Welcome back to Count Me In,
the podcast focused on management accountants driving business forward.
I'm Adam Larson.
Coming up I speak with Ryan Goral about unlocking the full potential of small
businesses through mergers and acquisitions.
Ryan is the founder of G-Spire Group,
a consultancy focused on companies often overlooked and underserved when it
comes to corporate development services. When it comes to M & A,
big companies all get the headlines. The reason is pretty simple.
A deal worth billions of dollars will always draw more attention than a deal
that's only worth millions.
This focus has contributed to the perception among many business owners that
they're simply too small or inexperienced to participate in M & A.
Ryan explains why M & A is a strategic option relevant to virtually every
business and highlights the critical role management accountants play in
corporate development success. Let's start the conversation.
So Ryan, I just wanna thank you so much for coming on the podcast today.
We are gonna be talking about mergers and acquisitions today,
and I was looking at the recent Bain and Company Global Report from 2021,
and they were saying that the total transaction value for M & A was an
unmatched $5.9 trillion in 2021.
So it seems that M & A is on its way back.
The last conversation I had about this was back in 2019 and it was much under
that number. So maybe to start off you talk a lot about,
in your business about the benefits of growing your business through mergers and
acquisitions. So maybe you can start by covering what are the benefits?
Sure. Thanks for having me. Yeah, the, you know,
companies can grow through acquisitions for a number of reasons and it's
strategic, you know,
really what is their strategic reason for growing through acquisitions?
Yeah, trillions of dollars. I think the M & A market's been real,
really red hot. You know, the market that I serve,
I serve privately held companies that are on the, you know,
10 to 50 million in revenue range.
So my transactions I'm typically working on is way,
does not have a B or a T in the title.
But I think that, you know,
the last couple years we've seen a couple things that are driving M & A
activity. One has been the historically low interest rates.
So the cost of capital has been, you know, really,
really attractive for a buyer to go out and secure
debt and even equity for that matter to engage in
transactions.
That would involve buying a company as part of their growth strategy.
You know,
and the various strategic reasons or I guess categories if you wanna
call it that,
that a company would really wanna look at as part of a growth plan
that would involve M & A. You know,
you see companies you know that I think talent is
one, you know,
that I've seen companies wanting additional talent and maybe the labor force
right now, which it is, it's constrained.
So a lot of these companies have all the work that they ever would want,
but they'll have people in the labor to satisfy it. So, you know,
growing through an acquisition to pick up key talent is kind of one strategic
motivation. There's other kinda strategic reasons.
One being size and scale from a cash flow
perspective allows the company to, you know,
invest more into other certain strategic initiatives.
So size also equates to sometimes more value.
So if your company is trying to improve shareholder value, you know,
size does impact that value.
So you'll see kind of acquisitions as part of,
I just want to get bigger and grow. I try in my practice,
try to hone in the strategy a little bit more than just let's grow because you
wanna make sure the acquisitions are aligned with that strategic importance.
But the types of acquisitions typically see are you're buying a competitor.
So that's kind of market share strategy.
You see acquisitions that are maybe of a supplier,
so you call that vertical. You're trying to, you know,
own the supplier so you can enhance your own margins. You know,
sometimes you'll see a geographic strategy where a company wants to
grow into other geographic areas that are strategic for them.
And making an acquisition in those kind of geographies is sometimes the right
strategy. And then, you know,
really the last one that there's a number of reasons,
but the other one that comes to mind is, you know,
expanding your product and services to your customer base. So if you're,
you know you've got one product, one service that you're offering,
maybe your customer's constantly asking you for, Hey, do you do X, Y, Z?
And you're like, no, we don't do that. Go talk to ABC company.
Maybe it's a good strategy.
Go buy ABC company so you can have another product service to offer your current
customer base. So those are some of the strategic reasons that drive M & A.
But I think the trend that you mentioned to start off here was you've got cheap
capital and you know, as you get into bigger transactions,
you see, you know, if a public company has, you know,
a stock price that is historically, you know,
very high, sometimes they're using that stock as currency,
which is another driver of the activity. So there's,
there's a number of reasons, the amount of M & A activity that we've seen.
And the last one that I've seen and more that's more in my market is you've got,
you know, kind of an unprecedented amount of baby boomers retiring and
their business is typically their biggest asset.
So you're seeing kind of a transfer of wealth from one generation to the
next that's occurring cuz there's a good amount of baby boomers that actually
own privately held companies.
So you're starting to see that activity happen and I think that's
driving the market too.
Yeah, so there's a lot of great benefits out there as you've just described.
And so with somebody looking into, get into that,
one term that I've heard is corporate development. So why would that,
why would that matter?
Maybe you can start by defining corporate development in terms of M & A
and then why is that beneficial to develop to,
to why does it matter as a small to medium size business in your getting into
mergers and acquisitions?
Yeah,
so corporate development is really more of a term that you'll see in larger
companies.
These are companies that have entire departments,
corporate development departments, and they're these departments,
sole responsibility is getting the company ready and then sourcing,
closing and integrating acquisitions on behalf of the
entire organization.
So they are the M & A team of these larger companies.
They're just called corporate development department. In my work I've seen,
you know,
that that service doesn't really exist for those smaller
privately held businesses for a couple reasons. One, it's,
you know, you can't,
typically there's not enough resources to hire a full
time corporate development executive, you know
so, and then the other,
the other reason why you don't see it much in the the
smaller privately held company spaces, they're usually run by owner/operators.
And these are folks that are really good at running their business.
They're really good at managing their employees and customers,
and they tend not to have time or capacity to think about M & A
and how other, you know,
partnerships and alliances could be beneficial to them growing.
So that's just a capacity challenge.
And then there's a lot of these privately held businesses have never gone
through like a substantial transaction before.
So there's a lack of capacity and there's a lack of really kind of,
maybe we know how of going through a process of going out and
acquiring a business and making sure that it,
you do all the things that need to go into that transaction.
So why does it matter? It, you know,
I think there's a big opportunity for these smaller businesses and I define 'em
as, you know, five to 10,
up to 50 million in revenue is kind of the companies I typically am working
with. And the couple things that I see,
and it gets me really excited about bringing corporate development down to
lower middle market is one,
the amount of value that can be enhanced with an acquisition is
pretty substantial for a smaller business. You know,
if you're, you know,
running a flooring company that is a $10 million revenue, you know,
maybe you're doing roughly, you know, a million bucks of EBITDA or cash flow,
you might be worth four or $5 million.
What happens as you get bigger from this size
is, let's say we go out and make a couple acquisitions that involve, you know,
you know, half a million dollar cash flow businesses.
So let's say we do two and we get the 2 million of annual regular cash flow.
Well, that multiple just went from four or five to six or seven,
and the multiple goes up due to a couple reasons. One,
there's a lot of buyers looking for those bigger cash flowing businesses.
Two,
the size of your organization requires you to professionalize the
business.
Which a lot of times these transactions will remove the owner operator from
being the business being so reliant on the owner operator and moving them.
Really, I call it, you know,
it's a transforming business owners into more of a CEO.
And that process also improves the value of the business
cuz a buyer typically wants to see the organization be, you know,
efficiently run, no reliances things that they would if the seller,
the main owner goes away, they still wanna see the asset performing.
So bringing corporate development or helping companies grow through acquisitions
is both a value enhancer. It's a lifestyle enhancer to a lot of my clients.
You know,
they do want to get out of the weeds and move into more of a CEO strategic role.
And those are, you know, a lot of times the main drivers. And then the third,
it's, it's a risk management. You know, if you're on the smaller end,
then a Covid hits and you, you know, stuff comes to a halt,
you know, business is at risk of going under the bigger you are.
The thought would be hopefully you're got a more diversified customer base,
you've got more cash flow, hopefully you've done some more retainer.
If you've done a good job retaining earnings and maybe you've got some cash,
something like Covid hits,
the risk of you going down is perceived to be less.
And so those are the main reasons why it is relevant to these privately held
companies.
So where does the accounting and finance professional play into this? You know,
it sounds like they would be be part of that corporate development team in the
bigger organizations, but if you get down to the smaller organizations,
sometimes your accounting a finance team is one or two people,
is your CFO who wears a number of hats,
can maybe we talk about where the accounting finance team comes into play
because mergers and acquisitions have to do with transactions and money,
and that's your accounting and finance team is helping analyze that, you know,
making sure everything's in place.
And so maybe we could discuss that a little bit.
Absolutely.
So corporate development supplements and helps the
accounting finance function. You know,
and there has to be a lot of collaboration.
So a lot of the strategy and the growth and the projections
that go into creating a good M & A plan largely
is coming out of the financial side of the business.
And when I first start kind of onboarding a new client,
the first thing I start with is understanding their vision and their strategy.
But also, you know,
are there areas within the business that really need to be shored up before we
actually go out and combine company A and company B, you know, and that largely,
and this has happened, you know, the financial function is not,
you know,
maybe it's understaffed or there's certain things about
the finance function that isn't ready, you know, reporting what have you,
you know,
those are things that are hugely valuable and needed as part of
growing through an acquisition.
So having a good accounting and finance team already in place,
having good management controls good reporting,
all of those things are super helpful and needed to,
for me to jump off and go do my work and go find a company to buy and do all
that stuff. The other places, you know,
once you do locate a company and you have a conversation,
you go under a letter of interest,
there's a due diligence process on the target company,
and a big chunk of the due diligence is financial.
There's plenty of other stuff that goes into due diligence,
but the financial piece is big.
So having a strong accounting and finance team that has the capacity as well,
so fully built out to not only continue to run,
you know,
the accounting and finance controls of the business ongoing,
now they're asked to, to help with some due diligence process.
So you know, having folks that are strong both,
you know, on the reporting, but also the finance side,
the projections and understanding how to talk to capital
is a huge component. And then the last part is, you know, now we've,
we combine companies, the accounting and finance team,
maybe there were combining departments, so now we have to create new processes,
new procedures, new reporting, everything kind of has to get pulled into one.
And again, I think, you know,
having strong accounting finance function is probably one of the
most important things you can have if your company is growing through an
acquisition.
So that really makes sense of where you've shown how the accounting and finance
team kind of fit into that.
But when you have the smaller organizations and you know,
what you do in your organization,
how do you kind of fit in the midst of all of the accounting and finance team,
you know, their corporate development?
Where do you fit into that as you're helping organizations?
So what I do with my clients is I come in as a fractional executive,
and it's a fractional corporate development executive,
if you wanna call it that.
But I'm coming in as part of the management team to specifically drive
the strategy and execution of their M & A strategy.
I'm not coming in and, you know,
doing accounting and finance, it's, that's not my role.
I work closely with accounting and finance and there has to be a good
partnership there. Of course,
there's a large chunk of accounting and finance that
I don't do, and it's just not, it's not my lane, if you will.
So as a fractional executive,
it's really important as I come in to understand everyone's roles and
responsibilities, who's doing what.
There is a little bit of a overlap with the work that I do initially
with my clients, which is really more of a strategy and projection exercise.
It's a where are we going, how are we gonna get there,
what's the projections look like? A lot of times that's being done by the CFO,
sometimes I'm being asked to help the CFO prepare those projections.
So if there's a capacity challenge with the existing team.
So it's really a collaborative arrangement across not just
accounting and finance,
but all the other executives that are involved in management that are involved
in my clients. It's a team based approach.
And you know,
there's a lot of the corporate development work that I'm doing that I think most
accountants and CFOs don't wanna do. You know,
it's building the corporate development plan, the target list,
doing the outreach, you know, negotiating structures, you know,
some of the real kind of heavy lifting on going out and finding companies to
buy.
So it's very complimentary and that's how I typically work with my clients.
That's great. So something that came to mind as you were talking,
how important are strong internal controls within our organization as you're
going looking to do mergers and acquisitions? I know as you know,
as IMA members know,
internal controls are hugely important within an organization,
but I can only imagine they can be even more important as you're going into a
merger and acquisition.
Yeah, it's,
it's imperative because as you and your,
you know, listeners know that it is super valuable and it's a risk,
it's a risk management thing of the business, and you don't have it, Right.
You've got gaps, you're not, you know,
there's a systemic risk to the organization. Yeah.
And when I, as I come in and I look at that,
if there's systemic risk of internal controls
there,
it doesn't make any sense to go out and find a company and put 'em together when
there's that big of risk and holes to be filled.
So a lot of times what I will do is as I start my process moving down the
road of executing an M & A strategy,
I'm working with leadership teams and management teams and financing and
accounting,
if there are risks such as internal controls that we need to shore it up
before we actually transact.
And there's usually a long runway between when I engage with a client and we
actually close on a deal. There can be up to, you know,
6, 9, 12 months sometimes before we actually get there.
So we have time to shore up some of that stuff. And a lot of times,
you know, even if we, let's say I work with a client,
we don't find something to buy right away. Some of this work is still valuable.
It's like, hey, let's shore this up to get ready for an acquisition,
but this probably should already be done anyway. So it, you know,
me coming in initially is, you know,
some of my clients will say it's just a third set of eyes just to, you know,
what kind of questions am I asking?
And it can be valuable just to have an objective onlooker
to make sure everything's, you know,
being done and operating the way it the way it should be.
Yeah. So regardless of the benefits,
you need to make sure your house is in order before you can start looking
basically.
Exactly. Exactly.
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