[00:00:04] Speaker A: Hello and welcome everyone. I'm Peter Lehrman and this is Master's in Small Business M and A. This show is an ongoing exploration into the vast and undercovered world of small business M and A, where we interview both the proven and the emerging owners, operators, investors and advisors whose strategies and methods for transaction success have been put to the test. The show aims to surface the nuanced intricacies, the key ingredients, and the important factors that can improve your decision making in your own journey in the world of small business. MA this podcast is produced by Axial, an online platform that makes it easier for business owners and their M and A advisors to find, research and privately connect with a diverse mix of professional buyers of small businesses. In addition to learning more about Axial, you can find this podcast, show notes, edited transcripts and many other related resources, all for free at Axial.
[00:01:02] Speaker B: Hey everybody, this is Peter Lehrman. Welcome to Masters in Small Business M and A. I am your host and I am extremely excited to have Adam Brezlowski join the podcast today. He's one of the founding partners and managing partners at Oberon Securities. We will get into what Oberon is and its great history. Adam, thank you so much for joining us on the podcast today. I'm looking forward to diving in.
[00:01:24] Speaker C: Thanks for having me Peter.
[00:01:26] Speaker B: So we spent a little bit of time before Push and Record just talking about lots of different topics and lots of different places to go. I do want to quickly give you a minute to just introduce Oberon and just the Oberon story. It's a multi decade story now and so just take us through a bit of the founding story of Oberon and then we'll get into some really good topics.
[00:01:46] Speaker C: I appreciate it. I'll keep it commercial free, but we started Oberon, my two partners and I about 23 years ago after having spent about a dozen years prior to that working at bulge bracket firms to really assist closely held lower middle market business owners with either financing or their M and A needs, be it buy side or sell side M and A At the get go, three of us started this working out of one of my partner's father's offices rent free. Thank you very much to Bob Schmidt and Today, fast forward 23 years. We're 80 professionals across virtually every market in the US. We're headquartered in New York City and we're predominantly advising business owners on the sale of their business, but continue to assist with regard to debt and equity financings across virtually every industry sector.
[00:02:42] Speaker B: Could you talk a little bit about why you all think you started the business. What was the founding inspiration for Oberon?
[00:02:50] Speaker C: To be perfectly honest with you, Peter, I think at least two of us had lost our seats coming out of the tech meltdown in 2000, and new jobs at bulge bracket firms were not plentiful. That was, think back to the middle of 2001 when the NASDAQ contracted. I don't know, I think it dropped 80% from 80.
[00:03:13] Speaker B: 90%.
[00:03:14] Speaker C: Yeah. And I was covering telecom, media, tech companies at J.P. morgan at the time. And J.P. morgan actually ended up getting bought by Chase. And I think they let go 90% of the combined workforce. So my wife had just given birth to our first child, played a bunch of golf over the summer, and as the weather got cooler, I figured I better get out of the house. And ended up bumping into one of my now partners who I'd gone to Wharton business school with. And he had the idea of maybe we should roll out our own shingle. We were like newly minted VPs. So the thought of like starting a business was a little bit intimidating. But at the same time, the opportunity cost was pretty low. So we rolled out Oberon securities, the three of us, and from there we really focused on the folks who would work with us, which were lower middle market business owners. Because there weren't really at that time, very many banks like us focused on companies like that. And I think we were one of the earlier entrants into serving lower middle market closely held business owners. And it's been quite a ride since then.
[00:04:18] Speaker B: Do you guys remember your first deal or the first couple of deals? I mean, it seems to me that if all the investment banks are shutting down and laying off desks and analyst classes and stuff like that, they're doing that because there's no deal activity. So for you guys to leave and go start your own investment bank, how did you guys find that? Didn't necessarily turn into a whole bunch of new deal activity. The market was still terrible, even though you guys were now out on your own. So can you remember back to those early months and years, what were the deals that you were able to do because the market was still in very rough shape.
[00:04:55] Speaker C: Not only that, but none of us had really had any experience in originating deals back then. I was 30 years old. I was like one of those middle level bankers that were executing other people's deals. So I had no experience whatsoever in originating any deal flow. But we, as accidental entrepreneurs, you sort of get thrown into something and you just start talking to people. You work your network and opportunities. Not many of Them were, in the early days were all that attractive, but eventually cross your desk. And one of my earliest deals was working with a company called XPhone, which was a small publicly traded telecom services company with something like $2 million of EBITDA at the time. And it had been started by a guy even younger than me, and they wanted to raise, I think it was like a million dollars only. And we get paid as a percentage of the proceeds that we raised. So that wasn't really going to pay too many bills. And the owner said to me, look, my constraints are, number one, I'm not going to pay you a retainer, and number two, I'm not going to give you exclusivity. And at that time, I was like, great, but you are going to let me work and try to make something happen. And he said, yep, we're going to let you do that. And so we went out, we found some investors that were willing to put in a little bit of money. And then one came along. It was called Crestview. I don't think they're around anymore. Sort of a hedge fund out of Chicago. They said, we love this story. Can we invest $2 million? And we were only hired to raise a fraction of that, but we had other investors and we ended up raising $3 million. And back in. In those early days, that was really, really exciting for us. That was huge. And after that happened, this was like a theme, I think, through our Oberon years. But after that, this guy went from saying, I'm not going to pay your retainer, I'm not going to give you exclusivity, and pretty much saying, like, I'm not going to trust you on anything too. After that happened, it was like I worked with that business owner for 10 years, and I would say every year we did something. We were buying companies, we were raising debt, we raised more equity. And ultimately we sold the business to a private equity group, took it private, company called Tower Three Partners for like $170 million. And so that was an early deal, but it was one that spanned 10 years. And the owner of that business, frankly, became like my best friend. And it was just a pleasure working with him. And that was something that was different for me versus working at large investment banks, or it was pretty impersonal versus when I work with business owners now, you inevitably you're talking to these guys multiple times a day more than my wife. I feel like I was speaking to the owner of that business. It just became a really close relationship. It was fun for both of us to the end.
[00:07:46] Speaker B: Yeah, that's an awesome anchor client that you guys found your way into in the early days of Oberon. That obviously made a huge difference to have a 10 year relationship with them that you guys earned your way into. That's a really cool story. So today you have now about 80 total bankers at the business. I want to get into a bunch of topics related to bankers and what makes them great and how you think about recruiting and how the answers to those questions implicate owners and implicate the buy side. So we're going to cover all of it. But what has the growth been? Has it been relatively slow and steady and fairly linear over the last 20 years? What has been the growth path to being the three co founders up to now a team that's close to 100. Have there been any big spurts of growth or has it been relatively measured and linear?
[00:08:35] Speaker C: I think over the first 10 years we were still sort of getting our sea legs and I really think it takes about that long. Peter, I don't know what it was like for you at Axial, if you had the same experience or not, but for me and my partners, over the first 10 years we were scrounging for clients. We had great aspirations to build a meaningful middle market investment bank, but we didn't have a fully built out plan about how to do it. And so what I found was that we grew from like three to like 15 or 20 bankers, but we had a little turnover during those years. And I would say the quality of some of the folks we were able to recruit in the early years was a little lower than they are today. And I think part of that is just a natural evolution. Once you've been around for 10 or 15 years, people start to know who you are. And when I mean people, I don't just mean potential clients, I mean investment bankers across the landscape. And so I think that they saw we had staying power. We were closing 10 to 20 deals a year and that just made it easier for us to grow. So I think probably in the first 10 years we grew from 3 to 20 slowly and up and down a little bit. And over the last 15 nearly it's just been faster growth. We've had a great deal of stability amongst our bankers. We've got folks that have been with us for 20 years, but that are not owners. But I would say that probably the majority of people we hired 10 years ago are still with us, which in banking is unique. This industry is thought of as or characterized by a high level of banker turnover and People sort of exiting the industry. So that's something we're pretty proud of.
[00:10:26] Speaker B: Yeah, yeah, for sure.
[00:10:27] Speaker C: And by the way, you know, we've done that. It's not that we're such wonderful people. I think we have a good team of people. But the strategy around it has frankly been provide people with resources, provide bankers with resources when they join your firm. Because I think many banks, folks like me, when you start a firm, you go from collecting a healthy paycheck to all of a sudden having outflows until you start closing deals. And so most folks that start banks, I think are focused on minimizing fixed costs. They're happy to pay out variable costs, but they're not really willing to spend on resources like technology and salaried junior bankers and nice office space. Those things are important and give bankers leverage. And so from early days we made those investments and we've tried to build something which isn't just a collection of people that aren't really working together, but rather a highly collaborative culture where we're having multiple calls a week amongst us to help one another on deals and stay present on everything going in on the market as well as pay above the market. People do care about that in banking. Sort of been that three pronged approach to recruiting and retention that has served us well.
[00:11:39] Speaker B: Compensation matters. It matters in banking. It matters in every profession. Skilled, unskilled finance, non finance. Any insights or any clear positions that you had in terms of just how to set up compensation that have been hallmarks of Oberon and part of the retention story.
[00:11:56] Speaker C: Look, everybody does it different. I don't think there's a right answer for how to run your firm and how to compensate your people. I think you just have to find a match between your people and how you can compensate them and how you want to compensate them. In our case, we err on the side of transaction based compensation. It's good and bad. The larger banks don't really do that as much. You have a very significant base salary complemented by a discretionary bonus. A lot of the folks that end up at Oberon have come from that and said, man, I've been really successful. I generated $10 million in fees over the last two or three months, but I only got paid 20% of that. They feel like they leave a lot of money on the table. And so we sort of say, look, if you're willing to take a little more risk on the base, we'll pay you a lot healthier on the success based compensation. And so that is attractive to High performers is what we've found when coupled with investments in fixed infrastructure and, and on a collaborative environment.
[00:13:00] Speaker B: I think people think that investment banks are not businesses just like any other business. It's like in this other category or private equity firms or whatever, they don't tend to get thought of as operating companies in their own right. And to hear you sort of just walk through the entrepreneurial start of the business, it's no different than starting a tech company or a services business in many ways. You're scrounging for clients, you're taking free rent wherever you can get it. Your ability to compete for the best talent in the first handful of years is probably quite hard and quite challenged. And you deal with turnover. Maybe as a result of that, you're also probably figuring out how to be a good leader and manager yourself. We could swap in tech company or anything you want instead of investment bank. And everything you said would sound similar. It's a very similar entrepreneurial story. Even though I think people view investment banks as this totally different entity type.
[00:13:55] Speaker C: Funny you should say that. I think if you were to take a survey amongst bankers just in general and I think they would say investment banks are some of the worst managed businesses with the least leadership. And I don't know that that's true or not. Maybe it's just that bankers don't like to be managed. But I think over the last 15 years we've taken a really deliberate approach and put a lot of effort into recruitment and retention of high quality bankers because we feel like if we get that right, everything else falls into place for the benefit of our clients and for us as owners of the business. So the key is attracting and retaining a critical mass of high quality, highly experienced bankers with deep industry expertise. And if you can do that, your clients are going to be happy and we'll be happy and our bankers will be happy and stick around and it all just builds on each other. So to me, I spend a little less time now than I once did handholding clients on each transaction because I've got people in many cases that are even better than me doing that, which frees me up to focus, working on the business and growing it.
[00:15:05] Speaker B: I want to talk about the bankers a little bit more. And just what you think defines an excellent lower middle market or middle market banker, how you think about that, how you source for that? Can we dive in on just the mind of Adam, on what are the key tenets of a great investment banker who's going to serve the lower middle market and middle Market, business owner. And then I want to cover that from the buy side's perspective and from the owner's perspective. But I want to start with you and how you think about finding them and recruiting them and then aligning them.
[00:15:39] Speaker C: Yeah, it's gotten a little easier to find these people with technology and just getting a little better known over the years. But I'm still getting probably 20 resumes a day on an average day. We're perpetually advertising for bankers. It's not a matter of I need two bankers to fill two roles. I just want really high quality people. And it's almost independent of industry coverage universe to me, what a really high quality banker is and an effective banker. I kind of break down senior bankers and just the funnel of overall deals into a sourcing of a lead. Before you have a lead, you can't really do anything with it. A conversion of a lead into a client and then a conversion of a client into a closed transaction. You're only as good as a bank as you are with the weakest of those three components as it pertains to closing deals. And I think that most banks in the lower middle market and middle market are focused on that first piece, piece sourcing leads. And I say that because when I'm interviewing and talking to bankers and there's a lot of good bankers out there, that seems to be the part they struggle the most with is finding leads. And I think as a firm we do that really well. Obviously when you have 80 people and one thing that we do, it's maybe a little bit different is we have maybe a dozen, what I'd call business development, exclusively business development professionals. But all the bankers originate, all the senior bankers at least are originating to one degree or another and have networks and relationships and do some outreach within their verticals. So we have a lot of lead flow. That's the front end. The back end, right. Is when you have a client, I'm going to go non linearly, I'm going to go to the end, which is you have a client and now you need to close a transaction. And there is an art and a science to sort of closing deals once you have clients. And I would say that the science, the process, if you will, is pretty cookie cutter and we can walk through it if you want, but I'm not going to go through it as it pertains to the topic we're hitting now. I think a lot of people can run a process, A lot of people can write a sim, pull together a financial model, pull together a Buyer's list, outreach for offers, run data rooms and all that sort of stuff. I think where the value for me when I get the most excited when I'm meeting a candidate is that middle step, that middle step of you have a really high quality lead. It's undoubtedly going to be a competitive situation and you can bring in a team of really articulate, experienced senior bankers that are going to work really hard to prepare for an effective pitch and come out of that pitch winning. And with the business owner feeling, man, I trust this guy. I like this guy. It's clear to me he's hardworking, he's thought a lot about my business, he or she. And I think that those bankers, they are not a dime a dozen. Those are hard to find if I'm thinking about being an effective senior banker. If you fill that role, it also means you know how to sell. If you know how to sell, by the way, you probably also have a network of people that are sending you deals and you probably also know how to sell that deal to buyers, whether they're strategic, private equity or otherwise. That's the piece to me that distinguishes an average banker from a really excellent banker. You can't have enough of those.
[00:19:12] Speaker B: Yeah. A fair amount of the audience on Axial are owners who own businesses, run businesses their founder owned or family owned. In some cases, the owners bought the business and are now running it or are maybe chairman and in a board capacity. Other folks are operating in corporate development and private equity capacities and really interested in deal sourcing. And I'm really interested to explore how origination for you and Oberon is similar or very different than origination for them. Every business owner is getting emailed. Every business owner is getting pitched by somebody constantly, whether it's an investment banker or a wealth manager or someone trying to sell the business software or digital transformation, whatever it is. The buy side is reaching out. But you all, as investment bankers are also reaching out. So how do you win leads? How do you originate good leads? How do the good bankers. How do you think that happens? If everybody's doing it, everybody's reaching out, everybody's going to conferences, everybody's exporting lists and sending emails. What defines the winner? Who's winning those leads, and what do you think it takes?
[00:20:25] Speaker C: I think there's like an old school and a new school way of lead generation. And at Oberon, we're really good at the old school and not so great yet at the new school. And it's something that we're looking into. But I think others are further Ahead, they're using technology to source clients, buying keywords on Google. They are hiring third parties to run email campaigns, they're hiring PR agencies. We don't really do enough of those things. And I think if we did, we'd probably have multiples of leads that we have now because we're very busy. We're probably at any point in time have 50 to 75 deals that are in process firm wide. But for us it's relationships. I think that's what we're best at is we have industry specialists who have gotten to know many, many business owners in their verticals. We have business development professionals who are out there. And most of our business development professionals have in some way or another gotten to know many, many business owners over the years. Sort of like you all do, right? You're not an investment bank at axial, but you guys, you're interfacing with tons and tons of business owners all the time. But accountants, wealth managers, lawyers, each of our bankers maintain relationships with selected close relationships from those industry networking associations. And it's not a quantity thing, it's a quality thing. For me, I've probably seen and I spend a lot of my time on origination. There's probably like a dozen lead generation sources that I spend all my time focused on that for me, building true win win relationships where those people get to know me and our firm and feel comfortable making referrals to Oberon because they've worked with us before, they know someone who's worked with us before and they know when they make a referral we're not going to make them look bad. Even if we're not interested, we're going to find a home for that lead and for those folks too. We're always trying to help them. It's a two way street if it's a wealth manager. We're not in the wealth management business when we're selling a lot of businesses, freeing up capital from our clients that were formerly illiquid. Now they're sitting on a bunch of liquidity. We'll make introductions to the right wealth managers. Same goes to lawyers and accountants and others. So it's old school. It may not be as interesting because it's fairly tried and true, but that's kind of how we do it at Oberon. Hopefully next time we do this, I'll be able to report more fully on how we moved into the 21st century.
[00:23:13] Speaker B: I think it's interesting that you guys are as busy as you are, that you have as many high quality businesses that have hired you and put their business in your hands to sell and that you guys don't do any of this. I think that that's as interesting as the answer that has AI and technology all laced throughout it. I think it's interesting that that approach still matters a great deal in this market. And I think I'm not surprised to hear the answer. And I think that it's interesting to see just the ways in which technology has not really impacted this market. And then technology in some ways has. There are great products like Capital IQ and PitchBook and Axial helps people on the sell side and the buy side. There are these quote unquote data and technology companies that have been impactful, but in some ways the business has been very unchanged for many decades in terms of how people win clients and win assignments. And I don't know, I just think it's a pretty Teflon resistant category in terms of sort of how it absorbs technology and how it reacts to change that happens very fast elsewhere.
[00:24:26] Speaker C: We use tech, but we just don't use it so much on the origination side. So we've been the Cap IQ subscriber for over a dozen years. We've been users of Axial's platform for 15 plus years. Those services have helped us immensely in terms of execution of mandates. We just need to I think utilize it as well for business development purposes.
[00:24:52] Speaker B: Are the business development professionals senior bankers who have stepped out of an execution role or do they have a different profile as professionals?
[00:25:02] Speaker C: In our case it's folks that have worked with business owners but not typically from wearing an investment banking hat. Almost all of our bankers, our managing directors on our directors and our VPs have significant experience before they join Oberon in investment banking. Both with working at larger businesses, but in most cases working with middle market closely held business owners even before they join our firm and they just make a lateral move to Oberon. But with the biz dev folks that's not really the case. I have business development folks that are former accountants, former investor relations professionals, former commercial bankers and so they boast many relationships but they're not accustomed to executing on that work. So they know a lot of folks that require investment banking services, but they themselves neither have the experience or the interest in providing the day to day execution that was involved with an investment banking deal.
[00:26:07] Speaker B: Let's change gears and talk a little bit about the buy side. There's two things here that I'm excited to talk about. The first is I want to talk a little bit about the way the buy side has changed and what you think has changed and stayed the same. And just what observations you have doesn't need to be empirical and data driven. I just want to hear anecdotes and perspectives on what you think has changed in the lower middle market and middle market from buy side complexion and how they do business and what it's like to work with them. And then I want to talk a little bit about this idea of coverage and how the buy side should cover Oberon and often it's vice versa. Right. It's how should the sell side cover the buy side. But there's definitely a bi directional dynamic underway. And so let's go with the first. Take me through some thoughts and observations on just buyers, how it's changed. What's interesting here, I'm happy to talk.
[00:26:59] Speaker C: About it from my perception. I have a feeling you know more about this than I do. But I'll give you my perspective as someone who runs an Investment bank for 20 some odd years, going back when we started this business at the lower middle market level, let's call that $3 million of EBITDA to 20. I've used that term without really defining it. When we started there was something like 1500 PE shops. Today it's like 6000. So there's been a fourfold increase just in terms of the number of PE shops that are out there. And that's worldwide. In terms of portfolio companies domestically, I think 20 years ago there were something like 800 portfolio companies of private equity groups in total. Today it's like 7,000.
So just within the private equity world there is a lot more competition for a fixed number of closely held businesses. At the same time, you now have family offices. I mean, we never even thought of reaching out to family offices. And they were really not investing in middle market M and A in the turn of the century. Now that is a separate and distinct category of buyers that we call on in addition to private equity. And of course, I think we're selling more businesses to strategic buyers than we are to private equity groups. They do tend to pay a little bit more, be able to extract some synergies. Yeah, there were certainly strategic buyers 20 years ago, but I think more companies, especially middle market companies, were content to just grow organically. And I think now there is a real emphasis on growth through M and A, complimenting their organic growth. Certainly we've had an incredible run with not a lot of blips along the way in the stock market since 2008 when things imploded. But since then it's Pretty much been a straight line up. I think every day today it feels like we're breaking new records in terms of the Dow and the S and P and the nasdaq. And so you have currencies of strategic buyers that are easier both to raise money with and to issue to sellers. And that doesn't even get into things like independent sponsors. That's a whole nother category of buyers that we find in our transactions. Depending on the transaction can be really valuable to have in a process, especially for some of the more esoteric deals that don't really cleanly fit into what some buyers are looking for. And I think they're particularly valuable today in part because even though you've had a proliferation of private equity buyers, at the same time they're much more focused on verticals than they were 20 some odd years ago. They have a much easier success raising LP capital when they're focused on one or two vertical sectors. And so when we sell a business like we sold a few years ago, one that always comes to top of mind is we sold business called Selective Search, which is a traditional offline matchmaking service.
[00:30:01] Speaker B: Yeah, to permanent equity, right?
[00:30:03] Speaker C: To permanent equity, exactly. And at the time they had a very small fund, but really they were operating more as a family office. Now they've raised I think a more substantial fund and they still hold that. And that was an attractive buyer, the selective team, because they were able and they still are, from what I understand, able to hold for like 20 plus years. They don't have a requirement. Their fund life even now they have a fund I believe is very, very long and that's very appealing to certain business owners.
[00:30:35] Speaker B: That's a 28 year fund in that case, which is really unusual. The standard fund Life is usually 10 years and you're investing for three to five and then you're harvesting for typically five to seven.
[00:30:46] Speaker C: Right. So you have all these different buyer types at the same time. It used to be the only leverage you could get on deals was through banks. And banks didn't particularly like lower middle market businesses. So the leverage you were able to extract if you're a sponsor or buyer of a closely held business was two to three times typically 20 some odd years ago. Well now you've got BDCs and you've got debt funds and non bank ABL lenders all competing to help fund lower middle market deals. And so leverage is shot up. I think I read the average leverage is three and a half times and I've seen it as high as like four and A half times on some of our deals. So between having all this capital and private equity and new buyer types and inflated stock prices and leverage, you've had one perpetual seller's market. That's what it feels like to me as an investment banker. And I think that you're seeing valuations as a result going from like the five to seven times that we were accustomed to selling businesses at back in 2000, now like 6 to 11 times or tech businesses, you're getting multiples of revenues and and as a result there's a lot more sell side M and A to do in the lower middle market. Business owners that used to say this is going to be a multi generational family business have thought twice and most are now as they approach retirement age or in many cases long before that, looking to transact when they're able.
[00:32:13] Speaker B: Adam, do you think that the change in the IPO market structure over the last 25 years is part of the story as well? I mean, you mentioned at the top of the conversation you had a public client with 2 million of EBITDA. That's basically unheard of today. You can't take a company public that's worth $50 million, $100 million, $150 million. They just don't go public anymore. Do you feel like that has also changed the way that small or lower middle market businesses exit? Or were these lower middle market businesses kind of never going public? Even if you go Back to the 90s and the 2000s, it was rare.
[00:32:49] Speaker C: That particular company xphone again run by Guy Niesenson, who's a terrific guy, he filed a self registration statement. He didn't do an ipo. He didn't even do a reverse merger. He didn't want to pay and bring on an old shareholder base. He just filed a registration statement, took himself public. And I think that thinking back to those days, I think the thought was it was easier to fundraise, honestly. And I think that there's not a whole lot of people that take that perspective today. You do see the SPAC market feels like coming up and down. And I've been through two waves of SPACs that were hot and all the rage and then basically it feels like to me anyway, just disappeared altogether. Once you're public, it's really, really hard not to be public and it's really expensive to be public. Multiple millions of dollars a year. So you're generating $5 million of EBITDA. Who wants to spend $2 million of that on public company costs? Boards of directors and who wants to spend half their time going out and talking to shareholders and hiring investor relations firms instead of just growing your business. So I think the folks that did go public are stuck. It's hard to go private with NTS. X phone got renamed NTS. We did it when they hit $15 million of EBITDA on an adjusted basis. It's a tough world. And also if you want to sell in your public, you're grounded in part by your stock price. As a private company, who's to say what the company's worth? It's worth whatever a buyer and a seller may agree on. Whereas you know, a buyer is free to just focus on the fundamentals of the business. But many of these public companies are relatively illiquid and the stocks are trading well below valuations they would as a private company. And it's really hard to go then sell it at a private company value when the stock is trading at half that. Because a buyer's afraid of looking stupid if things don't work out. You pay 100% premium to get to fair market. It doesn't work out. All anyone remembers is you paid 100% premium. And who does that?
[00:34:54] Speaker B: Yeah, that's interesting. One last question here on strategics, particularly since you guys tend to sell at least slightly more to strategics than to any other end buyer type. When you're talking about the lower middle market, 3 to 20 million of EBITDA, do you feel like the strategic buyer class that is most frequently at the table are public company strategic buyers or do you feel like they are other privately held businesses for the most part, how active are publicly traded strategics in the lower middle market? I know it's a big general question and is going to have a somewhat inaccurate answer just by nature of the question, but is the public company universe the buyer set for lower middle market businesses or is it more privately held strategics more and more of the time?
[00:35:40] Speaker C: Sometimes, but not usually. First off, I think like when we think about strategics, it's rarely the 10 ton behemoth that someone may think of associated with any given industry. Why is that? A three to $20 million EBITDA business, no matter where you are in that range, is not really going to move the needle for a multibillion dollar public company. Let's just start with the big public companies and we'll come back to the smaller ones. So those folks, unless you have something incredibly strategic, don't tend to be very opportunistic in looking to acquire smaller businesses because it takes bandwidth. If you're Going to buy a business. It's no easier or shorter to buy a smaller business than a larger one. We find that the best strategics typically are private equity backed privately owned businesses. Because every PE group that I know, when they're looking for a platform, they're already trying to figure out how can they add on smaller businesses and grow. Obviously they have the capital to do it. So we're highly focused on our sell sides at locating all of the possibly relevant PE backed portfolio companies in a given industry where our client may be strategic. Public companies are interesting as buyers. The thing I'll tell you about them in my experience is that they tend to be more opportunistic. In many cases they want to grow by size. Oftentimes they'll buy something that's wholly unrelated to their businesses. I've had multiple clients who have bought things that have nothing to do with what they do because they feel like it's a good deal, it's a good price, they like the structure, maybe there's a good amount of earn out and you have a buyer that will take their stock and so they're much, much more opportunistic. It's interesting to have those type of buyers in the discussions, but I would say more times than not, they're not the winning bidders.
[00:37:38] Speaker B: I'm not surprised to hear you say that private equity backed strategics are a great signal and that you guys work hard there. It makes a ton of sense. While we're talking about private equity, I would love to hear how you think about spending time with private equity firms, how you guys handle and manage inbound from private equity firms that want to make sure they are on the Oberon radar. Everybody in private equity wants to be top of mind for the next deal. They're trying to solve a top of mind problem and make sure that they're on Adam's mind and the mind of Adam's 80 colleagues who are running sell side processes. And so that has tended to create a huge amount of email, cold calling outbound and also a lot of conferences where people are working really hard to meet one another. And again, stay relevant and stay top of mind. How do you guys spend time with private equity firms? You clearly like them as PE backed strategic buyers for sell side assignments. You just couldn't have said that more clearly than you just did. But how would you recommend that a private equity business development professional or a managing partner who leads a specific vertical effort, what's the right way for them to cover the Oberon firm? Are they going to get an audience with you, or is it really just always in the context of sell side execution that the conversation unfolds? Is there any way to get up the funnel from that?
[00:39:02] Speaker C: I think that PE professionals are some of the smartest people that I know and maybe in my next life I'll come back as one of them. Although I love doing what I do. But there are a lot of them. And I would say just on an average day, I'm probably getting three to five emails from a PE firm in most cases that I don't know. And it is really hard when our focus first and foremost needs to be on servicing our clients and building our pipeline, that sometimes those PE outreaches can get lost. We tried not to have that happen, but it does from time to time. And I think about the ones where they are. What you said, top of mind, Peter. And I think it's a few things. First, we really want the relationship to be multidimensional. And what I mean by that is, of course we know private equity likes an early look and a good look at our pipeline and our clients and our deals. And they're an important buyer group for our deals. But I think the ones that stay top of mind also are really good about getting us more deeply ingrained in their firms and with their portfolio companies. We have, like I mentioned earlier, industry specialists across the spectrum and we want to get to know the teams and the businesses that they have. And we'd like to be considered ideally for sell sides when the time comes for them to exit. We're happy to get to know them on smaller sell sides, even sometimes with some buy side M and A help or financing help and we really appreciate or when they run into businesses that they're not going to buy, maybe there's not a banker and they make referrals to us. Those are the type of PE buyers that don't slip through the cracks at Oberon. The other type having nothing to do with the relationship side, is just people who are really straightforward, do what they say, say what they do. We understand how they're different and unique as it pertains to deals. And we build just personal relationships of some sort with those PE groups. Those are the ones that stay top of mind and they don't have to work all that hard to really build relationships and stay on top of mind. We've recently brought on a couple of coverage officers, Matt Gunther, Aaron Davids, who both themselves worked at private equity funds and they're going to sort of be the concierges at Oberon and for any PE groups or independent sponsors, family offices that want to get to know us better, it really starts with those guys and they're aware of everything that we're working on and where all the banker expertise resides within the firm.
[00:41:48] Speaker B: And that's a somewhat new effort or that's underway for a while now.
[00:41:52] Speaker C: Matt and Aaron have joined the firm within the last six months.
So it's a relatively new initiative. Prior to that, I'm a little embarrassed to admit that it was like, who do you have a relationship with at Oberon? That's the person you're going to stay in touch with. And hopefully they have a better idea of everything that's going on internally. And we do communicate weekly with all the bankers on what our pipeline is. So everybody's got basically a copy of that. So they have an idea, but it's a little less seamless than what we're doing now.
[00:42:26] Speaker B: So all the bankers at Oberon have a copy of all deals in flight across Oberon hq.
[00:42:32] Speaker C: Sounds dangerous, right? It doesn't actually have the names of the clients.
[00:42:35] Speaker B: I don't mean it dangerously, although I understand you responding that way. That's pulsing out to the organization on a weekly basis.
[00:42:42] Speaker C: Yes, it gets sent out right before we have a Wednesday meeting. And before that Wednesday meeting we send out a schedule of all the deals that are engaged. What type of deal it is, what industry it is, who the bankers are that are working on it, what the revenue and adjusted EBITDA are, what stage of the process is that deal in? Is it pre marketing? Is it pre ioi? Is it pre loi? Is it under exclusivity that gets updated weekly and disseminated to everyone in the firm.
[00:43:13] Speaker B: That sounds like a really good ritual. I want to cover one more thing before I let you go, which is I'd love to have the audience of business owners get the benefit of all of your experience.
We've talked about how you think about recruiting bankers, what makes a great banker. We've talked about the buy side and how you size the buy side up and how you think about spending time with the buy side as opposed to really just focusing on the forward pipeline. On the sell side for business owners who are somewhere between six and three years out, or five years out, or somewhere in the single digit years out from an exit, what is your advice to them? What would you like to share with them about investment bankers? Some of them feel significant intimidation about what that word means. Some of them are afraid, some of them feel they can do it themselves. Some of Them don't feel that they can do it themselves, but they don't know how to go about developing trust in a particular banker versus another. So you've spent a lot of time with a lot of owners, you've worked with a lot of them, you've sold a lot of businesses. How should they be evaluating investment bankers? When should they be doing it? Let's just do a 101 on how an owner should think about the way they spend time with investment bankers and how to try and make good decisions along the way.
[00:44:39] Speaker C: Your suggestion that business owners should get to know one or more investment banks more than a year out before they're considering a sale is one that not too many owners actually focus on. And I think, at least in our universe, that's kind of a function of many of our businesses operating lean and mean. And they just don't have the time to focus on a transaction until it becomes top of mind. And I think that many business owners will just follow their gut who they're comfortable with or have they heard of the firm, or maybe they've gotten a recommendation from someone else that they trust. Finding the right investment banker and cultivating relationships well before a transaction. Many transactions crop up because a circle of life event has occurred, whether that be a death, a divorce, an illness, or whatever. It is a scare that causes someone to basically rethink their lives. And immediately they're like, how do I sell this business in the next three months? That's not ideal. We are ready because we've done it so many times to handle those situations. Many other clients that we'll run across or prospects rather, are talking to bankers just to figure out how to prepare years in advance. And I'm not sure I know when the right timeframe is to start engaging with bankers. Whether it's a year out, two years out a year. I think I put you in the top 20% starting to talk to bankers a year out before you want to sell. But I think bankers will usually advise companies to professionalize things if they haven't. Oftentimes they don't have any real financials other than maybe QuickBooks or tax returns, because why should they? They may not have any debt, they're generating a lot of cash flow. They just have no need to do that. Many businesses also have no real collateral material in our case. And most of the time when we're working with these closely held business owners, at least half the time they're coming to us with nothing other than a website and it's on us to sort of produce a full fledged Marketing document takes 2 months, 3 months sometimes depending on the rate at which we get information from the clients, as I was talking about earlier. But getting your ducks in a row and on the banker front, it's just like anything else. I think with any interpersonal relationship, the more interactions you have with someone, the better sense you have to size them up. It's hard to size up anyone in one or two conversations, but over a short period of time. I have a friend who always invites me to meet his girlfriend so I can give him advice on whether I think they're great or not he should marry them. I'm easy to fool, but if I meet any person over a longer period of time, I'm really going to get a better sense for who they are. And choosing the right investment banker is really important. Choosing the right firm is important, but choosing the right banker or team is more important in my opinion.
[00:47:43] Speaker B: Let's talk about that.
[00:47:44] Speaker C: Reputation, sponsorship, these are important factors. But ultimately the difference between success and failure, whether that's getting a deal done or not, or getting a deal done at the right valuation, at the optimal valuation with the optimal structure. I mean, there's no question in my mind that the right banker versus the wrong banker makes all the difference regardless of the quality of your business. And the right banker is certainly someone who has transacted in your industry, but it's also someone who's throwing everything they have into your deal. There's checking the box bankers and there's people that are going to go the last mile when it comes to composing a model which is a marketing document disguised as a financial exhibit. It's really, really important. A sim. It's like we call it the bible at Oberon. My teams, we really focus on getting that right. I'm just talking about the pre marketing process. There's 20 different items at each phase of the process that you can either check a box or you can go above and beyond. When people pitch you, you can see and you can tell as a business owner, someone just pulled something off the shelf or have they pulled together something highly customized and really thought about your business? The strategic rationale, the buyer universe. Not just a list of parties, but why, what's the pitch to each of those? That's just a really strong indication that somebody's going to go to bat every day and they're not going to give up until your deal is over the finish line. And that client is going to become a reference client in the future and send lots of other Business. What I try to preach without being preachy to my team is that extra 20% you put into a deal or you put into a pitch. That's the difference between closing a deal and not closing a deal. That's one. And making a lot of money or not as a banker. Two is having a referenceable client that's not just a client, but there's also a lawyer and probably an accountant and a whole ecosystem of people who are now going to sing your praises to everyone they run across or not. And then number three is you got a referenceable tombstone that makes it a lot easier to go get the next ones. That's the difference between throwing in that extra 20% and not. You got to be honest and trustworthy with your client. You can't be afraid to deliver news that you don't think they want to hear or conversely to sell them something that is really not achievable upfront. There's a lot of folks that is particularly on valuation, they're trying to win business based on saying, hey, I'm going to get you an extra 2 turns higher than whatever the market is, with no real sense of how that may happen. So trust diligence.
[00:50:37] Speaker B: What do you think is the right way for an entrepreneur to try and figure out whether they have what one of these bankers that is doing the discretionary 20%. If you were selling Oberon and you couldn't sell it yourself, you're not allowed to sell your own company even though you're a super seasoned banker. Are there any questions that help get at this? Are references the way to go? What is the way to do this?
[00:51:03] Speaker C: References are fine. You ask for a reference, I'm going to give you the ones that are my best references. So if I'm a client, I'm probably like going to go onto a website, pick out a couple for myself that appear to be most comparable and want to maybe talk to those folks as opposed to just, hey, can I have a reference or two? And leave it up to me to give you which reference that is. When you are having a pitch, when you are selecting a banker and maybe you're going to interview three banks, don't just say, come in and pitch me. Come and say, here's some overview materials on my company, some high level information. Okay, maybe some of it's financial and some of it's qualitative and it's like a page or two. And then you say, look, I want you to come in, tell me about your credentials and what you've done in the space. I want you to tell me how you're going to position my company in the market. I want you to tell me who you think the right buyers are, and I want you to give me a fee proposal. And then you'd be surprised at the differences in pitches that you will get. Some of them are going to be off the shelf. If we have a really high quality lead that we're passionate about, we want to work with, we will work for weeks ahead of a pitch to put together a pitch that's going to stand out amongst others. And it will be apparent to you, the business owner, that we've done that. I think that's the best test you can give someone is to have them prepare materials. You can size them up and you can see their acumen, their knowledge, but also just in terms of how hard they're going to go to the mat for you.
[00:52:34] Speaker B: Do you get asked a lot who the buyer is going to be and how do you guys think about handling that specific question.
[00:52:42] Speaker C: 90% of the time, the buyer you think is not the buyer that it is. So our general approach to that is someone's outreach to you. They're interested. We should think about how to handle that party. Or maybe we just through our prior experience with a highly comparable business, we know there's maybe two buyers who didn't win, or maybe the guy that did win wants to acquire another business. But we prepare for a broad process unless we're told not to buy a client. Some clients are really, really concerned about confidentiality. Every client is concerned about it, but some to the point where they don't want to go broad. In fact, they want to go really narrow. We can do that too, but it's more typically we're preparing a broad list of parties because we want to create competitive tension, hopefully amongst a dozen or so parties that we can then play off against one another to get the best offer for our client in terms of value and structure.
[00:53:41] Speaker B: Yeah. Do you guys ever prefer to go narrow for your own reasons, or is it always the client who is nudging you in that direction?
[00:53:52] Speaker C: Well, yeah. If there's an opportunity that comes to us and we really don't think that we have a broad audience of buyers for maybe we just have one or two buyers that we think are relevant, then we will go narrow. And oftentimes we will run a full process. Sometimes we'll even utilize the company's existing collateral materials to just discreetly talk to a handful of potential buyers. In some cases on like a non exclusive, non retained basis. It really is situation specific. It's atypical but not unheard of.
[00:54:31] Speaker B: Adam, I think I only have one final question for you because this has been so great and we're getting to the other side of a full hour here. What's next for you and Oberon? Where do you want to go next? What wakes you up in the morning? How are you going to develop the company from here? What's the future of Oberon and what you want to build there going to be?
[00:54:51] Speaker C: I get asked that question a lot. People are wondering are you going to move into other businesses? When it comes down to it, we have a huge network of people with a variety of relationships with business owners, highly experienced financial service professionals.
So folks have suggested we should go into consulting because of all the relationships we have or we should go into a private equity or I think for US after nearly 24 years at it, we just want to keep doing what we do. We love doing it. We want to stay focused, just keep making friends, if you will, with business owners. Building the Rolodex, doing more and more with our existing clients, tighten those relationships with the buyer universe. Further add more high quality bankers to the team when we find them. And the mission at the outset was to build a consequential middle market investment bank that doesn't come off as the impression that a lot of business owners you suggested have about investment bankers. We want to really be true partners and allies and just be trusted advisors to more and more companies in the universe where we play. So we're happy with where we are and hope to continue to do more and serve our clients over the next however many years.
[00:56:13] Speaker B: I love that word that you chose, consequential investment bank. It certainly isn't broken, so I see no reason for you to worry about fixing anything. Really an awesome story and it's been really fun to hear about it and dive into lots of different details. Thank you for all the generous time and really appreciate the opportunity to work with you and your firm. This has been great. So thank you so much.
[00:56:36] Speaker C: Adam Peter, really appreciate the invite and Axial has been a tremendous partner to Oberon and we look forward to continuing to build that in the years to come. Thanks for having me.
[00:56:48] Speaker A: If you enjoyed this episode, check out axial.com there you'll find every episode of this podcast as well as our recorded Axial member roundtables, some downloadable tools for dealmakers, Axial's quarterly league table, rankings of top small business acquirers and investment banks, and lots of other useful content that we've created over the course of time. If you're interested in joining Axial as either an acquirer, an owner considering an exit, or as a sell side m and a advisor, you can get started for
[email protected] as well. Lastly, if you have ideas for podcast show guests, feel free to reach out to me
[email protected] I promise I will respond.
[00:57:26] Speaker B: Thanks for listening.
Peter Lerman is the CEO of Axial. All opinions expressed by Peter and podcast guests do not reflect the views or opinions of Axial. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Podcast guests may have ongoing client relationships with Axial.
