other members, you know, for whatever reason. and now other members of the, of the family potentially have to, you know, now figure out what to do with this. Right. So it wasn’t a proactive approach. Now it’s more reactive. And that’s where, you know, again, you can also get you know, you know, suboptimal outcomes if you’re not doing something, you know, under distress or you’ve got a lot of, you know, God forbid, the business start to decline. Right. So you had a, you know, a, a, a business earning axe, and now it’s kind of, you know, 80% of, of acts, you’ve just left money on the table and in value because, you know, sure, you can argue, well, you can get it back to that, but that’s the the buyer is going to say, well, that’s going to be on that’s my effort is to try to recover the business that was potentially lost because, you know, kind of that the leaders no longer there.
Right.
Well, and again, the metaphor to think about selling, buying and selling businesses similar to buying and selling homes, you know, if if I’m sitting here in my house and I’ve finally decided to put it up for sale, I can go through a mental exercise of thinking about all the money I’ve put into the house to, you know, do what we’re doing and create the setting that we want. And I could go to a realtor and say, I want to list my house for $500 a square foot. And the realtor is going to tell me, oh, your market’s only 200. What are you thinking? How? How in the world can you ask 500? Well, you know, look at all this stuff I did, you know, da da da. And it’s like, no, that doesn’t. That doesn’t translate that way.
That’s right.
And, you know, most people are aware that the whole idea of spending 80,000 or 100,000 to put a pool in your backyard, you’re not going to get that back. Penny for penny. You’re. Yeah. You know, you’re going to get a slightly increased value of your house, but it’s not going to be dollar for dollar.
That’s right, that’s right.
Closing Thoughts
So well Mark, this has been great my friend I really appreciate you doing this. Tell people the best way to get in touch with you.
Sure. People can email me directly. M Simms Simms at consult msg. Com and and or they could check out our website. If they want to learn more about our kind of transaction advisory as well as transformation services.
Perfect. Well, as always, folks, we’re going to have that info in the show notes. So feel free to mash those buttons and get Ahold of Mark. Ask him if you have questions or opportunities you’re thinking about. I do want to remind you, we have a video version of this show on YouTube channel by the same name. Leadership powered by Common Sense. Go over there and check out our archives. And if you need to get Ahold of me, Doug Thorpe, that’s Thorpe with an E on the end.
But for now, we’re done. We’re going to wrap it up. Say goodbye. Go out there. Make it a great day.
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