E221: Michael Mufson Discusses Investment Banking and Business Exit Strategies

[00:00:00] Ronald Skelton: Hello and welcome to the How2Exit Podcast. Today I'm here with Michael Mufson and he is an investment banker, a barely seasoned investment banker. And today I want to thank you for being here because we're going to talk about what did it, what do we do when we succeed? A lot of you guys out there, you're, you're out there, you're doing your roll ups, you're doing your thing.

And when you win and it's time to have that succession plan, it's time to sell it, this is the type of gentleman we need to talk to. And you've got a lot of experience in this realm. Thank you for being here today.

[00:00:30] Michael Mufson: My pleasure. Thanks for having me.

[00:00:32] Ronald Skelton: All right. Well, let's start, start with your origin story. It's the ongoing joke if you said you listened to some of my episodes, you know I'm going to ask you like, how in the hell did you end up on a mergers and acquisitions podcast?

Tell us, tell us your story. Like what got you into the space and you've got a really cool career in this space. So, tell us about that a little bit.

[00:00:50] Michael Mufson: Yeah. You know, uh, I was fortunate. When I graduated from undergrad, I was working for a U S senator. I went to George Washington University, undergrad. And, which is in downtown DC and, foggy bottom to be specific. And then while I was at the,the Senate, I decided to get an MBA at the same time. And I was finishing up my MBA and my Senator lost.

He was from California, John V. Tunney, the honorable. And, I had to go in the real world. So, I joined, uh, Ernst and Young in their consulting group and got my CPAat the same time. And this is like 1981. I'm, I'm an older guy. And, the markets, I think when I joined an investment bank in Philadelphia, which is called Butcher and Singer, which has now been rolled up into Wells Fargo, the dow was about 900. All right, 900.

And, uh, inflation was just starting to come down. We were heading, we had mortgage rates at 18 and 22 percent and the bond markets were crazy. And rates were coming down and all of a sudden, the, uh, valuations are going up and companies are going public. And, we were doing what's called underwriting.

We were doing IPOs for, uh, family held businesses, big family held businesses that were making bottles, steel. There wasn't an opportunity for companies to go public. And I'm telling you this because of a particular reason, where the market is today. So if you had a nice business back then, and you had a million, just a million of after tax net income, you could go public.

And I think there were 17, 000 public companies in the U. S. at the time. And so that was the thing to do. If you needed liquidity as a family, you went public. There were no private equity funds. There really wasn't a market to sell businesses other than, you know, companies and industries knew who was going to buy them.

There, there weren't private capital like there is today. So that went along pretty well from about 1981 to 2001. And we went through the internet. First, we went through PCs, we were taking Empolo, companies that make PCs. And then, intranet companies that were tying together computers in offices, and then, um, the internet came about.

And all of these things were massive capital requirements to fund, and the public markets were doing that. Well, come around 2001, we had 9 11 and we had a hot IPO market. There were regulators that were determining that, you know, the widows and orphans weren't getting the hot IPOs. I use widows and orphans as a term of love, meaning that the, the retail market and the big institutions were getting all the benefit and happened to be Elliot Spitzer in New York who was the Attorney General. 

Did an investigation and we as an industry were regulated it by at the time, it's FINRA now, it was the NASD back then on behalf of the SEC. And that whole infrastructure of companies to raise growth capital ended because the regulations got overburdensome. And, all that risk capital left the growth markets. Fidelity had a big fund, MFS, and everyone had Vanguard, was, and all that money went into all the pension funds started going into private equity.

So what happened in the first, 2003, 2005, 2010, private equity started growing. And private equity was buying family held businesses, closely held businesses business. Divisions of companies that public companies didn't want. And then you, that became a multitrillion dollar asset class.

Today it's a mature industry. So, I followed all of that. And my background joining an investment bank, being a CPA back then they hired me because I was able to do something called pooling of interest and purchase accounting. That's when you merge companies, you don't do that anymore, but it was, you know, a little tricky task to be able to do it. 

I mean, I was an NBA CPA. I was able to do that. And that's how my M&A career started. So, looking back, I had a great vantage point, but we followed the money all the way. And today, companies that are being bought by private equity would have been public companies today.

I don't know how many are left public companies, but you know, it was 17, 18 back in 1990, it's got to be, you know, a third of it today because people are going private. Nobody wants to be public. It's a burden and it's only for really big companies today. So typically you need to have about a half a billion pre money valuation to be public today. And that's a good size company.

[00:05:52] Ronald Skelton: You know, I get it. You know, good news is you were an attorn-, I mean, you were a CPA way before the Sarbanes Oxley and those things where, I used to joke with my friends because, when I was in doing my MBA, you know, I was trying to make the difference. And I'm going to go to accounting, I'm going to do marketing because I wanted to be an entrepreneur.

I knew I wanted to be an entrepreneur. I was doing my MBA to get out of tech management because I was in the dot com world and I was managing big tech, tech divisions of companies. And I wanted out of it. I was burned out. And then all this stuff rolled out and I started thinking, we had this show could be a CPA go to jail because of Sarbanes, you know, there were some real consequences for making mistakes. After Sarbanes Oxley and some of the stuff you were talking about. So it made the whole like numbers game, not nearly as fun. 

[00:06:37] Michael Mufson: I didn't even address Sarbanes Oxley, which was an overkill for smaller companies. So, and it really ramped up the cost of being public. And smaller companies weren't be able to take advantage of it because they weren't able to tap the, the capital markets and they had all the bureaucratic requirements for being public. So it was, um, two strikes.

[00:07:01] Ronald Skelton: I don't want to make any illusions. I'm your typical capitalist guy. I want to make money and stuff, but I believe that our public market has an inherent flaw, in that you could take a company that's generating a hundred million dollars a year in profit at EBITDA, SDE, what even you want to call it.

Year after year and if they did that and they never moved forward, their stock would go down and the, you know, the CEOs would get replaced because they're not growing. And that just, is illogical to me that somebody could be winning the game, steadily holding a market and then changing environment in, in an inflating market and stuff and managing to keep at that, you know, a hundred million dollars is a very profitable company. They're employing, you know, hundreds of people at that stage. Especially on the profit scale. But in the public market, you don't grow, you die, you don't grow, you get fired.

[00:07:51] Michael Mufson: Exactly. If you don't grow, you don't increase value. You don't increase value, people are going to lose interest. They lose interest, stocks go down. So, yeah, that's why, you know, the rule of thumb in public companies is, you're going to grow organically 5 to 10 percent a year, and then acquisitions are going to give you another 15 percent growth.

So you have to, if you're public you have to, unless you're, you have a product that is just growing double digits and will be for the foreseeable future. You got to make acquisitions to,to survive. Which is what's good for an M& A practitioner. But most of the activity in the middle markets and we call it the lower middle markets are, it's private equity is, is driving it through what we call tuck ins.

You know, they have a platform and they buy smaller companies to give them geographic reach, give them new products. And you talked about your audience that are buying up businesses. And at some point in time, they're going to need a liquidity event. And, in order to do that, that's really what you need an investment bank for, which, you know, it takes a little army to sell a business.

It's comp, it's complex. There's a lot of documentation and you need to know the kind of the rules of the road a little bit once you start going out because, guys like us tend to be gatekeepers. You could pick up the phone and call Mr. XYZ private equity firm and you could probably do a deal.

But, we, we like to tell people, you know, you're gonna be an expert after you do your first institutional deal. You, you wanna be with a group of people who you're not, they're not learning on your, on your task. That they've done it, you know, scores and scores at times. And that's why people hire investment banks.

[00:09:36] Ronald Skelton: Yeah, I know. A lot of our guys are out there, they've been doing this for six, seven, eight years. They're getting to that point. I was telling you before we hit record, I was talking to somebody, they're getting close, right? They're pushing a hundred million dollars in revenue. They're probably looking at, they're happy with doing what they're doing besides, you know, I asked him how long, it's probably another five or six years.

And I said, okay, what's your succession plan? Cause you know, we all know it takes a couple of years to, to get it right. To, to prep yourself for a proper exit, at least in the small business world. But, you know, if you start thinking about, start thinking about it, that three to five years ahead of time, and he said, he's been building it to sell.

But one of the things he said to me, it was like, you know, I'm going to give my brokerage, sold me the last three shot at selling this one. I was like, like, Oh, whoa, whoa, that's a wrong guy. In my mind you get past, I say $5 million in EBITDA, you're no longer calling your family broker. You're not calling somebody off a BizBuySell.

You're, you're calling, you know, that's a lower end for the investment banker. But you start talking to investment bankers when you get up there because there's an entirely different process, right? Much more competitive. You're talking about strategic buyers, people that are public there, you're, you're telling me earlier, you know, the teams are way more diverse.

You're going to have way deeper due diligence. So, walk us through that a little bit. What does it look like? I come to you, I've got a company I've been building for 8 to 10 years. We're, we're there. You know, I don't, this is hypothetical. I'm not there yet. But, you know, hypothetically, let's say we're turning up, let's make the numbers easy at 10 million, you know, 10 million in EBITDA.

We've got our systems and processes down. We've got our management team in place. We've got good accounting and, we've already had our books, you know, maybe we're starting to look around for a company to audit our books or something. What does that look like, like walking in the door with a company or somebody with your skillset?

[00:11:19] Michael Mufson: Sure. So you, you, you said the magic metric. 10% EBITDA margins. So if you're a hundred million, you wanna be doing 10 million of EBITDA, but EBITDA is, we talk in adjusted EBITDA. So, there are, which I'm getting ahead of myself, but,put a pin in that and I'll come back to adjusted EBITDA.

But what you want to be able to do is, ideally have at the very least reviewed financials, even better audited financials. And typically if you have a bank loan of any size, and if you're a 10 million, you're going to likely have a audited, but not always. Reviewed that have notes to the financials.And so what accompaniment, what is become a standard in our world is something called a sell side, a quality of earnings report. And a quality of earnings report is an addition to reviewed financials or audited financials, which basically bridges gap, generally accepted county principles to, cash, EBITDA.

So, now we hire firms to do quality of earnings. So before we go out, we'll have reviewed our audited financials and there'll be a quality of earnings that reinforces what EBITDA adjustments are. So adjustments to EBITDA would be, biggest one is typically compensation. I have a firm, a hundred million, 10 million of EBITDA and let's say I have a year, an annual CapEx, capital expenditure budget of a million.

That's 9 million of cash that comes in. I'm probably giving myself a $5 million distribution or, and I'm paying myself a really high salary. So what we do is normalize things. So, privately held companies typically, the owners make a lot more and the senior management than many public companies. So what you want to do is, annualize your comp as if you were at a public company or what the market will bear.

So if you're paying your CFO, $500, 000, he or she, would probably be more for a company that size 250, 350. So all that comp gets added back. Also many times people expense capital expenditures, don't advertise it. So we'll go back in the, in the quality of earnings and we'll, we'll capitalize it. Andwe'll put back, uh, you know, we'll spread it over five or seven years rather than the one year.

So obviously you get a benefit to that. So there are a lot of adjustments that take place. But you're, uh, your question is why we do all of this is because we do the due diligence that a seller would come upon from accounting, product. One thing you don't want to have is, you know, I mentioned audited financials, reviewed financials, the quality of earnings, and then you want 10 percent EBITDA margins at a minimum, and that seems to be what institutional investors, if you can't get 10 percent EBITDA margins, that means your gross margins are too low, most likely.

Low gross margins typically mean having built a moat around the business. If people don't pay enough for your product or service. And, so that's where that, that one comes from. But you have a, you want to make sure your business doesn't have customer concentration. That is the proverbial kiss of death.

The good news is Walmart's 50 percent of my, my revenue. The bad news is you got customer concentration, but it's great if you're a private company, but institutional investors are going to put such a weight, a risk weight on that. And I can tell you, you know, doing this, always after you sell the business, the next year, that big customer decides to pull back on you.

So, you want to have multiple customers. You don't want to be dependent upon one supplier for your, your product. If you have an environmental problem, because you've had tanks underneath your facility for 25 years, you're going to have a, an environmental problem, which has to be dealt with. And, uh, you need to have employees who are, you know, not all your age. You don't want everyone to be 65 and 70 when you sell the business.

So you need to have people in place to continue because in order to create value, you know, a lot of people think they're going to get fired, no. They're going to get employment agreements and they're going to want them to stay for a while. So what we do is really come in and beat up the company so we can withstand the due diligence.

And most importantly, we, we tell, our clients what the valuation would be in the market. What the terms likely will be. And the, we know this because we're in the market all the time. We're talking to hedge funds, strategic buyers, where we know what, how, how they value the business. And we, after doing all that due diligence, typically have an auction for, uh, today, 150 potential buyers.

When I started 30 years ago, we went out to 10, 15 people. Today, it is well over a hundred people. And that is like why the art world has seen such an appreciation in art because everyone on the internet's bidding on it. I used to be had to be, you know, old school. He had to be in the hall where the,the location. And then the telephones improved that.

And now the Internet is it's a worldwide auction. We do the same thing. We really go out to people who, who, who bid on this and it's international today. A $5 million EBITDA business can go around the world in an auction. There are buyers all over the world and that's what we do. And that's why people pay us the big bucks to do it.

[00:17:10] Ronald Skelton: Yeah, I know that that's a huge difference to where a small business broker is going to make a listing and put it on BizBuySell. Share it with some friends and stuff and hope somebody comes along. You guys actually go out and actively seek who's buying this type of company. Make introductions. You have, you've been, you've been doing it long, as long as you guys, you already have a Rolodex of knowing who's buying what. 

You have people in your company that's their job to really understand who's buying what and for what valuation. So that when somebody comes along like a, you know, a plumbing or heat, heat and air roll up, doing five, $10 million EBITDA. You kind of already know in your head, okay, here's the 35 companies I'm going to reach out to.

And Hey, team, call these five private equity. It sounds like they're getting into this space too. You've got that, you got your finger on the pulse of the space and it's more of an active marketing. It's an out, you guys, uh, or when I say you guys, I'm classin' all the investment banker. You actively market these deals to potential acquirers, both strategic public companies and private equity.

[00:18:15] Michael Mufson: Right. We do. And you know, we're, you kind of play the gatekeeper role and you develop relationships, that's you know, our value add is in addition to doing all the aforementioned work to make sure you're going to sell and stand up to the scrutiny, because our greatest risk is you get shredded in due diligence.

So it doesn't make us look very good. So yeah, we, we put, once we've documented the company, we put a teaser together and that's when we'll, we'll talk to 120 of our best friends to, to buy, if they're interested, and it's all cloaked with a project name. If they're interested, they get an NDA. And then if they sign the NDA, we negotiate terms that are acceptable to our client.

We send them what's called a CIM, Confidential Information Memorandum. And then we give them two, two, three weeks to review the CIM. Then we ask for something called an Indication of Interest, which is what I'm willing to pay. What are my conditions to closing and my ability to fund. We won't, you know, typically don't work with groups that don't have funds.

Meaning they have a, a dedicated fund to buy or it's a public company that we know that's a cash. And then, we typically, the yields can be anywhere from 10 to 20 percent of who you went out to. So it's not unusual to have 20 IOIs from that or 15 IOIs, it all depends on the markets. 

The markets are, are good you're going to get more. If the markets are tight, you're going to get less. And then you pick, five to eight people to have management meetings. After the management meetings we'll get in letters of intent. Letters of intent we'll have about the only thing binding on it would be the exclusivity period to do due diligence.

We'll pick someone and hopefully close. All of that can take, seven to nine months from start to finish.

[00:20:09] Ronald Skelton: So it's not too far off from the lower market where it's 3 to 5 months, 3 to 6 months if the SBA is involved, right? I've seen people doing it in 3 months, 90 days. That's a, that's a stretch. It's tough. That's a, that's a quick process inside of that realm. But, so it's not quite double, but it makes sense.

It's a much more complex deal. And then, how are these deals funded? I know some banks, I mean, some of these public companies they have cash, they have stock. We talked earlier about institutional funding or some of these guys going through bank funding also. They're taking a certain percentage of loans from banks and then funding it. You know, cash is king.

All companies want to reserve as much cash as possible and use as much, you know, affordable other people's cash as they can. 

[00:20:55] Michael Mufson: Well, you know, the better companies, people that want to buy typically public companies, just come to closing with cash. You know, whether they fund it through a bank line or off the balance sheet. Private equity, um, they tend to, we'll use either a commercial bank but, there's something a tuck in if it's a platform they have like HVAC and they're buying a regional player, you know, that's a tuck in and they're going to use bank debt for that. If it's a, um, platform company, meaning I'm buying my first HVAC company and it's a big one.

They typically use private credit funds because banks tend to be a little restrictive in leverage. So private equity today, it's probably 50 50. They'll, if they buy something for 50 million, 25 million of it will be out of their fund. The equity and half of it will be out of a bank or a credit fund. And they have well established relationships and they're doing the due diligence for their equity, LPs.

The bank is doing their due diligence many times. In addition to a bank, you're going to have a sub debt funding. So you'll have the equity, you'll have a Mez fund or a sub debt fund. And on the senior, you'll have a credit fund or a commercial bank. So you've got a lot of players. And they're all doing their due diligence.

And, you know, you hope it all comes together so you can get to a closing.

[00:22:26] Ronald Skelton: I'd say I've interviewed a couple people recently who have done private placement memorandums and raise funds. Two of them actually raised debt, debt funds. Which prior to talking to him, I didn't even know that was such a thing that, you know, it wasn't, it was always like when you, when you raise money, you have to give away equity. And, uh, both these individuals, one of the things I think that was unique about both of these parties is they had really unique stories to tell.

So in this time, time and climate, I think that helped them raise money as fast as it did. So one of them, they're buying assisted living facilities, veterans homes, care facilities, so their housing and, uh, drug and rehab and stuff. So they're housing homeless veterans or housing the elderly. It's not too hard for them to raise capital when they can go to the fire and pension funds and the other stuff and go, Hey, we're taking homeless veterans off the street, cleaning them up and giving them a place to live. The other one was really creative. I just interviewed them. They raised 225 million.

Their story is, they're taking an industry that is predominantly male driven, but cost, female customers and guarantee the investors that when they hit a certain point of EBITDA, they're installing an entire women based female, I don't know what the politically correct term is, but, board of directors.

So the CEO and C suite, so the C suite would be all women ran. We're going to take, they're going to take an industry and the investors ate that up because it's something that, that particular industry needed. One of the cool things they did is, you know, they have a private equity, they raised capital from like family offices, other private equity firms, but they have a backing from institutional lending that will end up to, I think the number was like 60 or 70 percent on a deal.

And then, so now they only have to tap into the fund they raised for the other portion. How does institutional lending work? How does a person who's out there raising capital start those relationships and start those conversations?

[00:24:17] Michael Mufson: Good question. And you said something that was critical. When you do something, let's say you buy a candy store. And, then you buy a second candy store and then a third one. Now you're starting to have a trend and you're showing that you're able to improve margins, cut costs, integrate them, and you start getting a credibility that you can manage third party money.

And that, so a bank will be, you know, attuned to that. If, you know, if you have a bagel store and it's killing it and you want a second bagel store, it's going to be hard to get bank debt on that one, unless you personally guarantee it.Aunts, uncles, doctors, parents help out. But now you get into the store three and four, you've got a brand and you've got systems.

And so at that point in time the banks and the institutional credit markets are going to say, you know, you're probably worthy of, of our, of our capital at this point in time, whether it's senior debt, sub debt. And you build a record showing that you're an honorable lent borrower. You're a good trustee for a sub debt, which is kind of more like an equityinstrument basically.

And without giving up the equity, but you know, it's a different underwriting standard. So you're building a brand, a name, a reputation, and it just keeps going and going and going. And you need to be a good Eagle scout, type of investor lender or accepting investment and a good fiduciary.

And as you grow, you're going to get people running after you. But you have to build, you got to show that your institutional grade, that you're someone good to bet on. And it's hard to do it the first time you've never done it. It's easier, the more you do it.

[00:26:12] Ronald Skelton: It's interesting you say that because now you said that both the parties I know that raised equity, have a, have a history. One of Marty holds 30 entities. This is a new project, but he has a proven track record. He has 30 entities that he's, a part owner and that he's acquired over the last 20 something years that he still, oversees and runs.

And the other individual, the other, they raised quite a bit debt equity. He's been acquiring those assisted living facilities and homes for a long time. He teaches other people to do it. He has a few dozen. Requires one to two a month. I mean, he's really active in the space, so he's got,

[00:26:45] Michael Mufson: He's got to have a good reputation. I mean, that's, you know, it's a highly regulated space. So you've got government reimbursement and you just need to, if you've got that many units and, and you're operating them, you're, you're pretty good.

[00:26:58] Ronald Skelton: Yeah. So that's an interesting way to look at it. So let's go back to the acquisition entrepreneur who's, he's acquired say his 10th acquisition. He's starting to look out what, how, what's the timeline do you think it takes? So in the small to medium business world where you always tell people start planning for your exit three to five years before you, before you need to sell. What's the timeline to get ready to sell through the investment banking process? Is it the same? Or

[00:27:25] Michael Mufson: You know, sometimes we meet some, I love it when we meet someone, they say, and I'm ready to sell. We'll say, great, let's do it. But no, typically it's a long term relationship because you're relying upon someone like ourselves as an advisor. And, once you start getting, you know, like two, two and a half million of EBITDA, you're typically, um, starting to get to be a big business. And, around two, two and a half, you're kind of considered maybe tuck in territory for people.

You start getting up to five depending on the industry. So you want a good CFO. I mean, you need to have someone, you need to know your business. The only way to know your business is someone who is really keeping good score and is controlling what's going on. And, so you need to have a good CFO or a good controller in the company. So you can't start that one too early.

And you know, it's less expensive to start with reviewed financials early on. But today, you know, QuickBooks can, we sold the business that had, uh, they had 20 million of EBITDA and they were on QuickBooks. So, um, did it help the process? No, we had to have a B quality of earnings study done, but, that's a rare exception. But you know, you want someone to come in sooner than later because it's again, shows good judgment.

And you have a controller CFO knows, helps you know the business and has helped me control expenses.

[00:28:54] Ronald Skelton: There's a couple of new players in the last 10 years or so that are out there. What are the big guys expect you to be running on accounting software? So I'm, if I'm thinking about exiting, I'm outgrowing QuickBooks. There's like, I think one of them is Xero or something like that. What's the, what does people.

[00:29:09] Michael Mufson: Yeah, I don't, there are a whole bunch of systems. Each industry has their own systems right now. Some of them are ERP kind of systems, enterprise wide systems that include accounting and manufacturing, great planes out there. They were probably required. I don't know the names any longer, but,it tends to be more industry focused.

If you're doing something in steel servicing, they're working on something. If you're doing something in distribution, they've got their systems. So, it's, it's pretty industry specific. And then there are other people that have, you know, very detailed accounting systems with a lot of divisions and obsidiaries and they're using, you know.But, uh, QuickBooks isn't too bad.

You know, it gets, depending on the business you can, you can get pretty far with it.

[00:29:55] Ronald Skelton: Yeah, I believe so. I'm, I'm small enough. That's what, what my people use. I'd say what I use, but I don't touch any of that. If I touch it, I mess it up. That said, what is the next, like, so they, they get their accounting system right.

They start to get a CFO in place. Is it too early? Like, at that stage to go ahead and start building what a data room would look like? Are you starting to collect an update? 

[00:30:17] Michael Mufson: Yeah, I think that's, yeah, that's a little early. I mean, uh, one, you got it, it's expensive to maintain. I know companies that do that. They get a virtual data room, which is a service and they start putting corporate documents in and leases and employment agreements. But we, we, I think that that would be, that's a cherry on, on top of the, the sundae. 

That can be done towards when you're ready to hire someone. But the fact that you have all that documentation there, is important. So it's, yeah, most people, it's, supplier agreements. Anything to help you run the business, you want to have documented. But, you know, the accounting is certainly key.

If it's, you know, certain, if it's a regulated portion of your business, OSHA and, the other government agencies you have to comply with. And, you know, payroll systems and you want to make sure you're compliant with certainly taxes. You know, it doesn't look very good if you're, you're not good on, on, uh, your taxes. Certainly payroll taxes and, and the like.

So you just want to run a good business that someone can look at and say, yeah, they're pretty diligent and run an honorable business.

Because that's what, that's what big, you know, and it's a fiduciary buyer, you know, public company, a private equity fund, they're going to look for. They're going to look for the character of the people at that company.

[00:31:45] Ronald Skelton: Already had, one of my first run ins is I thought I'd landed a pretty good sized company right off the bat. They were doing 15 to 20, depending on the year, a million in revenue. Their EBITDA was really horrible because they were managing it horribly. But, I was looking at them and a company right on the road that built a, 30 miles down the road that built a semi competing the over, their products overlap by one product line, but they built a suite.

They were half the size, but they were running at 30 percent margins and it was for sale. I was going to buy them both and have the team from the good round one, come over and help me run, cause there were 30 miles apart. And they, the bigger of the two companies, I mean, we had LOI signed. They agreed to it.

I agreed to take over their debt. They owed the IRS 960 million, or I'm sorry, $960, 000, nearly a million bucks. And they went to the IRS and said, Hey, this company is going to buy us. They're going to assume that debt and take over this. And the IRS like, no, they're not, cause they were on a quarterly meeting with the IRS going to a workout agreements.

So once a quarter, they had to meet with, with the somebody from the IRS and like continue on payments and do other stuff. And, uh, they'd never come, so one of the reasons I, the IRS just said, no, you're not transferring this asset. So they, they nixed the whole, you know, the whole sale. One of the reasons I was interested in it because I think we could turn it around and their books were such a mess. They've never even contested the, the IRS claim of what they owed. And I already had found a forensic CPA team that could have cleaned up the books. They honestly, just by looking at what I could give them, thought they could challenge that, bring that way down.

And they had a law firm, the law firm that owned the CP, the forensic CPA team, specialized in negotiating IRS debt. And I already paid, you know, I thought we were, we had the LOI sign. So I'd already given them a, you know, a $6, 000 starter retainer and like had them start to look at things. And when the IRS said, no, I just told the ladies to look, I already paid the retainer.

Chances are, I won't get that back without fighting them. Why don't you call over there and get this straightened out and renegotiate this thing. And I haven't heard back. Probably should because I, the whole goal was that she gets a fixed income call, you know, calling me back. 

[00:33:55] Michael Mufson: You know one thing that we haven't spoken about is how you, how you value businesses. And I would say, where ignorance is not bliss is a lot of people come in and say, Oh, I want to sell my business at 20 times EBITDA. I'm really okay. And that's what it's worth. And I, I'll wait until I can get that number.

And they're really because they heard someone else bought something for 20 million. And a lot of the, the statistics are not in the public domain. They, unless you're, you have to report it as a public company. Buying a private company that's big enough because of disclosure rules that hide most of the data.

It's just by talking and knowing, but I, I mentioned something that, private equity, when private equity can leverage a company five times, and I said it's 50 50, you might get 10 times for that business. But when leverage is at four and three and a half, you know, you're not, it's very hard for a ordinary business.

People get those kinds of valuations are, you know, companies that are growing at 25, 30 for the next, for consistent years. Cause growth is how you create value. EBITDA allows you to fund. And if you're, have a good stable EBITDA that's growing greater than gross domestic product GDP.

You know, the valuations are just not that crazy. Big companies get big valuations because they're big and they can borrow enough. But, us mortalsin the smaller, you know, if it's a, a small shop kind of a business, you're selling a business with purchase money. So they're taking debt.

There's earnouts and, you know, cash is not going to be a hundred percent of the acquisition. And as you get bigger, you know, that changes, but a lot of people have ignorance on valuation and they really need to become informed and understand how these deals get financed and how the financing really pushes what the valuation is going to be.

[00:36:04] Ronald Skelton: Yeah. I always tell people is very rarely does the first guy who talks to an off market seller in the small to medium business world, get to deal them because the off market seller is looking at, he's going to the Google. He's got, you know, what is my heating and air company worth? 

And they pull down those sheets from the colleges that says, well, heat and air industry gets a 12 times multiple. Or like, well, I want 12 times my, you know, I, I paid myself a hundred thousand last year, I want 1. 2 million. And I was like, okay, it doesn't work out that way. There's different tiers in this. You're looking at something that is usually geared at high private equity above $2 million in EBITDA, maybe even above, you know, five, $6 million in EBITDA. Those numbers, those colleges are given out are not your world. And they have to hear that from two or three buyers, potential buyers before they believe it.

[00:36:54] Michael Mufson: I don't, I don't know the statistics you're referring to, but you look at there's a linear relationship between size and companies below 5 million of EBITDA tend to sell at, you know, between five and 6. 5. And if you get above five, you might to 10, you might be 6. 5 to 7.

And you get above 10 and it's probably, it's primarily due to your ability to finance. Because small is risky, larger is less risky because you, you know, have a bigger base. And if you lose a customer or two or a service or something, you're, you're not going to, you're not going to devastate and default on debt.

[00:37:33] Ronald Skelton: So, I, people need to understand that. I can't tell how many conversations we've had with people over the years that, you know, we just can't get through and they don't want to understand how companies are valued. And those companies tend not to sell, you know? I was looking, I told you, I have a, before we started, I told you I owned a little pest control company. I was looking at a little pest control, a bigger pest control company that would service all the lake resorts and they primarily did mosquito repair. I mean, uh, mosquito repel, repeller. They have spray systems that hook up to the houses and at 3 a. m. it sprays. 

I was like, you're one EPA decision or one, you know, state agriculture decision that says you can't spray that chemical away from being out of business. You got one product line, right? I'm just, I'm not that interested in that because they've thought about it a couple of times. I already know that it came up that the question has came up. You know, is that leaching into the lakes?

And is it dangerous to the, to the, you know, aquatic life in the lakes? And, there's so many rules and regulations. You're one, one board decision away from losing five, $600, 000 a year. It was a small companies, five, $600, 000 a year in EBITDA. And you only have that, that's the only product they did.

They just, they were mosquito, you know, control. And I was like, you know, maybe if you had half your business in town away from the lakes and the waterways and, cause that's, that's where it really comes to play. But, uh, you got to look at all these different things. 

[00:38:58] Michael Mufson: So, yeah, those are the kinds of things you need before you sell to understand how to remedy it and how to protect the buyer from that kind of a risk. But, you know, you mentioned, mosquitoservice up in a Lake community. Well, the Lake community might not do well. Recession is going to cause people not to rent homes, which means they don't use the service.

So, you know, that's why you want a company that has, they're in multiple geographic locations where some event won't cause undue risk. And that's what I was referring to, you know, larger companies tend to have that. And when you're building a business and you're trying to create maximum values to have that kind of, in your, you know, not having, all your eggs in one basket. A restaurant chain that has 20 stores that are all in Philadelphia is not going to be as valuable as a good restaurant chain that is up and down the East Coast. It just,it's just logic. 

[00:39:56] Ronald Skelton: You're one natural disaster away from being out of business. So, what is the, what is the process to kind of go through this? If my guys are out there, they're listening, they've been doing this for seven to 10 years, they're ready to talk toan investment banker, how early do they start working with you guys?

Do you, do you start like, early in the process and groom it and coaches, there's some type of consulting or is there a different type of advisor they need?

[00:40:22] Michael Mufson: There are firms that will do that. You know, we play the long game. You know, if we meet a company that we know the industry well, we'll say let's meet. We just met with a sensor company that is about two and a half, three years away. One of my partners in the industrial space. We like it.

There, they need to grow it. They're doing that. We told them, you know, if they need some growth capital, maybe we'll introduce them to some people and, we told them exactly, you know, what they need to do in order to maximize their chances for, uh, for a sale. There's some customer concentration.

They need to kind of wean off, off of this and they have some products to do that. So, you know, it's talked to a bunch of investment bankers. It's a highly personalized service. So some people like us, some people don't like us, you know, it's a, and if you meet enough people, they'll all, they should be all saying the same. Relatively speaking on process valuation.

But it's, I would say, you know, once, once you're a million or so and EBITDA, 2 million of EBITDA and you're growing and you want to acquire companies and you want to be able to get additional relationships in the credit community, whether it's credit funds or banks, I mean, investment banks, individual will make those introductions.

And many times they do it just for goodwill with companies. At least we do.

[00:41:50] Ronald Skelton: Yeah, I was just talking to a, a guy who's acquired, they're on their seventh and they're talking to, acquired their seventh, multimillion dollar manufacturing, industry type of company. And they're talking to their, in LOI, I think with two right now. So they've got eight and nine on the hook. They don't know, you know, you never know when they'll close. So, and they're at the point now where people in that industry call them, right.

They, they've acquired enough. They're running them successfully. They're improving upon them. They're growing them. They've got a name for them and he's talking, okay, about time he's going to have to go out and raise, you know, raise a fund. 

And, like, I think he's at the right spot to do that. You know, he can, he's got the track record. He's got the history. He's got a heck of a community, both online and offline that know who he is and what he's up to. I think that's what it takes in this day and time to, to raise, raise capital from the both institutional and from private equity.

[00:42:46] Michael Mufson: Yeah. No, you, if you look at the progression, you know, it becomes kind of exponential. The incremental dollars, once you get to eight, nine, and 10, you know, you're starting to make some serious money and if you're showing that you're able to improve operations, you're, you know, golden and you're going to attract institutional money.

[00:43:05] Ronald Skelton: Awesome. So, I've asked a lot of questions. I feel like I'm asking questions here, but I feel like I'm missing things. Where are we, what else, what else does somebody out there in this space need to know before they enter into the world of working with investment bankers?

[00:43:21] Michael Mufson: Well, you know, markets come and go. So, what you hope is their life cycle and where the market is are aligned. I mean, there were a lot of companies that were sold during COVID in the consumer space that were killing it. And today they're, they're off, you know, 20, 30 percent in revenue. Companies were selling back then. We were buying, we're a home buying a lot of consumer products.

So, you know, knowing the markets, when things are good and when things are early in the cycle, not late in the cycle, you want to time it to be one of the, the uptick occurs, not when it's flatlining up top. And you know, you run a business there, every industry has their own nuances. And when it comes to selling businesses, talk to people like myself and,and, and learn. I mean, um, there's certainly enough of us out there.

And, you know, find someone you like and someone who wants to make an investment in you. Our business is incredibly competitive. So typically when you get a sale, sale mandate, as we call it, you know, we're pitching, you know, three, four banks with us. And, um, hopefully the goodwill you did previously and the knowledge and the relationships you develop with the owners, is going to prevail, but it's, uh, it's a tough, it's a bitch of an industry.

It's very competitive. There's so many good, good players out there.

[00:44:55] Ronald Skelton: I bet there is. You, you're talking about industry cycles. I know when I was in the real estate, we kind of looked at one guy will tell you there's a 15 year cycle in real estate. Most people tell you there's a 20 site, year cycle where, but you know, it's cyclical. A lot of these other industries seem the same way, right? If you, if you miss your window to sell, there'll probably be another one, but it may not be, but for five, 10, 15 years down the road.

[00:45:18] Michael Mufson: You know, I, I remember, my first, in 1987 was my first market correction. And, I think it lasted like nine months. I mean, right now interest rates have such a role in people's perception of the market because you're borrowing. But right now people have accepted investors and institutional investors have accepted that we're going to be in a higher interest rate environment.

It's baked into numbers. Valuations came down a little, but the credit markets, there's so much liquidity right now that, between, what we call,liquidity in the market. You know, unspent capital in private equity, in credit funds, and of course the banks and cash on corporate balance sheet were swimming in capital.

It's got to go somewhere. And, so right now we're starting to see it pick up a little bit. It was second half of 2023 was awful, but things are picking up again. They're not in like these kinds of cycles because, everyone is making independent decisions. Do I pay up now? Are things going to get cheaper?

These are the buyers and the sellers are, you know, are things going to get more expensive? Do I, but when you've got good numbers and you've got growth ahead of you, you don't have customer concentration and you're at an age where you really want to get a liquidity event. I mean, you need to be at a point where you say to yourself, I've got all my wealth tied up in this capital. 

I've been at it a while. My family and I deserve some liquidity. And, if all of those things qualify, you ought to be out starting to talk in the market and it might be, you know, another 18 to 24 months before you're able to do anything, but at least you're talking, learning and getting comfortable withthe process.

[00:47:12] Ronald Skelton: Interesting. You know, when this, when the interest rates started going up, I knew that there was going to be a downturn in like activity. But also it was telling people just hold on because it won't, everybody's like, we'll just have to wait until the interest rates go down. And I'm like, no, you'll have to wait until everybody gets acclimated to the fact that they're going to stay up because biz money has to move. The people, all that liquidity, it doesn't make money sitting idle.

Right. Not, not, not the kind of money they needed to make. So, they have commitments and promises to the, the holders of that capital that, you know, especially private equity and stuff that they're going to earn something on it. So it, it has to move. So now they, now they just go back to the drawing board and rerun the numbers and figure out how do we make this interest rate work, right?

[00:47:55] Michael Mufson: The dry powder, you use it or lose it. And, you know, at some point in time, you're going to rationalize spending that on, on assets. And, buyers are very, very particular. So in markets like we're in now, a great company is going to get a lot of interest. A company that, isn't, has some issues,it's not that kind of a market yet. 

But when a frothy market occurs, people are buying. So,we're not in a frothy market, but we're getting into a better market right now.

[00:48:26] Ronald Skelton: Well, I appreciate your time. I want to respect your time. So let's, let's wrap this up with this. If somebody could remember only a couple of things from this conversation with you, what would you want them to take aways to be?

[00:48:35] Michael Mufson: Be prepared, talk to a lot of investment bankers and,understand the rules of the road when you're going out to sell your business. And if you get a bunch of people that tell you the consistent things and you don't believe that, well, then you're probably not going to have success.

[00:48:54] Ronald Skelton: Well, thank you for being here today. And I think we'll call that a show. Before we do, if somebody wants to work out, work with you, want to reach out to you, what's the best way that you want them to contact you? 

[00:49:05] Michael Mufson: Go to our website, www. mhhco. com, mhhco. com. There's, my email address is on it and other partners here. We're about 18 people and, we'd be happy to chat with you.

[00:49:21] Ronald Skelton: Awesome. And I'll put that in the show notes for you guys that are driving, or you're listening to this on your commute or something. Don't, don't swerve and try to write notes down. It'll be in the show notes for you to look up when you get to your destination. 

[00:49:32] Michael Mufson: Well, thank you for having me. I enjoyed it. Thanks so much.