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Maximizing Value in New Businesses
57 Plays4 years ago
Buying or Selling a Business might seem like an easily repeatable process for those with lots of resources and capabilities, but how do companies plan to operationalize and execute these deals in order to maximize value? Listen to our discussion with Dietrich Partners' founder and executive chair, Celia Dietrich, to learn more!
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Transcript
Overview of Business Transactions
00:00:00
Speaker
Buying or selling a business might seem like an easily repeatable process for those with lots of resources and capabilities. But how do companies plan to operationalize and execute these deals in order to maximize value? Come listen to our discussion with Celia Dietrich of Dietrich Partners in Denver, Colorado to find out more.
Introduction to 'Market That Moves America'
00:00:25
Speaker
Welcome to the Market That Moves America, a podcast from the National Center for the Middle Market, which will educate you about the challenges facing mid-sized companies and help you take advantage of new opportunities. Welcome to the Market That Moves America. I'm Doug Farron, Managing Director of the National Center for the Middle Market at the Ohio State University Fisher College of Business. We are the nation's leading research organization studying mid-sized companies.
00:00:53
Speaker
which account for a third of private sector employment and GDP, the lion's share of economic growth. It truly is the market that moves America.
Meet Celia Dietrich
00:01:02
Speaker
The national center for the middle market is a partnership between Ohio state and Chubb. And today I'm happy to welcome Celia Dietrich, founder and executive chair of Dietrich partners based in Denver, Colorado. Dietrich partners recently collaborated with the center on a special report on the Rocky mountain region middle market. So Celia, welcome to the podcast. Hello, Doug. Thank you for having me.
00:01:28
Speaker
Sure. So why don't we just start, tell us a little bit about your background and your company, Dietrich Partners. So I have been in professional services pretty much my entire career and realized about seven years ago that you could actually deliver on a project and bring together a group of individuals with strong capabilities who have had operational experience and consulting experience.
00:01:58
Speaker
and do what they say they're going to do. And then as a company, you can take care of those individuals and develop them professionally and give them a great place to work.
Focus of Dietrich Partners
00:02:07
Speaker
So I started Dietrich and today we're roughly almost 30 people and we focus on clients from the fortune 50 to private equity and middle market companies.
00:02:23
Speaker
Awesome. You want me to tell you a little bit about what we do? Yeah, sorry. Yeah, please. Yeah. Tell us about what you, so what do you do for these companies? Like what, what is your kind of array of services that you provide? So.
00:02:37
Speaker
So we were like capability-based. And so like program and project stewardship, which is like large programs, project management, which then falls over into our acquisitions and divestitures practice, which is integration management offices. And then on the other side is like optimizing performance.
00:02:57
Speaker
And so for private equity and middle market specifically, we really become an operating partner. And so we're either walking in at the very beginning of a transaction to do due diligence and understand what's sitting under the hood, or we're working with the company once it's been purchased and helping them stand up, scale up, or get them ready for exit. So that's what we do.
00:03:21
Speaker
Yeah, interesting. And as we know here at the center, there's a lot of that activity that takes place in the middle market.
Middle Market Data Collaboration
00:03:28
Speaker
And that's kind of where I wanted to go next. It was, you know, interesting you approached us in, gosh, I don't know, summer of 2020, with an interest in working with the National Center for the Middle Market. So you can tell us just a little bit about what spurred that interest and
00:03:44
Speaker
kind of your desire and partnering on a project that would bring forth data and insights on the middle market in the Rockies. Like what drove that? It's actually interesting for my, well, I think it's interesting. I was out for a walk and I come back in and it's, you know, you're sitting there and you get a lot of information at the time about the remote working and what's really happening. So I think it was about three months in to the pandemic.
00:04:14
Speaker
And I happened to catch one of your surveys being read out. And I don't think I'd ever seen as much detailed information that was actionable and really meant something to the middle market. And to have that information
00:04:38
Speaker
right there and then want to continue it forward and then look to have it actually focused within the Rocky Mountain region where we are. I thought it was important. That's why I reached out.
Pandemic Impact on Business Strategies
00:04:49
Speaker
I felt because we were so fortunate in making it through the pandemic the way that we did, that was something that we needed to do to give back to the community and help them and help others understand what was going on around them.
00:05:02
Speaker
and what does this data look like, and what are they experiencing, and then share what they had from a story standpoint outward as well. Mm-hmm, yup. Yeah, and certainly from our side, it's been a fantastic relationship because we have done a lot of things, you know, national. We collect obviously our middle market indicator, but this has really been our first chance to look at a region of the country and
00:05:31
Speaker
working with you and your team has been really fun and useful in that process. So why don't we just talk about that a little bit? I mean, you had an opportunity, as you just mentioned, you know, we took a two-prong approach here with collecting survey data from companies in the Rockies, but
00:05:49
Speaker
your team had a chance to talk to a lot of these companies, a lot of executives and leaders across the Rockies. So what were some of the overarching themes that you heard and what are they saying about what happened in the last year with the pandemic? What are they saying about this coming year and what the future looks like? And that's actually the part that's really interesting because everything's reopening so quickly. But when we came together,
00:06:16
Speaker
And when the survey went out in December, you know, obviously it was still a very quiet time. And then to have the chance to have that, the work that you do, then be expanded really within the eight states, you were already there, do a little of that expansion, but then to have us go through and perform 40 interviews with C-level executives and go through all functional topics. It was really interesting and people were very,
00:06:44
Speaker
willing to open up and they shared a lot of confidential information because I think their hope was that in return, they also would understand what others were doing. And you saw revenues up, margins, I'm sorry, revenue was down, but margins were up and profitability was really up. And now in like 2021, there's some serious concerns about taxes because things haven't settled. And the backlog within the IRS
00:07:14
Speaker
interestingly enough Taxes are now being brought in which hadn't been for this year that haven't been processed from the previous year So we're starting to see some of our clients like working through how they're dealing with you know, carry forwards and the like because they're on hold Right. Cash was cash. I mean everybody's sitting on a bunch of cash. Most are sitting on cash and they don't know what to do with it those who like it within private equity felt it was
00:07:44
Speaker
just waiting for the moment. And some of them have been very acquisitive and things have gone forward. Others, depending on the sector in which they buy, have been quiet. These values didn't go down. So it'll be interesting to see over the next couple of months how that changes or if it changes. Because I think it also is very dependent on what companies, how they emerge. I would say middle market companies.
00:08:12
Speaker
Well, I was just going to ask that tax issue that you brought up, I've heard more and more people talking about that. Do you, do you think like that, that is accelerating any decision-making around, you know, selling a business or acquiring a business because of the uncertainty of what the changes might bring? The conversations I've been in, and it's interesting, I've been in three just within a week.
00:08:41
Speaker
have all been around looking at alternatives. So while somebody was actually preparing to make an exit or start to prepare, that was just one of the questions. And it was more of either like, let's think about what we could do in the meantime if you want to wait, or just know that you're going to have to have something structured within the deal because this may linger out there. And if it's not material, then everything just moves forward. It just really depends on the size of the company and what they're doing, how they're structured and the like.
00:09:12
Speaker
This has really been the first time I've seen this issue come forward, and I do think we are going to hear a lot more about it.
00:09:19
Speaker
Hmm. Yeah, that's interesting. I mean, to give a very nice shout out to the IRS, I do think over the years, I mean, like, you know, because who really does that? But honestly, no one, I was gonna say no one. They've become the kinder, gentler IRS. And then to now be in this position, you know, where they're half staff back, and the backlog is so great. It's concerning.
00:09:48
Speaker
So hopefully they'll come out just fine, but I think people need to be patient. Yeah. Yeah. You know, one of the big questions we keep hearing too is what do you think are some of the temporary changes, you know, as a result of the last year, right? Like everyone's been impacted in some way, some positively, some negatively, as you mentioned earlier, but
00:10:09
Speaker
What do you see as like potential changes that are temporary and we may get back closer to quote unquote normal or pre pandemic. And what do you think are going to be some of these more longer term or permanent changes? So I'm glad you actually asked this because I don't think I fully answered the last question. And I'll say some of these things are, we'll take care of that. You know, business models were proven.
00:10:37
Speaker
And people are very proud of that. Talent, I think, is very interesting. I think people during the pandemic started to have the difficult conversations to take care of the individuals who probably should have found greener pastures elsewhere earlier. But now, at least within the Rocky Mountain region, what I'm concerned about is we have a lot of customers moving in from the coasts. And we welcome them. Come on in.
00:11:07
Speaker
And our talent base has always been tight, but we have, the leadership has always come in. Now we've got leadership in Denver and in the surrounding state. So don't get me wrong. And the poaching and the level of compensation has also been a pretty hot topic around here. So we're going to see a lot of that. Wow.
00:11:32
Speaker
I know. Uh, then also as far as diversification of relationships, I would say for those coming out that they really should be evaluating, especially if they are looking for some type of exit, do they have the right banking relationships? Do they have the right lawyers? Do they have the right professional advisors sitting next to them? Just because many of them were caught pretty flat footed during the pandemic and didn't know what they didn't know. Right. Right.
00:12:00
Speaker
So we
Keys to Middle Market Success
00:12:01
Speaker
share this mutual interest in the middle market. Obviously, as the NCMM, it's who we study and work with. And you mentioned that you have the benefit of working with both the Fortune 50 as well as middle market companies. So in your experience, when you look at the middle market,
00:12:19
Speaker
What are some of the things that, you know, the dynamics or the secret ingredients of whatever you want to call it? Like, what do you think makes these companies so successful? Because we've been tracking their, you know, overall growth for almost 10 years now. And other than, you know, COVID hitting growth had consistently outpaced both large and small businesses. So as a strategic advisor and trusted partner to these firms, what is it that you see in them that makes them so successful?
00:12:50
Speaker
So in most cases, they're nimble and kind of when you get to that middle market layer, you have been kind of over that $10 million, which is, you know, your, your threshold here is 10 to a billion and 10 seems to be a pretty magical number for a lot of these companies because you're mature enough where your infrastructure is stable enough. You've got a little bit more money on hand and you're a little bit more nimble and you have the ability to scale.
00:13:23
Speaker
And I think the talent, hopefully, I think this is also a place where they tend to get a little tripped up as well. Because when you scale, the same talent you start with isn't necessarily the same talent you need to move to every next major gate. And those who do it really well actually understand that the founder may no longer have that talent. They're great at bringing that company to the table. But now they need to move, decide, and let somebody else come in and scale it up for them.
00:13:50
Speaker
I think here it's more of an openness to actually continue to move the business forward. That sentiment doesn't really apply to everybody, but when we engage with our client base, they're very vested in what they're doing. They have found their niche and things are moving forward. It's just a matter of helping them catch up on the back end with where they are, the infrastructure side.
00:14:20
Speaker
Yep. And one of those paths to growth, which, and we saw this in our, in our report, right? Was the, um, the willingness or I guess the increased desire to make strategic acquisitions. So we saw this in the Rocky mountain data, right? So since this is an area that, that your company focuses a lot on, what, what do you see as,
Challenges in M&A Processes
00:14:47
Speaker
big, I don't know, challenges or mistakes or kind of common hurdles that middle market businesses have to overcome when they start thinking about, you know, making an acquisition or selling, you know, that whole M&A process. Kind of talk about that a little bit. What do you, you know, see when middle market companies start to think about that process? So first, most that we engage with hadn't been thinking about this process.
00:15:16
Speaker
And it really should be. Because it has been such an acquisitive environment for so long. And this pause actually has allowed some of them to start to move forward with the necessary steps. But you need to have a plan. And I'm kind of talking about those special ingredients because it all kind of mixes together.
00:15:39
Speaker
You need to have a strong infrastructure in place of policies and procedures and the standards of habits and the financial oversight. And you'd have governance, um, the diversification of relationships, as I've mentioned, but you really need to also understand like kind of a SWAT analysis. So what are the strengths and where are your weaknesses and what does the competition look like?
00:16:06
Speaker
And you should really be able to start shoring it up. And so what we do for our middle market clients and what we do for a number of private equity is what we consider to be like an operational due diligence process. And it's really coming in in advance and saying, okay, we're just going to go through as if we were going to buy you. And let's go through every area and let's lift good and move through and let's just see where you are. And then.
00:16:33
Speaker
The trick there though is you have to also understand what's valuable about your company. And in most cases, some of these companies will spend a lot of money in the wrong area, assuming that's what the value is. And the buyer will come in and either not purchase that one piece or we'll sell it off right out, you know, like shut it down. And we've seen that a couple of times where that was the one area, like the founder or whatever was very proud of.
00:17:03
Speaker
And that didn't have the value. So it's a lot of good conversations along the way as well. Yeah. So it's, it's, it would be an analogy would be like selling your house and you, you know, you re renovate the kitchen, but that's really not what the buyers are looking for. They really just want maybe new paint and carpet. So you have to make those decisions.
00:17:29
Speaker
Yeah, in the marketplace, what's going to make it show well and drive the most amount of interest, right? Yeah, and what's of value to that buyer? So, it's having all of this way in advance, so you're not putting a pool in that somebody's going to put dirt in after they buy it.
00:17:47
Speaker
Right. Right. And what's the timeframe? Like, so how long does it take to go through that process? Because I think, you know, we've seen some business owners who, again, cause they've never done this, right? They may have had the business in their family or, for example, for 30, 40, 50 years. How long does that process
Preparing to Sell a Business
00:18:06
Speaker
take? Because I think sometimes there's a misconception that, Oh, I'll just, you know, clean up my books and
00:18:13
Speaker
Yeah, throw for sale sign out there or call my banker or call an M&A guy, but really that's a pretty long process, right? What is typically you see is like the timeframe to get a business truly ready for sale. So on average, it's going to go anywhere from
00:18:37
Speaker
A year to a year and a half. That may sound long to some. I think it depends on the maturity of the organization. I talk about everything from the talent, to the infrastructure, to the products, like customers, systems, the works. That will play a large part. How ready are you? And I would so hesitate in putting a For Sale sign out there.
00:19:01
Speaker
Just because you really need to understand what the value is. And if you're not sophisticated in that space, because not everybody is and that's not what you're supposed to be doing, but then making sure there's somebody out there who does know your value. So you take all the dollars off the table that you should have. But the process takes, it's a long time to prepare and it's a long time to go to market in certain cases.
00:19:27
Speaker
Are there any other common mistakes? Like, are there other mistakes that you see, like things that get overlooked or is that really the value that you provide? Just kind of walking through that playbook, so to speak. Well, and that's, I think it's just exactly what you said. You know, you kind of dust things off and say, okay, here we go. When we come in and engage, it's kind of interesting and it's different from what we've seen others do.
00:19:55
Speaker
You start immediately, like when we get to the private equity and they say, okay, here's the company that we've just purchased and we're either looking to truly show them up and start to scale them. But you may have an exit timeline of three years. Some have seven years. So really obviously depends on the hold. And it's really from there. So you can actually go in and help the management team with what they have sitting in front of them just to make sure that the daily operations become more efficient and continue.
00:20:23
Speaker
But then we immediately start like the list and that is everything that should be taken care of or addressed over the next three years so that when you pop out, those activities have been completed and they're proven. I mean, you know, you'll just put in a new system in two weeks. Like there needs to be some thought.
00:20:46
Speaker
And in working together with a lot of our clients, that's exactly what we do. And I think it's new for a lot of people to think so far out because you just want to get done with some front of you. And you worry about those dollars going out, but we're not asking you to start. You just need to start thinking about it. Right. And that helped in that trajectory. Right. Right.
00:21:12
Speaker
Well, maybe we could just close with one final question. Let's, let's think about the year ahead, like the rest of 2021, even into 2022, what advice would you give to middle market businesses who might be, you know, just struggling with a little bit of the lingering uncertainty. You mentioned talent, the talent poaching, like that's a huge concern. Maybe there's still issues around cashflow. I know there's, you know, there's still a lot of supply chain issues out there where, you know, you've got,
00:21:42
Speaker
vendors who might be late, you've got customers who might be having trouble, you know, paying their bills. And so there's, could be like lingering working capital issues. There may be revenue, um, as you said, revenue down specifically in the Rockies, but the margins were up. So when will revenue return? So there's still a lot of questions out there, but if you were talking to businesses, what kind of tips or advice would you tell them to continue to think and move forward?
Navigating Uncertainty with Expert Advice
00:22:10
Speaker
So I think the period of evaluation is not over. And if they have not moved through, which I'm assuming they already at this point have a significant deep dive into their business, not only within the financial area, within their their operations, now is the time. And if they need to have a sounding board, you know, you call somebody like us or you go
00:22:32
Speaker
Talk to your banker, you need to talk to your lawyer and have somebody sit down and give you that outside view from a cashflow standpoint, the same thing. The tools exist out there and there are a number of organizations who are happy to help. It's funny, we actually do work with a couple of the community organizations here in town just to sit down with people and help them move through like a 13 week cashflow.
00:22:58
Speaker
So something that's very easy for us is shockingly not so easy for others, but we want to be able to help. I think they also need to be very communicative, communicated to their employees. It's don't stop that. We've all been so open with what's been happening, but I think as we go forward, that needs to continue.
00:23:19
Speaker
And then there's still a lot of dollars that exist within the system. And I know here in Denver, like the downtown Denver partnership, the mayor's office, their economic development, there's dollars there. And companies really need to start looking into the programs that sit and taking the dollars where they need them. But we're reopening.
00:23:42
Speaker
I want to thank Celia for joining us on today's episode. For more about her and her company, check out the Dietrich Partners website at www.dietrichpartners.net. You can find Celia's profile and more about their business. Thank you as always for listening to the Market That Moves America. Never miss a new episode. Subscribe to the podcast on iTunes, Stitcher, Google Play, or wherever fine podcasts can be found. Or you can subscribe and learn more about us at our website, middlemarketcenter.org.