March 11, 2024

Taylor St. Germain:
Hi, everyone. Welcome to this edition of TrendsTalk. I’m your host, Taylor St. Germain, and we at ITR Economics are your unbiased and apolitical source of economic intelligence. And today I have a special episode for everyone. We had Albert from ButcherJoseph on the TrendsTalk to discuss the M&A space. And before I share with you my discussion with Albert, let me know that as we prepare for 2030, as many folks who have followed ITR Economics know, we’re projecting a major period of economic decline beginning in 2030. And so we get a lot of questions from our clients, the people that our speakers are chatting with on the road related to preparing for the 2030s. Is it the right time to sell the business? How do we go about selling the business? So we thought it was timely to have this conversation with Albert, not just for our 2030s outlook, but based on the trends that we’ve been seeing develop over the past few years, especially in this post-COVID environment.

Before I share this conversation with you, a little bit more about Albert. Albert is the managing director and a key member of the leadership team at ButcherJoseph. He has over 20 years of global corporate finance, capital markets, and ESOP experience at industry-leading investment banks. ButcherJoseph is a partner of ITR Economics, and we really appreciated having Albert on and gaining some insight from his industry-leading perspective. Check out this episode and I hope you enjoy.

Albert, thanks so much for joining us here today. We really appreciate it.

Alberto Toribio del Pilar:
Oh, thank you for having me.

Taylor St. Germain:
So Albert, I wanted to start off with a higher level question, but I really wanted to understand for my benefit and for our viewers’ benefit, can you share a little bit about your experience in helping companies sell their business? Can you give us some top-level perspective here?

Alberto Toribio del Pilar:
Sure. I’ve been fortunate enough to have helped both private and publicly traded businesses sell equity in their business over the years. I began my career in the equity capital markets, that is taking companies public and working with institutional retail investors. And I did that for a little bit right out of school and then moved over to cross-border M&A. So slightly more complicated. Instead of basically just missing shares on an exchange, really facilitating, say, European companies buying a business in Latin America and Brazil.

Taylor St. Germain:
Certainly a very diverse background with all the different markets you’ve been involved in. And I’m curious, as you’re helping these organizations, how do you assess a company’s readiness or attractiveness for potential buyers?

Alberto Toribio del Pilar:
Sure. The first thing we look at generally are the end market served by the business. So we want to have a sense of what they’re like. Are they large, small, growing, stagnant, shrinking? Are the markets fragmented or zero consolidation underway? So that’s usually what we look at because it’s always in our mind better to have say a solid business in a fantastic end market than a great business in a so-so end market. So we look for the macro sense of the end market served. Then we look at the overall business model, which is really begins with the top line revenue. Are the revenues recurring? Are they one-off? Are there a lot of project-based revenues? So you kind of have to start each year over. As you can imagine, a business that has recurring revenues is much more attractive to buyers typically.

We look at the business model in that regard, including the intensity of use of capital. So the capital intensity of the business. Are you constantly in the capital markets trying to finance your operations? And if the capital markets freeze up, are you going to suffer? Is your business going to suffer? So that really plays into the capital generation profile of a business, which can be looked at by observing the margins. We also look at the profitability in the margins of the business.

So after those kind of two, a macro and then a more operational view, we look at the company itself. So we look at the strength of leadership. Most companies have senior ranks, but is there a junior rank there, a bench waiting to succeed the folks who’ve been there for a while? What’s the company culture? Are people bought in? What’s the ethos of the business? And then we also look at the internal preparedness of the company to go through a process, to show well in a diligence process, to be able to be responsive to information requests and provide that data in an organized fashion. So if you can triangulate with those three major areas, you can pretty much assess how attractive a business would be to potential buyers.

Taylor St. Germain:
It’s interesting because I think a lot of us think it’s just the balance sheet you’re staring at, just the financials, but there’s clearly some other factors in there. Like you said, the readiness and preparedness and the employee base in leadership as well. So it’s really interesting that I think a lot of us think M&A stare at the balance sheet, look at the financials of the business, but clearly a lot more factors to consider there. And I guess that’s sort of the business side, but when you’re evaluating a market, are there different factors than maybe looking at an individual business when you’re evaluating the M&A space? I guess I think the question is more of are the factors when you’re looking at a specific business slightly different when you’re looking at the overall market?

Alberto Toribio del Pilar:
Yeah, short answer is yes. I mean, for the major factors we’re looking at macro trends in general and how a particular business fits into those macro trends. So for example, we’re probably familiar with some macro themes related to critical infrastructure, critical metal. So where does the business fit in that play? Does if at all? Like right now I’m representing a mining services business. It’s right there in that critical metal space and it’s really easy to tell that story and to kind of convey that value proposition given the national interest, the national security interest we have in obtaining a good supply of critical metals as a nation.

The other themes include on-shoring of manufacturing. So is the business going to benefit from the reshoring basically of manufacturing to the US? Is the business driven by demographic forces, healthcare, for example. Elderly residential facilities is another example.

And then we also look at any trends in the industry, I guess, or related to the reduction in costs. So we’ve represented different companies in the healthcare space and we’ve actually taken companies with great profit margins in the healthcare space and then talked to investors and realized that that’s actually not necessarily a good thing in the healthcare space because the goal in the healthcare space is to extract cost out of the system. So investors really are interested in companies not necessarily have great profit margins in healthcare, but perhaps are positioned to reduce the amount of cost and expenditure in the healthcare system generally. And that kind of business is much more attractive to investors. So those are the factors from the market perspective that we look for.

Taylor St. Germain:
I sort of smile. There’s certainly a lot of overlap with the type of work we do here at ITR evaluating those macro trends.

Alberto Toribio del Pilar:
That’s right. Sorry. And I would add that we also look for observable M&A activity. So we want to look at deal volumes. Can we see precedent transactions out there, demonstrated interest by buyers? And then yeah, we look at the emails we get every single day from all the private equity funds looking for these amazing companies with these amazing characteristics. So if we are hearing the same themes over and over again, then we know essentially we know how to benchmark our company, our client, versus what folks are expressing interest in.

Taylor St. Germain:
Certainly. And I think you’ve teed up my next question well, which is what trends are you seeing in M&A currently as we sit here today in early 2024? And maybe an extension of that question is are there any particular sectors, industries that you believe are particularly attractive right now? I know you mentioned healthcare as your example, but are there any that are gaining a lot of attention in terms of sectors for M&A right now?

Alberto Toribio del Pilar:
There are a couple. In terms of trends, a lot of folks were looking for the M&A volume to rebound at the end of last year, and that ended up not necessarily materializing. The other trends we’ve seen, valuations are more or less holding steady for smaller businesses. Actually we saw a pickup in valuations towards the fourth quarter of last year. Larger deals actually saw their valuations retreat. As you can imagine with the cost of capital being more expensive and PE funds being generally larger nowadays and wanting to write bigger check sizes and it being a more competitive dynamic, we saw maybe some of the buyers who don’t have the wherewithal to compete and push up prices on the margin basically retreat from the larger end of the segment.

We did notice as well, that premiums for companies with above average financial performance also actually expanded pretty well at the end of last year. But we also saw a greater number of companies that were not above average financial performers in processes. So I think the market generally interprets that to bode well for M&A volumes. That is because perhaps there’s a market and there’s people who would be receptive to stories that are not necessarily like the shining stars per se. So we think that the deal volume based on those observable points might come back in 2024.

We’ve also seen overall debt levels come down in M&A transactions over the course of the second half of last year and start of this year. So folks are more conservatively financing buyouts or transactions in general. And that could be seen by the uptick in rolled over equity that’s being used in some of these buyouts. So those are some of the trends.

In terms of sectors, we’re seeing healthcare and technology companies still going to the higher valuations. Business services for a number of industries continue to be the focus of many investors, say for example, in the critical infrastructure space or anything related to say data centers. So companies, for example, that provide janitorial services or HVAC services or things like that to data centers are benefiting from the massive amount of attention that’s being placed on chip manufacturers, AI businesses, data farms or what have you.

Taylor St. Germain:
I know that’s an area many of our clients are pretty excited about right now with all the levels of growth. And of course, I think even with Nvidia headlining, I think there’s so much going on in that AI data center space right now. It’s one of those areas for our viewers that are watching. We’ve talked about data centers and how we haven’t seen any contraction in those markets and really since the inception of those markets. So really interesting to see the overlap between what we’re seeing and what you’re hearing on your end.

Last question that I have for you here, Albert, what advice would you give companies considering selling their business? Again, in our introduction, I highlight that 2030 is coming our way and we’ve been projecting a major economic downturn that our viewers and our clients are aware of in 2030. And as I’m out in the road, many folks are thinking about selling the business as we move into the latter half of this decade, especially those that are demographically closer to that retirement age. So what advice would you give to companies selling their business? And then I have a quick follow up for you.

Alberto Toribio del Pilar:
Sure. I would say be prepared. If you have a sense of wanting to sell at all, but you’re not necessarily going to pull the trigger right now, you should be doing things to prepare for that ultimate decision that could add incremental value to your business. So if there is a spot in your senior management team that could be filled right now before going into the market, try to fill it. If you have a salesperson you need to put in there, or a finance person you need to put in a role, fill those roles in. If you have customer concentration and you know that’s going to be a point of contention for a buyer, maybe work on expanding your customer base over the next one or two years while you solidify your decision as to whether to sell or not. So there are things to do while you’re mulling over the ultimate decision that are part of normal operations, but if done within the greater context will add value when the time comes to do a deal. So that’s kind my greatest piece of advice that I can offer.

I would also add, don’t go at it alone. I think that’s a mistake that people make. They’ll try to negotiate one-on-one with a suitor that has been after them for years, and they know them as a competitor or as a value chain participant, and they feel they can work a deal out one-on-one. But on one-on-one, you don’t have any leverage for negotiation. And so I feel like that’s also something that I would advise clients to do is not necessarily go at the process alone.

Taylor St. Germain:
Any other common mistakes you often run into?

Alberto Toribio del Pilar:
Yeah, in addition to trying to do it all by themselves, I see, like I said before, folks try to just do one-on-one conversations to see if that works out and they can get a deal done on one-on-one. Doesn’t generally work because at some point you don’t have any leverage over the counterparty. The only leverage you have is just the ability to walk away, your willingness to walk away.

I feel the other mistake that folks might commit is to not necessarily be prepared for the demands of a process. That is not necessarily having all the internal reporting processes humming to be able to respond to diligence requests, not necessarily including the people in your management team that need to be included in order to present the best value proposition to your buyer. So I think owners are sometimes sensitive around who to include in that group that knows that the business is considering the sale. And by not having the right folks to present to potential buyers, you may be not optimizing how you present yourself as a company and a group of people basically with a shared mission.

And then going back, I think the other mistake people commit is not necessarily implementing a strategic value creation plan in advance of actually choosing to go into the market. Not necessarily having an honest discussion within the organization as to strengthen areas of development, and then identifying those areas of development and creating tactical plans to address those areas and buttress those areas so that when a process does kick off, you are that much more of an attractive business. So I think those are the critical missteps that some business owners experience in a process.

Taylor St. Germain:
Yeah, it sounds like summing it up, the old phrase, victory loves preparation. It seems pretty clear in this case. Albert, thanks so much for joining us. Where can our listeners find more about you and ButcherJoseph?

Alberto Toribio del Pilar:
At www.butcherjoseph.com. We have plenty of white papers, blog posts and podcasts on various subjects, various topical areas of interest, traditional, which from… One of my options was selling a business. What can I do to prepare to sell my business? What should I be thinking about? We cover the spectrum on the website in terms of information. So I would recommend folks go there, benefit from our resources there.

Taylor St. Germain:
That’s great. And I know on behalf of ITR, we really appreciate your insights, the relationship that we at ITR have with ButcherJoseph. So thanks so much for joining me on this episode of TrendsTalk. Really appreciate the conversation and your insights.

Alberto Toribio del Pilar:
Thank you. Really appreciate the opportunity.

Taylor St. Germain:
Thank you very much to Albert, once again, for joining us on this episode of TrendsTalk. ITR Economics really appreciates the relationship we have with ButcherJoseph. I hope you all learned something about the M&A space. Again, it’s going to be a space that continues to heat up, especially as we prepare for 2030. So please reach out to us or ButcherJoseph if you’d like any more information on the work that Albert and his team at ButcherJoseph do.

Thanks so much for joining me on this episode of TrendsTalk. As a reminder, please like and subscribe to TrendsTalk wherever you listen to your podcasts, and we will see you on the next one.