[00:00:00] Speaker A: I do see what I consider to be self sabotaging behavior that is driven purely by emotions and it usually shows up in an unreasonable amount of energy being devoted to something that doesn't deserve that level of scrutiny and attention.
[00:00:17] Speaker B: Hey folks, Peter Lehrman here. I'm your host of Master's in Small Business M and A. I'm very excited to have Lane Carrick join me today.
[00:00:25] Speaker A: Lane is the founder of of Optima
[00:00:28] Speaker B: Mergers and Acquisitions, lower middle market boutique
[00:00:31] Speaker A: investment bank that he founded in 2024.
He's got an incredible business history, entrepreneurial history.
[00:00:40] Speaker B: He is an adjunct professor and a recent author of his own book. There's just a lot of renaissance work that Lane has found a way to achieve. So it's great to get him for an hour. Thank you Lane for making time for us.
[00:00:54] Speaker A: Thank you, Peter. I'm delighted to join you. And I'm reminded of my guidance counselor in high school when he said that he did not think that I was engaged in higher learning. So for you to call me a renaissance man, I wish I could record that and play it for my high school guidance counselor.
[00:01:13] Speaker B: Well, we will have this recorded and so you're more than welcome to pass it on to him.
He had to make an early call on you, Lane, which was perfectly accurate at the time.
He may have been accurate at the time, but things can change. There's a lot that I want to cover today.
I want to get into some deals and how you manage certain kinds of deals. I want to get into Optima. But I think that in many ways it's very clear that Optima comes from some very clear origin stories and experiences of your own. So what? Why don't you just talk a little bit about, you know, what you think drove you to found your own M and a advisory firm for lower middle market American business owners. And let's just hear how the story comes together in your own mind.
[00:02:00] Speaker A: I would go back to my childhood like I think anybody would, considering the things that shaped them.
I was adopted when I was 2 years old. Don't know anything about my birth, but wonderful parents. I don't think of them as being my adoptive parents. This was 1960. They got caught in a terrible thunderstorm hail they had couldn't find a hotel room in Tupelo, Mississippi on a Sunday night. Stopped and slept in the car under a gas station awning. And the next morning my father went to a high school classmate's home. A gentleman named Timmons Wilson who had founded a business called Holiday Inns.
He wrote a check for $5,000, which he might have had. $5,002 in the bank to buy the franchise rights to the Holiday Inn of Tupelo, which he built.
He pledged my mother's wedding ring and his $10,000 cash value life insurance policy.
His collateral on a $300,000 construction and working capital line.
And so I grew up in a household with a father that went all in to build a business.
We had a rule when we were at home that we had our meals as a family at the table. So I grew up with a father who talked about business, talked about what he was dealing with in these hotels. He had a rule in the summers that if I didn't find a job for myself from the earliest age I can remember before I could drive, that he would find a job for me. The one summer I didn't find a job for myself, he got a job for me working for the Tennessee highway department, following tractors with the swing blade, cutting grass, you know, in a Memphis summer.
So I got my own jobs from that point forward. But the point is I grew up in a very entrepreneurial household and I wanted to control my own destiny. I wanted to start my own business. And I ended up doing just that. I started a wealth management firm and a bank and was a founder of the BB Kings Blues Club and other, you know, ventures. And, and I ex. Ultimately, as the president, CEO, founder of Sovereign Wealth Management and the related entities and the chairman of a bank, I was dealing with high net worth individuals who generally created their wealth through operating businesses. And the bank I started, Triumph bank in Memphis, was a small business bank. And so I'm looking at balance sheets and income statements I'm making, you know, participating in making business loans.
And then I'm helping them manage the wealth that they extract from that business, either from the cash flow of the business or from the sale of a business. And while I wasn't, you know, per se advising them directly on the sale of the business, I was very much involved in their. As their wealth manager and in some cases their banker in that process. So I ended up gravitating here in the last five or six years to just kind of by accident to consulting people in the Dallas area on the sale of businesses. I lecture at Southern Methodist University on mergers and acquisitions and alternative investments. And that led to a consulting role with a brokerage business, brokerage firm who then sold to Generational Equity, a large high volume M and a shop here. And I worked with them.
What I realized in consulting and working with other firms is I'm really terrible at poor employee.
I'm virtually unemployable. I've been self employed, you know, from the time I was in my 20s. And so I just, I'm just not very good at working for other people. So after learning a lot, you know, even though I had bought and sold businesses myself and consulted a lot of families around their businesses, the art of being an intermediary and representing a seller and working with buyers and all the things that go into that, there was some overlap with my wealth management, you know, role. But there's a lot of unique aspects to, you know, a particularly transactions of size and I'll just say lower middle, middle market, 10 million to a hundred million, which is where I focus. It's a lot of complexities.
And so there was a learning curve for me. Even though I teach it at the collegiate level and I've practiced it by selling my own businesses to private equity, there was a lot to learn.
So I feel like I, I got a great education, I've gotten a lot of at bats, a lot of reps, I've learned a lot and, and I really enjoy being that trusted advisor to help a founder navigate through a process that generally speaking, they have no familiarity with. They're great at manufacturing widgets, but they've never sold the widget factory.
[00:06:51] Speaker B: One of the other things you mentioned to me, Lane, was that your dad successfully exited and you saw the merits and the benefits of that firsthand for your family.
And, and you also exited your own wealth management businesses.
And so you saw the benefits of your father's outcome. You saw some of the opportunities to do a better job of exiting your, your own wealth management businesses and kind of all those things kind of coming together around Optima.
[00:07:25] Speaker A: Yeah, thank you for that, Peter. I. My dad, he was a victim of his own success. He once he built these chain of Holiday Inns. He was on the road five, sometimes six days a week going from Bowling Green, Kentucky to Kankakee, Illinois to Tupelo, Mississippi to Key Largo, Florida.
And he was a road warrior.
And my mother was raising myself and my siblings and my dad was absent and it caused friction, you know, in the marriage and the family. And he was really stressed out.
And my mother, I won't say she gave him an ultimatum, but I'll say that she gave him some encouragement to sort of step back and he had created wealth and with her encouragement, he decided to exit the business and he sold his chain of Holiday Inns. It ended up being a very fortuitous Time, because shortly. And I mean shortly. Within a year of his selling his Holiday Inn franchises, there was an oil embargo that spiked oil prices.
And Holiday Inn stock, which was publicly traded, dropped from the 90s to single digits during that period of time because people stopped traveling on the interstate highway system.
So the group, a publicly traded entity that bought my dad's hotels, according to him, called him back and said, please, just take a back. Just you could have him.
So he was able to exit. He thought that he was brilliant because of the timing. I think he was very fortunate and lucky. But shortly after the sale, or even before the sale, he became aware that my mother had terminal cancer. She. She lived a few years after the sale of hotels. But, you know, what I observed was my dad controlled his destiny. He built a business that had significant value for him, depending on how you define significant value. It allowed him to not have to worry about working. He was able to retire. He was able to spend a few years with my mother with no constraints. They traveled, they did things my mother wanted to do. And so what a powerful lesson for me, to see my father be able to pivot, be there for the family, be there for my mother.
And then subsequently, you know, I ended up in not a dissimilar situation. I was not happy running my wealth management firm. In the 2000s, there were three stock market crashes. The latest was 0809.
And anybody that was alive and running a business in 0809 remembers the impact in the financial markets, the subprime mark, you know, meltdown.
And it was just a really, really tough number of years. I was growing the firm significantly, expanding it than I had to downsize it. And I was tired. I was looking for the exit, much like my father was at that moment in his life.
And I exited successfully.
But it was a very emotional time. I was selling because I was unhappy.
And a few years later, when the cloud lifted and I was able to really reflect on that transaction, I recognized that I really didn't manage the transaction in a way that today I would consider optimal and effective.
And so I realized, and a lot of sellers are selling for emotional reasons. There's something going on in their lives where they don't want to own that business anymore. Very few sellers come to me saying, I'm three to five years away from selling.
I want to plan this. They usually come to me when there's some event going on in their life where they've decided that it's time for them to exit.
[00:11:14] Speaker B: Have you ever seen an entrepreneur have you ever had an entrepreneur, a founder, come to you who kind of nails.
Kind of nails it, so to speak? In other words, like, they give themselves three years of lead time.
They realize that they want to, they should sell the business before they're tired and before the bloom is off the rose. Like, have you ever bumped into an entrepreneur that somehow had the wisdom to avoid almost the unavoidable traps of entrepreneurship and exit timeline? I'm just curious whether you've bumped into someone who somehow seems to have figured it out in advance.
[00:11:57] Speaker A: I would say that it's more typical for me to function like an emergency room. Right.
You know, they're coming because they're bleeding from somewhere and they're looking for help.
It is somewhat common for me to have sellers that approach me that say, I've taken the business as far as I can take it. I don't really want to sell, but I don't want to continue on the path I'm on because I either need more capital or I need more human resources. And I don't feel like I'm capable of either providing the intellectual capital or the financial capital to get to the next level.
So actually, the last two transactions I've completed were majority recaps where private equity came in, acquired them as platform acquisitions.
The seller kept 20% ownership in the business in each of those cases, which seems to be kind of a standard in the.
In those deal structures. They wanted to move out of the operating role they were in or into a more specific operating role to sort of, you know, focus on the areas they felt was where their talent lied and where they could be most effective.
And, you know, and the PE firm came in and pushed, put resources in place to take the business to the next level. So I do see that that's fairly common. Now, again, the last two transactions I've completed presented that way. Sellers that, that weren't in a panic, weren't, I gotta sell tomorrow were more about, you know, I've taken the business as far as I can take it. Now I'm looking for a partner.
And we've been able to source those partners.
Most of the others present to us where they'd made a decision for whatever reason. Could be a sick family member, could be a divor, could be just age and tired, could be distress in the marketplace. Whatever business they're in has been under a lot of pressure and, you know, they're. They're tired and they want to sell.
I do have one current client who came to me about a year ago. He has A business in a niche that, that average time in market is over a year for businesses in his industry.
And he said I'm going to be 65 in two and a half years. I want to retire when I'm 65 and I'd like to go to market now.
So I have had one client over the last couple of years that came and said I got a two and a half year Runway. I'm willing to stay until 65.
You know, now that two and a half year Runway is a year and a half. But we do have a letter of intent on the table for the business and I think we're going to be able to move him forward where he can transition out with a new buyer.
And, but generally speaking, they come to me when they're ready to sell as or ready to transact, whether that's growth. You know, I want to, I want to transition within the business and grow or I want to exit.
[00:14:56] Speaker B: Maybe we could just spend a little bit of time covering the like emergency room examples that you mentioned.
Sometimes it seems like the emergency room examples are an artifact of them running a sale process on their own for the first portion of the ball game, so to speak. Like they either are responding to an unsolicited inbound acquisition and they begin to go down that road.
We were talking about a couple of those. Maybe.
So maybe that's a, maybe that's a good, like what, what are some of those scenarios like and what do you have to do?
How do you get yourself involved in those situations? Obviously the buy side is probably reasonably excited about the fact that they're buying a business off market. There is no intermediary involved. That's an opportunity for potentially a less competitive non auction dynamic.
And then now bankers getting involved. Yeah, I mean just take me through sort of the, the take me through some of the mechanics of that. Take me through some of the psychology of that, both with the owner but also with, you know, with, you know, with the buyer who is, you know, maybe pretty deep into their diligence at the point that, that you arrive.
[00:16:20] Speaker A: I've had half a dozen or more situations in the last 12 months where a business owner has been approached directly by a buyer, typically private equity, and received an unsolicited offer and acted on that offer and then found themselves in a process that they felt like was beyond their control and they didn't believe they were going to get the outcome that they anticipated.
Some of them called me early in the process.
I've been approached by a private equity firm. They're going to roll up in my space. Some of my competitors have sold to them.
You know, it's logical for me if I want to exit, to exit to them. Also, I'm not sure I want to compete against them.
Oh, now that they're buying my competitors, they've become really aggressive in my market, you know, so maybe they have an offer on the table. Maybe they've just been approached. So that, that seems to be a more common opportunity. I do have two clients right now who had received offers from private equity firms.
One was under a letter of intent. And during the diligence period, some things came up that were problematic.
There was an adjustment in the price in terms of the transaction.
The seller did not believe that those changes were warranted by the information. The buyer felt that they were warranted and appropriate given the situation.
Ultimately, the two sides stopped communicating. They just, the communications just broke down.
And I was introduced to them as a potential solution, an intermediary who had experience working deals from founder owner operators to private equity.
And I have, knock on wood, if this is wood, been able to step in and hit reset.
A lot of it is just communication. There's a language that private equity speaks that's not the language that founder owner operators speak. When that language is in a 90 to 100 page purchase agreement, you know, can be very, very challenging. Even when they have counsel. Oftentimes founder, owner operators don't go to sophisticated M and A council, they go to the corporate attorney. And so sometimes there's a mismatch there where they're, you know, that they're not necessarily, not to disparage, you know, attorneys, but sometimes they may not be getting the level of expertise they need for the complexity of the transaction.
[00:19:01] Speaker B: I've heard that a lot.
Where does the generalist attorney tend to break down relative to the M and A attorney? Do you have a.
Are you able to put your finger more, more specifically on that?
[00:19:11] Speaker A: Well, certainly when it comes to one understanding where the boundaries are, you know, in transactions of this type, look, if you're given 10 pages of reps and warranties, you're not going to like them at all. And if you're a generalist legal counsel, you're going to say you shouldn't agree to any of that. Right.
And you know, there are certain things in transactions of this size and type that are industry standard and acceptable and they are what they are. And the private equity firm's not going to transact if they don't get certain, you know, reps and warranties. A generalist lawyer might, in a genuine effort to protect his client, you know, try to push back on something that is just going to happen. I use the analogy, it's like when you buy a house, they give you 100 pages of documents to sign at the closing table. And if you actually read everything in those agreements, you'd find plenty of things to find problematic. So I think a little bit breaks down over the reps and warranties, identifications, the escrow provisions, you know, the things that a generalist attorney may not have had the experience of dealing with M and A transactions of that size and type. So they don't know what is generally acceptable and what is not.
You know, you just have to pick your hills to die on, you know, and you're going to have plenty of opportunities in a deal that's going to take months to get done, where there's going to be a quality of earnings analysis and you're going to answer a thousand questions about your business and feel like you're being attacked. And then you're going to get literally a 900 page purchase agreement and non compete all the things that go into these complex transactions. It's easy to, to let some term something along the way. If you're looking to kill the deal, you're going to have lots of opportunities to do that.
So you know, it's tough sometimes to figure out what do you have to have and what would you like to have and where, where, you know, where do we draw boundaries in this transaction?
[00:21:27] Speaker B: You gave the analogy of the emergency room.
I have a question for you.
When someone pulls into an emergency room and usually there's like a pretty clear plan for somebody to pick up the bill associated with delivering the care.
As a, as an investment banker, the model is entirely performance based. It's organized around a transaction successfully completing.
And my guess is that when you are in this emergency room setting, you're, you're not, you know, you know, you're not, you're not, you know, you're not invoicing billable hours like, like the legal profession.
So how do you size up these situations on your own behalf? How do you think about the likelihood and feasibility of being able to get something done when you, when, when one of these, you know, sort of arrives on your desk, how do you decide whether or not you're going to take it on or not take it on? I'm curious just how you think through feasibility and what are the things that you're looking for when you think about just not just how to help a founder in need. But how to make sure that there's an opportunity for you to get made whole under the circumstances?
[00:22:41] Speaker A: Well, that's a great question and it may be the defining question in a business where the overwhelming majority, if not all of the compensation is driven by a success fee.
And, and I haven't, I'm still wandering through the, the forest on that, trying to find the path out.
I don't have, I have not solved for that problem. I don't know that it's fully solvable.
I had two transactions last year where I. One of the ways I address it is I do a front end valuation and the front end valuation is not discounted cash flow. It's not Hypothetical. It's here 32 Comparable Market Transactions. You know, for your industry, your geography, your size.
The range was 3 to 5 multiple median was, you know, 4.1. Here's where I think you're going to trade. We'd love to bring you, and we'll try to bring you offers at the highest level of the market. We're going to run a competitive process to try to get that outcome. But if you're not interested in transacting within that range, then I would say go work on your business and come back when the business will merit that price. Let's not go through a process that's going to be painful for you and painful for me if we're not. If there's not an opportunity to get a price that's going to be achievable
[00:24:02] Speaker B: and you're able to say that and do that even in these kind of emergency situations as opposed to like a more sort of like, you know, two year lead time sort of sell side M and a process. You can, you can you have the time to be able to do that and talk like that and do that front end work?
[00:24:18] Speaker A: Yeah, that's a good question. In the case of the two current engagements where I was brought in after an LOI had already been signed, no, I didn't do a valuation because there was evaluation on the table. Now what I did do was pick up the phone and call some of the acquirers that I know because I've been able to develop relationships with private equity firms sitting in this seat over the years. So I was able to identify, you know, acquirers in the space where my clients are being acquired and say if I have a client that looks like this, where are you pricing? Where are you doing deals? So I was able to, you know, informally get some data to say is the offer they have in hand, you know, consistent with the market as opposed to a multi week formal evaluation that results in a work product I hand to the clock client, you know, any other situation where it's not, they already have an offer on the table and they're already in a process that I'm going to do the valuation, I'm going to present it to the client, I'm going to say if I bring you offers in this range, will you transact?
And I want them to say yes.
There are people that are willing to go through the process where they just want to learn where they're going to trade and I'm not interested in and spending nine months of my life, you know, to give them some data, you know, I want to know that they're interested in doing a transaction and I'm very transparent with them about that. With that said, over the last year I had two transactions, two engagements where I did the front end valuation, presented it to the client, they said if you bring me offers in that range, I will transact. I brought them offers at the highest end of that range, in one case meaningfully above the high end of the range and they walked away from the process and didn't transact. So I probably spent thousands of hours between those two engagements from beginning to end. I brought them in aggregate 25 offers from the market. Right. It wasn't like we had two offers. We had in each case double digit offers because they were businesses and you know, residential services with recurring income. They were the kind of businesses that are getting a lot of traction these days.
And so to me what I recognized was, well, whatever process I ran to vet them to determine if you know, if they were going to transact just didn't work.
So what should I have done? What could I do in the future to mitigate that risk? And I haven't found that exact answer.
And it's painful, it's painful to invest that amount of time and energy, run a process, bring offers that are consistent with expectations it and not transact.
[00:27:05] Speaker B: Does your business model in any way help you there by creating some. Yeah, I mean, I don't know how you're thinking about retainers relative to success fees, but I mean is, is the simplest way to think about this, just to sort of continue to tinker with some amount of upfront deposit which is some amount which is refundable and maybe some amount which isn't. I mean, you know, when, when, when you, when you post collateral to buy a house, you know, at some point you make a deposit and at some point you Got to be ready to lose it.
Have you experimented with anything like that?
[00:27:35] Speaker A: I have not. You know, and I talk to other people in the industry, my peers in the industry, and I've had several say, well, you idiot, you should have a clause in your agreement that says if you bring them offers consistent with that, then the success fee is due.
And when I worked at other firms, they had those types of provisions where if you fulfilled your obligations under the agreement, the end of the day, I'm not interested in suing people. I'm not interested in having to litigate to get paid.
And so I've just made a business decision that I'm not going to do that.
But I do think there's a more elegant solution to this than Harold. I'm operating right now, and so maybe some of the listeners to your podcast will reach out to me and say, have you thought about this?
But I keep thinking that there somehow on the front end, I can do something that will identify those folks that really aren't going to sell.
And I don't know that that's true. When I was in wealth management, maybe
[00:28:40] Speaker B: there's like a personality test equivalent. Maybe there's some sort of Myers Briggs test that can decode this and, and be helpful. No, it's, it's. It's an interesting question. As when I was reviewing your academic profile, I think one of the things that you studied very early in your.
Isn't there like an investor psychology?
You studied that in, in your undergraduate days. If I'm not mistaken, it was somehow part of your finance curriculum.
[00:29:12] Speaker A: Yeah, I created a unique degree at the University of Memphis through the University College. It combined psychology and finance into a program with the senior thesis that was on basically behavioral finance. Why do people make the decisions they do? What informs those decisions? What traps do we fall in? What biases do we bring to decision making?
Now, you know, the field of behavioral finance is very rich, and you got people like Daniel Kahneman and others where you could just. You could spend the rest of your life reading materials. At the time. I'm 67, so you have to rewind the tape a bit. There wasn't a lot in behavioral finance, and I was really intrigued with why people make decisions they do, particularly why they make repetitive, bad decisions.
[00:30:04] Speaker B: So, yeah, you haven't been able to take that degree and fully decode the founder's mentality when they're.
[00:30:12] Speaker A: Now, I will say I think that that background.
I will say that I think my philosophy has been more valuable than my finance degree.
You know, psychology and philosophy my undergraduates, because I do think understanding the emotions that sellers are going through that inform their behavior is as important as understanding the mechanics of how to get deals done.
This is a really emotional thing for founder owner operators when they sell.
And one of the ways I see that show up Peter, particularly towards the end of a deal, is they start doing things to sabotage the deal.
And I've gotten really good at spotting that. Now even though I may not be able to stop it, I can spot it.
[00:31:01] Speaker B: What are they doing?
What are some examples of self sabotage?
[00:31:04] Speaker A: I had a client that ran a services business. Let's just say it was H Vac. It wasn't but, and we were a year into the deal and we'd had a failed loi and we were under loi with a private equity firm, really good firm. They ended up completing the transaction. But you know, the week of closing, you know, after the engagement agreement, the purchase agreements had gone back and forth five times and everything had been agreed to.
He, you know, raised his hand and said I want to add something to the purchase agreement where they're going to provide H Vac services for me and my family for the rest of our lives. And it's like that's not going to go over well.
You know, let's stop and think about this. This is a 30 plus million dollar transaction. I don't know what the value of h vac service is for you and your parents, you know, but it's probably a nominal number relative to the size of the transaction. But imagine how your buyer is going to feel that you guys have finally completed these agreements and we're set to close and now you want to add something.
And ultimately I think he confessed that he just was getting really scared that he was actually going through with the transaction for a business that he had started right out of college and grown and it was his identity, somebody else was going to hold the keys.
Um, and he started stirring things up. I had another client that, you know, the morning of closing the, the, the documents had gone out by docusign and the wires were set up at the bank and, and were scheduled to go out at 9 and he called me at 8:30 and said after a year in the market and said I had a great night's sleep. And I said that I'm so happy to hear that. I, I, I'm at peace, I'm not going to sell the business.
I was like, you know, and I, I was just gonsmacked and I said, you know, have, is that a final decision. And he said, well, probably. And I went, okay, well probably, it's probably filed, you know. And so, you know, I kind of worked him off the ledge. Let's think about why, you know, what, what's, you know, what, what, what's motivating this. And ultimately, I think within a week we had closed the transaction, but he, he had this moment of, you know, right before closing, um, and he had a very clearly articulated reason for selling, um, and he was achieving his goals as was the previous individual.
So I do see what I consider to be self sabotaging behavior that is driven purely by emotions and it usually shows up in an unreasonable amount of energy. Being devoted to something that doesn't deserve, you know, that level of scrutiny and attention. Sometimes that's just deal exhaustion too, right? You're just so tired of the deal that you just don't care anymore.
[00:33:48] Speaker B: I understand that one.
I've never sold axial, but went through some really grueling financings and in particular one that was, yeah, it's fairly straightforward by the end of a process to get exhausted and to almost get to a place of sort of irrational indifference to the outcome, no doubt.
[00:34:17] Speaker A: When I was in my 20s, I did a leverage buyout, which I can't believe to this day. The bank funded it, you know, if they had no business loaning money to me at my age and immaturity. And I bought a, an imaging company, an X ray equipment supplier and service company.
And late in the deal the bank and the seller were, were acting in a way that I thought was very irrational. I got very upset and my father offered me counsel and he said, son, don't get mad at your money.
And fundamental lesson was step back from this and think rationally about what this means. And at the end of the day, he was right. I was really irritated about something that really had a very limited economic impact in the overall scheme of things. But I was allowing it to, to really upset me and I was prepared to kill the deal over it.
That simple advice, don't get mad at your money. Let me sort of step back and go, okay, you know, well, well said. I tell my clients that now too. You know, don't get mad at your money. I also talked to him about Aetna, the best alternative to a negotiated agreement. Because I think a lot of times in deal making, clients lose sense of the fact that there may be one buyer for their company.
And so if you're going to kill the deal over this thing that you don't like, what is your alternative?
You're going to keep running the company, you're going to go try to find another buyer.
You've already been through this process. You've gotten all the way to this point. Are you willing to kill the deal?
What is your alternative? And so sometimes when you really step back and think about it in the context of what's the best alternative to this?
There is a great, best alternative to that.
[00:36:03] Speaker B: Yeah, maybe it's a great time to spend a little bit of time talking about your work with owners, assessing buyers and assessing private equity buyers and non private equity buyers.
I'm particularly interested in your view on just the either evolving or not evolving reputation of private equity in the circles that you travel in, how you think private equity is doing in terms of managing its image and being an interesting partner versus being, you know, a more sort of demonized and sort of scary end game. So maybe, yeah, just, let's just talk a little bit about private equity as an, you know, as, as an exit offer and just. Yeah. The buyer assessment process that you try to work through with, with any given founder or any given owner on any given deal.
[00:37:00] Speaker A: Well, I'll start by saying that so far universally, and I don't have a thousand data points, but I probably got a hundred sellers universally come to the table thinking that, you know, private equity is this corrupt, evil, you know, it's, they're Darth Vader and they're coming to take advantage of them and to screw them in the deal. And so there seems to be this universal belief, you know, that private equity is, are bad actors.
[00:37:27] Speaker B: And so that's the opening position that they tend to have.
[00:37:30] Speaker A: It's the opening position. And even if during the course of meeting the private equity, the people behind the private equity firm and getting under an LLI and starting a process, even if they come to recognize these are actually people and they actually seem okay, you know, as soon as there's a conflict in the deal, which is going to happen fairly quickly, Right. You, you know, Hula and Loki does quality of earnings and they're attacking, you know, some of your numbers and, and, and things. And they immediately gravitate to the point of, see, I knew that these bad people were going to, you know, try to take advantage of me. And so I will say that I spend a lot of time when it's appropriate. And I think that they're making it, drawing a conclusion, conclusion that's not accurate relative to what's happening in the process to tell them I don't think they're bad actors.
You know, and you know, what they're doing is customary and consistent. They're trying to mitigate risk. They're trying to understand that what you told them is accurate because they're going to write you a really big check. And because they're running you a really big check, they want to make sure that they fully understand what that checks by. And if you were going to write a 30 or $40 million check to buy a business, I bet you would be asking the same questions and I bet you'd be going through the same process.
So I spend an enormous amount of my time in the deal making trying to keep them from getting to this emotional place where they have, you know, the buyer is an adversary and they have, they're corrupt or immoral or unethical or unprofessional in some way.
So, you know, somebody could, could engage the entire private equity universe to remake their image. And I don't know how that would work.
[00:39:22] Speaker B: Maybe a trillionaire.
[00:39:23] Speaker A: Yeah, they would definitely be able to create significant wealth for themselves that they can figure out why everybody gravitates to the worst description of private equity.
So I try to debunk that, that I will say, certainly if you do enough deals, you're going to come across some folks that probably fit the image of the bad private equity firm.
I had a situation in the last year where a PE firm just did a gross retrade of a deal. They threw a big number out, we went under loi, they came back and retraded it without any justification. It really makes you mad when that happens. And it sort of, even for me, knowing better, you sort of want to go, well, you know, this is what you get, you know, when you dance with the devil. But my experiences with private equity buyers so far has been very, very positive. They have been the buyers of most of my clients firms and I have found them to, to be honest, sincere people.
There is an inherent friction in a deal because the buyer wants to buy on the best price and best terms and the seller wants to sell on the best price and the best terms. That those things are in, in conflict.
And, and so there is inherent tension there.
And I just try to sit in the seat of, of not emotionally judging or irrationally judging the motives or actions, but just look at the facts and look at, look at the situation presented in a, in a, in a way to my client where I'm not promoting their fears and perceptions of the buyer.
So I do see private equity firms, good private equity firms as the ideal strategic buyers for my clients because Generally speaking, they have committed capital and they'll pay a full price.
I get, you know, I have a harder time with searchers. And you in my deals kind of straddled the fence between, you know, bolt ons for private equity and high, high value deals for searchers, which I would say is sort of the, let's just call it $10 million, right where the searchers could, with an SBA loan and some equity and you know, seller note, cobble together a deal and private equity doing a bolt on where they seem to be a lot more active. I have a lot more private equity now than I did two or three or four years ago looking at those $10 million deals.
So with the searchers, you know, my biggest concern is just simply how are you going to fund the deal?
And generally speaking, you know, they're searchers, they, they don't have committed capital. They're going to have to tie you up under an loi and then they're going to have to go confirm the capital. So I spend a lot more time on the front end focused on can the buyer perform. If it's a searcher or an individual or even a strategic, you know, what's the source of capital and is it committed, you know, is it on deal by deal basis with pe? If they have a committed fund, all things being equal, I'm going to favor them in my dialogue with my client because that just removes one of the major risk from, from the transaction and the structures.
Entrepreneurship through acquisition.
There's a much wider variance in terms of their knowledge and sophistication and access to capital than there is among private equity. And then you kind of got independent sponsors layered there in the middle of those.
And then you've got individuals, which I rarely come up with just straight up individual buyers.
I will say the searcher community is more sophisticated now. They have more resources than they used to have. Walker Dibel and you know, Acquisition Lab and you know, the various groups that provide resources to help coach them up and train them and help them understand how to source capital.
You know, so I am seeing a higher level of sophistication among the searchers now. But I do want my clients understand, I think part of my responsibility as their intermediary is to tell them I think there's more execution risk with this buyer than that buyer. Right, this buyer has a better offer but I don't have a clear path to their capital. And so the risk is we go under loi, we get tied up for a period of time and they can't perform this buyer, we don't have that performance risk, but here are the risks associated with them. You're going to go through a QAB and this, that and the other. And there's a possibility that this number's not going to hold up. So I want them to be fully informed about the strengths and weaknesses of each buyer in a situation where hopefully and ideally I have multiple offers from multiple prospective buyers.
[00:44:19] Speaker B: What's been your experience on just the chemistry and personality dynamics as a factor for an owner who's selling? Let's say all of the things are more or less, you know, somewhat similar, the offers are somewhat competitive, the capital base is well understood by you and you know how much time is spent by you or by owners just assessing just their general level of, you know, just what of like the feel good factor of selling to private equity firm A versus private equity firm B. Is that, is that a very important consideration all the time?
Not really. Only some of the time.
[00:45:02] Speaker A: I think it's an important consideration all the time.
How you work that into the process. If you have multiple PE firms, you know, can be challenging because you want to run a tight process, you want to move people towards an LOI and you want to present to your client.
In the last transaction I completed, completed, we got down to three or four private equity groups that had Lois on the table. And we scheduled four meetings on the same day in the city where our client was located.
And we had each of them come in and present to him.
[00:45:37] Speaker B: Is that their first in person time with, with, with your client?
[00:45:41] Speaker A: It was their first in person time. We'd done plenty of zoom calls, you know, but it was the first in person person and, and it, it was, it completely changed the arc of the transaction. The best bidder had a meaningfully higher, I mean, several million dollars more cash at closing in their deal. And he turned them down after the in person meeting.
And there was actually one. This is very politically incorrect. I'm just reporting the facts where the head of the private equity firm was a very obese gentleman. And when, and it was a, I thought it was a very good meeting on its substance.
And when he left, he said, I'm not selling to him. And I said, why? He said, well, look how much he weighs. If he's that undisciplined and how he treats his health, I thought, okay, that would not have been a criteria for me, but it is for, for, for my seller and it's meaningful to him.
So some things that you just don't think, think or Factors or factors, he ended up selling to the right group.
And I will say that that deal got like a lot of deals got really squirrely towards the end. And you know, the guys you meet with the PE firm that are, you know, the nice guys that are putting the LOI on the table and talking to you and telling you how pretty you are and how much they love your business and how smart you are, they disappear. And all of a sudden you've got, you know, a Q of E firm and lawyers, and you get lost in that process and you forget that you really liked the guy that came down from the PE firm from Chicago or New York. And so I've had a couple of occasions where I've asked the face of the firm, that person that that was there at the beginning, to come sit down again with my client so we can just have a human being in the room where they're just not getting a bunch of ugly emails over disagreements on, you know, a legal document. And they just lost their sense of what this is, this is all about.
I had just a great, great firm out of Chicago where I asked the principal to come and fly down to Austin in that case and meet with my client towards the end of the transaction when he had just gotten really frustrated with it. And I said, he just needs a little love. He needs you to come down and remind him why you're buying him and what this is going to mean. And it worked.
And so I think those relationships and how they feel about the people they're selling to are very, very important.
But do I do a great job? Can you do a great job in every situation of making sure they really have a full understanding of each buyer, you know, in the process?
It varies.
Sometimes we don't have that luxury. The way the deal's progressing, particularly the
[00:48:31] Speaker B: committed capital category of lower middle market private equity has created the business development function more or less in the last 15 years. There are some exceptions to that. There are certainly some organizations that had a much more intuitive commitment to business development and sort of specialized deal sourcing professionals prior to that. But it's become much more of a professional career within private equity firms.
And those business development professionals typically are responsible for originating opportunities and, you know, doing a high level vetting of them, but then referring them to the right managing directors and, you know, heads of different sort of initiatives inside the firm. I'm curious how much time you spend sort of passively developing, you know, having conversations, you know, business development conversations with the buy side with, versus just keeping your head down and sort of focused on working with the sellers. And your, your engagement with the buy side is always in the context of a specific and live transaction. Like what's your, how, how many calls do you take? Do you, do you take calls from the buy side that are just sort of like passive? Get to know you, this is what we're looking for, you know, conversations or do you really, do you really just stick to the sell side and, and, and, and spend the time with the ownership?
[00:49:59] Speaker A: It varies with my bandwidth.
As you know, I have three, three engagements under letter of intent right now. I think a fourth is going under Loi and so I am heads down in diligence supporting these processes to get to closing. I get it. I don't want to embellish, but I'll get a dozen emails a day from buy side folks that want to introduce themselves and they want to schedule a call to tell me about that.
And here's the thing, we don't really have a challenge getting buyers engaged in a process and your firm Axial is a big part of that.
You know, we took a, we took a client to market last week, an imaging, medical imaging company in Texas and you know, we matched up with four or 500 businesses, you know, buyers on your platform that have expressed an interest in exactly what our client does. And we now have 25 non disclosure agreements signed by those buyers. Now we do have a tool we use to go out and try to identify strategic buyers that may or may not be on your platform. To supplement that we have a, we have a list. I will put those people that reach out to me on our outbound deal flow email list.
But between our 3,000 people on our growing email list using the Axial platform and our website where the engagements are active, I don't have a problem, you know, getting robust engagement in the marketplace. So I could spend hours each day on doing nothing but having phone calls to talk to buyers about what they're looking for. And I don't think it would help me make me more responsive to them.
And so I'll be honest. It's.
Unless there's a relationship at stake there or it's somebody doing something that I feel is really different and I want to get to know what they're doing.
I'm kind of a no guy on the 30 minute.
[00:52:15] Speaker B: Good honest answer. I appreciate the honesty.
I was curious about that because even when you're not in the middle of three or four. Signed Lois.
If you have some downtime, isn't the highest and best use of your downtime still spent finding the next set of founders to begin developing a relationship with towards the sort of sell side pipeline.
[00:52:39] Speaker A: Yeah, absolutely.
What time I have available to me, I'd rather spend it developing Deal Flow where I can represent founders than talking to buyer number 432 that's looking for an H Vac firm in Dallas Fort Worth with $2 million of EBITDA.
I don't mean that to be mean spirited or demeaning. I just don't have the capacity to support, support that level of activity. I'm not sure what to tell those people that are reaching out to me.
I do respond to everybody. I'm not a jerk, but they may perceive that because I'll say I just don't have the time to do it. But thanks for your one pager. I put it in our database.
You're on our email list for deal Flow and we'll keep you posted as we bring new deals to market. And we do.
I am being responsive at a certain level, but I'm not surrendering my caliber to that.
[00:53:35] Speaker B: We got a few minutes left before your call.
I got this in the mail. Thanks to.
Thanks for the opportunity to be part of this in my own tiny little way. But this is an incredible achievement of yours. You've done this despite all of your emergency room visits with various founders in need of. I've, I've tried to read more or less every book that has been written about the sale process, the M and A process, the founder exit journey.
There are some good ones that, that predate this one.
What, what is in here that you're most, you know, that I guess that you feel most proud of what is in here that you feel is sort of most uniquely you and, and, and your beliefs. I'd love to just hear maybe one or two anecdotes on that. Obviously the book itself is worth reading, but yeah, I'm just curious, what are you most proud of that sort of sits in between the front and the back cover here?
[00:54:34] Speaker A: Yeah, I wrote the book. Well, first and foremost I'll give my wife credit because I home office and so she gets to hear me talking to founder, owner operators all the time.
And one day a year or so ago after I'd gotten off a of couple call, she said, you know, I could give that speech you give because I've heard you give it so many times. I could, you know, I could just get on the phone with these founder, owner operators and she said why don't you just record it and then you could just punch play when they asked that question and I thought, well, that didn't make sense, but I could write it down.
[00:55:09] Speaker B: That sounds a lot like a book.
[00:55:10] Speaker A: Yeah, I said I could read it down to your point.
And then when people reach out to me and say, tell me about Optima or tell me how you run a process or tell me what I need to know, know about selling my business, I can hand them a book and say, here, here's the process.
I don't know that I contribute anything new and unique to the literature that exists in the space.
What I did do was to think about it in a very sequential way, which is if you own a business, one, is it sellable? And I think there's an assumption that most business owners make that if they have a business then somebody will buy it.
The statistics in our industry don't support that.
A minority of businesses that actually go to market transact.
And if you have a business that has a lot of owner dependence, that has customer concentration, that doesn't have good books and records, that doesn't have good systems and processes, then you may not have a sellable business. Or if you do have a sellable business, it might sell at a significant, significant discount. So what I do is I walk.
The book is targeted to owners of, of lower and middle market businesses, sort of 10 to $100 million trial enterprise value that are going to be brought by an institutional buyer. And it says, you know, here's how to. And their quizzes in there. I guess if you asked me what I did that I really like about the book is each chapter has a quiz.
And so you know, in the first part of the book it's do you have a sellable business? Well, here's a quiz and you can score yourself. And based on your score, you either have a sellable business or you don't. If you don't, here are the things you can go do or should go do to make the business sellable. So go do these things and then come back.
If you have a sellable business, have you optimized it? Well, you know, here are the ways you could optimize the business. And look, if you have a business that's doing $10 million of EBITDA and you optimize it and you get another 1, 1 or 2x on that, you're talking about another 10 or $20 million. And that's not an unreasonable thing. If you're able to take the steps to improve the business so can be really transformative.
And if you, if you have a business and it's sellable and you've optimized it. Then here's what going to market looks like, and here's the process that you'll go through with someone like me or if you do it yourself, and here's what you're going to face from buyers.
And, and I also talk a lot about the emotional journey that we've discussed some today.
And I talk about making sure that you understand that you've thought carefully about what does it mean the day after the sale, how are you going to feel about this and what are you going to do with that time and energy that you've spent 20 years showing up at the business every day. And if you're not there, you're thinking about it on Saturday and Sunday. How are you going to replace, you know, that part of your identity?
So I was really appreciative that you contributed to the book. You wrote a great section. I had, I think, 15 expert contributors from Mark Cuban's chief Investment officer to you, to others that would take your unique approach to it. And you talked about what's the best time to sell. And it's very counterintuitive and it was a great contribution to the book. So thank you for that.
[00:58:27] Speaker B: I mean, it's, I know I need to let you go. I'm so thankful for the time.
You are.
You really have just a prolific amount of experience in and around this market. Leverage buyouts in your 20s, learning from your, you know, at the hand of your father as a very young man, seeing the merits of a successful exit, seeing the merits of suboptimal exit.
Now you're teaching in school, writing books while, while staying in your scrubs at the emergency room. You're, you're definitely a man on a mission. It's a, it's a, it's a, it's a pleasure to know you. It's a pleasure to be able to support you and the Optima team. And I'm just really grateful for the, the 50, 60 minutes you gave us today, Lane. And I know I'll turn you loose now to, to, to get, get back to get back to work, but thanks so much. It's just great to see you and great to talk about all this.
[00:59:23] Speaker A: Thank you, Peter. It was a pleasure for me and I appreciate the friendship with you and I appreciate the professional relationship with Axial, which is a great tool for us and our clients.
[00:59:31] Speaker B: Good luck with all these assignments.
I hope everybody makes it out of the er all patched up and very happy and healthy. Having after seeing Dr. Carrick so thanks again, Lane.
[00:59:42] Speaker A: Thank you Peter.
[00:59:48] Speaker B: 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. 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.
