Deal From Heaven: A Lower Middle Market Deal Story
Every M&A advisor I know dreams about the deal from heaven. Everything about the deal moves smoothly signing the client, preparing the client, marketing the deal, due diligence and closing all go off without a hitch resulting in a happily client and a nice fee. Of course, it almost never happens quite that way.
We have a vertical-market firm focused on the lawn and landscape industry. Like many others, we have built our practice by developing long-term relationships and that has really paid off.
I’ve only had a few deals from heaven, but I will share the story of one.
I had known this seller for a long time, about 13 years. I will call him Jack. Jack responded to one of my newsletters and we had a long phone call.
I had hour-long calls with Jack many times in those first years. My wife was a little annoyed when he would call in the evening and tie me up for an hour or more.
One time I was in a neighboring city on other business and visited his offices. I remember a few things from that visit. His business was super-organized. They could pull up all the details on each of their customers from a computer easily, including copies of contracts, correspondence, every client interaction, etc. Back then, that was pretty unusual. I also remember him talking about how good his accountant was. I did a small valuation project for him more than ten years ago but no other actual engagements. I always took his calls although it was a little hard to see how they would ever produce anything.
Jack’s profile was not too unusual. He had started his business right out of high school and it grew steadily as a commercial landscape company until its revenues were about $20 million. He got a lot of mileage out of telling everyone he only had a high school education.
After a while, the calls slowed down to one or two a year. I was still happy to have them. He was always interested in what the market was like and how he could make his business more valuable.
A little over a year ago, Jack called and said he thought he was ready to go. He sent me updated information and he asked me to check in with his accountant. We discussed strategy and then he asked for a proposal. We had a couple of rounds of revisions with comments from his attorney and his accountant, who each had significant experience with similar transactions. The advisers worked together in positioning the client in the best way.
Every step of the process was smooth – developing and circulating documents, negotiating with potential buyers, letter of intent, due diligence and the final documents.
The client ended up going with a strategic buyer who had a phenomenal acquisition team. Due diligence was thorough, but the issues identified were quickly resolved. The transaction closed almost exactly six months after we signed the engagement letter.
The biggest issue we faced was dealing with a spike in revenues and earnings in the current year. We addressed it by building a compelling case that the higher earnings were valid and most likely to continue.
The company had $1.8M in EBITDA for its prior year in $15M in revenue. The purchase price was $15.8M, all-cash, subject to a two-year 15% escrow. The multiple was a very high 8.8 based on last year’s EBITDA. Due to the spike in earnings in the year of sale, the multiple was closer to 6 based on trailing twelve months data.
Upon reflection, it was the smoothest transaction I have ever been involved with. On top of that, the client realized a price that was approximately 50% more than we had initially projected. That produced a very happy client and a very happy advisor, too. That was the result of the Company’s strong performance, a strong market, the correct positioning and working the market.
What factors came together to permit this outcome?
- A great seller who had worked toward this day for a very long time, producing a business that truly was ready to sell,
- Great advisors who were brought into the loop at an early stage,
- A team approach to the process,
- A very strong buyer with another great team,
- A strong market, great positioning, and
- Some good luck.
The story reinforces the power of long-term relationships, the importance of preparing a business for potential sale and how important a team of good advisors really can be.
Ron Edmonds is the managing member of Principium Capital, LLC, a merger & acquisition advisory firm based in Memphis, Tennessee serving the lawn and landscape industry nationwide.
