Episode 18: Mergers and Acquisitions with Jamie Watson

On this episode of skucast, we look at the world of mergers and acquisitions in the promotional products industry. We’ll look at questions about when is the right time to sell your business, how does one acquire another company and what key factors drive business valuation.

Our industry has seen a huge number of acquisitions and mergers in recent years so this is a topic that is particularly relevant to industry professionals.

Our guest today is Jamie Watson. Jamie is a Partner at Certified Marketing Consultants, a leading M&A firm focused on the promotional products industry. Jamie has worked in the finance sector for over 15 years and entered the promotional products industry in 2006 when she joined Certified Marketing Consultants. Jamie earned the MAS designation from PPAI and has a strong interest in working to further the prosperity of the promotional products industry through education and volunteerism.

Highlights from Jamie

 

On the red flags:

The biggest red flag is when they don't even have a solid set of financial statements to give to us. That happens more often than you think, so that's a pretty big red flag also it's an indication that internally that the policies aren't in place. That's just not something people are really looking to buy. Further to that, (a little more sophisticated), there are a lot of women owned businesses in this industry and that's a great thing, but when your sales are contingent upon having that woman-owned status, it's difficult to sell that company without some sort of discount because they don't know that they're going to be able to retain some of those contracts or customers ... [the other red flags] the compensation issue is the other one that we already spoke about. If you're overcompensating your salespeople and they're really kind of running the show, that can be a big red flag. Just because they have a lot of leverage and if they catch wind that the company is for sale, they'll use that leverage and we've seen that happen before. I would say those are the major red flags. Most obstacles we can overcome when we're selling the company. I guess the only final one would be a huge concentration. There are a lot of distributors that started based around one company, one customer, I've seen companies that have 80% of their sales with one customer. That can be red flag, I mean we can still sell that company but the structure's going to be a lot different.

On getting your company ready to sell:

... you definitely want to have your infrastructure in place. You should have policies and procedures, manuals and there shouldn't be any question as to your company, what it stands for, what your mission is, and all of that. You don't really want to start building on top of a foundation that isn't already solid. I mean there's really no right or wrong time in the stage of a company, as long as you built that strong foundation and you have financing in place ...

On what types of companies carry higher multiples:

... the online space definitely does carry higher multiples. There's a number of reasons for them. One is the lack of that intermediary, that salesperson in there. There's still costs associated with SCO, but you don't have that relationship there that you have to continue preserving in the future so it's a less risky purchase as long as you understand SCO and how to carry it forward ... there are [also] some niche companies out there that they can drive up higher prices.

On what drives the value of a sell:

Obviously, profitability is the #1 thing ... When a buyer buys your company, they're looking to add on to their own to make money, or maybe they're not adding on, maybe it's a sole purchaser. At the end of the day, they're looking to leverage what they have already to make money. I mean profitability is king in that respect. Now if they're looking to relocate it, then they're looking at maybe just your gross margin ... and they're going to use their own operating infrastructure. The main factors on the distributor side are your customer make-up, who your customers are, what your concentrations are, what industries you're in, that sort of thing. The compensation model for salespeople is huge. The gross margin percentage is big. Then it all boils down to profitability and quality of earnings ...

On where the market is at right now:

I'm working with more suppliers and 10 years ago, when I joined Certified Marketing, we were doing more of an 80:20 ratio in favor of the distributors. That made a lot of sense based on the make-up of the industry being more distributors than suppliers, but now we're doing more and more supplier transactions and I kind of expect that to continue. I think that it's an indication that running a profitable, small supplier, and competing with the bigger suppliers is becoming increasingly difficult. It's difficult to get that critical mass that you need in order to cover your overhead and still make money and then, also, with all the preferred supplier lists and buying groups, the little suppliers can sometimes fall through the cracks.

On knowing your value:

... understand your value and what's driving your value. If you want to sell your company and you want to get to a certain point, you need to know where you're at now so if you have any interest in selling your company even if it's 10 years from now, you would have 10 years to work on building that value and building up those key things that make your company more attractive to buyers. I think everybody needs an exit strategy and they need to understand the timing of doing a deal. Many buyers are looking for a two to three, sometimes even four-year transition to help get the clients over, and that sounds like a really long time but that's the best bet for you if you're selling your company is to stay with the company while you have some sort of earn-out or contingency in place. Otherwise, you're leaving it all in the hands of the buyer and you accept more risk that way so definitely consider your exit strategy and your timing.