A certain kind of East Coast deal guy can certainly alienate his clients.
JANUARY 25, 2017 — 10:23AM
It was refreshing to hear the investment banker Jon Freeland of Minneapolis volunteer that he tries to keep many of his clients safe from the threat of dealing with New Yorkers.
Other investment bankers in Minnesota will admit to doing much the same thing, steering clients who are trying to sell a business toward private-equity firms from cities in the middle of the country, although they are usually not as direct about saying so.
Freeland has been selling companies for nearly 20 years, although he has a varied background that includes running a manufacturing company. He’s now one of the principals of Freeland Briese LLC, a small merger-and-acquisition adviser that got its start in 2015.
What he’s learned about living with private-equity owners is through his own experience and by keeping in touch with past clients long after a transaction has closed. And while he gets along well with plenty of East Coasters, a certain kind of East Coast deal guy can certainly alienate his clients.
This is not an endorsement of the superiority of Minnesotans or even Midwesterners. A Texas or Arizona fund manager with money to pay full price is also likely to be a great candidate to pitch a deal to.
It really comes down to the potential buyers showing the seller enough humility and curiosity. There are arrogant Midwesterners and self-effacing New Yorkers, but like in other aspects of business it usually pays to go with the odds. In general, Freeland finds his clients have a better experience when they deal with other people from the middle of the country.
Freeland said his clients will hear at the start of the sale process that there’s no avoiding private equity when it comes time to getting a good price for a consistently profitable company. Generally these are investment partnerships with a small group of managers calling the shots, and there are about twice as many of these firms in North America now as there were in 2000. The accounting firm EY estimates the private equity industry had more than $540 billion of “dry powder,” money these firms need to invest.
A lot of PE firms are far too large to chase after Freeland Briese clients, companies with between $2 million and $10 million in cash earnings, or earnings before interest, taxes, depreciation and amortization. Yet companies with at least $2 million in cash earnings are big enough to show a lot of private-equity buyers they are no longer a mom-and-pop, that they have the basic bone structure to grow much bigger.
Having lots of buyers with money is certainly a good thing when looking to sell any asset, but Freeland said it’s rare when the former owners get to retire at the closing. Usually they’re going to be asked to stay in management roles, at least for a while, and also keep some ownership in the company.
Meanwhile, the new majority owners are going to want to make a lot of changes as they seek to increase sales and cash flow, likely investing in new technology, revamping the product line, hiring new managers and buying competitors. “Going into this with eyes wide open is pretty important,” Freeland said.
That’s why the owners have to be clear about what else they want out of a transaction besides a good price, from maintaining a big payroll in their hometowns to being fair to any other family members who work there.
Business owners may have only a cursory knowledge of private-equity firms at the beginning of a sales process, although once up to speed it’s often clients who first bring up a reluctance to pitch the deal to a fund from the coasts, Freeland said. And he’ll agree they’ve got a point.
“When I worked on Wall Street,” is not a good way to start selling yourself as a potential partner to owners of a food processor located in a small Midwestern town. Neither is boasting of an Ivy League education. It’s a sign that if they became the new majority owners they sure wouldn’t listen very closely when faced with a difficult decision.
“Our clients are salt-of-the earth people, folks who have built the business up, oftentimes from scratch. They’ve worked really hard to do that,” Freeland said. “Sometimes business buyers will come in and they have a view, through education or experience, that they are smarter and understand more about the world than our clients do. And that never goes well.”
What Freeland finds fascinating is how anyone would risk boorish behavior in such an acutely competitive business. When potential buyers meet with the company’s owners and managers, the two groups are really interviewing each other. The private-equity buyer needs to be thinking, having identified an attractive acquisition candidate, how to get picked as the winning bidder without resorting to simply paying more.
A good example of how the process works is a client Freeland Briese helped to find a buyer last year, Roseville-based Warner Tech-care Products. It’s a hearing and health care products distributor with just 14 employees, and former CEO and owner Teresa Nelson said she was amazed that about 40 buyers expressed interest. She remembers 17 parties making preliminary bids, and even paring back to a shortlist of finalists turned into a challenge.
“I wanted to make sure that the buyer would keep the company intact, that they did not want to merge it into another company,” Nelson said. “I also wanted to make sure my employees would be taken care of and not replaced or let go. Starting a business is like birthing a baby.”
She picked the winning bidder after a series of meetings with potential buyers, almost all of them outside of the Twin Cities. The buyer was the Pathfinder Companies. “They weren’t the highest bidder,” Nelson said. “But they were, I felt, the most honest. Just the best fit for the company.”
Pathfinder happens to be based in Minnetonka.