[00:00:00] Speaker A: Foreign 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.
[00:00:44] Speaker B: Buyers of small businesses.
[00:00:46] Speaker A: 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.
Hey everybody, welcome back from a fairly long hiatus here on Masters in Small Business M and A. I am your host, Peter Lehrman. I took about a one month break, but I'm back at it and I'm extremely excited to be interviewing Bo Stump, a partner at a third generation family investment bank.
I've got him here on the call with me today.
Bo, I'm really excited to have you on. Thank you for making time. I'm looking forward to getting into it.
[00:01:27] Speaker B: Thrilled to be here and thanks for having me. Peter. Looking forward to it.
[00:01:31] Speaker A: I think the right place to begin is with the Stump and Company history. It is a lot of things. It is a family enterprise. It is a multi generational enterprise.
It is in the small business M and A category. It connects around a lot of interesting dots that tend to usually be connected around operating companies. But in this case you guys are longtime advisors in the category. And so I'll turn it over to you and love to just hear you talk about the history of Stump and Co.
And then we'll get into your ideas and your dad and your sister's ideas about where you want to take it next.
[00:02:09] Speaker B: It is a family business as you mentioned, and it's great because we have that in common with almost all of our clients. It's a great place to start for us. The history is quite something. We're based in Charlotte, North Carolina. We've been here really forever since the beginning of this business. And my grandfather back in the late 50s and 60s was a traditional banker lender. He visited all the local companies in the Carolinas to make them basic loans, working capital loans. A lot of it was, you know, asset based lending at the time and was really good at it. Kept getting promoted. The banks would send him far afield. At one point shipped up to New York and lived in New Jersey and was commuting into the city and two young kids at the time. And he just one day threw up his hands and said, I'm done with this, I can't do it anymore. I'm going back to North Carolina. He had a few starts and stops between then and now. Ultimately formed his own small advisory business. And he converted all those relationships that he built up over probably 20 years of banking.
Worked directly with business owners, doing whatever he could. And you know, at the time I think that was quite more broad than what we do today, which is really just M and A. And over the years it slowly specialized more and more into providing that M and A advisory service. Just given how fragmented the space can be and how many family owned businesses there are. And the differentiator for us, or at least one is we do focus on a niche, vertical or industry. And that would be the broader furniture space. And that's a function of. At least at the time when he was coming up the textile upholstery case, good manufacturing world was huge here in the Carolinas and Virginia. And that was a lot of his business. So we, we've stuck to that. We've certainly added to it over the years as well. And it's, it's much broader today than it was then. That's really our origin story. And we been fighting that good fight for over 50 years now, which is a lot of fun.
[00:04:15] Speaker A: The Stump and Company of today is known for being a category leading advisor in the broadly defined furniture business.
Do you consider that to be part of the sort of founding generation story of Stump or did you guys home in on that incrementally since the 70s? It sounds like there was maybe just a natural exposure to those businesses based upon being in the Charlotte area. Do I have that right?
[00:04:41] Speaker B: Yeah, exactly right. I mean it was a natural exposure from the beginning given those original set of relationships in the Carolinas. The big manufacturing centers here at least were kind of the Hickory Lenore area. High Point, North Carolina is widely known as kind of the furniture capital of North America. If not the world, we like to say the world. There's still plenty of manufacturing here in North Carolina. Certainly a lot, you know, moved overseas. But yes, that's how it started and it's continued. I would say from an evolution perspective back in the day was really all domestic manufacturing. That was the industry and those were the businesses we would work with over the decades and generations, we've layered in a lot of additional expertise and verticals as the industry has evolved. So for example, in the 90s and 2000s, so much product moved overseas from a manufacturing perspective and a lot of companies here turn more into importer distributor type models. And so of course we've worn that hat extensively since that time. The other elements of that is we've come to embrace the international investment community which kind of naturally has followed that. Both the manufacturing base overseas in Asia and then other import distributor types in Europe that maybe want to acquire their way into US assets. So yeah, it goes all the way back to the founding, but certainly a lot of nuance and additions since then.
[00:06:08] Speaker A: Let's stay with Stump for a moment, talk about your dad and talk about you, you and your sister Stuart. Maybe just talk a little bit about the way it went from generation one to generation two and then yeah, I'd love to hear about how you decided to join the business and a bit about that journey as well. If I'm not mistaken, I think Stuart was at McKinsey at one point before coming back to the business as well. So you guys have had your own careers prior to being part of Stop. So I just want to make sure that we cover a little bit of your dad's story and then the third generation and then we can talk a little bit about the future as well. And then let's get into furniture, starting.
[00:06:49] Speaker B: With my father Tim.
He's been doing this since I want to say 1990 or 91, so over 30 years. And he certainly earned his stripes in the furniture space. He started on Wall street out of business school, would have been in the early 80s and was on that track really up until he made this jump. He was there for several years. He was in Atlanta for several years. He was with GE Capital towards the end in Atlanta and they sent him up to Charlotte I think to open up an office here. And you know, that's really where our family is from. And he jumped to that opportunity I think a year or two into that as he was closer to his parents and seeing what his father was doing, I think he connected some dots and saw an opportunity to make a jump and really work for himself and define his future a little bit differently. And that's what he did. He got to work really side by side with his father. My grandfather would have been 1990 until 2007 or 8 was when my grandfather really exited. Growing up I have all these memories of going to my grandparents house and he's over there in the corner, huddling with my dad. And just kind of great memories and really vivid images in my memory.
[00:08:06] Speaker A: How were you thinking about the Stump & Co. Business back then when you were really young?
Was it a situation where you were going to definitely come and work for that business? Was it not clear what was that aspect of it?
[00:08:19] Speaker B: Like, we always laugh talking about this. The answer is really no. It wasn't ever really presented that way because we're not some big business with a warehouse full of inventory that just sells all day and there's just a business that runs on its own. We're very much a professional services business and the professionals are us.
We never really thought about it that way growing up. We just thought, yeah, this is what dad does and he works with Granddad. And we were kind of doing our own thing.
Wasn't the plan at all. We certainly weren't brought up to think this was the plan or path. When I went off to college, probably was when my dad more or less pivoted to being kind of a sole practitioner. You know, his father, son said it and he was on his own. He brought in, you know, an analyst here and there for support, but he really was driving the train. It would have been 2015 or 16 when my sister, who you're right, she was at McKinsey for several years after her undergrad and she's two years older than me, she was a little ahead of me. She was starting to settle down and put down roots and thinking about doing something different. She started talking with my dad about what he did and sounded pretty applicable to what her experiences were and she was confident she could do that. So she would have joined up in 2016. So that would have been almost 10 years ago. I had no real vision of joining the firm. My first career was actually in the entertainment business, believe it or not, Los Angeles after school. So I spent several years in la, got wise, I guess, and decided to come back east to get my mba, go into more corporate finance route. So that career pivot. It would have been 2019, six years ago. I started talking to my father and sister about what they were doing and similarly felt like my career. Up until then, I had a lot of relevant experience I could bring to the table. So, yeah, it's been six years now. All three of us are pulling in the same direction.
[00:10:14] Speaker A: That's great. What do you guys talk about when you're thinking about the future? How much time do you guys spend thinking about that? Is there anything to talk about there or do you Guys just love to continue to advise the category that you know so well and there's not a lot to talk about. That's what you do and that's what you're always going to do. What are the off sites like at stumping company these days?
[00:10:39] Speaker B: We love that question. We love the off sites. My sister and I are always joking about how we need to up our off site vacation game since it's all a business expense. So much of it is, I imagine, familiar to folks in the services space. We want to think forward and be so proactive about that, but we're also so darn busy all the time executing and we execute what we know and love, which is the furniture industry. So it's a lot of just heads down, hard work over here. My sister and I being third generation, we're both in our mid-30s. We're definitely eyes wide open that we're running this business for the future, for many years to come. And there will be evolutions.
We're always reactive and responsive to the needs of the industry we cover, which is furniture very broadly defined. And so we're always adding to our toolkit and capabilities. One example there would be E commerce broadly defined. Certainly in the 70s or the 90s when my dad joined, or even 10 or 15 years ago maybe when my sister first started. That wasn't a big channel for furniture. The talk track had always been people are going to want to go to a store and sit and feel and touch. And it just was really an afterthought. I think in the last five years we've probably done 10 or 11 E commerce focused transactions where the go to kind of E Com, DTC branded furniture, home decor people. And that's a skill set we didn't have and it's one we learned and added to it. That's the direction much of it is going. So I think that's pretty instructive on how we approach that. The only other addition I'd say this is again back to my sister and I looking to the future. We're based in the southeast, we're in Charlotte and my sister Stuart, she's in Savannah, Georgia actually. We know a lot of the private equity family office investor community. We go to the networking events and our core sweet spot isn't a fit for many. It is a niche kind of industry focus and it served us well, but may not be of interest to certain folks in the my side. And we've realized, you know, we're really good at what we do and providing these advisory services. Are there other types of businesses we could be helping that might be more interest to this broad network of folks that we've cultivated over the decades? And we've started building out what we call our Southeast services vertical. And that would be very simply put, kind of blue collar, home and commercial services type businesses that are here locally in the Southeast. I mean, Charlotte and the Carolinas are booming. Savannah and that low country is booming. And we just want to make ourselves available to folks, owners of good businesses that are well within a day's drive of us. That's kind of early days, Peter, but it's one we're excited about. We think it's a second vertical to our company that doesn't detract at all from our sweet spot. But it is an area we're interested in exploring more in the coming years, decades, you name it.
[00:13:33] Speaker A: What about the development of a team at Stump and Company? Right now it's you, it's Stuart and your father.
Do you guys talk about and think about expanding the team? Have there been any stops and starts to that? What's the dialogue around just the puts and takes on heading in that direction? I have a good friend who runs a big art gallery in New York, but it's still 100% family owned and almost all the employees are members of the family.
And I asked him a similar question. And it just gets complicated when you start adding people. So I'm just curious how you guys have thought about the development of the team, the evolution of the team and puts and takes associated with having it be this incredibly nuclear core, you, your father and Stuart versus expanding.
[00:14:23] Speaker B: It's one we think about a lot.
Back in the day we had a joke, you know, if your last name's not Stump, it's tough to stick around.
Is it really true? But we definitely think on this a lot, especially as we look more towards the future.
We're eyes wide open on the path ahead and we're always interested in good health. We have brought on an analyst or two to support us more on the material side and we've served more of as a staging ground for folks that want to break into banking. Maybe didn't have the traditional education or career path. So we've served as a great launchpad for ambitious folks that are looking to get in. And we typically let them know, you know, it's going to be one to two years, we'll get you up to speed. And then there's so many options all over the East Coast. That's tended to be the path. We definitely Think about is there some bigger career path we could make available to someone comes in as a associate and wants to kind of come up with us through the years? I'd say that's not a fully developed strategy yet. It's one we think about a lot. I'd be interested to talk to your art gallery buddy. Sounds like we might have a lot in common.
[00:15:31] Speaker A: Similar family owned business, three generations as well, very relationship oriented. They know their craft, they're selling unique art in the same way that you guys are selling these totally unique N of 1 businesses. Let's dive into furniture. I'd love to get into the furniture business with you.
Could you just paint a picture of what is the sort of broad categories of the supply chain in the furniture business? Where does it start and where does it end? And then maybe we can dive in a little bit to the areas where there might be some significant change or whether the onshoring and reshoring and tariff related events of the last six months are interesting to talk about. But let's just start by just defining this category, laying out what the sort of big categories are within it.
[00:16:23] Speaker B: To start, we think about this two or three ways. There's the residential or home furnishings space, broadly defined. That's by far the biggest total market that's going to the consumer is vast. It's over a hundred billion dollars a year, that total category. We also think about commercial furnishings. And within that there's tons of different sub verticals. It's a smaller total market, but very robust. The biggest inside of that would be the contract office market, mostly suppliers into offices. There's also hospitality, which is a big business. I mean, every year there's thousands and thousands of hotels renovating, refurbishing, opening. Within that there's even smaller ones. Senior living, healthcare, education, suit, housing. We cover all these areas.
Residential is the big one. That's the majority of our work. Inside of that there's a huge supply chain. Covid really exposed how complicated and vast it really is. I think of all the industries in the US it was one of the two or three probably most impacted by all the different permutations of supply chain disruption caused by Covid and various other instances. So a lot is still made here, believe it or not, manufactured here. A lot is manufactured overseas. Historically that would have been China and more recently that's shifted to Vietnam and other Southeast Asian countries. So Indonesia, Cambodia, India you'd hear about. The supply chain starts with the raw materials and components that are going into furniture. So really big categories of whole Street. So a sofa sectional, the wooden frame inside is a big first part. So you got to supply or get slabs of wood and has to get manufactured into components to get turned into a frame which ultimately that furniture manufacturer or upholsterer is going to upholster and finish. So there's so many different components and inputs.
Wood for the frame, fabrics for the finish, nails and glue and all the stuff that goes into it, all that gets to the manufacturer, whether it's here or overseas, it gets finished.
Some of this is made to order, right. And gets shipped directly to a retailer or a retailer's warehouse. A lot of companies are building to stock or warehousing themselves and then shipping to their customers, which would be the retailer. One nuance to this, I mentioned it earlier. In the last 10 years, E commerce has really exploded. E Commerce is a few different things, but at the highest level, right, it would be either product you're buying on a Wayfair or an Amazon, or it could be a branded product that you're buying directly online, directly from a company that's caused an explosion in finished good inventory. And these warehouses all over the country, I mean it's not needed to furniture, right? I mean Walmart and Amazon and all these guys have them. Good chance if you're buying something online, it's being drop shipped from some nondescript warehouse somewhere in the country and showing up on your doorstep in a couple days. So that's a pretty broad supply chain. I'm describing the stump team. We try to be as active as we can across that entire supply chain. So we work with folks that are working on those inputs. So fabric manufacturers, wood frame manufacturers, we've worked with those types of companies.
Certainly the manufacturers themselves of the finished product, that would be our bread and butter. Then likewise the retailer or final seller of those products too were active in. So we try to be as close as we can to that entire supply chain from start to finish.
[00:19:58] Speaker A: It sounds like E Commerce is definitely one of the things that's changed about the supply chain.
And I guess the historical narrative there was, oh, it's E Commerce resistant because it's a big ticket, good. And people want to sit on it and they want to touch it. But it sounds like in the second or third decade of the Internet that has no longer quite been a true statement anymore and people are just pulling out their credit card online and increasingly buying furniture, at least in the residential category. What are the implications of that? How has the fact that consumer preferences and consumer willingness to pay through the online channel what has that done to the furniture industry? How has that reverberated through the way the industry works? Has that created new winners and new losers? I'm curious just what the knock on effects are from the E commerce trend being more significant than originally anticipated.
[00:20:55] Speaker B: In really broad strokes, that's exactly right. Folks are comfortable buying online.
That's not across the board. True statement though. There's actually some interesting developments with these smaller retail showroom concepts that you're seeing pop up from really all the online players. I mean, Wayfair is very publicly opening brick and mortar both for their flagship brand and some of their more niche or higher end branded concepts. So it's really a give and take. I mean, you hear Omnichannel a lot.
Again now, not to be cliche, but that's absolutely proving to be the case where folks are certainly buying online but there is still a desire to come and see it. And really, for those higher price points, someone's paying 300 bucks for a sofa on Wayfair, they're probably aware that the product they're getting isn't the same quality as the $3,000 sofa. There's probably a correlation between a consumer wanting to touch and feel the $3,000 sofa versus the 300. There's gives and takes to this, but it's absolutely the trend. There have been winners and losers in this. It's a totally different dynamic to service a Wayfair as a customer. I'm talking about this from the perspective of one of our clients, a manufacturer. To work with Wayfair as a furniture manufacturer is a lot different than to work with one of their traditional retail accounts that may have been a small chain nearby or could be one of the big national retailers. It's two totally different dynamics. And back in the day you would hear about these folks, their Boston area sales rep would cover Wayfair because that's just how this industry always worked. You had reps in territories and they covered the customer well. Wayfair, well, it's based in Boston. Just the guy. He's covered based in Boston doesn't mean he's going to know how to cover Wayfair. It's a totally different animal. So definitely have been winners and losers. I think the folks that adapted and got comfortable selling these E commerce accounts certainly benefited. There's also been such a huge influx of competition on that side that it's really become tough for folks that are exclusively focused on that channel. The more Omnichannel, the more diverse folks can be both at the retail and the manufacturing side has tended to work out for the best.
[00:23:18] Speaker A: One of the things that we were talking about before pushing record was the different businesses within the furniture category and how either small or big things impact the way these businesses ultimately get valued.
Obviously you guys serve the whole category, so I don't want you to feel like you have to say that some categories are unattractive and other categories are more attractive. Obviously these are all your babies and you're going to treat them all with great love and care to the extent you're hired to sell these businesses. But what tends to create a more premium valuation in the furniture supply chain? What are the attributes of those businesses? Where do they sit in the supply chain? What have they been able to develop that allows them to command that price point? And this may also leak a little bit into a conversation about how those businesses get sold and the importance of the sell side process.
[00:24:09] Speaker B: We think about it all the time. I'm going to start somewhere a little bit further off and bring it back to the question. The most important element evaluation I think for the space we're covering is who is the customer of the product and what is that customer profile look like? What implications does it have for the profitability of the business in the long run? The trend that you see is we've already talked about E commerce. There is more purchasing online than there was 10 years ago. So that means what was being sold at retail?
Some percent of that is no longer being sold at retail. It's going online retail.
Historically there were small mom and pop retailers all over the country. Every town had a furniture store that increasingly is going away. A lot of baby boomers or older own those businesses. They all own their own real estate, which tends to be worth quite a bit of money today versus when they bought it quite a long time ago. And they tend to have quite a lot of inventory and physical assets in the space and they just close down and liquidate and sell off all the products and sell or have already sold their real estate and make out quite well. So there's less and less of these independent retailers. There's more and more being sold online.
There is growth at the mega accounts. You see a Crate and Barrel or a Pottery Barn or an rhythm, big brands, those folks are growing. There's a real vacuum though somewhere in there. I mean there's billions and billions of dollars at retail that's still being consumed somewhere, but it's not being sold in the store. So what's happening, one would be the growth in E commerce, the other which we're really excited about is this explosion in the interior design trade. There's more and more people using designers to furnish their house and there's more and more designers do that work. And increasingly for our space, clients that are able to sell that designer and keep them coming back are becoming very, very valuable, especially to the buy side, perceived almost as a recurring revenue kind of element. Because that designer, I mean, that's really a B2B transaction. And that designer is going to have five projects a year, six projects a year, they're going to have the same next year. So they're always saying to come back for product. So I guess to come all the way back. What drives higher values? It's things like that. So for example, company that's sufficiently selling designers, that means it's a higher end product, means it's a higher price point, it's going to be higher margin and it means they're going to have that stickiness with the customer that comes back for more and more in a channel, the designer channel, that's growing. Whereas if, and this isn't to speak poorly of any company or any segment of the industry, if you're servicing a segment that's shrinking every year, or at least not growing, even if the two companies, P and L or Balance Sheet are identical, there's obviously different expectations for the long term future of that company. For us, the more we're seeing companies selling into that designer channel, the more value we're seeing. That's what's being talked about in our space all the time. Not just an M and A valuation transactions on the ground with our clients, the makers of these products. Gosh, how do we focus more on the designer and get that designer business?
[00:27:19] Speaker A: Am I correct that there are just more designers that are intermediating the placement of furniture in the residential category, like design LED purchasing as a category, that is a secularly growing category right now. Is that right?
[00:27:33] Speaker B: That's right. There's secular growth. It's a poorly covered and researched topic just because it's so fragmented. But you know, I'm just going to paraphrase, there's something like a hundred thousand interior designers in the country and most are sole proprietor or very small businesses. These are not huge firms. And there's more every year. I think social media has democratized some of this. If you have an eye for design and you know how to do Instagram, it only takes a project or two to present as super capable accomplished designer. And if you can do that, that's awesome. That's A career for somebody. I think the other element is on the homeowner or consumer side. People are busy.
Many households have those spouses working stuff's expensive and confusing. And to go to a bunch of different retail stores to cobble together a whole home, I mean it's a lot. We hear a lot is I just don't want to make the $5,000 sofa mistake. I want someone to present me some good options and then go execute on it. It's just a much different mentality and approach than when I was a kid or something. I don't remember my parents or any of my parents friends having an interior designer come through and do their house. And a generation later we hear about it all the time.
[00:28:52] Speaker A: Is there a capability that's being developed by furniture brands and furniture makers to pursue and acquire these relationships with designers? Is that something that is making its way into the operating motion of a furniture company, that they have a sales force that's acquiring the channel of agents, or they have a marketing motion that's organized, attracting demand from designers? Is that how it's kind of getting done and is that somewhat of a new capability inside these furniture businesses?
[00:29:22] Speaker B: I think it's kind of tied in with the E Commerce piece. I think technology has helped make what used to be a pretty high touch, high friction sale because designers are famous for, oh, I change this or this color that. It's taken that and made it a lot quicker and easier. And so many brands, manufacturers have found ways to really just sell designers directly. They can register on the website, a trade account, get access to what products are available and really just do it all themselves. As opposed to having an employee spend an hour on one customer going through the catalog and making the selections. I'm simplifying, of course, but technology has made that process easier. There's some interesting more macro tech approaches to this where folks are trying to figure out is there one marketplace where we can aggregate all hundred thousand designers so all kind of purchases, 1. You hear about these buying groups and things like that. It's relatively early days in that space, but it's already a huge channel. Billions and billions of volume is going through at Designer Channel today. And every forecast would make you think that's going to continue.
[00:30:34] Speaker A: What does tend to be the like range of valuation for furniture businesses? Not to put you too much on the spot, what do you tend to say to prospects and to clients when they ask you a question like this?
[00:30:45] Speaker B: It's tough to say, Peter. I'm always reluctant to put an exact multiple on it legacy manufacturer, they're not trading for 10 to 15 times EBITDA. I mean it's mature businesses but there's definitely nuance below there margins, growth outlook, who the customer is. Like I mentioned, these things can really drive multiple turns of ebitda.
[00:31:06] Speaker A: Do you think that manufacturing, Vietnam, China, tariffs, robotics, advanced manufacturing. Are there opportunities in the supply chain where you can see furniture entrepreneurs potentially capture outsized value through some form of innovation in the manufacturing process or otherwise in the next five years? Or is there something that would happen if the reshoring trend extended well beyond the Trump administration? Would that create some dislocations or some outsized valuations? What about those kinds of things?
[00:31:41] Speaker B: It's possible the trade uncertainty has just been problematic this year. Deter valuation, if anything more likely it's really just made it more challenging to get deals across the finish line. That's really kind of easing up now. We've had several nice transactions announced just in the last few months. I think the more likely opportunity for alpha or arbitrage is pretty probably more on the distribution and sell side than the manufacturing piece. I don't want to rule that out. I'm sure there's all sorts of advances coming eventually to that space. It's hard for me to see it. I will say that the AI evolution is already fully in play from the design perspective. So many folks in the industry are talking about how they're leveraging AI every day as part of their product development design process. So I don't want to rule out, I mean I'm sure there are some potential cost savings to be had. I think frankly folks are more focused on what country am I sourcing this from, what's the tariff going to be than that, but that'll change.
[00:32:44] Speaker A: What might be interesting to transition to now would be having started your career in the entertainment business and now very, very waist deep or chest deep in furniture M and A. What have been some of the transactions, either on a no names basis or however you want to discuss it, where you feel like that have really shaped you as an advisor and have really shaped the way you think about what is the job to be done by you and where is the opportunity for you to provide like a really differentiated level of excellence to the customer. What are some of the either interesting war stories or just memorable moments getting transactions done that have shaped the way you think about who you are and what you do and the job that you're trying to get done for each of these owners one by one.
[00:33:32] Speaker B: I love looking back on the past Deals we do little tombstone deal toys for every deal and they're in the conference or over there and it's always fun to just look through them and remember the war stories. There's a couple I'd probably highlight. An early one for me was a tremendous company in the San Francisco Bay area. It was called Euro Style Euro and fell in a really fascinating intersection of things we've been talking about. They had a nice business with designers, actually they were servicing very efficiently. They had a tremendous E commerce business, really strong vendor into Wayfair and other dot com areas. Tremendous company, great growth prospects, great margins. And that was really the first time for me. I think dots connected around what does the client really want?
And then actualizing that and being sure we're pursuing the right track. And you know, to be specific, our client was an older gentleman in his 70s, just he wanted to retire.
Didn't want to stick around for five years and do a roll up and be. The guy was ready to sail off on a sailboat. And in this case quite literally, he was a very avid sailor. We did our diligence, we were ready to go to market.
Took another look at the buyer list and really thought through exactly what he wanted. And where does this fit? We had all the right names on it. There are a lot of private equity sponsors that would have and were interested because we did approach many of them. But we really took a closer look at the handful of targets we felt were going to be in a position to give the client what he wanted, which of course was the right valuation, a reasonable number, but also just that freedom to leave day one. And that was a transaction where we did run a great process. We had a lot of interest, but we really honed in on those two or three names that we knew would be interested and were strategic enough with enough resources to be willing to do that. We got a very energetic bidder that ultimately wanted to skip the line and skip the process and do a preemptive LOI type bid. And closer than 45 days. And they did that at the right number. They did everything they said they were going to do. Quite literally the first day, well, I guess it was the second day. Our client hopped on a sailboat in the bay.
[00:35:49] Speaker A: Never seen again.
[00:35:51] Speaker B: We're still great friends. He stayed in touch with the company. He helped them out when they needed it. It was certainly a very positive thing. But Gabe recruited a great team and they took it over. And it's the company's doing great and the client's doing great. He's doing exactly what he wanted to do. So it was the first time for me, it really crystallized from start to finish seeing that outcome. And I try to remind myself of that now every time before we really get to market. Just take a step back, refocus. What's the big picture?
[00:36:18] Speaker A: What's the precise job that the owner is asking to be done? It sounds like big piece of it in that case was true freedom at closing to really move on to the next chapter of his life, which is not a unique desire, but it's an important thing to make clear because it obviously has a lot of implications for the new owner of the business.
Maybe I'll ask you, like, a couple of process questions just to get into some of the interesting details here. It sounds like you identified a couple of organizations that you speculated would be comfortable with that preference that the owner had. How did you confirm that? Did you just know that, or did you actually reach out to them? And was that like a clear talking point when you were just at the top of the funnel initiating the initial dialogue? How did you confirm who was ready to sort of take on a business where the owner was going to be around, but you were going to be reaching him, literally on his sailboat?
[00:37:18] Speaker B: I think that's one element we really love about being specialists, is nine times out of ten, we already know the ultimate buyer of the business. I'm not saying we know who the buyer is going to be out of the gate, but we most likely already personally know the buyer. We have a direct relationship, so we're going through and making the buyer list. We already had a good sense, Peter, of who would be open to that or not. Certainly it's just our sense, from what we know, when we then went out to market, no, it wasn't the first thing out of our mouth. But once they confirmed they were interested at a very high level, it was the next thing out. Just to be clear up front, it was front and center. But you hate to weed with something like that that could be perceived as a negative. It really isn't a negative. I mean, I think it was a great thing, but you gotta kind of ease into that.
[00:38:09] Speaker A: Another process question here. It sounds like you reached out to a handful of firms, but then one asked for privileged and preferential treatment.
Tell me about that. How many firms had you begun to speak with when it was made known to you by that one firm that they really wanted to jump the line and to have 45 days of sort of quasi exclusivity?
[00:38:30] Speaker B: We're always sensitive to this, we want to be very respectful of the folks we've approached and asked to spend time on an opportunity. Of course, we're also very respectful of our client and our duty to them to do what's right for them. So we had approached the priority buyer targets at that point and were really running our process. We distributed materials, we were working with everybody equally, no preferential treatment. When this was escalated that there was this preference to do this, we were actually very transparent with everybody and we notified other bidders of what the status was and gave folks an idea of what kind of the terms were from a overall dollars and timeline diligence requirement perspective. So we gave folks an opportunity to raise their hand and say they were equally as enthusiastic. I think everyone was enthusiastic, but perhaps not quite to the same degree as the eventual buyer. So we wouldn't like string people along and run a parallel phantom process while we're telling everyone else something else. So it is all very transparent. You can't ask people to spend time and resources on something if we're not serious. And we try to be as straight up as we can on that.
[00:39:42] Speaker A: Everyone was working in good faith, including you guys. And then the level of energy from a given buyer precipitated a conversation with the others when it was clear that there was just one buyer who really had like a step out level of interest.
Then you went back to those others and said, hey, put your pencils down for now. This is the process that we're going to move ahead with. And then we'll circle back around with you and give you an update if the opportunity presents itself to re engage or something like that.
[00:40:11] Speaker B: That's exactly right. I mean, we went into an exclusive period with those folks, communicated very clearly to everybody else. You hate to do that because you want to play out the process with everyone. But again, back to the client's desire and the situation at hand.
Older gentleman wants to move on with his life early on in the COVID pandemic. So supply chain concerns were out there. Who knows what's going to happen? So someone tells you, hey, in 45 days this is all done, versus in 45 days we're talking about management presentations and bringing through five bidders. And there it was a pretty easy decision for our client to make. And then of course, it's on us to execute what he really wanted to do.
[00:40:56] Speaker A: Of course there was a chance that the 45 days would come and go and for some reason the transaction would not have completed in the way that it did. It sounds like this one went pretty ideally the way you all drew it up, but I'm sure there was a plenty good chance that it wouldn't have ended that way. How did you manage the expectations of the owner in the event that it didn't go in the direction that it ultimately did?
[00:41:19] Speaker B: I think that goes back to our sweet spot, which is one having really close relationships typically for many years with our client. It's pretty rare we get a call from someone we don't know that says, I want to sell a business, I want to interview you to sell my business. And like we've never met him. We have. It's very rare. We typically know folks for years, if not 10 plus years before we start business. So one just working closely with him, very strong relationship. He was a great client. We always joke he was very coachable. So we give feedback and he'd always take it in straw and implement that feedback. The other part is a specialist really knowing the buyers, their interests, their tendencies, and in this case just really felt good about the intent and the fit of the businesses and just had a lot of confidence it would work out as drawn. But of course, any deal, unfortunately there is that risk of things not going as design for whatever reason. And luckily in that case, we were prepared. We had a lot of other interested folks that were eagerly waiting for an update 45 days from our previous communication. So it was what it was. Luckily we didn't have to call back to plan B, but we always like to have a plan B.
[00:42:36] Speaker A: Is that the preferred process that you want to run is the one that you've sort of laid out, Roughly speaking, in this case. Is that what you hope to do or what are the various approaches to the process that you guys adhere to? This was obviously one of them. It seems very thoughtful. It worked out very well.
Well executed, expectations well managed. How else do you guys go about your stock and trade?
[00:43:00] Speaker B: That was not the norm, I wouldn't say. I mean, typically we want to run a full process.
We'll come up with the right buyer list with the right materials and we'll go build a market and we'll do the two round process. We'll ask for IOIs and see where that comes in and what the interest is. And we'll invite the right handful in for management presentations and then ask for Lois. Fully intend to run a full process. In that case, we did too. It just happened to not go that way. So typically we're running that traditional full process with hopefully multiple bidders and visitors and all that good stuff. The other path that we pursue sometimes is really more of a one off type approach.
It's an interesting idea. We just have a lot of connectivity with the buy side in the space. Both strategics as well as financial sponsors, many of whom own portfolio companies in the industry. They like to give us feedback on what they're interested in from the buy side. And every so often we can really triangulate and realize that we actually have a client that's the perfect fit for this company. They just told us exactly what they're looking for. Is there a potential to. Instead of running a full process and all that entails and the work we put on our client, it's a lot of work to do this. Do we talk about. Maybe we just make a direct approach.
We feel so good about it. Maybe that's the better option, maybe for everybody considerations there. If you don't have that auction style process, there can be concerns around valuation and accountability, but on the other hand it also can be a good character stick. We're engaged. This is the perfect fit. We think you're the perfect buyer. Let's get a deal worked out and if we can't then we'll do a full, full marketing process. That is something we do do and are happy to do depending on just client circumstance. I wouldn't say we steer people necessarily towards that path, but we've had a few great outcomes where it's just kind of a matter of knowing the buyers really well, having the right clients that are in the right timeline and interest. We've had several great ones just in the last few years that check that box. It's great when that can work out because of course there's a lot of time and expense and can get to the right outcome quickly.
[00:45:19] Speaker A: I always like asking a banker like you, particularly selling lower middle market businesses and I know this will just be an anecdotal answer. But when you run a full process and you've got genuine credible buyer interest, multiple buyers interested as you approach the finish line, how often would you say that the highest price is the winning buyer in the market that you serve and when it's not, do you have any just anecdotal sense for the percent that it is off relative to the highest bid and any just color on why that was able to happen, why they were able to win without having the just raw highest octane economic bid?
[00:46:04] Speaker B: The answer is it's not always the highest bid. I can definitively say that there's a couple examples from the last year. So it's Certainly not always the highest bid. The number one reason why it would really come down to the relationship and the fit that's been developed through the process. If you have multiple options and bids, I mean that means you've been through the full process. I mean bidders have likely met hopefully in person, certainly multiple times via zoom. The owner had a chance to really talk about it. They submitted an ili, they submitted loi, and they've had opportunities to be either really, really thoughtful or be more transactional and not casting judgment on folks, just there have been opportunity to that point when it's not the highest bid.
Frequently I feel like the client just feels so much better about another party and it's been hoping that will be the highest bidder, of course, and if they're not pulls on us to try and get them there, as close to there as we can.
I think there's something to it. There's an intuition. Maybe diligence will be marginally easier or more friendly at least maybe if quality of earnings comes back a little light, there's not a need to reset. It might wind up being the best economic outcome as well as social or emotional outcome. That's hard to say anecdotal, but that's certainly been my experience is when there is real interest from multiple parties, frequently the client does have a preference from a personality relationship perspective. And they're frequently very intent on doing everything they can to get to yes with that party. It's on us to try and facilitate that.
[00:47:49] Speaker A: Yeah, it's one of the interesting aspects of the lower middle market because all the inventory of businesses, both furniture and otherwise, tend to be family owned and founder owned. And so they don't hold a fiduciary obligation to to shareholders in the same way that an upmarket multi hundred million dollar business likely has a more institutional fiduciary obligation to maximize price. And so it just creates this dynamic even when a full blown process is being run, there's a real opportunity for the winner to avoid the winner's curse.
[00:48:23] Speaker B: I think that's exactly right. I also think there's so many different approaches to this in the lower middle market. And so offers can just be very different even for the same process. It can have different approaches to structure the timing of those structures, whether it's earnouts or notes or equity. So even if maybe the sticker number is more one place, maybe the structure at a lower number is preferred with the other bidder, so there's no end of permutations. And you're right, I mean so much of this comes down to relationships and the preference of the client.
[00:48:57] Speaker A: When you're not running an M and a process for an active client, are you spending more of your time meeting with owners being in the industry or are you spending more time with the buy side of the market? What's your split of time?
[00:49:13] Speaker B: Roughly when I'm not on my computer screen doing work on a specific deal or zoom calls for specific deals, always try to get in front of business owners. That's our bread and butter. We try and stay in touch with the folks that we already know. All the big markets every year. There are several here at High Point Las Vegas. There's commercial furniture shows in New York and Chicago. So it's always a great opportunity to physically in person drop by and say hello to our clients. So that's number one. Another discipline we have is we hear a new name of a new company that we don't know and we just immediately go out and try and find them. I'm constantly emailing, cold calling LinkedIn, requesting. Not more than once or twice. So I'm not spamming people. But you know, if there's someone new that we don't know, we want to get to know them and tell them what we do and just let them know that we're here to help anytime. That's remarkably successful. Multiple deals that have closed in the last two or three years.
I cold called or email several years previously to that. And that's a discipline that we really stick to. Definitely also focused on the buy side. I mean we cover the sponsors closely that are in and around the space. It's helpful in a way because I mean there's not 500 firms invested in furniture. Right. Or it's closer to 50.
A definable list that we can cover. We do closely, so always doing that. I do go to the networking type things. The ACG Charlotte chapter on Activin, same with their National Vegas conference. So it's a healthy mix. But yeah, definitely the bias is towards staying in front of business owners and trying to meet nuance that we don't yet know.
[00:50:53] Speaker A: Has private equity become a bigger force in furniture? What's happened in lower middle market private equity? Obviously I spent a huge amount of time there. What has happened around private equity in furniture specifically? Is it the same as it was 10 years ago? Is it it substantially bigger? Has it waned? What is going on there?
[00:51:14] Speaker B: It's materially different. I would describe the activity as it ebbs and flows. There's periods I think of intense activity there's periods of kind of slackening currently where we are in the space. Unfortunately it's been a tough few years. Interest rates, inflation experiences over things, you hear all these different things out there. The bottom line is that's tough on companies that are selling consumer durable goods. There's been a lot of private equity investment in the category. Unfortunately over the last three or four years a lot have faced unfortunate outcomes. There have been a lot of pretty public bankruptcies or transactions that were not at numbers that were desirable. Currently, I would say we're at a low point of sponsor activity in the industry. I think we're starting to see that bottom being scraped and we're actually on an uptick. We had a great deal announced two months ago on Axial Axial deal with a great financial sponsor based out of Dallas. Traditional buyout, got a reasonable amount of bank debt, did the deal and really healthy outcome and there's a couple other bigger sponsor back transactions that have been announced in the last month or two. So it feels like we're starting to re enter one of those phases where there is a lot of activity. The last few years it's been a period of client and distress. So it's always fun for us when we see that. Because of course new sponsors entering the space, new opportunity for us to build relationships. And of course the add on approach is typically the playbook for these folks and that's where we can thrive. So we're expecting a lot of activity in the coming months.
Years has not been as much for the PE side the last few years.
[00:53:00] Speaker A: Yeah, obviously you're spending a lot of time with owners and you've done a lot of work to get in front of a lot of them. But if you were able to reach a series of owners through this podcast and talk just about your advice for them as they think about exiting their business and they think about exit readiness and exit preparation. When you catalog the archive of experiences that you've had with different owners with different levels of readiness and you've spoken with them or you sold their businesses successfully, what is the advice that you have for owners who are mulling an exit? What's the checklist that you would put back in front of them on a literal basis or on a semi formal basis? Where do you point an owner's headspace to go when they begin to confide in you?
[00:53:49] Speaker B: It's great to talk about and I'm always tickled to speak with owners that speak in that way. I have this idea, I'm not ready yet. It's so Great to start somewhere like that as opposed to I need to sell my company a day.
It can happen.
Number one, just take a big step back. What's the timeline? Are you approaching kind of a retirement scenario and that's the timeline, is it? You're kind of lonely at the top as the CEO and you're looking for a partner financial sponsor. What is the timeline? Let's reverse engineer from there. The two things we always like to point to is one, when we do sell this business, ideally you're trending in the positive direction. Two, the market ideally trending in the positive direction. None of this is rocket science, but it's unfortunate how Windows opportunity can be missed if the personal timeline and the market timeline aren't calculated right. And certainly the owner is in control to some degree of their own business and its performance that no control over the market. But we can't control timing, so we always start there. I mean if someone tells us they're within two years of wanting to sell, the next hand say is great. Let's get an NDA in place.
Let's start going through your financials, your information.
We just want to get to know your business better, give you evaluation, read today and then start talking about if two years is the timeline. When do we think in that two years is the right time to do this? I mean how are their earnings this year versus last year? How do they think next year is going to look? These things take time. Readiness is important. I mean the financials have to be in a good shape and if they're not, those have to be fixed. If they're looking more to retirement exit scenario, they need a team in place that can give surety to the buyer. So there's so many different nuances that go into this, but our big thing is let's just have a conversation, let's get it out there on the table, see what your preferences and desires are and most importantly, what's your timeline. We can then help reverse engineer the general plan. And of course plans are flexible, they change. We can't market time with a crystal ball either. But we know when the market's good and open and we know when it's not so good or close. And we like to guide people there, certainly the people that have more flexibility. So it's long winded answer. There's no one size fits all approach. But for us, the more we can talk and just give that feedback and advice, the more successful the eventual outcome will be.
[00:56:20] Speaker A: Well, this has been so great. I really have enjoyed just getting to learn a little bit more. I mean I had a chance to spend time with you down in Charlotte, but it's been a great conversation, learned a ton.
You can see the power of compounding in The Stump & Co.
Business, the specialization, the generations of high quality work, the narrow focus just leading you guys to be in the market leading position that you guys so often are in in your category. So it's really fun to just explore it all with you. And it's been obviously great to be your partner on some of these transactions, but this has been a great conversation.
[00:56:58] Speaker B: Same here. Peter. Thanks for having me and thanks for all you guys are doing over at Axial. It's been a pleasure working with you guys and look forward to continuing to do so.
[00:57:05] Speaker A: Good luck with the remainder of this year and good luck with this transaction that I interrupted you on today with this podcast.
[00:57:12] Speaker B: Much appreciated. August 29th. It's fast approaching.
[00:57:17] Speaker A: Thanks again Bo.
[00:57:18] Speaker B: All right, take care.
[00:57:19] Speaker A: If you enjoyed this episode, check out axial.com they 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. Thanks for listening.
Peter Lehrman 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.
[00:58:18] Speaker B: And should not be relied upon as a basis for investment decisions.
[00:58:22] Speaker A: Podcast guests may have ongoing client relationships with Axial.
