As a business owner, it is important to understand what a buyer is looking for in a deal so that you can position your company for a future sale. Representing this side of the M&A equation are Ben Mimmack and Andy Waltman of Baymark Partners, a lower middle market private equity firm based in Dallas, Texas. Listen in as they join Domenic Rinaldi on the show to talk about how their firm is approaching acquisitions. They also share insights on what the M&A market might look like over the next months. If you want to learn what things you need to work on to set yourself up for a profitable exit from your company, this episode is a must-listen for you.
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Ben Mimmack & Andy Waltman: Baymark Partners Acquisition Criteria, Due Diligence And M&A Predictions
What are private equity firms look for in target companies? How do private equity firms approach value and risk assessment? How are private equity firms changing their approach during this COVID-19 pandemic? My guests now are Andy Waltman and Ben Mimmack from Baymark Partners, which is a lower-middle market, private equity firm. They will talk about how their firm is approaching acquisitions. As a business owner, understanding what a buyer is looking for in a deal is great knowledge to have as you position your company for a future sale. Ben and Andy also discussed what they think the M&A market might look like over the next months. You will walk away with some great insights.
Before we get into this episode, if you want to avoid common deal pitfalls, the risk of losing substantial dollars, you need to know how ready you are for a transaction. Because I believe that proper preparation is critical to your deal success, I have developed a five-minute assessment that will allow you to immediately gauge how ready you are to buy or sell a business. You can access these free assessments and other free resources on our website at www.K2Adviser.com/resources. Being prepared is critical to ensuring that you maximize returns and minimize risks. Thank you for being here. I hope you enjoy this episode.
Ben and Andy, welcome to the show. It’s nice to have you here.
Thanks, Domenic. Thanks for having us.
It’s my pleasure. For our audience, could you both give us a quick backgrounder on yourselves and maybe one of you take doing a high level on Baymark so that everybody understands what you do?
I’ll start with my background because Ben will give a little bit more on the Baymark history. I’m Andy Waltman. I’m a Director of Baymark. I’ve been here for a few years. I originally came from the world of accounting. I started at PricewaterhouseCoopers several years ago. I was there for two years. I left there and I joined a great oil and gas, a private equity firm, Energy Spectrum. I was in their financial reporting group. They had about $2.5 billion of assets under management. I was there for five years. During my time there, I got my MBA at SMU. I wanted to look at some opportunities outside of the energy world. That’s when I joined Baymark and I’ve been here ever since.
I have been at Baymark for almost a year. I joined Baymark in November 2019. My background was I grew up in the UK. I have a legal and banking background. I came over to the US in 2010 to do my MBA also at SMU. I started working for American Airlines after my MBA. I did various finance roles as well as several years in corporate investor relations at American Airlines. I interned here at Baymark during my MBA.
The founders here, David and Tony, reached out and said, “Would you be interested in working in investor relations for us?” With the background I had, knowing them and knowing the interesting work they do here at Baymark, I jumped at the chance and came over. Baymark Partners is a little unusual for a private equity firm. We don’t have a fund. We were started several years ago and we’ve done 21 acquisitions at that time. We have six standalone companies in our portfolio.
We are slightly different compared to most private equity firms in that we are looking to grow our companies, and give them the tools to transform themselves into professional enterprises. In many cases with the companies we look at, we are the first outside money outside financing that they’ve ever received. A lot of what we do is geared towards professionalizing those companies and giving them the ability to take advantage of the opportunities they have. We are fairly agnostic in terms of industries that we will look at. We don’t do brick and mortar retail, real estate, hospitality or anything like that.
We’ll take a look at almost anything else and areas where we are interested, our healthcare, IT services, business services, light manufacturing and things like that. We have examples of most of those in our portfolio right now. We’re a lower middle market firm so we look at companies generally with EBITDA between $2 million and $10 million. We like what everyone else likes, establishing recurring revenue streams, some form of moat or competitive advantage and a diversified customer base.
Thank you for that overview and you got out of the transportation industry in time.
They feel like I had some insider knowledge about the COVID virus but it was just coincidence.
That is one industry that is going to go through a lot of changes. We are going to see what happens as that unfolds and whether or not we bail out the airlines and keep them afloat. Let’s have a few more questions about Baymark. You don’t have a fund. Was that a conscious decision to not raise money? How did you decide that you weren’t going to raise funds, go out into the market and be a regular search fund?
David and Tony like the flexibility of not having a fund give you. There are a number of fairly well-known disadvantages for investors the fund structure gives you. The fact that in many cases with the time horizon imposed on you by having a fund that can lead to some suboptimal acquisition decisions as the deployment date comes closer. The way we structure our deals right now is we find a company that we like. We arrange financing on a deal by deal basis. For our investors, they get to look at the company. They get a full analysis produced by Baymark.
They get full financial modeling and they get to make an investment decision on a deal by deal basis. For us and for our investors, it gives us a lot of flexibility on which companies we buy and when we buy them. Also, how long we are invested in the company. There’s no requirement for us to sell a company before it’s the best time to sell it. We can hold a company for as long as we feel like we need to. For our founders and for Baymark, flexibility is something that we value.Baymark Partners is not just after earn-outs. It helps companies grow and transform themselves into professional enterprises. Click To Tweet
Having been an intermediary for many years, I’ve had the opportunity to work with companies who have funds and those who don’t. They’re not all created equal. I think sellers are too quick to dismiss folks that don’t have a committed fund. What would you say to owners out there that are reticent to show their businesses to folks who don’t have a fund?
I understand why there is some hesitancy there. We’re hesitant to use the term independent sponsor because that can mean a lot of different things. Sometimes that can almost be a broker who might want a couple of points in a deal and they can go all the way down to us where we’re control investors and we’ve done 21 deals. I think it’s important that sellers know that can be an attractive partner that can get you the right value and learn about their history like what have they done. We’ve shown over 10 or 11 years the deals that we’ve done and that should give some confidence that even though we don’t have a committed fund, we do have committed investors who are ready to work with us.
That’s a great point is that not all independent sponsors are created equal. You do have a bunch of folks out there that are searching for deals and hoping to find a home. They don’t have investors behind them up the spectrum to you guys who are at the high-end of the spectrum where you’ve got investors behind you. You’ve done deals and you’ve got a track record. I think it’s important for anybody in the M&A Unplugged community who’s reading to understand that just because somebody is an independent sponsor doesn’t mean that they should automatically be kept out of a deal. There are plenty of good independent sponsors such as yourselves. What is your typical strategy for a company? Are you looking to invest and hold it for 3, 5, 7 years? What are you looking for in a company? Do you like the management to stay? Do you want the owner to stay? What are you looking for in a typical transaction?
There are too many exceptions to each one of these rules. Our general strategy of what we try to do is we have some people here with a little bit more of an operational background. We don’t look to come in and take operational roles. We’re not looking to replace an entrepreneur or founder and come run the business. However, we are comfortable coming in working with the entrepreneurs and finding the right team of people to build around him.
We look at companies that are maybe a little undervalued in the market. We like companies that have recurring revenue, but sometimes we’ll look at companies that don’t have that. We’ll look at companies that are a little bit more tied to the construction market with a little bit more cyclicality or they’re a little bit smaller. We’ll go down into the $2 million of EBITDA range and some private equity firms don’t want to play in that space. Our general strategy is to find companies that have the potential, but they don’t have the people, the infrastructure and the procedures there.
We look to come in and help them build that, grow the company, take that $2 million to $3 million of EBITDA then grow it to $5 million, $6 million, $7 million of EBITDA, where now you’re not solely dependent on an entrepreneur. You’re dependent now on a company of people and systems and hopefully, you have a market of buyers that was larger than when we bought it. That’s the goal. As far as owners, our goal is almost always to have the owner. I’ve taken it as far as I can. I want to take some chips off the table, but I want to keep a meaningful stake and have that second bite of the apple.
Depending on the age of the owner, that’s appealing to them to be able to get a sophisticated buyer like yourselves, to come in, take some chips off the table, bring some real process and professionalism and then go sell it 5, 7 years down the road for 2 or 3 times what the original transaction was worth or maybe more.
We’ve seen many people with 20%, 25% retained stake and that ended up being worth more than the original 75% purchase price.
That is very appealing. Let’s talk a little bit about what you’re seeing in the market right now. We’re in this COVID environment. There have been a lot of shifting grounds. I don’t think it’s all settled out, but what are you seeing on the sale side?
We’ve seen a wide range of things. A lot of firms like ourselves, we’re focused on our portfolio going through the PPP loan process and weathering that storm. You can be as prepared as you want. You can have cashflow statements be on top of everything, but when something like that hits, there’s always a little bit of a rush to try to put a Band-Aid on as quickly as you can. That was the focus. We have been fortunate during this time. We’ve been able to exit a company successfully which was good.
We were able to buy a platform company that did get delayed because of COVID, but the company was able to perform through the March and April months of 2020. We were able to get everybody across the finish line and still complete that. Our deal flow right now is we have a few businesses in particular that have done well during this time. We have a couple of essential businesses that are tied to construction and we’ve been aggressive looking at for some add-on opportunities for those. We also have an IT services company that we’ve been looking for add-ons for those.
We’re still looking for platforms. The deal flow there for those bigger $3 million, $4 million, $5 million EBITDA companies has slowed and the quality hasn’t been quite as high although we are starting to see that come back a little bit. We’ve been focusing on a little bit of a smaller. For add-on opportunities, we’ll go as small as $400,000 or $500,000 of EBITDA. We’ve been looking into some more of those opportunities. We are trying to put these companies that are doing well during this time and put them on an even stronger foothold.
That’s an interesting point. We saw the market slow down a bit. We are seeing a bit of an uptick, but I’m a little surprised that we haven’t seen more of an uptick given some of the discussion around the outcome of the election and maybe capital gains taxes going up and things like that. I thought we would have seen more sellers come out and try to get ahead of that but we haven’t seen them.
A lot of the people that work in the market March, April of 2020, and even right now this, they started their process with brokers pre-COVID. They said, “You can sell this company for 6, 7, 8 times.” All of a sudden, overnight, buyers changed. “I’ll pay you six times but 30% is going to be an earnout. You are going to have a seller note.” First, there was a knee-jerk reaction from buyers. Some of it is right, but some of it is also like, “Everything’s going to go bad. I have to reduce everything.” You are now starting to see, “How has this company performed?” Sellers are starting to say, “Maybe I have to get my evaluation expectations.” Everybody moved apart and now we’re starting to come back together. I do think more and more deals will start getting done again.
People are struggling with valuations because not only do you have for many companies, a big hole in the earnings from the COVID shutdown but also people are struggling with what the new normal is going to look like. Projecting earnings into the future for a lot of firms is difficult. Therefore, the conversation about valuation, as Andy said, is there are a lot more private equity firms that are probably going to put a lot more earn-outs, seller notes and variable compensation, variable acquisition value into deals. That’s difficult for a lot of people.
I’m curious about your exit. I’d like to learn a little bit more about that. It’s been intriguing to us to see that our buyer activity is higher at this point in time than it was at the same period during 2019. We’ve been sharing that data with our prospective sale side clients but it’s still not enough to move the needle for some of those folks. I don’t know if they don’t believe us or they can’t get over what’s happening in the environment, or they don’t want to walk away from a business that’s generating significant cashflows with all the uncertainty about what’s going to happen going forward. We’ve been completely shocked at the level of buyer activity on our deals. Did you experience that same thing on your exit? Did you see a good number of buyers coming after that deal?
The point when the pandemic started to affect things, we were under LOI. We were exclusive to a single buyer. We had somewhere between 7 and 10 buyers who had made offers. At that point, we had already chosen our buyers. We had gone through that stage. A lot of sellers will think, “They are private equity firms. They want to do the earn-outs and all of that. We ate our medicine too. We sold ours. We had an all 100% cash at the close deal. We had to convert some of that.” Even in those early months that they didn’t miss a beat, they were doing great but we had to take some of our compensation at the deal and turn it into an earnout. It’s happening to everybody.
It’s great though. You still got the deal done pre-COVID. You were able to keep that buyer on the line and get it done. We had a few of those as well. We lost some. We had eight deals under diligence before COVID. Four survived and four didn’t. The ones who didn’t, those businesses just imploded. They almost went away. We had one that lost probably 95% of their revenues almost overnight. They had a great deal on the table. It was an awesome opportunity for the owner to walk away and retire and a cautionary tale there about timing.
You predict something like that. That breaks my heart. I’ve never done it. I’ve never built a business like that from scratch, but I’ve worked with many people. I know that those people are ready to have that sale and they put so much into that sale too. That’s unfortunate.
It happened a lot out there. Let’s talk a little bit about now knowing what we do know, how are you approaching diligence? What’s changed for you internally? Have you added anything to the diligence process that you didn’t have before? Talk a little bit about your approach there.
I don’t think so. It’s unique by each company and we have to look at what in March and April of 2020 looks like and what does it look like since then. I wouldn’t say any of our diligence has changed. I’m trying to think of any companies other than the general downward trend, because of COVID. I’m trying to think of any that I’ve worked on that had a direct link that we had to do extra due diligence. We’re trying to evaluate each company on a case by case basis. A lot of these valuations are based on a trailing twelve-month EBITDA multiple. We’re trying to work with companies and get creative. It’s not always earnouts.
If you were a $4 million or $5 million company, and then you had two months where you were a zero EBITDA company, but now you’re back to that $4 million to $5 million EBITDA, I’m not going to make you sit there with these two months sitting in your trailing twelve months ding in your value. If we can get solid footing that you’re back to those old $4 million to $5 million levels, you’re cruising along. You shouldn’t have any more hiccups or we’re trying to get comfortable and we’re trying to get creative where we can say, “You’ve had three months where you’re back. We can work with you, then we’re not going to make you wait twelve more months before we get you a full valuation.”
What are the banks saying to you on the backend about that? What’s the conversation you’re having with your lenders?
With some lenders, it’s across the board. Some lenders have turned the spigot off. They’re not doing anything unless we put in one-to-one equity to debt or it varies across the spectrum. Most of the ones we’re still working with, they’re still active are taking a similar approach. They might want a little bit more earn-out or a little bit more, “They got to prove it’s going to keep going.” They’re not forcing the issue of having to wait twelve months until this all rolls off. They’re trying to look forward and saying, “What is this going to look like over the next twelve months and not one of the last twelve months?”
Have you seen the opposite of that where companies benefiting from the pandemic and their revenues are up 30%, 40%, 50% and now value expectations have gone in the other directions?
We did have one that was tied to home renovation. They did get hit hard at the beginning, but then they did take off. Now we ended up losing that one because they did want to see where this was going to play out. We never got as far along. They did see an explosion because everybody started doing every renovation they could while they were at home. They had this two-month black hole in their books and they show that they got back to the old normal that they were at and we were ready to pay them for that and even give them an earnout for the new stuff that was coming in. We said, “You’ve got to show it’s going to come in now for a year or eighteen months.” They said, “We want to wait to see it.” They want to ride it out and they want to see how the next twelve months will look for them.
We had an interesting situation with one of the companies we bought during the pandemic closed down. It was an installer of school security systems. A lot of the potential investors we spoke to were concerned about the impact that COVID shutdown and school closures would have and state budgets. They were wary about investing in that business, but the COVID was beneficial to earnings for that company because they are able to make money where they installed school security systems.
This closure extended the window so that they were able to make those installations from three months to a much, much longer period. The backlog of revenue and projects grew bigger and bigger during the COVID shutdown as more and more education departments such as scheduling work. The COVID pandemic was beneficial for earnings on this company and yet the perception was that it was going to be a big negative. We had to work to address the perception and bring to people to notice the quality of the company.
When you look around at various companies, it has become the haves and the have nots from a growth perspective. Owners that have benefited are clearly looking at their values and they’re wanting more, but the question is exactly what you’re saying. Is it sustainable? What is this going to look like 12 to 18 months? Is it going to settle back down to where it was before? It’s going to be interesting to see how that unfolds for a lot of those owners. Let’s talk about closing up a deal, the legal aspect. It sounds like your diligence hasn’t changed that much. I’m sure it was comprehensive but what’s changing from a legal perspective, maybe in some of these agreements as you look at closing up deals that might have been impacted by the pandemic?
Everybody is looking a lot closer to the reps and warranties to make sure you want to get as much out in the purchase agreement that, “If you know something, you got to come out with it if a customer’s going down” or anything like that. There’s been some additional attention to that. We’re a firm that hasn’t historically used many earn-outs. With deals, we are we’re making sure those are crafted where the seller feels it’s fair and it works for us as well.Baymark values flexibility. It doesn’t sell a company before it’s the best time to sell it. Click To Tweet
In reps and warranties, are you seeing some changes there from the reps and warranties perspective? Are you getting ahead of that with folks? I’m hearing from attorneys that reps and warranties and indemnifications are getting beefed up now because there’s so much uncertainty.
We try to allocate a little bit more of the risk that we think is a fair allocation at least to the seller. I’ll use an example like knowledge qualifiers. A lot of sellers want to put in, “To the best of my knowledge.” In certain instances, we might allow those words. Now we’ll say, “You can’t say, “To the best of my knowledge, my top ten customers are all doing great and expected to be business as usual.” You need to be calling them and you need to know. Who better to know than you?”
I’m not going to know you need to do more than to the best of your knowledge. Things like that are getting beefed up but we try to be careful. We luckily have someone who works here which is one of our founding partners who is an attorney. He’s knowledgeable about that. He keeps us all honest, but sometimes those reps and warranty, there’s 3 or 4 you care about. The other ones, you forget about them sometimes, but now each one you’ve got to look at and say, “What does this mean in this new world we live in?
It’s important for owners to understand that this is fair given what’s going on and the uncertainty. This has always been a sticking point in a lot of these negotiations, but it’s going to change and private equity groups and strategics are going to spend more time worrying about reps and warranties and indemnifications rightfully so not knowing what’s going to happen. As a firm, have you guys ever used reps and warranty insurance?
We have done it once. It was before both Andy and I started but we did ask about that. It has been used by Baymark. It’s a good idea when you have a seller where one party has a lot more risk in the game than some of the other sellers. It helps get everyone on the same page in terms of where the risk is being allocated. There’s a place for it in certain deals where you might have an asymmetrical risk profile between different sellers and buyers.
You’re not thinking now is a time where you might be incorporating that more given the uncertainties in the market.
I don’t think as a matter of course. It’s something we’ll look at but certainly, there are situations where it’s something we would use.
I’m going to ask you to pull out your crystal balls a little bit. What do you think happens here in the marketplace where historically low-interest rates, lenders are still out there looking to put capital work, lots of buyers as we’ve talked about it? What do you think happens in M&A here over the next months and what impact might increase taxes have on the M&A market?
As Andy mentioned, we have seen a lack of good, larger companies that will be suitable for us to buy as portfolio companies as standalone acquisition. Naturally, a lot of people have taken their company off the market because they think they can wait for the COVID impact to pass and hopefully, the valuations return to normal and maybe they’ll put it back on the market. If COVID continues to be a big impact on the economy, then maybe people start to think, “Maybe I will accept a lower valuation on this company because I’m ready to exit. I’m ready to take some chips off the table.”
Gradually, over the next few months, you will see some companies returning to the market that was previously taken off the market. The impact that perhaps higher capital gains taxes will have on that, it’s hard to say, but if higher capital gains taxes are here to stay, then there’s no real workaround for that. If you didn’t do the deal before the election, then you either wait for a new administration or you sell your business and that could be four years. For a lot of people, that’s probably too long to wait.
Andy, do you have anything to add there?
It’s going to be a lot of starts and stops. You’re going to see some of the cases go down and maybe people get a little bit more wanting to sell their business, but I still think we’re going to see mostly a deflated deal flow. That being said, I don’t disagree with you. If Biden wins the election, we will see that some people might kneejerk and try to sell quicker and move a little faster in order to try to avoid a potentially higher capital gains rates. We might see a lot of deal flow in the first quarter of 2021, if that’s the case. I’m not going to speculate on what happens. There are many scenarios.
It’s been a pleasure visiting with you. I appreciate your time and sharing a little bit about Baymark. I want to reiterate for owners that are in the M&A Unplugged community that are reading. Independent sponsors come in all shapes and sizes. Baymark is at the high end of that spectrum when you’re looking at independent sponsors. I think it’s important that as an owner, you not disregard folks like Baymark who could add a lot of value to a business. If folks want to get in touch with you, how could they reach you?
Thank you so much. I appreciate you being here.
I appreciate it. Have a good one.
I hope you enjoyed this episode. If you enjoyed our content, please remember to subscribe and review our podcast. I look forward to seeing you again next time. Until then, please remember that scaling, acquiring or selling a business takes time, preparation and the proper knowledge.
About Ben Mimmack
Experienced Director of Investor Relations with a background in both private equity and public listed companies. Skilled in communications strategy, investor communications, equity raising and financial analysis.
About Andy Waltman
As lead investor, raised approximately $60M for acquisitions, debt refinancing and capital infusions. Director at lower middle market private equity firm ($2-$10m of EBITDA) with success in all facets of investment life – sourcing, underwriting, deal structuring, negotiation, portfolio management and sale.
* Demonstrated ability to work collaboratively w/portfolio company executive teams on strategic direction
* Strong background in deal due diligence leading to creative solutions and better outcomes
* Effective communication & presentation skills that are adaptable to different audiences
* MBA with focus on Finance and Real Estate from SMU Cox School of Business
Cross-industry Investment Experience:
* Light Manufacturing
* Consumer Goods
* Business Services
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