Top Takeaways
- Don’t start a search until you know what you are looking for. Ensure there’s a clear strategy laid out in advance. This will help research targets and for making a compelling case for why they should consider you as a buyer.
- When building a potential target list, it’s better to start with a wide net and then shrink it down in a structured way. It is more difficult to try to expand the list later. Tools like Grata, Source Scrub, ZoomInfo, CapIQ, and Pitchbook are good for list building. These tools are expensive but worth it.
- Building rapport with an owner is best done with senior, experienced people. Potential sellers will be anxious about parting with their company; they want to know if a buyer is serious. Third Coast Capital Advisors uses Senior M&A bankers for this role.
Guest Profile
Doug is the founder of Third Coast Capital Advisors and manages the firm’s daily activities, with responsibility for originating, advising on, and executing merger and acquisition transactions for clients across various industries.
Before forming Third Coast Capital Advisors, Doug was a Managing Director in the Middle Market M&A group at Banc of America Securities LLC. He led a national effort focused on M&A transactions with values under $150 million.
Before Doug’s tenure at Bank of America, he was a Managing Director in the M&A/Corporate Finance group at LaSalle Bank and ABN AMRO. He has over 25 years of experience working with private and public companies on merger and acquisition transactions.
Doug’s diverse M&A experience includes acquisitions, private company sales, corporate divestitures, portfolio company sales of private equity groups, and sales of public companies across numerous industries.
Doug holds a Bachelor of Arts degree in Finance from Indiana University and a Master of Business Administration degree from DePaul University.
Episode Highlights
- Before Third Coast Capital Advisors
Doug previously worked at the Bank of America, helping middle-market companies. Right before the economy was ready to go off the cliff, he left with a couple of guys in August 2008 and formed Third Coast Capital Advisors. He looked at how the buy-side was being done then and eventually developed a better model.
“I was doing traditional sell-side work. We primarily worked with clients of the bank who wanted to sell their businesses and they’d hire us. We did that for a long time.”
“We were asked fairly often by the commercial bankers at Bank of America who had large clients desiring to pursue strategic acquisitions.”
“Due to different resources required, we always said no. But over time, it became clear that there was a real need. And as we looked around the market, it was being underserved.”
- Forming Third Coast Capital Advisors
With the sole intent of doing buy-side, Third Coast Capital Advisors initially went after larger, private, and public companies that didn’t have dedicated mergers and acquisitions (M&A) people on staff. They reach out to help execute strategic acquisitions for these companies.
Working with strategic acquirers: “We became more of a consultant. So, we created a system for leading a full-day strategy session with the company’s top executives until we got a clearly defined acquisition strategy.”
The core services of buy-side M&A advisory: “Not only did they need us to help with the strategy, to identify the companies, to do the outreach, to find an owner who’s willing to talk about a potential sale, but they also needed us to help them work all the way through the process… the strategy, the outreach and the execution.”
- Creating A Process for Corporate Development That Is Repeatable
“Reaching out to business owners that aren’t actively looking to sell isn’t “rocket science,” but it does take years to create a process that measurably increases the probability of success.”
“The outcomes of owner outreach are unpredictable, but it’s possible to create an efficient, streamlined and repeatable process.”
“Third Coast uses a senior experienced team background related to M&A investment, banking, private equity, and corporate development to improve the odds.”
- How much is your team already looking at what exists out there to buy before you even develop a strategy?
“From the beginning until today, we’ve always taken the same approach. We like to do pre-work before we get into something.”
“We ask them to give us a little time to research the target landscape and get a better sense of what’s out there if it happens to be an industry sector that maybe we haven’t done any recent work in. They understand and appreciate it instead of other firms saying, oh, they want to hire us; let’s grab it and hope it works.”
“We’re both going into it with realistic expectations. And we’ve certainly had some cases in the past when we did that pre-work and determined that there just weren’t a lot of targets fitting the specific acquisition strategy. So, we told them we don’t think it makes sense collectively for all of us to be engaged here. And I think they appreciate a good amount of work done before we reached that conclusion.”
- The Importance of Casting a Wide Net in Identifying Targets
“Accuracy in identifying targets is critical, but there must be balance. You do want to cast a wide net because it’s easier to take a broader list and reduce it than to have a narrow list and wonder what you missed.”
- How Do You Assess What’s Really Important to the Owner of a Business?
First, figure out if there’s an excellent cultural fit. Is there good chemistry across the principles? Because if we don’t have those pieces, the price is irrelevant, and we’re all wasting our time. Try to connect strategy and culture before talking about price.
“The idea is to try to find the privately owned companies target companies and make them feel special. You must make them feel like they’re not part of just some shotgun approach. Instead, they were specifically selected for very strategic reasons.”
“If you’re talking to the business owner, you must establish credibility. Make them say, I get these goofy calls all the time, somebody wants to buy my business, but no, this one is different. This one seems genuine and credible. They’ve spent the time to look at my business.”
Additional Resources
Third Coast Capital Advisors: https://www.thirdcoastca.com/team
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Transcript
“Whether you’re focused on advising companies, building your own, buying a business, or working for any of the firms that do all three, this is a great episode for you. And even if you’re not one of those three, I think you’ll take away some lessons about sales and maintaining relationships in a business context.” – Justin Fortier
Justin Fortier: Thanks for opening up the toolkit. I’m your host, Justin Fortier. Today, we’re talking about investment banking. Now there’s a lot about investment banking on the internet; I’m sure if you go to YouTube, there are countless lectures from universities or recruiting videos from firms like Goldman Sachs and JPMorgan. But today, I’m going to talk with Doug Lovette, who’s from Third Coast Capital Advisors, which does things a little bit differently, and has a different focus from the typical mergers and acquisitions, M&A for short, investment bank. Most firms are focused on helping companies sell, but very few focus on helping people buy. Doug’s firm, Third Coast Capital Advisors, is focused on helping companies and private equity firms research and identify companies to buy. And then, they specialize in reaching out to them, getting them interested in starting a deal and guiding the companies or firms through that process smoothly. Now, companies represent a lot to a lot of people; they’re certainly worth a lot of money. In many respects, they represent somebody’s life’s work. So it’s really interesting to talk with somebody who’s done these hundreds of times and has a firm that focuses on guiding people through this important high-tension, high-stakes process. So whether you’re focused on advising companies, building your own, buying a business, or working for any of the firms that do all three, I think this is a great episode for you. And even if you’re not one of those three, I think you’ll take away some lessons about sales and maintaining relationships in a business context. So without further ado, here is my interview with Doug Lovette of Third Coast Capital Advisors. Before the Third Coast, you worked at Bank of America, helping middle-market companies. Did you develop the buy-side thesis while you were working there? Were you supporting both sell-side and buy-side engagements? Or how did you see this niche that needed to be served?
“The challenge with buy-side is the unpredictable outcome and there wasn’t a lot of process around it.” – Doug Lovette
Doug Lovette: That’s a great question, Justin. I was doing traditional sell-side work. So we were primarily working with clients of the bank, who would decide that they wanted to sell their business. And they’d hire us. And we’d run a formal sale process, which is pretty typical in the market. And we did that, you know, for a long time. And that was our main activity. But we were asked fairly often by the commercial bankers at Banc of America. They had large clients who were important customers with a bank that wanted to pursue strategic acquisitions and were looking for assistance. So the bankers would come to us and ask if we could help; we weren’t set up to do it by sight. It’s really it’s a different activity. It’s a different process, and different resources are required; we always said no. But over the course of time, it became clear that there was a real need there. And that it was, as we looked around in the market, it was being underserved. And we decided I left with a couple of guys in August of 2008, right before the economy was ready to go off the cliff. And we formed Third Coast Capital Advisors. And we looked at how the buy-side was being done at the time. And we said, let’s see if we can come up with a better model. And really, the better model was, we felt, if we took a lot of the formality and organization that we used on the sell side. And if we applied that to the buy side, we could be much more efficient at doing that work. And I think that was always the challenge with the buy-side is the outcome was unpredictable. And you were, and there wasn’t a lot of process around it. And that’s what we did in August of 2008. And with the sole intent of doing by side, and really initially what we were calling outsource corporate development, we were initially going after larger, private and public companies who didn’t have dedicated m&a people on staff, and we said, “Look, we’ll do that for you.” And we’ll both identify, and reach out to and help evaluate and execute strategic acquisitions for the company. But that’s really how and why it’s done.
Justin Fortier: So I have two questions. I think I’ll start with just the why. Traditional sell side, M&A bankers are not set up to run a process like this. I’m not a banker; I only interned for a small technology investment bank up in Boston for one semester during college. But from there, I understood there’s always a deadline, or there’s a firm commitment where a company says, “I want to sell. We’ve made the decision to sell.” So even though there’s risk and taking on a client, because maybe they’ll decide that all the companies you bring to sell or sell them to are not suitable and they may back out there’s a much higher likelihood that they’ll actually go through whereas the buy side is a little bit more nebulous and may take longer. And that’s a little more difficult is that kind of summing up why these banks typically don’t take buy-side engagements?
“We felt like if we could create a process and approach that was very repeatable, streamlined, and efficient, and if we were doing all the outreach, which we do with very senior experienced people who had long backgrounds in M&A related investment, banking, private equity, corporate development… we could be successful.” – Doug Lovette
Doug Lovette: Yeah, that’s certainly a big part of it. As you noted, on the sell-side, if you are engaged by an attractive client, in the market then, and in the market today, there are more buyers and sellers, and there’s more money than deals. So if you have an attractive company representing for sale, you’re gonna get a lot of interest. And while you put a lot of time and hours, and manpower into it, the likely result is you’re going to get a deal closed. The outcome on the buy-side is much more unpredictable. Because, really, at the end of the day, we are reaching out to business owners who own companies that are not for sale. They’re not actively looking to sell, in many cases, not even thinking of selling. But you can imagine the outcome is very unpredictable with that kind of outreach. But we felt like if we could create a process and approach that was very repeatable, that was streamlined, that was efficient, and if we were doing all the outreach, which we do with very senior experienced people that had long backgrounds in something, M&A related investment, banking, private equity, corporate development, that we could be successful, and we could be efficient. And in doing that, it took a couple of years. It’s not rocket science, but it took a couple of years to continue to fine-tune the approach and the process to try and come up with something that would increase the probability of success. And so, I would say, now, we’ve been at it for 14 years, and probably the last 10 years, we’ve had a fairly set process we use, it’s very rigorous, it’s very tight. And then, we found a way to be successful in something that otherwise can be challenging.
Justin Fortier: I was listening to a talk that Wharton had posted where they had a bunch of panelists talking about acquisitions. And one thing about corporate development, I think it was somebody from Intuit who they do a large number of acquisitions, and he was saying that it was a skill. And from what I understand there are both two parts of corporate development, there’s the strategy of what types of companies do we want to acquire? How are we going to augment our company or use it for growth? And then on the other side, there’s the actual going out finding and closing the deal effectively, these firms that don’t have corporate development that are using Third Coast as outsourcing corporate development? Are they usually coming to you with a strategy? Or did you have to develop a process when they say, “We have the cash to spend; we think we want to spend this.” Did you have to learn how to coach them about what even would make sense? And how much of that strategy part is your firm involved in?
Doug Lovette: When it fits a corporate-type client, the strategy pieces is critical. I think when we started out, we just assumed the corporate strategy would be very clearly defined, the acquisition strategy would be clearly defined. And we found it was typically not the case; it was companies that said, “Hey, we decided that part of our strategy is to grow through acquisition.” There are many different ways we could go about it. We have different core competencies, different products and markets capabilities, but we just really don’t know which would be the most productive to pursue. We did it over time, so for some, it was just fine tuning the strategy for others, it was fully developing the strategy. And so early on, we found ourselves becoming more of a consultant. And starting out with a project where we said, “Okay, we’re gonna do an acquisition development or strategy development project.” And we created a system for doing that, we would interview the top executives at the company, we would lead a strategy session, full-day strategy session at the company. And we would come out of that saying, “Okay, we’ve got a clearly defined acquisition strategy.” And then, we would go back and do our traditional work of researching identifying companies that exist in the market, that would be a good fit with the strategy. The other thing with the corporates, and we knew this, from the beginning, is that, it wasn’t just acquisition search, it was acquisition, search and advisory, not only did they need us to help with the strategy, to identify the companies to do the outreach, to find an owner that said, “Okay, I’m willing to talk about a potential sale.” But they also needed us to help them work all the way through the process. So we’ve we would help them with the debt valuation for the business with transaction structure, with a negotiating strategy, all the way through, help them helping them manage due diligence, build letter of intent, so we’re really intimately involved in both the strategy, the outreach, and the execution.
Justin Fortier: Do that strategy session move forward? I’m sure there are some times when you have a strategy developed and then you go out to outreach. And either when they start to see their first companies that you’re showing, maybe they change, and I know that probably takes a lot more work for your firm to adapt to that change. Are there any themes that you see or elements you added to your process that that helped reduce the amount of waffling. I don’t know if that’s the right word, but going back and forth when you’ve worked with these clients.
“We figured out that we need to be proactive and assertive in suggesting. It makes someone feel relieved that somebody with the appropriate background is guiding them down the right path.” – Doug Lovette
Doug Lovette: Yeah, that was a bit of a learning process too. So early on, if we found a willing seller, and we collected all the information, and we were presenting it to the client, and oftentimes, our main contact was the CEO of the business. And these are anywhere from a couple 100 million in revenue to several billion in revenue companies, some very successful, very accomplished CEOs and CFOs at these companies. So we just naturally assumed, “Okay, if we came to them with all the information, all the facts, they know exactly what to do next.” We realized pretty quickly that while they want to appear that they know what to do next, many of them don’t have an M&A background, and they really didn’t know what they should be doing next. So early on, we figured out, we really need to be proactive and assertive in suggesting, “Okay, here’s all the information. Here’s our view. Here’s our recommendation. Here’s the next step. Here’s what we should do.” Even to the point of, “We’ve run the models, here’s what we think, this is the price we should go in, this is how it should be structured.” And we found pretty quickly, that instead of getting pushback, they said, “Yeah, that makes sense. That’s great.” I think they were relieved that somebody who had the appropriate background was guiding them down the path. Once we figured that out, we were able to smooth out, what you were suggesting the waffling or changing of a view or strategy or cherry picking or being overly selective, all those kinds of things. We realize that, it’s not just, you initially going to think we just have to manage that business owner, meaning we have to hold their hand, warm them up, try to get them intrigued about a potential sale, or try to keep them walking down the path. We also learned pretty quickly, you have to manage the target business owner, but you also have to manage the client, and you have to manage the process. And each of those pieces are equally important.
Justin Fortier: Yeah, that makes quite a bit of sense. And when you’re setting up this strategy, how much is your team already looking at what exists out there to buy? Is that part of the research before you even develop a strategy? Because I feel like it could be difficult if you work out, like this is the type of business we want, and then there’s three of them, one of them’s owned by another conglomerate or something, and one of them’s a family-owned business and they’ve got, I don’t know, like four generations on their family page and it’s clearly important to them. And then, you get your client excited about the strategy, but there’s really not anything to deliver on that. How do you go about that assessment process?
Doug Lovette: That’s a really insightful question. Because I don’t think people always think about that. They think more, “Oh, this company wants to make acquisitions, they must have already determined that it’s fragmented.” And there’s a lot of options out there. But in fact, that that isn’t the case. And from the beginning, until today, we’ve always taken the same approach. And we say to potential clients, prospective clients who say, “Hey, boy, we referred to you or we just met you, we’ve talked to you, it sounds great, we want to move forward.” We like to do pre-work before we get into something. And we say, “So give us a little bit of time to do some research on our site…” to really look at the target landscape, and really get a better sense for what’s out there, if it happens to be an industry sector that maybe we haven’t done any recent work in. And we tell them, “Look, that’s for the benefit of both of us, we want to succeed for you.” And to your point, if there’s only five companies out there that makes sense for you to buy, you really don’t need us. But our experience suggests that if there’s a 30, or more preferably 60, 80, 100, that could make sense, we’re going to have a highly productive engagement. And they understand in fact, they appreciate it instead of firms saying, “Oh, they want to hire us, let’s just grab it and hope it works.” We take a very insightful, professional approach and say, “Look, we’re gonna take some time upfront, that’s on our time. And we’re gonna come back to you and tell you what we found out.” And so, we’re both going into it with eyes open. We’re both going into it with realistic expectations. And we’ve certainly had some cases in the past when we did that pre-work, and determined that there just wasn’t a lot of targets that were fitting the specific acquisition strategy, the client, and we told them, “We don’t think it makes sense collectively, for all of us to be engaged here.” I think they appreciate that there was a good amount of work done before we reached that conclusion.
“This podcast is called the Toolkit, because I want to talk about the tools, but then I realized that most of the tools that I want to discuss were skills, ideas, or concepts.” – Justin Fortier
Justin Fortier: This podcast is called the Toolkit, because I want to talk about the tools but then I realized that most of the tools that I want to discuss were the skills or ideas or concepts, but I know you’re not doing probably this earliest level of research because you have a team before you. But does that process start with some of the tools like company databases like PitchBook and Capital IQ? Are there any other types of things that either your firm’s developed over the years or other things that you found fruitful and assessing companies like this stage?
“We’ve determined that the research and the target identification is so critical to what we do that we don’t want to shortcut that piece. So we invest an extraordinary amount of money across a number of databases in order to have all the best information available.” – Doug Lovette
Doug Lovette: Over the years, I always say the process, which is predominantly focused on target identification and collecting as much data as you can and all the targets you’ve identified, but it’s really an art and a science, the science piece, or the databases that you subscribe to. So in that regard, we’ve determined that the research and the target identification is so critical to what we do that we don’t want to shortcut that piece. So we invest an extraordinary amount of money across a number of databases in order to have all the best information available. So we use, we use graph data, we source scrub, we use Zoom info, and we use Capital IQ. And then, but then that’s just giving you a lot of raw data, right? It’s giving you a lot of companies that at a high level appear to fit of a specific acquisition strategy. But then it takes a lot of additional filtering and scrubbing, to really work from that broader list down to companies that truly said, we have a really rigorous and robust research process, which it has to be critical, because when we present a final target list to a client, we want them to say 99% of those names. Yeah, I totally get it. Those are a good fit and the 1% that don’t fit, we just want it to be, that’s a fit. But I know the owner, we’ve had a bad experience with them. We don’t want to buy that company, we have a two younger guys, super sharp guys that are 100% focused on research. And that kind of shows you how critical it is not only does it use those databases, but to then continue to filter and scrub to get to a good list.
Justin Fortier: When you’re presenting this list. It sounds like you are focused on presenting only hits, or you said 99%? Is that something you learned over time that it only makes sense to show what exactly fits the strategy, and presenting more companies is a distraction or confusion? Was that always the process? Or is that something you learned?
Doug Lovette: No, I would say that evolved over time. Originally, we would do the work from years ago, to put together a target list and we cast a fairly wide net. And in some cases, I think we probably were cutting corners saying, “We had less people than we were probably cutting corners, but this looks pretty good. Let’s just put it in front of the client, let’s have them go through it because they know better than we do, what they really like.” But the problem with that is I think it was a frustration for the clients. Because that meant that they had to put a lot of time into it. Because if they looked at a target, it didn’t really fit. They say, “Boy, I gotta I really got to check every single one of these and make sure it’s a fit.” And again, pretty early on, we said, “Okay, accuracy in identifying targets is critical.” But then we said, “But it’s a balance, right?” You do want to cast a bit of a wide net, because it’s easier to take a broader list and reduce it than it is to have a narrow list and wonder what you missed the last few years. And I’d say over time, our business has really evolved in the early years, it was heavy corporate, with a little bit of private equity work in the last five years, it’s completely flipped, we’re probably, you know, 80% to 90% doing strategic add-on work for portfolio companies that are owned by private equity firms. And we can talk about what led to that trend. It was really a market trend. But that audience in particular, that private equity audience and the management teams, their portfolio company are very aware, obviously very sophisticated as it relates to what’s a fit, what’s not a fit, that really forced over the last five years, we had to be even more accurate than we’ve been before. And the way we address this situation where we said, “Okay, we don’t want to inadvertently exclude something that might be a fit.” Because there’s still going to be overlapping products, overlapping markets, we’re only gonna put something on there that we can comfortably argue it’s a fit, and here’s why. But by the same token, there could be many of these businesses, there’s something about them, they might be doing something else, serving another market, a different capability, different geography that someone could argue, “Okay, that’s not really a fit.” We’ve started tiering the lists. And in the early days, we’d have the client tiering list, for the most part will initially tear it and then have them confirm our tiering meaning, we’ll say, “Okay, tier one, these the ones we identified, they seem to check all the boxes, we really think this is a fit.” Tier two is we also think is a fit. But these are companies that are also doing something adjacent that we still think we should make a phone call to and talk to those owners, because we may find that the mix in their business is either more towards what we’re looking for, or it’s away from what we’re looking for. And then that would really what the level of interest would be. So we do a tiering now, and then we present it to the client, and we asked them to evaluate arterial and ultimately it’s a simple 1231 in the bull’s eye, looks like it’s a really good fit. That’s gonna be the first wave of outreach calls to, again, it’s a potential fit. It looks like it could be attractive. But that’s going to be the second wave of calls. And three is just the category mentioned earlier, where they just the management team, they happen to know the company or the owner. And there’s just, they know they don’t like them, or it’s not a fit for some other reason, and so, they’ll knock it off the list.
Justin Fortier: It seems like there has been a trend from what you’ve said so far about more and more hand holding more assertion from your side, as you’ve gotten more confident about the process to guide which takes more work off the plate. You talked about the business shifting a little bit, or shifting quite a bit from corporates to private equity. Was that… the corporate business basically stayed the same in total number of deals for you, and the private equity business just really took off because of the increase in private equity funding and the sophistication and maybe the amount of capital these companies have, so they’re really looking for advisors to help them speed up or I think roll up. I don’t know if you use that word, but they’ve acquired a company and one of the services they offer is helping that management team grow quickly through acquisition or corporate actually declining as a part of your business?
“The sell-side auctions are becoming much more competitive for quality companies.” – Doug Lovette
Doug Lovette: Yeah, no. Great question. I think it’s a two pronged answer. First, really, corporates are as acquisitive, as they’ve ever been. So that piece hasn’t changed at all. I think what’s changed is the overriding trend in the market for the private equity firms that everybody’s been seeing for a few years. Look, it’s always been competitive. But in the last few years in particular, as the markets been stronger, the sell-side auctions are becoming much more competitive for quality companies. So ultimately, what happens is, whoever’s going to win that auction, is likely paying a very high price, a premium price. And an often organic growth alone isn’t going to provide the return they need based on the amount of equity, they’re investing in that platform company. So now, whereas add-on acquisitions, in some cases, for private equity firms were more of a luxury over the last few years, it’s become an absolute necessity, they really need to do add on acquisitions at lower multiples, in order to get the return that they’re looking for. So the thesis has changed, where add-ons have become a lot more important. And with that, I think a lot of these private equity firms look all their traditional buying build firms, many of them were already using buy-side firms like us, because that was their investment style. But the rest of the private equity market that would only selectively pursue add-on acquisitions for certain portfolio companies now said, “Look, that’s got to be a part of the growth plan.” And so, they said, “We don’t want to distract management, we don’t want them doing the outreach, when we’ve already put an aggressive organic plan in front of them, we need to get some help.” So they started popping their heads up, “Well, we’ve been hearing about these biocide firms out there, and maybe we should talk to some of them.” And that was the market shift that really ramped up the private equity side of our business. And it will be the last few years as we like anything, if you get an engagement with the private equity firm, and you do a great job. They say, “Oh, well, I’ve got this other portfolio company over here, I want you to do some add on work there. Oh, by the way, we’re pursuing a new company and a competitive process, we think we’re going to win it, we want to engage you there as soon as we close on that.” The corporate business was really a referral business. It was really their commercial banker, their accountant or attorney would say, They’d reach out to us and say, “Hey, I’ve got a company are interested in acquisitions, I want to introduce you.” The private equity side, we could actually proactively call on these groups and say, “Hey, you may not know who we are, here’s how we do business. Here’s how we’re different. Here’s clients we’ve worked with in the past.” And so you can hire a business development person, and we really started getting in front of this is probably starting four years ago, getting in front of a lot of private equity groups. And then it really just built out from there.
Justin Fortier: When you’re reaching out to the target businesses, if it has a private equity owner already, that’s your point of contact. I heard you mentioned calling CEOs before, I think that was maybe in, “your clients were the CEOs” context. But is that the people you’re typically working with? You don’t reach out to one of their portfolio companies?
“We have several managing director-level people who do all the outreach to our targets, and we’re always trying to get to the decision maker or the owner. That’s who we want to connect with.” – Doug Lovette
Doug Lovette: I’ll answer it two ways. So in terms, obviously, in terms of not obvious, but in terms of prospective clients, we’re reaching out to the private equity groups in terms of just introducing the firm, if they don’t know us already, and this really goes back four or five years, and then they’d say, “Okay, you know, great, sounds great.” And we were always differentiated because our model from the beginning was, we feel a way to be most successful in executing an add-on acquisitions, is to do it with very experienced, senior people. So we’re very top heavy as a firm and with a number of managing director level people, it’s that level that does all the outreach to targets and really all the client service work because that increases the probability of success when you’re a 30-year investment banker reaching out to someone in the same peer group age group. There’s a maturity level there that connects well with those business owners. And we feel that that helps create success. But at the target company level, we’re always trying to reach out to the owner of the business. We want to get to the decision maker or the owner. That’s who we want to connect with, on a sort of marketing business development basis. We’re always calling on the private equity firms, because obviously, that they’re going to say, “Okay, we’re going to introduce you to the management team of this particular company, you’ve convinced us that you’d be a great fit for this.” But we don’t want to just force this decision on the management team. So we also want you to talk with them as well and make sure that they’re comfortable with engaging you here, so it’s a two-step marketing process.
Justin Fortier: You said, you’re top heavy. Are most of those senior people all coming from investment banking background, and are they more generalists? Or do you hire specific sector focus? What have you found works best for this type of work?
“We’re still playing an advisory role, even if it’s providing a second opinion about valuation or structure strategy. That’s how we differentiate ourselves from the other firms that are doing buy-side out there.” – Doug Lovette
Doug Lovette: Yeah, no, as a firm, we’re intentionally generalists, mainly because we feel like it’s the quality of our process, the quality of our people, the approach and we feel like it can be universally applied to the vast majority of industry sectors out there. It’s the minority that are really nuanced. And if we don’t have direct experience, we’ll be the first to say, “Hey, we’re not a great fit for this.” But the vast majority of the industries out there, we’ve either done some work in, or we can come up to speed pretty quickly, the background of the people. It’s a bit of a variety, but it’s all M&A related, the senior people got 25 years in investment banking. I’ve got a couple of colleagues with sit very similar investment banking backgrounds, we’ve got corporate development backgrounds, we got management, consulting, and leveraged finance. So we’ve covered everything that every angle of a typical M&A transaction. And that is the right background. Because even with the private equity, we still need to be in a position where we’re still playing an advisory role, even if it’s providing a second opinion about valuation or structure strategy, that’s still a critical part to our value add, and how we try to differentiate ourselves from the other firms that are doing buy-side out there.
Justin Fortier: I’m sure this is something that investment bankers learn over a long career about how to reach out to targets, while especially in your buy-side case, when you’ve identified a business that looks good on paper that your client may like to acquire. But reaching out to businesses, the private equity owners are probably more likely to talk to you because they’re in the business of buying and selling companies, but getting the attention of a family-owned business and get with them or get them excited about something. Are there any types of skills or tactics that younger people coming up could learn about communication? Have you ever had experiences where somebody said, “No, we’re not interested.” and you’ve found a way to convince them or contact them or get the idea in front of them enough in order to have them say, “Okay, yeah, we’ll take a look.”
“Establish credibility by making someone feel special. That you’re genuine, despite them receiving these goofy calls all the time, that they were specifically selected for very specific strategic reasons.” – Doug Lovette
Doug Lovette: Yeah, sure. First, the vast majority of the companies we’re calling are privately owned. And we’re able to run databases to determine if a company is privately owned a target, versus owned by private equity firm, some of our clients, private equity clients say, “Hey, you don’t need to call the ones that are owned by private equity, because we know it’s gonna be all about price. And it’s unlikely we’re gonna get a deal done.” But some are open to that. But really, the idea is to try to find the privately owned companies target companies. Yeah, and with them, it’s very nuanced to your point. First and foremost, you’ve got to make them feel special. And you have to make them feel like they’re not part of just some shotgun approach that instead it’s they were specifically selected for very specific strategic reasons. We have to make sure before every outreach call we make, that it’s very customized, and that we’ve looked at the information about that target company, we’re going to reach out to that we’ve looked at their website, that we’ve thought through what the strategic fit and rationale is. Because you only have a short window, if you’re talking to that owner, you have a very short window to establish credibility, where they say, “Okay, I get these goofy calls all the time somebody wants to buy my business, but no, this one, this is different. This one seems genuine, it seems credible. They’ve spent the time to look at my business.” And so we articulate very clearly the strategic fit, in other words, why is our client interested? And the ultimate goal is they would hear what we say and go, “Well, I get it, I think I completely understand why they want to buy me, it’s a good fit.” And so the real key is to not make that conversation or the transaction about money, because they’re not for sale. So their natural inclination is to fall back. If you give me a crazy price, I’ll sell you my business. No, if there’s some interest, we want to first say hey, let’s put price and money to the side for a minute. We ask you just to accept that our client is willing to pay a fair market price for a good business. So before we get there, let’s just first figure out is the strategic set, what we believe it to be, is there a good cultural fit, is there good chemistry across the principles? And we say, because if we don’t have those pieces, prices is irrelevant, and we’re all wasting our time. And so they said, “Yeah, that makes sense.” And it’s a more comfortable way to evaluate a fit and a more comfortable way to maintain a dialogue. And so, that’s the real strategy is to try to really connect on strategy and culture, before we ever talk about price.
Justin Fortier: Culture is something I’m still early in my career. So I’m always trying to get a sense of how you can assess that in the early stages. If you have any sort of short answer, I’m sure it’s pretty difficult. But that’s something I’m really curious about how one assesses that just quickly, a lot of companies websites start to look the same, they might have similar values posted, but how can you determine what’s really important to that owner? And if your client values the same thing, especially when private equity sometimes has a strategy of cost reduction? Sometimes it’s about growth? But yeah, do you have anything to speak to that?
Doug Lovette: Yeah, you’re right. It’s difficult through a conversation to assess culture. But we asked early on when we’re talking to business owner, what elements of a transaction are very important to you beyond price? So then you’re gonna start to hear things like, “Oh, I want to take care of my management team. I want to take care of my employees. I want to make sure we maintain this facility and this particular task.” So you start to hear some of the things from the target side that are important. And then, ultimately, after we have our initial conversation with the prospective, or with the target company, and they’re interested in willing and continuing the dialogue, we download all that information that we’ve obtained on that call to our client. And we say, “Hey, we think this is pretty interesting, we think it’s a good fit. But let’s move to an introductory call.” And so it’s on that call, that you first get a sense for culture and chemistry, because we’re going to bring the CEO of our client onto that call, the business owner is going to come on to the call. Now, obviously, the last couple of years, we’re able to use Zoom or team, so at least they’re seeing each other. But you start through that conversation, that initial call, it’s a higher level, it’s a little bit of a get to know you, it starts with our client giving kind of a quick history on the business, where they focus on what’s important to them. And then, we flip it over to the target to do the same. I think our clients’ culture is important. Our clients are just as much as culture is important as the target company. I think it’s through that initial dialogue you start to hear what’s important, how they manage their businesses, and that’s, early on, the best way to get to culture. And ultimately, to keep moving through the process is going to be a point where there’s a face-to-face meeting. And sometimes, most often, it’s at the target company’s business location. But sometimes our clients say, “Hey, we want to first invite him into our facility.” so they can get a feel firsthand for our people, our culture, and our operations.
Justin Fortier: I was listening to a woman who runs she calls it a private equity firm focused on boring businesses. And some of these privately held family-owned companies that she’s trying to reach out to don’t have a ton of information out there. And she was saying that she’s used a bunch of different tactics, calling being the first one email sending letters sometimes. Are there any things you found effective to get that first meeting so you can actually get that appointment set up where you can have everybody come together and discuss the opportunity? How much work have you done beforehand?
Doug Lovette: Yeah, yeah, we’ve never been a big fan of mailing a letter or sending in FedEx, things like that, more just sort of traditional, we always start with a call, wait, often, you may get in the voicemail, which is fine, at least you speaking to them directly. When you leave a voicemail, we immediately follow up with an email. But it’s a very descriptive email. And we always say, who we’re calling on behalf of, you know, what’s our client’s name, a link to their website, sometimes we have a short overview presentation about our client. But we’re fairly direct about why we’re calling, but it’s through that voicemail. And through that email that we need to, we really need to be articulate in and explaining the fit, why we’re reaching out and just demonstrate some knowledge. So they say, okay, this is credible. And most often, they will respond by replying to the email instead of calling you back, which is fine. It’s easy to respond to the email, set up a call, and then go from there. So it’s let’s call email call email, call, email. So you can, you know, make a connection.
Justin Fortier: I found that I’ve often underestimated the amount of work that actually requires to get something done working for school. School was very easy to estimate how long something was gonna get done. Do you find that the number of companies you start with, I think you said 30-60, whatever that list may be of a complete but strong target universe or whatever you want to call it, is that something where the total number of companies you started with has to get whittled down at a certain point? So people can tell that you’re serious when you start making these introductory calls? Is there a number? Or is it more of a feeling of these are the right people to move forward? Because if you’re trying to be sincere to 15, I feel like that would be difficult.
“We really like the engagement to reach at least 70%. The other 30% are some other companies who won’t respond no matter how many times you reach out, because they’re not interested.” – Doug Lovette
Doug Lovette: Yeah, no, upfront, obviously, there’s a lot of vetting around the list. But whatever the ultimate approved list is where the clients and okay we prove that you reach out to these business owners, we’ve tracked to statistics. One is just the initial penetration. In other words, what percent of the business owners on the approved list are we able to actually talk to? We got through, they responded in some fashion. And over the course, the engagement, we really like to get that at least to 70%. The other 30%, they’re just some companies, no matter how many times you reach out, they’re just not going to respond. They’re not interested. They choose not to respond, and that’s fine. That’s just the way it is. That’s 70% penetration, but that doesn’t mean they say, “Yeah, we’re interested in talking about a sale.” It just means we’ve talked to them, and they’ve said, “Hey, we’re not ready; thanks for reaching out, call me in two years.” Whatever the answer is. The other stat we’re looking at is what percentage of that initial approved list, or what percentage were actually willing and interested in discussing a potential transaction? That typically, you know, it varies a little bit, not a whole lot, that tends to be 15% to 20% of companies saying, “Okay, this is interesting, I’m intrigued enough to have a dialogue.” And those things stay fairly steady across most of our engagements. But the real, I think the real key to what we do, ultimately success and to a great extent hinges on our ability to very quickly connect and develop a rapport with that business owner, that target business owner, because if we can get them comfortable with us, then they’re going to put their guard down a little bit, they’re going to open up in providing information and answers to our questions. But more importantly, they’re going to open their mind to exploring the possibility of combining their company with our clients. So that gets back to the value of having a more experienced mature person doing the outreach. Because just through the course of time and experience, I think we’re in a good position to try to develop a rapport with that owner. But ultimately, we don’t want them to see us as, “Oh, they’re representing the buyer; they’re going to try to screw me.” We want them to look at us as, “Hey, this is what these guys do every day for a living.” View us more as a facilitator because it takes it takes two sides to make it work. So we say, “Look, we’re just trying to figure out if this is a good fit both ways, and let’s explore it together and figure it out.” And then ultimately, because they’re comfortable with us, they’ll ask us, maybe, the dumb questions that they’re reluctant to ask our client directly because they don’t want to look bad. And so we’ll, depending on their level of sophistication, we’ll talk about things to think about. We’ll talk about add-backs to their numbers, we’ll talk about how the transaction comes together, and we’ll talk about how companies are valued all those things. But ultimately, we want them to feel comfortable with us. And if you get that comfortable rapport, it really changes the whole dynamic of the conversation.
Justin Fortier: Well, thank you so much, Doug; this has been insightful. I’m definitely going to send this to anybody interested in private equity or buy-side banking, for that matter. So thank you very much.
Doug Lovette: Yeah. Great talking with you, Justin.
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