Transtar’s Neil Sethi
Proprietary deal flow is a key component to Transtar’s M&A strategy
Neil Sethi has negotiated business transactions from both sides of the negotiating table. As CEO at Transtar Industries Inc., one of Sethi’s primary goals is to develop “proprietary deal flow.”
“It’s basically engaging business owners, maybe before they’re even thinking about selling,” Sethi says. “I think that’s been a really critical focus as well as success point for us.”
Sethi is a transmission industry veteran who also happens to be the son-in-law of Monte Ahuja, Transtar’s founder and executive chairman. He previously served as CEO at Transmaxx LLC, a technology-driven driveline parts distributor that was acquired by Transtar.
Dealmaking is all about trust and being able to relate to your negotiating partners, Sethi says.
“For us as business owners ourselves and entrepreneurs, and particularly as a strategic buyer, our benefit is we’ve been in those shoes,” Sethi says. “We’ve sold our business.”
We spoke with Sethi about what experience has taught him about the flow of deal activity and the important distinction between markets and micromarkets. What follows is a transcript of the above video, edited for readability.
Be a proactive dealmaker
Well, I think particularly in the environment we’re in today related to dealmaking, there’s a frenzied kind of atmosphere in terms of the deal markets. Valuations are really high and it’s really a seller’s market. As a buyer, you have to be very calculated and very selective about the types of deals you want to go after. Because of the sheer fact that valuations are very high, there is embedded risk when you end up buying a little higher than where you would maybe historically be at.
The biggest advice we follow ourselves that I could give to others is what is that organization really going to do for your company? What is it going to advance for you? As a strategic buyer, that should be really well thought out and even committed to writing. If you have your core strategy settled, and as important for a business leader, it’s actually well understood broadly in your organization.
Deals almost naturally happen. Now with that being said, for us at Transtar, what we’re trying to do in the environment we’re in is get involved earlier in transactions. The formal term for it is developing proprietary deal flow. It’s basically engaging business owners, maybe before they’re even thinking about selling. I think that’s been a really critical focus as well as success point for us.
Study the opportunity
For us as business owners ourselves and entrepreneurs, and particularly as a strategic buyer, our benefit is we’ve been in those shoes. We’ve sold our business. We’ve sold family businesses on our end before. Having a firm understanding that when a business owner is selling a company, sure the dollars and cents matter. But it’s an emotional experience.
Our starting point is actually just getting to know people. Establishing relationships, really understanding the business owner. Not just with respect to why they are selling the company, but really what’s motivated them basically to create their organization for those who are actually entrepreneurs that have established these companies. It’s about getting to know them as individuals. I think we spend a fair amount of time on that part of the process at the front end. I think that helps us fundamentally gain trust and in many ways, the business owner is really getting to know us as well and that’s a very important part of the process.
Markets and micromarkets
Market share is important when you look at an organization. What’s probably more critical is how you define market share within a company that you’re evaluating. I tend to think that within a larger market, there are actually micromarkets. Typically, what we see when we’re in processes that are formally sponsored, the market tends to be positioned as very broad and very large. The most important thing to do when you’re diligencing an organization is really, truly understanding how it’s positioned in what I’ll call its micromarket. That may reveal certain characteristics of the organization, both positively and negatively, that will help your decision, ultimately, of whether or not you’re going to acquire the company.
Dig into the details
There’s a few tips I would provide to folks who are interested in buying businesses. The first for me and for us from experience is buying companies is a team sport. It’s not an individual sport. So surround yourself with really good folks, whether it’s advisers or other people that you trust through your network who can really help diligence an organization. I think that’s critical. Multi points of view are pretty important when you’re looking at an organization.
Second, while of course it’s very critical to have great diligence, quality of earnings and all the formal diligence processes that folks go through, it’s equally as important to really understand the company. Keep in mind the goal isn’t to deliver an asset purchase agreement or a stock purchase agreement. The goal really is to buy the organization. Really taking a look at the long-term view and how it’s positioned, not only today, but into the distant future is critical.
Third, certainly last but not least, just really understanding the management team, understanding the culture of the company. It’s amazing what you can engage and maybe extract out of spending more time than maybe conventionally you would have thought in a deal process with business leaders of an organization or having a meal with let’s say the CEO of the company. Really see and evaluate their body language and level of enthusiasm when they speak of the company.