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Robert Ritch on Ask the Crowd interview:How do you build an M&A strategy?

Post Series: Q&A

Ask the crowd ♫ Ask the crowd – [Announcer] Welcome to the Ask The Crowd podcast, where top experts answer your business questions. And now, your host, serial entrepreneur and founder of Crowdsourcia, Mike Volkin. ♫ Ask the crowd ♫ Ask the crowd – [Mike] Welcome to Ask The Crowd, where top experts answer your business questions. Each episode features one question answered by multiple people. So you can get a different range of perspectives. To ask your own question, simply use a Twitter hashtag #askthecrowdpodcast or contact us at Crowdscouria.com. Today’s episode only needs one expert though, we’ve got Robert Ritch. Robert has founded and successfully exited four multi-million dollar businesses. He is a CEO and chairman of the board of Secured Equity Group, it’s a venture capital and private equity firm that has completed over a billion, that’s a billion with a B, in transactions. Rob has completed deals with Bain Capital, Trump and Berkshire Hathaway. Welcome to the show, Robert. – [Robert] Good morning, it’s a pleasure to be here. – [Mike] It’s awesome to have someone like yourself, a heavyweight like yourself on the show. What we’re talking about today is how to build a M&A strategy. And what a M&A strategy does, is it translates a strategic business plan into a list of target acquisition candidates and it provides a framework for evaluating acquisition candidates. So this way, everyone can be on the same page, from your management team to your board of directors, to your investors, and so on. So, how does one build a M&A strategy? So, we’re gonna go ahead and ask Robert that question, give a 30 second overview and then we’re gonna go ahead and deep dive into his answers a little bit. So, Robert, how does someone build a M&A strategy? – [Robert] First we target, we create a list of targets and then we investigate, do the research, before you ever even reach out to anybody, you need to go, everything about ’em, as much as you can prior to even reaching out, so you can nail your list down and have a plan of action. And then, don’t just look down as far as, everybody thinks M&A is always you’re just gonna buy up competitors. But we look at vendors, we look at, you know, when we also look at M&A as a way to look up because sometimes you can find a company bigger than yours that is looking for an exit or looking for a strategic partner in a certain area. But maybe the management’s getting older and it’s a private company and they’re looking for a strategic way out. And you can get financing for that. So, don’t always look at smaller competitors, sometimes you can go up as well. – [Mike] Yeah, that’s a really good point ’cause almost everybody when you talk about M&A thinks down but I’ll tell ya, I have a friend who’s an entrepreneur and he just acquired a company that was bigger than his because they’re owned by two people and they’re kinda having a little spat on how to grow the company, so they wanted both out of the company. So, we took advantage of that and bought ’em out. Let’s talk about Secured Equity Group. You are not only a venture capital firm but you’re also a private equity firm which, correct me if I’m wrong, that also means you buy the companies that you invest in, is that true? – [Robert] It is. We do both because we found that not only did we provide our investment targets in the venture capital a, pretty much a guaranteed exit at some point. But we also bought other verticals around them. So we constantly have a M&A strategy from the day we invest in a firm from the venture capital side, we already have an exit strategy planned and are already targeting verticals on the M&A side of it from day one. Before we ever place that investment. – [Mike] Wow, that’s great. So, how many people are on your team and I’m sure each of them have kind of a different view points on how you would evaluate an acquisition, right? So the board of directors might say, “Never pay more than two times “trailing 12 month revenue.” CFO will have something numbers orientated in mind. So, how many people are on your team there at Secured Equity Group and what does each of them bring to the table in terms of evaluation? – [Robert] You know, we actually, as far as, if we actually were classifying as employees per se, we actually have a very small team. And most of those are more on the admin side. I have my paralegal who helps me obviously with the legal research documents, things of that nature. We have our own in-house accounting and bookkeeping side. But most of the research and some of those things are actually done subcontracted out. When we identify a target that comes to us and says that they are looking for capital. Then we go out and find experts in that field, or retired executives, or people that have exited a company that are formally in that field. And then build a team accordingly from that. We don’t necessarily keep in-house all the time, we bring ’em in, bring them in as equity owners in that as part of the deal. And let ’em all grow together. We’re not greedy in that regard because I want everybody to have a piece of the pie because it changes the perspective. Down to the employees. We do a lot of employee ownership and options for the employees that are long-term, that stay with us and help us grow. – [Mike] That’s exciting. So, I just got back from an accelerated program, I don’t wanna say just but the end of last year. So, one of the things I learned is that a lot of entrepreneurs don’t know the difference between angel funding and venture capital, can you shed some light on that? – [Robert] Most angels are individuals, there are some angel groups out there. The average angel is an individual, the last statistic I heard, writes a check for somewhere between 20 and 25,000. Venture capital is more of a fund that comes together, the funds come from various sources depending it’s not a set industry standard. But we tend to come in, in larger amounts. And a more organized fashion. As far as taking an active role in the company, the venture capital usually always does and always wants a seat on the board and takes an active management role. Angels, it depends on the angel, to be very honest, and the group. But those are things you need to discuss upfront. – [Mike] Okay, is it safe to say that maybe the difference, one of the differences is that an angel primarily uses their own money? And a venture capital uses other people’s money, OPM? – [Robert] I would, although, more and more, the venture capital firms that are surviving, the principle partners in it start to fund with their own money. There is an industry trend that is changing out there. – [Mike] Interesting. Wow, so, in what ways can an acquisition be funded? So with cash, public, I’m sure you’re familiar with private equity since that’s a major part of your company. Are there any other common ways? – [Robert] You know, truthfully, we have never done a deal that there was just one way we did it. Usually it’s a combination of things and that’s truly where my strength and successes coming over the years is they’ve kind of nicknamed me the Puzzlemaster because if a deal is worth doing, I’ll figure out a way to get it done. And it’s a combination of debt, it’s a combination of going out and raising, you know, from cash on hand to debt, to reaching out to public companies that may wanna participate and maybe potentially be an exit or a future buyer and, you know, down the road, there’s just so many different options out there depending on what your long-term goal is to, you know, and it really, it comes down to. Every deal we do, we already have the exit pretty much set out and a couple of targets set that we’re gonna sell it to before we ever even acquire or invest. Because too many people go, bring us plans and go, and we say, “Okay, so what’s your exit?” “Well, we might go public one day.” Or, “We may just sell off to some bigger “competitor one day.” The problem with that plan is it’s just too vague. So, how do you build towards certain goals to know when your exit is? And if you wanna stay a mom and pop forever and you think you wanna own the thing for 50 years, that’s great. But then you’re really owning a job not a business and to me there are two different things there. Owning a job is the business is you and you have to be there everyday to make it happen. Owning a business is I can be in Europe and the business still operates everyday whether I’m there or not. And so, I wanna make that distinction. We really don’t look to own a job, we look to invest in businesses, where the management will run the business whether we’re there everyday or not. – [Mike] That’s well said, I like that nickname there, Puzzlemaster, that’s a good one. What are some good ways to develop an acquisition candidate list? I mean there’s a lot of entrepreneurs listening to this show right now, maybe they’ve owned their business for three years or seven years and they’re just starting to think about maybe being acquired or putting their business out there for sale. And they would like to know from you, from the venture capital perspective, what are some of the ways that you kind of evaluate what’s a good candidate to either invest in or bring on into Secured Equity Group? – [Robert] There’s a lot of public information. There’s a lot of information out there on just lists of companies. I mean everybody, if you’re looking at geography, just simply go to the Sectary of State site, type in the SIC code and they’ll give you a list of businesses. – [Mike] Okay. – [Robert] There’s list brokers out there. I could name several, InfoUSA is one that comes to mind that we use. Not exclusively, I’m not recommending ’em but that’s just one of many. And honestly, we go with whoever’s gonna give us the best price at the moment, we’re not married to any of ’em. But we may just pull a generic list of everybody that’s in a particular SIC code with certain criteria of income and various other parameters. And then start doing research on those firms accordingly. You do need to get set up with, and there’s a bunch of services out there but depending on what your budget is. So that you can pull the business credit, so you can pull UCC filings and things of that nature. Because you can shorten your list rather quickly and save yourself a whole lot of headache and due diligence clause, if you do that ahead of time. I know it sounds like a lot of money to sign up for these services but believe me, you save yourself more money doing that than you do the time value of sitting on the phone and thinking you’ve got a good prospect when the reality is you get in there and they’ve got lawsuits and they’ve got all kinds of debt and things that they didn’t necessarily disclose upfront. – [Mike] Sure, yeah, you don’t want that. – [Robert] And the other way to do it is if you’re willing to pay the commissions, is there’s, you know, acquire, not acquire but retain a M&A firm and let them do the searches for you. – [Mike] Mkay, so I never thought about it from that perspective. So you’re actually going out and researching based on something that, an area or an industry that you’re interested in. I just figured venture capital are always just pounded with pitch decks and proposals from companies, then you evaluate them as need be. We always hear about from bloggers and accelerated programs that the mentors say, “These VCs are so busy, “you’re lucky if they have a chance to “open up your pitch deck,” and this and that. So, would you say that you have an overflow of pitch decks? Or are you mostly doing your own strategy and research, and you kind of just ignore that aspect of whatever is emailed to you or a phone call that rings from an entrepreneur that says they wanna look into being invested by your company? – [Robert] And actually I was speaking more from the M&A side when I spoke of the list we pull. Because we are always looking for potential targets and verticals in growing. As far as the people that come to us and actually bring us the initial concepts. We’ve never run an ad in over 20 years. And we get, on average we get about over 100 business plans a month. – [Mike] Wow. – [Robert] Sometimes it’s a week, it just depends on what’s going on. And usually we don’t even take business plans directly from the initial source. They come through trusted advisors such as attorneys, accountants, people of that nature. We’ve actually even built a step in between. So, just to help filter a little bit because I really don’t want to, because if I build the staff to handle it and try to become Merrill Lynch or Goldman Sachs. I’ve gotta pass all those costs onto everybody else. So we really don’t wanna be that big firm. Our goal is to, and we’re different than most others but we really wanna stay in that VC and that small/mid cap range and build them and then sell ’em off to the bigger partners that you mentioned earlier on that we’ve done business with because they don’t wanna deal with those smaller deals. – [Mike] Sure. – [Robert] So, we’ve kind of, we’ve found that, early stage that they don’t wanna deal in but they want us to be there and then because of our relationship with them when those early stage come to them, they actually send them to us and say, “You need to go here first, “they’ll help you get there and then “we’ll bring you back to us.” So it’s kinda become, it’s all about relationships in this business. It’s not always about, the biggest problem a lot of entrepreneurs have is, it’s not the product or service, it’s not even necessarily their experience. It’s they just don’t know the right people at certain points. It’s they don’t know, if you take the show Shark Tank for example, and there’s things I love and hate about that show. – [Mike] Me too. – [Robert] In full disclosure, okay, I think it gives the wrong conceptual of what goes on in this business at times but a lot of it’s not just the money you bring, it’s the contacts, the way you can save ’em money through introducing them to this company or that company. That they would never be able to even to get on the phone with that person, much less get an in-person meeting with that person. – [Mike] Right. Yeah, and one of the things I don’t like about Shark Tank is they make it look really easy to get an investment but I know, I’ve had a few friends on the show, one of ’em was on twice, I was almost on it a couple seasons ago. One of the things they don’t tell you on Shark Tank is that 60% of the handshake deals you see on TV, don’t even wind up to be actual deals. When the shark gets done with the show, they actually do their real investment not the 30 second pitch they hear and they go, “Ooh, maybe this entrepreneur exaggerated “or even outright lied a little bit, you know.” Yeah. – [Robert] Well, it’s like I like to tell everybody, that’s just the elevator pitch but then they do the due diligence. – [Mike] Right. – [Robert] And, you know, we send out quite a few term sheets, you know, initial, handshake agreements is what I call ’em. But in there it plainly says in all our letters that this is subject to due diligence. Okay, and the offer is subject to change based on what we find. And the problem is a lot of investors get those letters and think they’re funded. And it’s kinda like the phrase I like to compare business is like potty training, it’s not over till the paperwork’s done. They think they’re done and in my opinion we’re just beginning. The hard work’s just starting. Because the document dumps and the things we’re getting ready to ask them, personal information, and all that I’m gonna require before we actually fund that business, it’s pretty extensive. Because I’ve got to know everything there is to know about them and be comfortable with them because it is truly almost like getting married, is the only thing I know to equate it to. Whereas, where they think we just got married, we just asked ’em on a date. – [Mike] Yep, I can tell ya, being married for a couple years, there’s nothing like being married but I’ll tell you, a little unique. So what do you require of your entrepreneurs who you invest in? Is there weekly updates, monthly updates, how does that go? And what is required for those meetings? – [Robert] I meet with every one of ’em every week. Now, a lot of it is by phone. And some of it is just a quick 15 to 30 minute call. And I do require that every by close of business Friday, that they submit, well, and I am a little loose around that, as long as it’s in by Saturday morning. A report, a written report that we then go over during that call. So we shorten the call up because that way they’re not having to tell me a bunch of mundane things. – [Mike] Sure. – [Robert] So, we have created a system, and we don’t even really do it by email anymore, we’ve actually modernized it to where it’s more of a online forum that goes into the database where there’s certain things I wanna know every time, and it’s more fill in the blank. And then there’s open conversation blocks. – [Mike] Oh, wow. – [Robert] And that way the whole team sees it, it stays in our project management tool and we truly treat it as an ongoing project management tool. And, but that way, I wanna touch base with ’em, I want ’em to know, A, I care and I’m there if you need me. But a lot of times they’re just telling me what’s going on and, okay, great, keep going, and that’s pretty, and sometimes it’s as simple as a five minute conversation. Other times we have to call what I call my meet, Jesus Meetings, you know. So, it varies. – [Mike] Yeah, I’m assuming, most entrepreneurs, I know this from experience are pretty responsible, they want their company to work out, of course, and get acquired and do you find that you provide an advisory role there? Or are they pretty much plug and play once they become an investment? Let them take the ball and you’re the finance guy, and that’s it, you get the updates. Or do you provide some kind of guidance advisory role or even work on your behalf to market and sell the company? Or the products of the company? – [Robert] We really don’t get involved in the product or service traditionally. We tend to take more of a support and an admin and CFO type role. We take a lot of the bookkeeping, accounting, legal, capital, if they need additional capital, if they need a line of credit, we take those things off of ’em, so they can focus on the sales and marketing, production, fulfillment, customer service roles. – [Mike] Okay. – [Robert] Because that’s usually where the entrepreneurs are the weakest, are on the first things I described. And that’s the things they usually hate. – [Mike] Yeah. – [Robert] And, those are the things that will get them in trouble as a business because they will tend to not do their corporate filings, they will tend to not keep their corporate record book up-to-date. All the things that from a legal and when they go to sell thing that will cause nightmares, you know. When due diligence starts on the exit side. So, we tend to take all those roles off and I have never had an entrepreneur ever go, “I don’t wanna give that part up.” They usually welcome the help on that side. We are there as far as to, I do give advice just from having been there before, on the sales and marketing side. We will bring in other experts and trusted advisors that I know, if their sales team needs help on different subjects, or training, or things of that nature. But that’s pretty much the role because we, again, we’re not, we’ve literally backed everything from lingerie to cattle ranching. So we’re not industry specific at all. We back the jockey not the horse. So we look for a management team that we feel can get there. And the example we use there is, Microsoft in my opinion, and please don’t sue me, Microsoft. Was not the best operating system, when they came out. But they became a monopoly and got sued for it, which in, you know, as bad as that is in the business world, that’s probably the biggest compliment you can ever get. So, there was something to their sales and marketing program and their ability to run the business. So, again, we look for a team that can pull it off, and that’s really what will get you there. Because some entrepreneurs think they have to have everything perfect day one, you’re never gonna have everything perfect day one. – [Mike] True, that was well said. I was gonna ask you, my next question is what type of companies do you usually, or not usually, but what kind of companies do you have in your portfolio right now and you answered everything from lingerie to cattle ranching? Is that what you said? – [Robert] We have literally done all of those, I mean the four that I built were very diverse. In and of their self, so. – [Mike] That’s great. That’s exciting to kind of have a Friday update, and one hour you’re talking about lingerie and the next hour you’re talking about cattle ranching. That’s quite an eclectic mix. – [Robert] Well, they would probably say that I’m ADD if I had to look So, I actually love the diversity for my own personal reasons because I don’t get bored. – [Mike] Sure. – [Robert] I love building ’em, I hate running ’em, personally. – [Mike] That’s well said. So, tell me how our audience can reach you if they wanna follow up with some questions. – [Robert] You can follow me on Twitter, Robert Ritch and Ritch is R-I-T-C-H. Or email me, rob@robertritch, and again it’s R-I-T-C-H, .com. – [Mike] Excellent, well that’s gonna do it for us today folks, thank you, Robert for your wisdom today, that was a really special episode to have you on. For more expert advice, head on over to Crowdsourcia.com, Robert is a Crowdsourcia expert. Be sure to go to Crowdsourcia.com/askthecrowd to be notified when another episode airs. Until next time everybody, keep learning, keep questioning, and keep profiting. ♫ Ask the crowd ♫ Ask the crowd ♫ Ask the crowd

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