Episode 8: Middle Market Update: August 2020 Edition
Episode Summary
While there is still much uncertainty in the world, there are many strong signs that the middle market is picking up activity. Tune in for what we are hearing from private equity and other institutional investors (spoiler - this might be a great time to sell), as well as advice and encouragement for business owners still struggling in the current environment.
Episode Transcript
Stephanie Chambliss Gaffin: 0:00
Sometimes, it's good to just step back and see a little bit about what's happening in the world. On today's episode of Right in the Middle Market, we'd like to share some updates on what are we hearing right now from capital providers, from buyers? And what are we seeing in some of our own clients and the work that we're doing with them out in the market? On today's episode of Right in the Middle Market. Welcome to Right in the Middle Market, a podcast about pragmatic perspectives on running, growing and selling your business. We talk about the challenges, decisions, and most importantly, the actions business owners can take to create long term value in their companies. Welcome to Right in the Middle Market, a podcast about running, growing, and selling your middle market business. Last week, we had a chance to go to one of the industry events that we do- these are one of the things that we used to do in person. I'm here with my co-host, Mark Gaffin, this is Stephanie Chambliss Gaffin and we thought it would be nice today to talk a little bit about what are some of the things that we're hearing? We ask Mark all the time about what are private equity firms saying, what are institutional investors saying? And here, we're not talking about the public markets, but we're talking about the private capital markets. And I know we talked about this in an episode a few weeks ago, but this to me, especially in today's environment, it seems really relevant to just stay top of mind and stay current about what are we hearing from these capital providers. What were some of the themes that you were hearing and folks you talked to last week?
Mark Gaffin: 1:39
The public markets, I still think we can take some lessons from. As we speak today, we're testing new highs on potentially regaining new highs in the S&P 500. The NASDAQ is clearly past where it was pre-pandemic, so underlying there's some good information there, around the economy. I think that if you look at consumer prices, they showed some promising strength and demand and the consumer demand, and the jobs going in the right direction. So I think, there, you take that information to heart. I think on the private sector, look, ACG, I think has done a terrific job keeping us connected. They've worked on a couple different electronic formats and I think they've been really good. There's bugs, I think the one last week, I asked ACG Chicago for some of the statistics and they had 320 some different people registered, 189 investment banks and 158 capital providers, so private equity, they could be debt, they could be whatnot. And then 75 other general and they could be accountants and those kinds of other advisors. Part of our shop is strategy consulting, as well as our investment bank. So they had thousands of meetings last week, and people showed up, I think ready to look for opportunities. I think my feeling was, I probably talked to 20- some private equity firms last week- just those two days, day and a half. And I think we have- one of your deals in market. Right? I think we had traction on that across several of them.
Stephanie Chambliss Gaffin: 3:17
Absolutely. And first of all, for those that may not live in the world of the private capital markets, ACG is the Association for Corporate Growth. It's a great organization, industry professional organization that is really designed for the middle market. And it's designed to be a place where people who are representing firms, that are looking to either sell or raise capital and those who have capital to put to work, meaning they want to either be part of that capital raise, or they want to buy companies, can come together, as well as, as you mentioned, Mark, other advisors that live in that world. So just for those who may not be familiar with ACG, that's what ACG is. It was interesting the first question, because I also did 20-some meetings across that day and a half, it was a very productive couple of days. And one of the first questions that I asked every family office, every capital provider, every private equity firm that I
talked to was: 4:12
Are you in market? Are you still looking to do deals? And the answer was a resounding yes. I typically couldn't even finish getting the sentence out before I had people jumping in and saying, "Yes, absolutely. We want to be doing deals. And here's the kinds of deals that we're looking for." And, you know, I think a couple of things that I noticed in particular, and we've talked before about that the experience of middle market companies right now is going to be very bifurcated, depending on if you are doing well - or if you're struggling. And for those that are doing well, I was actually amazed - not only did I hear from the institutional investors that they are doing deals, they have done deals, they are continuing to look for deals - but even they have been somewhat surprised at how strong the valuations and multiples have been on businesses that have very strong performance right now.
Mark Gaffin: 5:12
Yeah, and I think, Stephanie, that that really picks up from a lot of what we learned in the last, you know, global financial crisis, right? The private equity firms that learned. They actually raised funds right after the crisis and realized they were not deals necessarily to be had, but maybe some even some rationalization of the multiples and the structures of some deals, there were some willingness to work, because you were kind of at the nadir. And so if you look at the- we break funds, sometimes into cohorts, right, for when they actually were launched to kind of track where their growth is and those returns from those kinds of funds typically are really, really robust, so private equity firms learn, they know that, that this is a time if you're a professional investor, that this is still a good time to be [in market] that there's still a lot of really, really good companies out there, that [companies] really by no fault of their own found themselves in a tough situation. So you say, look, if we can make we can come to a reasonable agreement on what the valuation is and how we structure this deal around the uncertainty that still lies out there. This is still a very good time for add ons, as we saw there, 72% of deals right now are add on. So they're adding on to a platform, so they have a bigger company in their platform, and they're buying something strategic to put on that that increases that value. And that can be a very viable exit strategy for someone if they're looking to exit right now.
Stephanie Chambliss Gaffin: 6:31
I think one of the things that struck me related to that, was that the willingness to really be creative, to be thoughtful about structure. So whether it's trying to bridge a gap in valuation between where the seller thinks that the company is it should be valued and what that price should be, because they strongly believe that the company is on a path to recovery, they're going to come back and we're a prudent buyer. maybe saying, look, I believe you or I wouldn't be buying this company. But I also have to be cautious so that I don't overpay for this particular asset. And but I, I was really impressed with the degree of willingness to be creative. Think about structure, think about how do we bridge that gap. And quite frankly, where the companies are the portion of middle market companies that are struggling right now, I've actually now talked to several capital providers that are actively looking for: Where are there good companies that are going to bounce back, but they're going to need some help to get from here to there? And how can we come in with some creative capital structure, to be able to make sure that that company survives and that they get from here to there?
Mark Gaffin: 7:43
Yeah, I think t at's a really great point. nd I think that one of the thi gs that, you know, I think w 're seeing, which is a little ifference in this environ ent than we saw in the last fi ancial crisis is, a lot of the lenders, the capital provid rs, you know, aren't so back o their heels. Yes, some o then are dealing with some s cond quarter you know, defau ts right, as everybody kin of comes up putting up the r numbers for June 30. Bu really the banks are strong. nd the non-Bank Group out th re is also pretty robust. So t ere's still capital to be had, I know that one of the things th t you're setting up as a s ries for us on capital choices, ight? How do you work on t e different flavors of debt sol tions out there? And then we'll alk about some of the hybrid ebt equity solutions, and th n how do people work like wit growth equity versus just just elling outright their growth e uity is a huge component no . So, I think it's impo tant for our listeners, as we t lked about that, how there's a ot of options for just growth, r ght? We talked about Running, G owing and Selling your business I think that we're abou all three of those things, ight? We want help to help peopl run. This is a good time f r people that have stabilized t emselves to get back on track, o accelerate through this period right now. When your compe itors may not be, right; this is not a time to be sitting still. ight? The world is not sitting s ill, if our company sitting stil , I think that's a verydire pos tion to be in.
Stephanie Chambliss Gaffin: 9:07
I think that's right. And to go back to your point about the capital, the different kinds of capital that are out there right now. Look, the reason that we do this podcast is because we love working with Middle Market companies, we love helping educate around this particular area, which is not the expertise of most Middle Market business owners out there. And I think this is a time where, you know, I know, we have been getting a lot of questions from our client base around, gosh, what are those different kind of flavors out there? You know, we'll we'll be talking to a potential investor, they come back with a creative structure, the client really excited because it's, yo know, showing that there's way to get the deal done. I' thinking about one of th capital raises that we'r working on right now. That is you know, it, look, they lik everything there - there was a little bit of a pause a litt e bit of a slow down during Q , and now we're back. We've got wo excited parties at the ta le coming back with interest ng proposals on structure. But it takes a different level of expertise to be able to h lp navigate through to say, lo k, the really exciting part of t is is that there's a way to et this deal done. And there' a way to get this deal done i a manner that is truly va ue accretive to both parties. he flip side is it means that i 's going to be a little bit m re sophisticated, it's going o be a little bit trickier to make sure that the deal gets s ructured in a way that it ach eves the outcome that that w 're intending it to, and that it s really beneficial in the way hat we intend it to be, a littl tougher to navigate.
Mark Gaffin: 10:44
If everything's humming and you're at the end of middle of 2019 - and you [business owner] get a bunch of inbound calls, right? You can take that call and decide to engage it if you're a business owner, right. And maybe you got a good deal. Maybe you didn't, right? You may have undershot the valuation by 20 percent and that would be, that'd be horrific. But I do think that now to your point to be able to get the right people and go back to that conversation, the Right People, Right Story, Right Time - there still are the right people out there. I think that's what we saw from this meeting last week. And that's what we do when we call our calls daily. And we're still finding those people out there that are thoughtful, operationally focused, keeping their eye on the strategic ball. And I think what we're seeing is on the company side, you know, we've got folks that are still in the turnaround mode, there's no shame in that there are people were hit disproportionately depending on you know, customer concentration, what market they were in, what their supply chain look like those kinds of things. So there's still room to be had to help folks there. We've got a couple, we call them "small t turnaround" projects that we're working on to help those people regain their footing. But then again, my point then is you got to stabilize and then move through, right, it's keep going and even for your own company, and I think one of the things I was I was listening to, an episode you were working on yesterday that people say I just I just want to rest. I'm tired. I want to rest. Why can't they do that? Why do they feel that way? Is that normal?
Stephanie Chambliss Gaffin: 12:13
You're right, Mark. Matter of fact, twice in the last couple of weeks, I've had conversations, I was able to host a group of female business entrepreneurs, founders, CEOs, and we were having the conversation around cognitive bandwidth and the stress of the current environment and why is it that we are all so tired right now I brought it back to this fundamental concept of cognitive bandwidth and the impact that that has on decision making. And there's great research out there the book "Scarcity", the book, "The Power of Habit", really good resources out there. And pretty good research that says, when we are back to that, that base of Maslow's hierarchy, right, we are back to worrying about survival. So maybe worrying about the survival of your business, quite frankly, there's a real physical threat in the environment, you're worried about finances, worried about our family, and that there is a demonstrated tax on cognitive bandwidth. And what that means is that, we have less bandwidth available to make big decisions, exactly at the time that we have some very big decisions to make. And so in this episode, that's going to come out next week, teaser there, we spent some time trying to unpack both what are some things that you can do to make sure that you're making good decisions right now? And also, what are some of the things that you can do to recognize that there is this tax on your cognitive bandwidth right now? And what are some things that you can do to try to counteract that?
Mark Gaffin: 13:49
Yeah, I think one of the things I took away from that conversation I think it's very, very in line with, you know, our thinking all the time on, you know, on strategy. People kind of say, you know, strategy is just out the window right now. And and I just could not disagree more. I think that, you know, the companies that have a long term goal out there, where do they want to be? Are going to be more advantaged over people that just don't and they're throwing their hands up and just trying to muddle through day to day. I think what does become interesting is the strategy to attain that goal, right? Are there things that we can do now in heightened areas of uncertainty to continue to move forward, but, but actually make progress and I think that, you know, becomes a little bit more like [an] Agile Strategy, approach to strategy, where you're trying different things. And I think you guys talked a little bit about that in yesterday's recording, and I think we had, actually, we just got back from a lunch not too long ago, we talked about getting that kind of data that information to people in more robust ways that that you can pool information, to knowledge, to insight, and then make those, if you will, small bets, so that we are moving forward, we're trying maybe different sectors, we're opening our eyes to different opportunities, and not betting the farm on it. The whole command-and-control strategy- three to five years strategy, is a little bit hard in this environment, but still is important to have a direction.
Stephanie Chambliss Gaffin: 15:12
If I go back to pick up on something that you've just said, because someone else may have heard this and their ears picked up and wondered if they heard you, right? Yes, actually, we just got back from a lunch. I mean, how crazy is that? But I think you take that and to say, look, we all sat there and marveled. So yes, we did actually meet someone for lunch. We did so at a place that was outside, they put great protocols in place, you know, all of those things. And it's the first time that we've done that since, what, February or March. But I think it's a great example of where people are starting to say, Okay, I now understand, no, is the risk zero? No. But I can figure out that there's a path where I can manage risk and I can manage what that looks like. And I think just as people are starting to do that in their personal lives, I think this is what we are encouraging and hoping businesses are going to be doing as well to say, look, it may look a little bit different, it may feel a little bit different, but I can't just keep my head in the sand. I can't stay there in my bunker. And so, I think that's where you know, Mark, you've said before "Frozen may be a great theme for a Disney movie, but it's not a strategy." And I think likewise, it's how do you start to preserve optionality and actually doing nothing starts to cut off options. So it may be a tough time to say I'm going to make a decision, I'm going to commit to something that, you know, has a three year horizon, but to at least say, what are the things that I can do? What are the decisions I can make in a way that has a 30-day horizon and keeps us moving forward -- little bits at a time as I continue to get more and more information about the environment?
Mark Gaffin: 16:52
Yeah, I think you know, there's part of this there's the blast if you will, that happen in March and April. Where we were out of PPE. And and people were switching from distilleries to putting hand sanitizer together, right? Awesome and patriotic, it just makes your heart, just swell, to see people putting that kind of ingenuity to work. But you do have to come back to what do they really do better than anybody else it was probably distilling, you know, whatever whiskey or whatever it is they do. And someone else is going to wind up being long term, the better parent for that, maybe, maybe there's an actual way to do that. But I think that we saw, I've seen a bunch of companies talk about when things happen, how certain people stepped up and figured out another way to do something. They cut through all the red tape, cut through all the, "this is the way we've always done it", right, so that goes out the window. And I think what's really important right now when we work with clients, it's like, Okay, if this is a more efficient, better way of doing something, right and we broken through that is it a sustainable process to keep doing that? Do we do things better, faster, cheaper, with higher, you know, throughput, you know, those kinds of things all matter. But are we still going to be able to do this down the road, effectively? And if not, has it
opened our eyes up that: 18:09
Yeah, we can actually redesign, we can re-approach the market because we have a core set: it's ingenuity; it's putting together A, B, and F from our products into something that really matters in the new world.
Stephanie Chambliss Gaffin: 18:25
Yeah, it's been so fun to watch those companies that have just seized unique opportunities. But I also want to take a minute to talk directly to those businesses that are struggling and at this point may be looking and kicking themselves to say you know, oh my gosh, I don't know where the last four months went. And I didn't do that and now they're kicking themselves and now getting into that vicious cycle of of frustration and and feeling even worse. And Mark you know, that one of my current theme song right now my anthem, the thing that's, you know, good energy going in the morning is the new song by Pitbull called, "I Believe." But he has a great line. And you know, there's tons of good quotes about this but: "it's not how you fall...It's how you get back up." And so I think this is the time and so I want to issue that call out there, to, if you are at that point where you have been stuck. So first of all, it is okay recognize it, but this is the time and if you're stuck, if you're struggling, this is the time to reach out, to reach out for help. Look out for who's around you. Do you do have other people on your team? Or is this a time that you need to bring in an external advisor to help you figure out what's next? So Mark, I want to get your thoughts on that, right after we come back from a message from our sponsor. Right in the Middle Market is brought to buy SLS Capital Advisors. SLS Capital Advisors is a boutique financial advisory firm. are working directly with Middle Market leadership to tackle critical growth opportunities, including exits, mergers and acquisitions and access to capital. The principles of SLS Capital Advisors bring deep industry financial, and consulting experience to firms seeking tailored strategic opportunities, including capital for major growth initiatives and alternatives for those evaluating corporate transitions and exits. SLS Capital Advisors services include managing effective exits and sales processes involving sophisticated buyers such as strategic purchasers, financial buyers and operator-to-operator transactions and raising capital to fund our clients growth including debt and equity elements. They also assist companies in capturing growth opportunities through focused and effective organic growth and M&A programs and unlocking profit potential through business portfolio, rationalization and divestiture. SLS Capital Advisors. Focused on delivering consultative executions for clients seeking strategic growth and capital. Find us at SLSCapitalAdvisors.com to learn more about how we can help you. Welcome back. So Mark, I was just talking about the concept of it's been awesome to see those examples of companies that have been able to pivot. But what about the companies that are kicking themselves because they didn't. What would you say to them?
Mark Gaffin: 21:19
I would say there's no reason to kick yourself. In normal times, it is hard to run a business, right? You're dealing with uncertainty all the time. You're trying to plot your next move, you're trying to stay relevant, technologies move, you're trying to work with people, you're trying...you know -- especially as a middle market company -- you probably know, if not 99%, 90% of the people by first name basis on the plant floor -- So this isn't easy (this isn't easy to do [either] furloughs). This isn't easy to do, if we've had to let people go, so there's no, no reason -- the fact that we're surviving and even if we're plugging along, even if it's way, way closer to the edge then we'd like... there's still so much, so much to be proud of. And I think that that's what we try and do a lot with with, you know, kind of the profit improvement the profit recapture work that we're doing is finding out where we can help them deal with existing creditors, where can we help them with cash flows? You know, the tools we talked about before, the 13 week cash flows. Give them an opportunity, what's coming, what can we avoid, that's important because we want them to play for another day. If we can just do that, then we can work on all the other stuff. I think what I want to do, is say we want to be able to move everybody forward and figure out what the tools they have, what markets that they have, but if they're in a market that's going to face major restructuring your (sales, sorry) if supply chains are going to change significantly, we've got to know about that we've got to figure that out because just not doing anything about it's not going to change the outcome. So no, I completely agree with you. No one should ever feel bad that they couldn't automatically sew masks overnight, you may just not have the capacity if I made flags, I can make masks by repurposing but you know; I don't know If I was a roofing company, could I could I change and do hand sanitizer? Probably not.
Stephanie Chambliss Gaffin: 23:05
I think it's actually been really refreshing to hear a little bit of -- in August, you know, typically in a typical year, things just go dead quiet in August. And it's actually been a little bit refreshing to hear there are people that are taking off on vacation they are taking, you know, and again, that vacation may look very different. I'm seeing a lot more people load up the car and go out to a cabin in the woods and figure out ways to do that safely. But that people are getting away before kids get ready to go back to school in whatever form school is going to look like and actually starting to see in in some areas where the kids aren't getting back to school. But I think there's a little bit and I wonder if what's coming is, you know, as we think about the second half of the year, and in particular, the latter part of Q3 and Q4, so that post Labor Day where again, in most years, we see a real uptick in activity in starting right after Sept, right after Labor Day. And I have to wonder if you look at even just from a from a deal activity, if you look at from a business performance, there was so much suppression of activity in all kinds of different metrics for most, not for all, but for many. I wonder how crazy that three months of September, October, November, kind of before we get into the holidays is really going to be. And what can folks do now to start to say, all right, no matter whether I'm really happy about how things went the last few months, or it has been a really tough few months. How do I get myself in the right space? And how do I get ready to take advantage of the last half of this year? is there hope left in this year?
Mark Gaffin: 24:46
Oh, yeah, I'm actually a big proponent on this. There's I think there's still plenty of time for this to be very second half performer. I don't think, unrealistically optimistic. I think there's a lot of reasons to believe. And don't bet against the Fed. I don't think you get rich betting against the American economy. And I certainly don't think you're going to win by betting against the ingenuity and, you know, hard-work-ethic that we see in our Middle Market companies, I would tell, you know, leaders of Middle Market companies that they have advisors, I think they need to be, I think, not to tease too much more of your episode, but be kind to themselves, right? They're dealing with an environment that no one's ever dealt with, before, with the kind of information we have pouring in. I think in 1918, when you had that [Spanish Flu] pandemic, then at least you probably didn't know by minute what was going on in Europe, so you could at least worry about was in your little area. But give yourself a break, you know, take care of the CEO and the CEO should have advisors, should have people that they can talk to, that they trust that will actually give them the real poop, not just a you know, whatever. It won't make you feel good. Let's talk about what we can do what we can't do. To your point, I think that says that if you want to, you know, grow, not sell right now, you just want to grow, there's still things you want to do to bolster the platform, right, so that you can attract capital - growth capital - be that debt and/or equity - to grow into 2021. I think there's potentially, and I'm not getting in the political sphere of things, but you can see, potentially it's been articulated there would be change even in tax regimes, like capital gains tax, so that would have a big impact on when somebody decides it's time to sell their company, if they have the luxury of selling it by time. I think if everybody thinks 2021 is when I'm gonna be able to launch this, then then a whole bunch of fish are thrown into the pool up same time, and I you know, that not that it won't work, but they'll just be a lot of other people out there at the same time. So I think that there's nothing I'm seeing that would suggest that this isn't a good time to, to make sure that you are aware of and thoughtfully exploring all options for Running, Growing and Selling your business.
Stephanie Chambliss Gaffin: 27:04
And I think on that note, that's a good note to end for today. I'm Stephanie Chambliss Gaffin and you've been listening to Right in the Middle Market. A podcast about running, growing and selling your middle market business. We'd love to hear your comments about today's episode. Do you like hearing this kind of just casual update? Or do you like the more formal content? And to that end, what are some of the topics you'd like to hear us talk about in the future? Please drop me a message on LinkedIn or send us an email at podcast@gaffingroup.com and don't forget to subscribe to make sure that you hear our next episode. Until next time, Be Well and Be Curious.