How to Compete in a Competitive M&A Market

Creating Strong Relationships

Our first strategy within the auction process is to create a strong relationship. There are two relationships you're creating.

The first one's going to be with the seller. It can be tough if you don't have their vote of confidence. Obviously, money talks at the end of the day, but it helps when the seller likes you.

So we try to create a relationship with them quickly and get access to the seller's creative relationship with the bankers.

We want to stay actively engaged, especially in a deal. Follow up every two or three days by calling them and showing them that we're really putting in the work.

Being transparent with them that we're looking forward to getting this done and coming to a valuation that all three parties (the buyer, the seller, and the banker) feel confident that we can close on because we've done our work on the front side. 

The other part we like to discuss on some deals is bouncing between being a platform company or an add-on acquisition. From there we can get a lead way with the sellers and bankers and try to communicate our strategy and why we think an add-on makes sense. Especially for founder-owned businesses trying to diversify their investments. 

Another portion we're going to talk about is add-on versus platform is the management of the business as you come on as a platform, there are additional responsibilities, but from reporting to your board and making sure the investment team is happy in really achieving their objectives.

Whereas the add-on, again, you're achieving the objectives of the broader company. However, we have a corporate team in place today. 

You can absorb within the corporate team and let them lead the integrations. They can help lead the acquisitions and work with you in tandem. 

We search back to our founder owned businesses and try to leverage our relationships to source additional add-on acquisitions. However, we have guys here who can do the work and the legwork to get the deal done. It's another thing off the operator's plate that we can handle where if they're at the private equity group or as a platform, they have to handle themselves.

That's another thing that they gotta drive besides just driving value within their organic business as it is today. 

Delivering the strategy and vision 

Our approach on strategy and vision is really just being open. And so, we're going to tell you, we're going to integrate these companies, we're going to do an extensive integration. We call it integration light, however, there are going to be some changes. 

From a competitive process, it might eliminate us from some people who just don't want to integrate which is fine. That's not going to fit our strategy and what we're trying to do. 

So we take that on our front side and try to define roles and responsibilities. Discuss how we see them playing within this. 

How does it work with them, and discuss that, discuss compensation on our front side, discuss how they feel like their company fits within. Then also understanding, what really makes them happy?

What kind of management style would they like to see from us post-closing and try to pick their brain to get the information that we can use to make sure that our investment thesis is going to be realized. 

We can also do the things that we need to do post-closing without anybody getting upset on the backside of things. 

It's our size. From a strategic perspective, we're about $150 million in revenue. And so, we're we have direct access to our CEO, CFO, as well as our deal team. 

So from a timing perspective, we can move really fast. We've put out LOIs within a week. Typically, we'll try to preempt some of it sometimes as we think about a competitive process, basically once work comes in, it's going to get quickly.

There are just a couple of phone calls to be made and everybody dials in and gets it done. 

From a diligence perspective, we can move quicker without having to get into every single weed and turn over every single stone, just from a risk tolerance perspective being much greater.

The Role of the PE sponsor

If we get bogged down from a deal flow perspective, they're happy to help. They've been fantastic from that perspective.

Even questions that we have within the industry they're well connected. Anytime we need industry experts they're quickly on the line, they can typically call people up and help us out a little bit from that perspective and also provide guidance and other stuff they're seeing. So they've been fantastic from that perspective. And also, I think, again, drives towards our ability to get things done quickly.

They know what they're looking for. We know what we're looking for. That's between those two parties. There's not much ambiguity into what needs to be done to close a deal. 

Add-on versus the PE firm

There are a couple of things that benefit us being private rather than public. The first one is the second exit and the second bite at the apple. Most of our deals are going to have rollover equity. 

Obviously, there are exceptions to everything. We try to keep the founders invested in it, but we will also have to exit from selling at some point. 

When that happens, the rollover equity they have is going to be realized and go from there and we'll typically also try to put in. As a seller, you're still going to get the rollover equity if you want it. And then also we do try additional incentive plans, sometimes we'll structure it as rollover equity inside that, whatever it is, we still have the opportunity to sell that second bite of the apple.

The main thing that we're going to focus on is, let's say a $50 million deal. You roll over 20% of it. That $10 million is equity. A platform has no diversification of it as of today. So as a platform, your $10 million equity is that 10 million equity that's all that's there. 

Your business goes to zero. That 10 million goes to zero. Within our platform here at EIS is an add-on. Your $50 million of revenue might go to zero. However, as I said before, EIS can still grow. 

So, your 10 million still has value of it. So it's a little bit less risky investment as a founder-owner, which typically turns into another portion of the retirement plan from the $40 million you just took home, but that's a big sell we're going to play.

And then also really focus on you still get to run your business. You don't have to deal, with blue-collar guys. That's for us to be concerned about and stay up at night; you show up, you run your business, and we'll integrate it for you. We'll run your strategy for you. All you have to do is sell and have that flow down to the bottom line. And we will help you do that as well. 

What if they say no?

When doing the M&A, culture is a big part of this too. We're really focused on that and trying to create a partnership, and everybody's aligned on the same page. 

So, if somebody wants to do that, we'll never wish them bad. That's just the route they want to go, it sucks, but it's also part of the job.

If that is what makes that guy happy, more power to him, hopefully down the road, we can work together on a joint venture or as a prime and a sub on a contract or project and maybe in three to four years, we linked the companies up at that time and double our size.

There are various reasons, but typically, they want to go be a platform or get offered a little bit more money.

If we're on offense about doing, not on offense about it, but like just basically tapped out and somebody else offered more money and that's what they want to go after, then okay, fine. no way we can win. 

"Our goal is to never lose a deal based on the relationship because they like somebody else more. It's more of the other intangibles of money, or the platform are the only two I can think of that we might be blown out on that. - Tyler Rodewald. "

Building Strong Relationships

There are two different individuals within our team, Joe and me. Joe, is our chief strategy officer, he'll get on a phone call and tell you he's just a redneck from Arkansas but he underplays it a bit since he studied at Harvard.  

For me, I have more investment experience on the back side of it, and I'm the numbers guy; that's what I do in the valuation. So, between the two of us, we're on the opposite side of things, one of us will hit it off with the owners and be able to drive that relationship home. It just depends on who it is, we both get out of each other's way.

Whoever got the relationship drives it, and after that initial connection is highly responsive and working. Many ask how we do so much deal and why we do so much work on the front side.

I'm not guaranteed to get it. However, we have a better chance if we're doing the work on the front side, which leads to a little bit of a certainty to close. 

We have that valuation work completed before sending an LOI 95% of the time. There are those exceptions, but I want to see the monthly financials back for some time, and look at the trends.

A couple of other items we'll focus on is safety. In our industry, safety's a really big thing.

If your safety record isn't relatively clean, you won't win jobs, and you won't work. That's a big thing for us. And it also affects our pro forma of financials. There's a score that the worker's company gives you forward that will affect your premium. And so, if you have a higher score, your premium goes up and try to understand that.

Anything related to valuation, I want to do that on the front side, before we even send on to LOI rather than putting in a range or something else. So whomever it is we're dealing with, know we've done a significant amount of work.

We understand the business and when they look us in the eyes and tell us, they will pay $50 million for this. The worst conversation we have is going back and saying, we missed something on the front side. Therefore, we're going to reduce this price. It's just not a fun conversation to have. 

And it happens, not necessarily missing stuff anymore. It's more, so it just wasn't disclosed. But we try to avoid that conversation on the backside of it and just do the work in the front when we're not under exclusivity, but we're still spending resources to get stuff done, understand the business, and show that we're engaged. 

I want to talk to those individuals, if it's an investment banker, at least two to three times a week, leading up to stuff or leading up to different bid dates between IOI and LOI, let's say IOI once a week, I try to talk to them. The LOI, it's two to three times a week, really pushing hard and making sure they're engaged too, and know that I'm here. 

Leveraging relationships with the banker to build rapport with the seller

It depends; it's really just phone calls and working with them. Once they go through a deal process with us and see how we get stuff done, they want to work with us and that's what we want to do. We're incredibly fair, quick, nimble, but as I said, in the beginning of the call another thing is we're transparent; we'll tell you what our problems are.

Sometimes people like to hide problems and avoid them and then use them as aha moments at the end. That's not what we want to do. We're legitimately trying to get deals done in great value. 2 million of equity value means a lot more to us than zero.

So here are our problems. Here's how we get this done. We solve these problems together and we'll move on. From a relationship perspective, that's how we've handled it, being transparent and honest with the investment bankers and what we're looking for and trying to do. 

We'll go out to lunch, keep in contact with them, send them emails, and ask them how they're doing, but there's not much wine and in dining and it's more just our actions in how we treat the deal process.

Preliminary diligence questions

We'll go over the financials. Any potential legal matters, so we consider escrows appropriately and make sure we're not stepping into a bad situation there.

The safety matters, understanding union exposure that might be there and safety are a lot more industry-specific. We try to understand their revenue splits. What is it by geography and markets, who are the major customers?

A big strategy inside our business is being a services business, and where we stand today. We get much more excited about commercial synergies than cost synergies. 

So we do a lot of founder-owned businesses and there's not much room for cost synergies because all the salaries they pay come from their P&L.

And then we'll talk to the owners, and if there is any stuff we can pick up, we will. But our real thing is just understanding that commercial synergy, and that's what we're digging into the customers. 

What's the owner selling, what's the approximate potential in new markets we can move into between EIS and the target we're going after, and try to quantify those in our front side.

Timeframe to get to LOI in an auction process

The auction process is weird because that's always typically set by the bankers. We'll try to preempt stuff where we can. 

When you read a CIM, you know whether you will do the deal or not. You know if you're going to get something done, barring any major red flags by reading the CIM I've got a data request and had an LOI together 48 hours before, typically maybe a week.

But that's just because it is driven more by the other guys. We have the time to take, they said that we couldn't preempt it. And so, we'll just hold our stuff in and wait for the backside of, and try to pull out as much information as we can to make the most competitive offer.

All of them go back to the PE firm. Just a collaborative approach of it. It's, those are our shareholders, our investors, and we've seen a lot of stuff, but as a group, we've seen even more stuff. 

We take the group knowledge approach and we send everything up and go through that way. But I put together a quick model, and we've got it down to a template now, spits out our returns, pretty simple and tells the strategic rationale and why we know, we want it.

And when I think about the agenda, it drives into the next phase of it and one of the questions I believe we're asked. We understand our investment thesis, and we have a strategy, we know what we're trying to do. 

The ones within our investment thesis move faster because we know the industry. We've done our market research on the front side of it. We know exactly what we're looking for. 

We know how to speak to the industry, and it's the ones that are a little bit outside of it, to where we need to do a little bit more market research on the front. We'll have our call with the different banks and consulting firms to gather the industry from there. So it adds a week or two to the process of like how fast we can move on it. 

Preventing Deal Fever

We all get our hands slapped a little bit. Everyone in the team, we've seen a decent amount of deals. It's group knowledge, and once you bring it together, we'll realize it doesn't make sense. It can be a little ambitious for whatever reason. 

That's how we avoid deal fever. Once everybody gets along to the table, puts the ego to the side and that's a big thing that we talk about when we get into those meetings. The ego goes aside to be honest with each other, talk to each other as professionals and do what's right for EIS and our shareholders. So that's how we avoid it. 

To do M&A, you got to be honest with yourself. We're all type A individuals, a lot of us graduated top of the class, are smart, always been outperformers. 

We don't want a deal to fail on our plate, so it's a lot better to have them get turned down if they don't necessarily fit the strategic vision and strategic value of what you're trying to do. 

We have a very strong push on leveraging internal relationships. Our operators here, cold calling too if we need to.

In a broader sense, maybe 15 to 20% of the time focus on sourcing, just add some flows a little bit. You can always get stuff in the pipeline, get real busy. And then you're sitting there about halfway done through the deal and you need another one after this because you don't want to get bored.

So 15 or 20% of the time is used to sourcing whether talking to investment bankers, trying to get their minds, cold calling.Then also, as I said, we take a lot of time going through the businesses and talking with our different founder-owners there.

Another team that we all like to use a lot too is our sales team. I'm super close with the VP of sales at EIS, and have him pitch different targets to us and what he sees in the market. 

Developing relationships with third parties vs sourcing your own deals

Probably 70-30 in-house, the bankers, we know the ones we really make a good impression once we do start working with them. We're going to take phone calls, take them out to lunch sometimes a little bit, but at the end of the day, there are two things: 

We have great relationships with those. They're a two and a half million fund been around for at least 30 years. And the other part is we have what the investment bankers want. We have money to buy their company.

And so, they're going to reach out to us regardless. It's better for me favorably so we can preempt deals and get additional information. However, many people are reaching out to sellers between cold calls and in-house relationships.

And so, that one's a little bit more, you have to be a little bit more proactive in getting those inroads and creating those inroads. In the environmental services space, everyone I talk to has somebody else calling them and not just one other person. It's several, it's a hot industry, a hot space, and so highly competitive.

So I spend a lot more time kind of making sure that those guys see us. In the instance they do decide to sell, they think of Tyler and Joe in EIS as a great stomping ground to go to. 

Lessons Learned

My dad taught me, three things about living life, doing business or whatever, honest, ethical, and hard-working. If you get those three things, you're going to be able to put up a really good foot forward and have your company on a pretty good pedestal within the auction process.

M&A is just such a competitive market and you're dealing with a lot of dollars, and people are trusting you with their money and their dollars and their livelihoods. So it's even more heightened to do the right thing.