Transcript
Speaker: A CEO change, an M &A, the sale of the company, a restructuring. People think of these events as being rare and unusual, but in fact, they're very common. We'll learn about how middle market companies navigate major transitions on the next episode of The Market That Moves America. Welcome to The Market That Moves America.
Speaker: a podcast from the National Center for the Middle Market, which will educate you about the challenges facing midsize companies and help you take advantage of new opportunities.
Speaker: Today's podcast is about major business transitions and how middle market companies navigate them. I'm Tom Stewart. I'm the executive director of the National Center for the Middle Market at the Ohio State University Fisher College of Business. We're the nation's leading research group studying mid -sized companies, which account for a third of private sector employment and GDP and the lion's share of economic growth.
Speaker: It is the market that moves America. The National Center for the Middle Market is a partnership between Ohio State and Chubb. With me today are two special guests, George Calfo, who's a managing director at SunTrust Robinson Humphrey, and Russell Sanders, who's a senior VP at SunTrust. Both are part of its M &A and transition advisory groups, and they were key advisors and helped sponsor the study's brand new report, Preparing for Major Business Transition.
Speaker: George Russell, welcome to the Market That Moves America.
Speaker: Good morning. Good morning, Tom. Nice to be here. Thank you, Russell. And thank you, George. George was the first first. Gentlemen, business transitions is a broad topic. It encompasses everything from selling the business to a planned and predicted CEO retirement. It can be bringing in a new investor, restructuring, acquiring a major, acquiring a new subsidiary. But while these events are big ones,
Speaker: They're also very common. They're sort of like once in a lifetime changes that happen a lot more often than once in a lifetime. Can you talk a little bit, George, about the frequency of these big transitions in mid -sized companies? Sure. Thanks, Tom.
Speaker: We would say that this is a topic that's on the minds of most of the clients and companies that we talk to. We would characterize the market environment as very active at the present time. We actually think that there are a number of factors that conspire
Speaker: to drive the level of activity that we've observed really over the last, I wanna say five -ish years. It seems like the pace is accelerating to us in terms of the velocity of conversations we're having and events that companies are facing. And in many ways, we think that those factors have a lot to do with
Speaker: You know, the business cycle, the economic environment that we're in, there's a demographic dimension to this, we believe. There's a whole host of consolidation occurring. There seems to be a consistent barrage of solicitations that are occurring, inbound solicitations.
Speaker: And frankly, we also think that most of the business owners that we speak to about this topic, frankly, remember the recession and what it did to their respective businesses. And so all of those factors we think are driving what we think is a very active market environment on this topic.
Speaker: One of the data points in our study was that typically a middle market CEO says that he or she gets pinged about a deal between one and two times a month, which struck me as being an awful lot of incoming phone calls. What are some of the other factors driving that? I know that there's an awful lot of money sitting on the shelf waiting to be invested.
Speaker: And that would be one of the things. And you also mentioned demographics. Is that I'm a boomer. Is that about is that about boomer retirement or is about. Yeah. We actually I think it's a it's it's all those things that you mentioned. And if I if I go back and sort of repeat some of the things that you mentioned, there is sort of unprecedented liquidity in the system.
Speaker: And if you think about central banks, frankly, globally being very accommodative, there's a lot of money in the system. Rates remain low. Folks are looking for a higher rate of return on their invested capital.
Speaker: private equity investors have done very well relative to other asset classes, which is driving more dollars into that alternative asset class private equity. And so private equity firms are now sitting on unprecedented levels of capital to be deployed. At the same time,
Speaker: you know, the business owners that we are talking to and the conversations that we're having, what we're reading, all suggest that, you know, most business owners who are baby boomers, and there's a large percentage of business owners who are baby boomers, you know, expect their employment horizon to be inside of the next eight years.
Speaker: And so you've got capital looking for deployment and you've got business owners thinking about what they're going to do, most of whom are enjoying really good, a very good business environment for their company. And so their companies are performing very well, which sort of speaks to the valuation opportunity that folks can realize.
Speaker: And even if I'm not thinking I might sell and sell at the top, I might just say, it's time to pass the business on. Scottsdale's looking pretty good to me right now and a little more golf and fewer meetings and just a plain old ordinary transition. It's funny that you say that. It is striking to us. We did some work with you all, as you'll recall,
Speaker: a year or so ago, and it was really interesting to us that of the population of folks that we surveyed that had actually transitioned in the prior three and a half years, almost 50%, it was 45 % said that they actually had no intention to transition at the beginning of that year where they sold their business, but they simply received an attractive offer and they took it.
Speaker: which really speaks to what you're saying. There's a reason people are receiving, on average, one to two calls a month. It's because it's proven to be a pretty effective strategy for a number of private equity investors. Yeah, Russell, I was gonna pass it on to you. Yeah, I just second everything that George just said. And I think when you look at the survey and you talk about the frequency of transition, I think that
Speaker: I think the numbers are surprising. You know, 77 % of the respondents said that they either experienced a transition in the past years or expect to experience a transition in the next five years.
Speaker: and a lot of them say that they had more than a lot of them say that they had more than one reason i might have had a new anti -structuring and they've had an issue and major acquisition and uh... and a major and i think that is a really really interrupting the cookbook uh... i think the number was fifty four percent in our survey had one had a transition in the in the last five years and expect to have another transition of the next five years and
Speaker: To me, the interesting fact about that statistic is that it demonstrates that often we think of transitions as kind of a one and done type thing. But it's not. Transitions often are processes that go on for years. You may have one type of transition that's really getting yourself ready and the business ready for a second transition.
Speaker: You know, business owners need to understand that when they're beginning to think about, you know, life after the business and what they're going to be doing next. To understand that this is a, often, is a process. Yeah, so really these unusual events are actually business as usual. So that's an interesting way of putting it, yeah.
Speaker: So what should I do? Let's put me in the position of a business owner or a business leader. I should expect a transition. I've likely gone through and I should expect another and expect another after that.
Speaker: Russell, what should I be doing about it? I think that is a good point is understanding that the business community, the business environment today is very dynamic and change is always in the cards in order to stay competitive. We talked about the demographics of the Baby Boomer generation, which owns these businesses or is running these businesses.
Speaker: But, you know, I think the most important thing is to recognize that this is a very dynamic environment that we're living in today and to prepare for the transition, to get ready and to start the process early. And I think that's another interesting statistic that came out of our survey is that the average time that
Speaker: owners are preparing for a transition is about one, a little over one year ahead of the event. Is that too little or too much? To me that is too little. That's not giving owners enough time to think through the myriad of issues that come up on both the business side and on the family side, on the personal side of things.
Speaker: You know, in our survey we go through and we ask about, you know, what the view is or what they expect the challenges to be going forward. And it's a long list if you look at it. And so there are a lot of things to think about on the business side and on the family side. Some of these things are not easy answers. They take a lot of soul searching and one point
Speaker: three years on average is just not enough time to be able to think through all of those issues. And you want to be prepared because I think the other thing that we all understand, maybe we don't like to talk about it out loud, but the unexpected happens all the time. We talked about the frequency of
Speaker: You know, paying the business owners are getting health issues or always the dynamic family issues or always something that aren't easily anticipated. But preparing for a transition, preparing yourself for a transition, preparing the business for a transition, starting that sooner rather than later, I think are best practice.
Speaker: Do you know one of the things that struck me in this study, and we all know that preparation is a good thing, but we also know that one of the things that really comes out in this study of major transitions
Speaker: in business is the value of preparation. I mean, we've been through this. You guys are going through a merger right now. I've been through it and you all know the level of anxiety that comes in a transition
Speaker: But you also know and you also hope that there is greener pastures on the other side of that fence, of that transition fence. And the data in the study show that nine out of 10 executives who say that they were very well prepared said that the transition was a success. But only one third of executives who said they weren't well prepared said the transition was a success.
Speaker: That's a huge value to preparation. There's no question about that, Tom. What was fascinating to me was buried in the data is this statistic that folks that had experienced a transition in the last five years tended to be more prepared for the one that's coming up in the next five years. It is interesting to us that
Speaker: If you weren't prepared and you went through it, there seems to be a much more deliberative approach. Getting back to something Russell mentioned, these events actually are not events. They're actually part of the regular business process. And it's interesting to us in the data that those that had experienced a transition in the recent past seem to be more deliberative about their preparation.
Speaker: in the view that something would likely occur in the next five years. So what are the elements of getting prepared? I mean, we talk about in the report and the study about a green zone and a red zone. And the green zone is when there's no immediate transition on the horizon, but it's time to prepare.
Speaker: We could go on for hours on this, but what's the down and dirty checklist of what you ought to do to start that preparation process? Yeah, and Tom, yeah, and you're right. That's a really big process. And kind of going back to what we were talking about earlier and the average prep time, the 1 .3 years that came out in our survey, that was 1 .3 years before the event happened.
Speaker: not 1 .3 years before the transition event began, which I think is an important point to highlight is because when you get to the, you know, when you start a transition process, you know, it kind of develops a life of its own and it becomes oftentimes all -consuming
Speaker: And you're being reactive, and you're responding to inquiries, you're getting the right reports, and you're cleaning up things where you need to clean up things. And it kind of takes on a life of its own. And so you're being more responsive. And so we often talk to clients, and we call that the red zone. So you're in the thick of it. You're in the red zone.
Speaker: We often talk to our clients about the green zone and the red zone. The red zone is just explained, but the green zone is before that. While the business is operating business as usual, there's no transition event that's about to begin. It's in the green zone that it's when you really need to start thinking about and preparing for a transition.
Speaker: And we often talk to our clients, you know, because, you know, how do you start it? And we tell them, well, begin with the end in mind. That's the phrase we use often. And by that, I mean, think about, you know, what is it that you want to accomplish in all of this? Well, what is it that you want to be able to provide to your family? How do you
Speaker: what's the future vision for your employees and the relationships you built there, the customers that you've worked with, your community and the involvement in the community, and also looking at the business itself and the operations and financials and getting a sense of where you're at in the industry and just the overall economics.
Speaker: You know, the quick, down and dirty checklist, you know, on the green zone, it's, like I said, number one, is start with the end in mind. Figure out all of that stuff that I just said. Begin to think about it. And begin to put a plan in place and realize that you're not going to come up with the final answer, your first attempt at this. So this is going to take a little bit of time and communication with all the relevant people in your life on your family side and the business side.
Speaker: So start with the end in mind, figure out who the decision makers are going to be, who are the relevant people that are important in this type of decision, and begin to bring them into your tent and to have a conversation with them. Like I mentioned, clean up the books, look at the books, the management, your key employees. Do you have agreements in place to ensure that they'll stay around
Speaker: And I think another very important thing to do at this stage is to look at your advisors that you're working with and to figure out if you were to go through a transition, do you have the right advisors in place? And often when we work with clients, we discover that they're working with the same advisors that they've been working with for years.
Speaker: And those advisors know the business frontwards, backwards, and sideways. They grew up with the business. But they may not be necessarily deal -savvy advisors. It may not be going through a transition. It may not be something that they do on a day -to -day basis. And so it may be necessary to figure out how you supplement those advisors, not replace them.
Speaker: but how you supplement. And then finally in the green zone, you know, deepening your relationship with your customers, ensuring that the business is on sound footing and moving forward.
Speaker: Let me interrupt, Russ, let me interrupt for just a second. What really is interesting about that list, which talked about getting the end in mind, which I can think of as strategy, right? Decision rights, tightening up management, making sure you've got the right team, and really focusing on your customers. That's all good for business anyway.
Speaker: I mean, you're basically putting a transition lens on it, but this is also stuff that is going to improve your business, so it's not like you're going to be taking your eye off the ball. You're actually going to be adding a little more power to the ball with the operating of the business itself. No question. I think you operate the business as if a transition is right around the corner, whether one is or isn't.
Speaker: and let me give you a quick story about what what i mean by uh... plan with the end in mind um... george and i both met with the client and he had set a plan in place uh... years ago and he had by the time we met with them in the transition was about to happen he he had already exceeded the plan he had already accomplished everything it was that he had that he wanted to accomplish he had it
Speaker: He had it crystal clear. He had it laid out. He had been focusing on it for years. And his viewpoint was, I'm good. No matter what happens in this transition, I don't need to try to squeeze the last penny out of a buyer.
Speaker: I have already accomplished everything that I wanted, that I set for myself. I've already accomplished that. And you could just tell that the ease in his mannerisms and just that it was not a very stressful event for him. This was something that he had thought about. He had put a plan in place on both the businesses.
Speaker: And his family. And I can't trust that enough, the importance of looking at, you know, what are you going to do with yourself and how is this going to impact your family and what do you want them to get out of all of this? But he had that plan in place and it was just amazing to see him and to talk to him and to listen to him because, you know, he had the checklist and he had put the checknecks to all of those and the transition was not a very stressful event.
Speaker: That's what I think everybody wants to accomplish, and that's what he did, and I think that that's a good practice for all of us to follow, is to begin early. Think about what it is you want to accomplish. What do you want to happen on the family side? What do you want to happen with the business going forward? And this came out in our survey, paying particular attention to the human side.
Speaker: your employees and your customers and your vendors and people that have helped you along the way. But yeah, starting early and being prepared and acting out that the transit is going to happen even if one doesn't.
Speaker: You know, it's interesting, I'm sort of thinking about watching a world -class athlete, a skier go down a hill and you think, wow, they make it look easy if they've prepared well and the rest of us are crashing into trees and falling down and breaking our twisting, our ankles are worse. And I think that that, we don't have a whole lot of time, but that is that red zone situation that a lot of companies have, that 45 % of companies who weren't expecting to sell, for example, but
Speaker: The doorbell rang, or the phone rang, or somebody got sick and it happened. Suddenly, unprepared, you find yourself in the red zone. It's happening. The clock is ticking, and you have no idea what time it is. What do you do? Well, I think it's in person. No, go ahead. Go ahead, Russell. Go ahead, Russell. Yeah, I was going to say, first and foremost, you know, don't panic. And begin to build a war room.
Speaker: And you need to figure out who are the key advisors that you need to work with internally and externally. And recognizing that this could be time consuming, but the business needs to continue to run day to day. And then you need to figure out what your top priorities are. And what are the most important things that you want to get out of this? And then kind of going back to what I mentioned earlier,
Speaker: Make sure you have deal -savvy advisors as part of your team. People that have been through this that understand the lingo, maybe know the buyers, know what they're thinking about. And then finally, communicate. Communicate with the key employees within the business. Communicate with family members.
Speaker: One of the things that I found in the survey that was really interesting and in my own experience, too, is that when these things happen, people tend to be worried about rumors, worried about confidentiality, and they tend to keep things really close to their vest.
Speaker: And meantime, everybody else in the company smells something's going on. Why is the door closed all the time? And I think that it's a really interesting question about how you find that right balance between protecting the confidentiality you need to protect and making sure that you're communicating enough and maybe even more than enough
Speaker: because otherwise people will imagine the worst and there go your best employees or there goes all kinds of things that may damage the viability of the company going forward. I think that's a fair statement, Tom. You know, as Russell was talking about the green zone and the red zone, you know, the interesting thing to us about the whole topic of transition is it is inevitable. And so because it's inevitable and our data would suggest it's
Speaker: rather routine for businesses to encounter differing types of transition. It just seems like stitching in
Speaker: transition planning as part of the fabric of a business. And by the way, many people think private equity are the most sophisticated investors. And it's not surprising, and the data supports this, that those companies in our survey that had private equity as part of their investor group actually were better prepared and had better results through transitions.
Speaker: simply because they have familiarity with it and they recognize that it is inevitable and their results are, you know, benefit as a result of that. Yeah, private equity transitions what they do for a living.
Speaker: Gentlemen, this has been an awesome conversation, and I hate to wrap it up because, as I said earlier, we could go on for hours on this. But let me try to—a few highlights, and George, you just hit number one. Transition is inevitable. Not only that, it's pretty frequent.
Speaker: It seems unusual, but it is business as usual. Russell, I think you talked an awful lot about the key elements then of what needs to be done to prepare for these transitions, building the internal team and the external team, bringing in advisors who
Speaker: have experience with these kinds of transitions, whether it's a CEO succession or restructuring or a sale of a company. It can be all of these things have a similar need for expertise that you may not have internally.
Speaker: instilling this as a process that will not only help you cope with the inevitability or the transitions when they come as they inevitably will, but also will help you run a smarter, tighter, more profitable ship going forward, which by the way also means that when a transition comes, you're probably going to get a better price because you're running a better business in the first place. Is that a pretty good summary, guys? I think so.
Speaker: I think that's a great summary. I think that preparing for transition and recognizing that transition is a very broad term, but preparing the business if it's going to be sold is beneficial even if you're not going to sell the business, even if you're going to keep it within the family. As, Tom, as you said, the process that we've been talking about is really making the business stronger and making the family stronger.
Speaker: So, George Calfo, Russell Sanders from SunTrust becoming truest as it merges with BB &T. I want to thank you very much. For more about SunTrust, now truest's transition advisory services, you can check out the business transition section of the SunTrust corporate and commercial resource center.
Speaker: And for more about middle market transitions, check out the NCMM's new report on the topic, which you can find on our website, which is middlemarketcenter .org. Thank you for listening to The Market That Moves America. Never miss a new episode. You can 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, which is again, middlemarketcenter .org.
