Exit Group’s Unique Approach: Speaking the Language of Business Owners

The Exit Group, a premier buy-side M&A advisory firm, focuses on educating lower middle market business owners and investors about its unique and personalized alternative to M&A transactions. This Q&A with Jordan Wagner, co-founder and managing partner at The Exit Group, explains how the firm has built deep relationships with family and founder-owned businesses using their novel approach and a deep understanding of private business owner needs and objectives.

Founded a decade ago and based in Henderson Nevada, The Exit Group has carved out a niche as a boutique advisory firm which serves as an intermediary between institutional investors and middle market businesses that power 40 percent of the nation’s economy.

The Exit Group has advised owners on nearly 100 private company transactions with a total enterprise value of almost $5 billion since its inception ten years ago. A key to achieving this milestone is The Exit Group’s ability to navigate the unique needs of business owners and potential buyers. Finding a middle ground to enable a sale requires being bilingual – speaking the language of buyers and sellers and translating it so both find a common ground that serves as the foundation for a successful transaction. The Exit Group does not advise early-stage or venture capital-backed businesses.

Q: For a decade, The Exit Group has advised private owners on the sales process of their businesses. Can you tell us about how you work with these owners and address their unique needs?

A: Our transactions almost exclusively involve family or founder-owned businesses, and the dynamics of these transactions are quite often different from those of a typical sponsor-backed company. Of course, the purchase price of a business is a very important factor for owners. This is a once-in-a-lifetime occurrence, and they need to make sure they get the right price. But there are many other considerations such as dynamics and questions about whether an owner wants to continue working or retire. Another key consideration can be whether or not the transaction is good for their employees and culture. Many of these employees have been with the company for five, ten, sometimes twenty-plus years. We work hard to understand all of these issues upfront to ensure owners are comfortable with the transactions and the buyers are the right fit.

Q: What are some of the challenges that these owners face in today’s market?

A: One challenge is that so many different potential buyers and intermediaries are reaching out to business owners. Many of them sound and look alike, so it’s tough to cut through the noise and figure out who is a suitable acquirer in their respective industry, who is the right fit, who does what they say will do, and what deal will offer the best outcome over the long run for the business and its employees.

Q: The Exit Group views itself as bilingual – it speaks the language of a private business owner while at the same time it can translate the language of a financial sponsor looking to put money to work. Why is it so important to be bilingual?

A: Private Equity firms are always looking at businesses through the lens of risk aversion. They must focus on the negatives and “what could go wrong.” This can become frustrating for owners who may have a very successful business that has withstood the test of time. Entrepreneurs by nature are inherently more tolerant of risk as they have put in a lot of time, effort and personal sacrifice to build a successful business.
For example, an owner may send five years of financial information that shows strong growth, profitability, and a very impressive track record. A PE firm may review these financials and ask, “Why did revenue dip in June 2018?” That negative focus is a very common frustration point for owners. There is also often a perspective misalignment. At this stage, many owners often feel like “Hey, you called me. I don’t need to sell.” So, there is frustration that results from differing perspectives of buyers and sellers. We truly understand the owner’s point of view. They have built this business over a long period of time, and they do not need to sell. We also understand that it is imperative that PE firms get the right information to fulfill their due diligence needs and come up with a fair valuation they are committed to. Our job is to help the business owner navigate this process. We do this by expediting the steps and helping get to a valuation range quickly. This allows both buyers and sellers to determine if it is worth proceeding further to next steps. We are coaching owners through what is a normal request from a potential buyer and what is an atypical ask and we help them compile the requested information in a format that institutional investors are accustomed to. Our goal here is to make sure deals don’t break up over misunderstandings which can be quite common or recognize misalignments early to ensure time is not wasted with a group that does not fit.

Q: Why is it important to serve as an advocate for owners of private businesses?

A: There is a difference in perspective that often presents itself once negotiations begin. Many of the owners we work on transactions with are already highly successful and often financially comfortable. They are earning good returns owning the business. The decision to sell, oftentimes, is based on potential family dynamics and where they are in life. They consider the sale’s impact on the business itself and its employees.
PE Firms are accustomed to seeing transactions from investment banks where an owner has committed to selling the business and a formal sale process is being run. The business owners we have worked with for more than a decade typically don’t want to spend six months on an audit or preparing financials for a sale. They would rather have a few conversations and share some financials that are readily available to quickly get a sense of valuation and deal structure. When we started The Exit Group, we often heard PE firms say it was impossible to do this as they couldn’t stand behind an offer without receiving the required amount of data. However, we have found that many clients not only are able to respond quickly with offers, but these transactions also have the same close rate. We have seen no meaningful increase in transactions breaking up prior to closing. This leads us to believe that much of the industry has gotten used to receiving a level of data that is far above what is needed, mostly influenced by the investment banking processes. We find most business owners are reasonable. They will spend a finite amount of time to understand if they and a potential buyer are on the same page. After that initial interaction, the owners can decide if it is worth investing a lot of time to respond to the deeper set of diligence requests a buyer will eventually need. At the end of the day, they have a business to run, and time is an irreplaceable commodity.

Q: You have helped advise on 100 transactions involving private owners. Tell us about the common themes behind these sales. What is driving them? Is it a need for capital? A decision to retire and pass on generational wealth?

A: In our experience, the vast majority of transactions are driven by owner’s time of life – meaning are they ready to retire? What is their personal situation? What is their age? Family dynamics? These all play into their decision. Our average deal size is approximately $50 million. Transactions we have advised range from $3 million to $5 million to more than $500 million. It may sound odd that for deals of this size money isn’t the sole motivator for business owners, but we have found that to be the case. Most of the businesses we work with have significant cash flow. Therefore, these owners can continue to earn distributions annually or sell and invest those proceeds. Once they decide to sell, there is no doubt that price becomes the most important factor. However, in deciding whether or not to sell we have seen that it is personal timing more often than the macroeconomic environment that plays a key role. Once they make the decision to sell, they’ll move forward to see if they can find a group that can pay a fair price and is a good cultural fit.

Q: How have expectations changed for buyers and sellers in today’s high-rate environment?

A: Seller expectations have not changed dramatically. Most sellers understand the current market and are willing to wait it out if the valuation of their business has changed significantly. From a buyer perspective, we have found that add-ons and smaller deals have remained pretty consistent, while some of the larger platforms have been more challenging due to the high-rate environment. We do still have clients being aggressive and getting creative in how they get deals done, even larger platforms. Some firms are sitting on the sidelines, and it feels like others view this market as an opportunity. On our smaller deals, activity has not been impacted as much and deal flow continues as usual. This can be attributed to the “time-of-life” dynamic as well as buyers being able to fund smaller transactions out of cash flow or previously contracted leverage terms.

Q: What is your outlook for deal activity in the unique market where you operate over the next 12 months?

A: We believe that in the first half of 2023 we’ll likely have a lot of add-on transactions completed, and fewer platform deals. We expect activity to pick up considerably in the back half of 2023 and 2024 as our pipeline is building. We are seeing that there is still substantial interest among owners in selling their businesses. Ultimately, the fund sizes of the private investment firms have continued to grow, and acquirers are incentivized put the equity in their fund to work.

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