Business Acquisition Criteria: From The Buyer’s Perspective With Nick Seger
What are potential buyers looking for in a business? While there is no such thing as perfect acquisition criteria, different buyers do have their preferences in terms of what industry the company is in, what its corporate structure and company culture looks like, and what the reason for the owner’s exit is. Taking a break from the usual format, Bob Roark interviews someone who is looking to acquire a business. Nick Seger is the president of Parkland Field Management, a search fund that intends to become the succession plan for a business inColorado or the surrounding states. Coming from a family business background, Nick has deep respect for business and is not looking for a quick flip as private equities tend to do. He plans to hold on to the business to see it grow and provide long-term value to its employees, customers, shareholders and community. What is his criteria for acquisition? What does a handoff transition period look like? What does he think business owners have to do to make their company attractive to search funds if they’re planning to sell? Nick shares all of these in this episode.
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Business Acquisition Criteria: From The Buyer’s Perspective With Nick Seger
We have Nick Seger. He's the President of Parkland Field Management. Nick is a recent arrival to Denver. He's in search of a company to acquire. This show is a little different and many times we talk to business owners that have an existing business. They may be looking to transition their business or they may be looking at some point to sell. In this case, what we have is a potential buyer of a business. We're going to explore some of Nick's thoughts and also the view from the buyer's eyes when you're looking at a business. Nick, thank you for taking the time to be on the show.
Thanks for having me, Bob.
Nick, tell me a little bit about your business and a little bit backstory on you.
I moved out to Denver over the 4th of July 2020 weekend. My significant other and I were living in Chicago before this. We were trying to figure out where we wanted to start that next phase of our lives and I had gone out and raised a little bit of money from some investors, which I'm sure we'll touch on here in a little bit. She was graduating from a Master's program and we figured Denver was a great place. She's from San Diego, I'm from Indiana and we picked up and drove the U-Haul out here and brought our puppy out. I've been searching for a company out here in Colorado. I appreciate you giving me some space here to talk about it.
For you, people go, “You raised some money from some investors but you didn't just start.” You come from a family business background.
I do. I grew up back in Indiana. My family still runs a third-generation agriculture business, turkeys and chickens. My grandfather started the business decades ago. My father has seven brothers, grew up in a large German Catholic family and large agriculture community back in Indiana. My dad and his five living brothers still run that business. People ask me all the time, “Why did I do this?” I tell them all the time that I had never seen the path to success being anything other than being a business owner.
Where I grew up, it was the largest town within 60, 70 miles. I tell people the nearest Starbucks was 60 miles away. There were no consultants, bankers, lawyers, accountants or tech companies. That didn't exist in my hometown. What I saw as success in business was being a small business owner. That's always what I grew up wanting to do. I had always thought I'd go back and help run my family's business one day but they have strict rules. You have to go out and prove yourself in the world before and so I did.
I went out and worked in finance and sales marketing for ten years. I was at Wells Fargo for a number of years and towards the latter half of my career was in more of a business development sales type role. I had a few offers to go back to the family business in the past several years or so. Some of them I turned down because I was still young and not ready to move back to a small farm town in Indiana. I was getting my Master's degree and had started dating my significant other who I live with here in Denver. I got another offer to go back and she wasn't willing to move back to the farm town.
[bctt tweet="Business acquisition starts with finding the right type of seller." username=""]
For many of the business owners, they go, “People don't get what we do.” I always chuckle when somebody says, “I'd like to own my own business.” I said, “I don't know that you know what you're asking for.” For you, the folks that you're potentially looking at, they may well have the same or similar backgrounds. They grew up in business or they've cut their teeth on their own business for years. The difference for you where you're different from some of the other folks is not only have you seen it and grown up in a family business, but you also worked in the industry that served small businesses. You've also worked on the side of the acquisition side of the house. That's something I wanted to dive into because we talked about you're in search of a business to purchase. Let's talk about what your ideal business might look like.
Hitting on one of the points you mentioned, I do come from a similar background as a lot of these business owners. I grew up in a blue-collar town, in a family business, third generation. I knew the names of all the employees at the company. It was run like a family. It had an eye on the long-term. There weren't any short-term decisions made. I did go out and cut my teeth in the professional world. I worked in lending for a little while doing a lot of these types of small businesses. I learned what worked and what didn't work. I worked on the investing side of the house for a little bit. Now I have these investors who are going to help me and guide me and advise me along the way as I'm acquiring and operating these businesses. You asked what type of business am I looking for? What's the perfect acquisition criteria? I always start by saying, it's looking for the right type of seller. I do care about what type of business it is. I care what size it is. I care what the characteristics are.
For me, first and foremost is who is selling the business. I'm looking for that person who has run the business for 30, 40 years. It's either a 1st, 2nd, 3rd generation family business and has a great relationship with their employees, customers and suppliers. They're not just willing to pass the torch on to anyone. I think the perfect scenario is one where the business owner maybe doesn't have a son or daughter who wants to take over the business even though that would be their primary choice. If they don’t have a son or daughter who wants to take over the business, perhaps they don't want to sell to a big private equity firm or to a competitor or a strategic.
Private equity tends to have a much more short-term view. They make short-term decisions to cut costs and grow revenues in the short-term, which isn't always the best thing for the employees and the customers of that business. Competitors, or strategics as you may call them. A lot of times they already have a lot of the employees doing the things that your employees are doing. There's a lot of redundancy there and they might come in and cut some of your employees and fold you into that house. I'm looking for one person who is looking for a succession plan that's going to carry on the vision, the values, and the legacy of their company. I think I'm uniquely positioned because I come from a family business multigenerational that has those characteristics. That's what I'm looking for in terms of the seller. You need to have that connection with me. I'm not an ordinary buyer.
When it comes to characteristics of the business, this is more of what my investors and I have decided on that's going to position me for the best opportunity for my growth and for the company's growth in the future. We've decided that I'm best suited to find a company that’s in this lower middle market where we define is about $5 million to $50 million in revenue or in finance speak, more like $1 million to $5 million in EBITDA or seller discretionary earnings. I like recurring or reoccurring revenue. You have a lot of foresight into what's going to come down the pipeline in the next 6, 12, 18 months. I’m looking to minimize my risk as I'm coming into a new business that I probably don't understand that well. It provides some insight into the revenue going forward while I formulate my strategies and get to know the employees and the customers and move this forward.
That's the size and the characteristics of the business I'm looking for. I'm trying to stay away from things that are largely cyclical. I have no way to predict the financial markets or the economy. I'll try and stay away from real estate and construction and oil and gas, those things that haven't flowed throughout the course of many years. I don't have a crystal ball so I can’t see that. I try to stay away from those things.
I don't have expertise in healthcare. Outside of that, I love business to business and service-type businesses. I like software technology-related to those industries. I have looked at anything from commercial landscaping to elevator maintenance and repair to call centers to veterinary software platforms. I’ve looked at any number of things. It doesn't matter to me what the industry is as long as I can understand it relatively quickly and it's something that I think I can sink my teeth into and grow over the next 5, 10, 15 years.
As you're out there looking for businesses, you describe yourself potentially as a search fund. I think that most business owners will know about the local buyer. They'll know about the private equity folks and so on. I don't know that they're familiar with the term search fund. How did you get involved with the search fund side of the house?
[caption id="attachment_5485" align="aligncenter" width="600"] Business Acquisition Criteria: The search fund community wants to invest in the buyer’s personal growth so that they can continue doing it in the future.[/caption]
The search fund world started in the late 1980s.And up until the mid-2000s, there were maybe 2 or 3 to 5, maybe 10 search funders or searchers out there in the country at any given time searching for a company to acquire. Over the past 10 or 15 years, there has been anywhere from 20 to 50 per year going in and raising search funds. Many business owners that I talk to have been contacted by many search funds often. A lot of them are either confused or they're wondering why the heck they've been contacted by so many people looking for the exact same thing with similar messaging over the past few years. The way I got tied into the search fund community is I grew up in this family business. I always saw my path to success one day being a business owner. When I finally realized I wasn't going to be able to go back to my family's business or that wasn't an option, I started talking to other business leaders who had similar backgrounds as mine.
I started talking to business owners. I started talking to people in my hometown. I have nearly 30 cousins on my father's side. I had a few cousins who were in similar situations. Their wife didn't want to move back to Jasper, Indiana and they always had the same goal as I did, which was to run a small business and they were working in Corporate America. It's fine to learn there and that was great for us but it's not exactly what we always wanted to do. A few of them had started acquiring businesses in the Midwest from people who have similar characteristics of what I mentioned before. I started talking to them and they're 10, 15 years older than me. They were having the time of their life. They love it. They were providing a great liquidity event, solution, legacy, and leadership for someone they acquired a company from and they were doing what they always wanted to do in life.
They were successful. I thought that was cool. I'd love to do that one day. I started talking to a number of business owners in my hometown and other parts of Indiana. I was living in Chicago at the time. I came across this hypothesis that there are a lot of 60, 70, 80-year-old business owners out there who don't have a succession plan that they're happy with. They don't feel comfortable with someone currently in the business, buying the business. They don't feel comfortable with the son or daughter taking it over or the son or daughter doesn't want to take it over. They don't want to sell out to private equity or to a competitor for any number of reasons.
I was in business school at the time and I started talking to some of my professors about, “I always wanted to be an entrepreneur. I always wanted to run a small business.” They kept throwing the idea of the high growth startups out there like, “Go work for Facebook or Google or these.” That never had any interest to me. I liked the salt of the earth businesses that I could sink my teeth into and something that I could grow. And thathigh growth stuff is fine. It's fantastic but it wasn't for me. One of my professors introduced me to the idea of a search fund. I had never heard of a search fund before and he introduced me to one of the search fund investors. There are about 30 of them out there in the country investing in search funds.
I talked to them and they pitched me on the idea that some MBA graduates, some 30-year-old business person with good background and also an entrepreneurial spirit behind him to go out there and acquire business from someone who wants to retire and he'd be successful doing this. I talked to them. I started talking to a number of people who had acquired companies and had been running them successfully and some not successfully and trying to figure out if this is something that I felt confident doing or that I wanted to do. I thought the risk-reward profile was for me and I spent about 1 and 1.5 years trying to figure that out and then I pulled the trigger and said, “This is the risk I want to take. This is the time I want to do it.” There’s no better time to do it.
I think about the business owner that gets hit up by any number of let’s say its search funds alone. What advice would you offer to the business owner that's approached by a search firm to discriminate the good ones from the moderate ones to the bad ones?
In terms of any business owner who wants to sell their business, there are search funders out there and they're probably getting hit up by wealthy individuals, by equity funds, whatever it may be. I try and guide potential sellers to think about things in three buckets. What are their personal goals for themselves and their business in retirement? What are the most important things to that person in life? Does that person have sufficient time to do those things? Do they want to stay in the business after they sell it? Do they want to move on? What would that person do with their time if they weren't working on the business now? Would they spend time with their grandkids? Would they spend time at the beach? Would they start dating their wife again? I hear that all the time because once they retire, people will start dating their wife again and it's true. You're married to your career at some point. What are the most important things for that person?
The second bucket I ask them to think about is in terms of operations of the business, what does your business need? This person has clearly been growing their business, whether it be 1% or 20% a year over the past 10, 15, 20 years. What would get their business to the next level? Do I bring those skills or not? My skills personally are in financial controls and sales and marketing. If there's a company that could benefit from having a sales team or a sales process or more financial controls, I could bring some value to that person's company. If there's a private equity firm involved or if there’s another potential buyer involved, does that person also bring those skills? Are they going to acquire the company and hope that it runs itself? Another thing to think about as they're thinking about these succession plans, is there someone in the business that they think is set up to take over the business after they retire or move on? Whether it be a son or daughter or whether it be an existing employee of the company.
[bctt tweet="Business acquisition is a relationship game. " username=""]
I think a lot of business owners that I talk to, in their mind, they have someone pegged to take over their business that's already involved. There are a lot of times where they have that conversation with that person and realize either that person's not equipped to do so or they frankly don't want to have that responsibility. That's something to think about and you and I were talking about this. What are the person's financial goals? That's the third bucket. What's the dollar amount that person will need to step away and retire? What do they need to hit their goals in the long-term? In that financial bucket, a search fund can be creative with how we structure this.
If someone maybe is not ready to solely retire or let go yet, they don't want a bucket of money and they don't want to walk away to Florida, Mexico or wherever they want to go. We can structure some potential sale where you get half of the sale price in cash and maybe half of the sale price in terms of equity rollover or in terms of if they want to provide a loan to the company. It's to earn a nice interest rate over the next 5, 10 years. There are a lot of different ways we can do it. I usually tell business owners to think about it in terms of three separate buckets. We've already hit on this on what type of person do they want to sell to. Private equity has a shorter-term time horizon and they make more short-term decisions that can be good and bad for the business. When they sell to a potential competitor, that competitor usually wants to create some synergies by replacing or moving some of their employees into that company. Maybe getting rid of some of those other employees. I ask them to do some reflection in terms of what exactly they're looking for.
You had this group of investors that you raise funds for. Let's say you go into company A and it filled the bill. It was exactly what you're looking for. What are the pros and cons for you in the fund with this group of investors? How much input or control or whatever do they have with you in the business?
Most people look me in the bucket of private equity because I do have private investors and I completely understand where that comes from, but we have different types of investors. Private equity funds are looking for a short-term return on their money and they only care about the financials of that company. They're only worried about the capital gain that we may potentially sell this company. My investors, although you might not believe it, they do care about the mentorship and the advisement and the growth of the search...