Note: The “Tale of Two Deals” series explores different aspects of two deals that we closed recently in the same week.
The world is rarely black and white, but with the two deals, one went to a strategic buyer that practically defines the term strategic, while the other went to a financial buyer, a classic private equity group with a dedicated fund (which means they have money) and intelligent, professional management.
The Financial Buyer
Economic Modeling Specialists, Inc. (EMSI) provides economic modeling products and services to a wide variety of customers. They collect and analyze labor and economic data, and although they use very sophisticated modeling, they output plain language results. For example, if you are an employer can choose a geographic area and do a what-if analysis by simulating moving a facility with 50 jobs to that area. The model may tell you that you will actually add 83 total jobs because of the net impact of creating those core jobs.
We brought EMSI to market and were able to bring ten offer letters to the owners of EMSI. Meetings and negotiations followed, and Tregaron came out on top. Purchase price in terms of cash, equity, notes and earnout is of course part of the equation, but Tregaron was also chosen because of the value that they could add to the company and the personal connection they were able to build with the owners of EMSI.
A financial partner was important to EMSI because the owners will continue to run the company and are not ready to completely cash out yet. So retaining equity was important for that proverbial “second bite of the apple”. Plus, they made it clear they were enjoying the ride and were looking forward to working with a financial partner to grow the company (but not on their nickel any longer).
Tregaron is a quality private equity group run by three bright young guys. I’ll call them JR, John and Todd, because, well, those are their names. JR has owned, operated and sold a business before. He is Tregaron’s frontman and was our main contact throughout the transaction. John ran the financial models (and re-ran the models, and re-ran the models) and watched out for their financial interest while Todd is a technical guru; he did the technical due-diligence on EMSI and also will be key in helping EMSI as it grows.
In comparison to a strategic buyer, a financial buyer does tend to focus on the financials and specifically the earnings. After all, that is exactly what they are paying for. You can be sure that at the end of due-diligence there is no question in anyone’s mind what the earnings really are. Tregaron actually hired a third party financial due diligence company that came in and really scrubbed the numbers. I was extremely nervous about that because I thought that firm might try to justify its expense by making sure it found something to subtract from earnings. And they did, but they also found some things that added to earnings, so in the end it was a wash. Whew.
Although focused on the numbers, Tregaron was able to step back and take a more holistic view when required, and I really appreciated that. After all, Tregaron is dependent on the owners and management of EMSI to continue to manage and grow the company, and it is not in their best interest to start off with a rocky relationship by arguing over a few dollars.
In contrast to a strategic buyer, which often can be thought of a 100% buyout, EMSI found a partner that can help finance growth and provide management assistance. It is a good match, and there is no question in my mind that EMSI will be a larger, more professional company in a short amount of time.