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Mutual Capital Partners’ Wayne Wallace

Why your country club buddy is not a good judge of your company’s value

Wayne Wallace

November 22, 2017

By: Mark Scott

OrthoHelix Surgical Designs was an innovative, high-growth business ready to bust out of startup mode and make a lot of money.

Mutual Capital Partners co-founder Wayne Wallace had just one message for executives at the young Medina company: “There is nothing more important right now than this company performing well financially. We’ll deal with all this M&A stuff so you guys can focus on running the business.”

The OrthoHelix team did its job and Mutual Capital Partners did as well. The company was sold in 2012 to Holland-based Tornier NV for more than $150 million.

“If you say you’re going to do this much revenue and you exceed that figure, those deals will get done most of the time,” Wallace says. “If you don’t hit that number, that’s when things can go sideways and a deal may not get done. People who haven’t been through this before don’t understand how important it is to hit those metrics.”

Wallace spoke with Smart Business Dealmakers about what sellers need to know to get top dollar for their companies when they go on the market.

What benchmarks or attributes are getting the interest of buyers?

Good companies are bought and bad companies are sold. We always want to be in a position where our companies are being bought and people are coming to us. It’s not us reaching out to drum up interest. These companies have a number of milestones that they jump through over the years. A first would be achieving $10 million in revenue. A second would be becoming cash flow break even. A third would be P&L break even or net income break even. And a fourth would be generating a 15 to 20 percent profit margin.

If a business has great technology, strong leadership and is doing business in a large market, as it hits these metrics and passes through $20 million to $25 million in revenue, it will begin taking market share from some of the other large public companies in that space and will start to get inbound interest.

What are some tips to consider as you look to raise capital?

Entrepreneurs naturally want to raise money at the highest valuation they can to prevent themselves from being diluted. Any time you’re thinking about raising money, just make sure you get a professional opinion about the right approach to take. If you rely on your buddy at the country club who just happens to be a lawyer, he’ll tell you it’s worth 100 times revenue.

There are enough professionals in this ecosystem like JumpStart or the North Coast Angel Fund who can say that companies like yours are being funded at this type of valuation. You can also use precedent transactions that are often a pretty good indicator of what market terms will be. When you have an accurate read on your valuation, you set yourself up to make a better deal.

How do you bring it home and close the deal?

To use a fishing analogy, you have to keep your line tight right up to the very end. People are going to look for reasons to knock the price down to get a better deal. When a bunch of smart people start doing due diligence on an opportunity, they are going to find something bad about it. No business is perfect. That’s why you have to keep the line tight.

When you’re getting to the final stages, make sure you have a couple gold nuggets in your pocket to use if the buyer comes at you with something bad. It could be that you recently brought on a new customer or just renewed a valued existing customer for another three years.

Finally, keep in mind what’s at stake. You are about to take something you’ve worked very hard on for a long time and marry it with something else. While valuation is incredibly important, and probably most important, having trust that there will be speed and certainty to closure of the deal is a very close second. You need to be sure you have people you trust in place to bring the deal to a close.

What is the current climate for dealmaking?

There will always be capital available for a good deal, even in the worst of times. During 2008 and 2009, it was a really tough market, but good deals with good people still got funded. It’s just the way it works. That being said, the overall market has been on a really good run. Valuations are high for good assets right now. People are starting to be a little more careful. Is it another 10 days, 10 months or 10 years before we have another downward cycle? But whether you’re in a good market or a bad market, deals will get funded.

How to reach: Mutual Capital Partners, www.mutualcapitalpartners.com