Over the past six months, Smart Business Dealmakers has spoken with many of Cleveland’s top dealmakers, entrepreneurs and investors. They each bring their own unique insight and perspective on what it takes to succeed in the world of M&A. On the following pages, we’ve pulled together some of their most compelling opinions on what it takes to be an effective dealmaker, how to study potential sales or acquisitions and what they enjoy about the dynamic career path they have chosen to follow.
First of all, Transtar I consider as my baby — the company I started from scratch. I have a very deep attachment to the company itself. Second, the industry that this company is in — the transmission industry — I made a lot of friends, a lot of relationships and I had great success. So I can easily say that I have a passion for that business, having done it very successfully. Now, not only do I have the opportunity to build this company back to its glory, I also have a very large investment in the company that I know is a good investment.
The passion to lead
My motivation comes from, No. 1, just plain, simple passion that I can drive the business — that I know everything about this business that there is to be known, and I know I can turn it around. And, as I said, the last two, three months that we have turned it around has already made a big difference.
My contact with the customers or suppliers or employees, it was so exciting that I felt that I received a great welcome back. Everyone was rather pleased to see me come back and save the company and do the right thing again and make this company great again. In fact, somebody sent me a cap that says, “Make Transtar great again.”
The thrill of negotiating
I enjoy dealmaking. The art of negotiating — the thrill of negotiation — is something I especially enjoy. The more deals I’ve made, the more negotiations I’ve done successfully, the more confident and more excited I get. To me, growing the business or acquiring anything — dealmaking sort of comes naturally.
Know every detail
When I’m making an acquisition, buying a business or something like that, I try to know every single thing that I can about that deal, about that business. Many times, people go into negotiating not knowing everything that they should know… Whether through people, through information available — I always have a saying, “Give me everything you can.” I just want to know everything I can.
And it is beyond just the due diligence that normal people do. I want to know more, to go deeper, to see what the seller’s motivations are, what is important to that seller.
Think about a group of people in a square room. There are some people in those corners with great ideas that won’t come to the center because they don’t want the rejection. That’s where all the action is. That’s where all the danger is. That’s where all the deals are done. But they want to stay in the corner, even though they have the ideas. They just don’t want to take that skill in the game. There are many reasons why people don’t do it. For me, it seemed like I had no choice.
Every acquisition starts with the same question. When I’m sitting with someone and they’re selling the company, the first thing I want to know is why am I so lucky that you’re selling me your company? If they can’t make it clear why they are selling the company, there is something wrong. I’ve bought a lot of companies, but I’ve also walked out of a lot of rooms when I got the wrong answer. If they’re selling and the owner is getting out, the question is who is going to be there? There has to be a reason. If you’re not armed with that information, you can’t get to the operating people to ask the right questions.
The worst thing you can do when you are selling your company is to do business with people who are just bringing money to the table. We do bring money, but we bring talent, recovery and working people. We understand how a company operates. We have a team and they are all very good at one thing. So our motives and the concept of how we approach finding deals, developing deals and pricing deals supports that goal.
Leave your ego at the door. Ego will, sooner or later, be fatal. You set up in a negotiation and, No. 1, you’ve got to get the lawyers out of it because, talk about egos, they have egos because they get paid for winning and losing. So let’s assume we’re not going to be using lawyers. You can feel confident about yourself. You can feel committed. You can have a dream. But you always have to be wary that the other people are sizing you up just like you are sizing them up. And if you think for a second that leaving someone to think you have a big ego is going to help you in a transaction, you better get another job.
Becoming an entrepreneur and a dealmaker is not about taking risks. It’s about being able to handle rejection. I got a lot of noes in my life. I’ve been self-employed for over 50 years, so I never worked for anyone else. I had the dream. But the ability to handle rejection is critical, even in your family. The ones who want you to succeed the most are afraid of you losing. When somebody comes at me with no, no, no, it doesn’t deflate me, put me into a panic or make me lose confidence. It makes me stronger. I consider it a source of energy.
If I can’t understand the business, I’m not interested. Once I understand it, I want to see how well the company is positioned and I want to understand the leadership. If I believe in the leadership and I believe the leader is the right person, I take the next step. If the leader is not the right person and I don’t have a leader who I believe is the right person, I don’t have the resources to move forward and I won’t.
The third step is just evaluating the financials. I want to see what their margins are, what potential growth opportunities there are and what their revenue is. The last thing is I have to make sure I can make the right deal. Any deal I do, I like to take control of and have majority ownership. If I don’t have majority ownership, I like to have the right controls in place where if they don’t hit financial benchmarks, I have the right to take over operations — immediately.
Be willing to pass on a deal. The best way to continue to be a dealmaker while not losing focus on the businesses that you own is just to have discipline. Be willing to pass on deals, even if you know they are good deals, because you don’t feel comfortable that the company you just bought or the company you are chairman of or the company you had to become CEO of is healthy.
One of the rules I have is I will not do another deal until I’m comfortable with the leadership of the company I bought and if I did use leverage, the debt is down to a comfortable amount. If I’m still highly leveraged, it’s not right. It’s not responsible of other peoples’ money or of your own money. So I make sure we get the debt paid off to a certain benchmark that I’m comfortable with and then I’ll go look at other deals.
The stereotypical dealmaker to a lot of people is flamboyant and loud. See, to me, it isn’t. Because I know the real dealmakers. There is a saying from a movie: ‘The loudest man in the room is the weakest man in the room.’ The dealmakers I know are not loud. They are not. They are bold, they are aggressive. They’ll make tough decisions. But they are not loud. Those are the people I admire.
If we all named the top deal guys in Cleveland, the Steve Demetrious, the Stewart Kohls, the Umberto Fedelis — and I apologize, I missed a lot — these guys are not loud guys. They get a lot of attention because of some of their bold actions. But they don’t need all the attention in a room. They’re the first ones to give. They all are hugely, hugely charitable. I think that’s just the stereotype because we see it in the movies and we hear about it on Wall Street. But servant leadership goes a long way and the greatest leaders are usually the most loving because they stick with them when things are tough.
Market multiples are different for each industry. Just because deals are being made at really high prices, that doesn’t guarantee that your next deal is going to be just as profitable. Business is cyclical and so are specific industries. It is constantly changing. You have to have a good perspective on what’s happening in your industry and whether now is a good time to make a deal. If you’re fortunate to be in an industry that has a lot of analysts who are following it, that makes it easier to get a good read on what’s happening. If your industry isn’t covered as closely, it will take more effort to understand the dynamics of the market and the type of return you could get in a deal.
Don’t let lawyers drive the deal. M&A lawyers bring a certain level of knowledge to dealmaking that is very important. But they aren’t the ones who should be driving the negotiations. Lawyers represent the people on the buy side and the sell side. They are there to give advice and to help you properly execute a deal. It’s your company and it’s your job to make the best deal for your business. Do not let your legal counsel dictate how you move forward.
You’re buying people, you’re not buying products. When you make an acquisition, you’re buying a team of employees who each bring a particular set of skills to their work. So many of these people that the seller has been employing are going to stay with the company under your ownership, so it’s critical that you know what you have before you close the deal. As you’re conducting your due diligence, evaluate the team and make judgments on who to retain and who to let go. You don’t want to have death by a thousand cuts.
Many companies do that. When you take this approach, it’s an indicator that your due diligence was not good enough. The price you pay is that as you continue to make these cuts a little bit at a time, the really good employees are leaving to find a more stable environment. When you lose talented people from the company you just bought, you’ve lost much of the value that you paid for.
M&A is a lot of work, no matter the size of the company involved. When you are buying a $100 million company, the amount of work involved is not 10 times what it is when you buy a $10 million company. Take the time to conduct a self-assessment to determine if you’re actually ready to acquire another business. Is your company performing well? Does your team have the bandwidth and the bench strength to take on the additional workload that comes with working through and negotiating a deal? If it doesn’t, do you have a plan in place to bring in external support?
Over 11 years ago, I was given the opportunity to bid on a company called MAI. I had just left KeyCorp as CEO of Victory Capital Management. I started a small little boutique investment management firm, and I got a call that said there’s a firm down the block and you should look at buying it. I laughed. And I said, “We’re three people here. How are we going to buy any firm?” And they said, “No, really; you’re perfect for this.”
I got the book, and as I started going page by page through the book, I did realize that it was a perfect opportunity for me.
Sure enough, I made it to the final three and was very disciplined in the approach we took. In the final three, we lost, initially. We lost to another large, well-known firm. But over that time of them trying to get the deal done, they couldn’t get it done. So lucky for me, they called me back about four months later and said, “We couldn’t complete the transaction. Would you be interested?” I was able to do that, and I think it taught me a couple of great lessons.
Have a vision of the future. Whenever you do any transaction, and in any evaluation process, it’s really important to come up with your vision of where you’re going to take the company — what you think you can produce from that company versus what it’s currently producing. In the case of the acquisition of MAI, it was clear to me there was one thing that they did exceptionally well, and that was really the ability to take care of their clients.
What they didn’t do as well was run a business, so it gave me the opportunity to sit back and say, OK, if we have a professional manager doing this, what could we do with this business? What do we need to do? What do we need to invest? What do we think those investments will return? And where can we take this business?
Vision is a critical part of any acquisition. Because if you can’t figure out — if you’re just going to put one and one together and get two, there’s no incremental value or benefit of doing that. But if you can put one and one and get three, four or five, then you’ve really added tremendous value for yourself, your shareholders, your clients and everybody involved. And over 10 years it’s been a great opportunity. We started with $900 million under management with 50 people, and today we’re at 95 people with $4.5 billion under management. And that wasn’t the easiest 10 years to do it over with a 2008-2009 period, but it’s been a great learning experience for me, and I’m just very proud of what our team has built.