Latest / Exit Algorithms / 45 Years of M&A: How to Buy, Scale & Sell a Business for Maximum Value | Jeff Villwock (#60)
Transcript
- Pete Vera: Welcome to Exit Algorithms, the podcast where we decode what it really takes to unlock growth, streamline operations, and prepare your business for a high value exit. I'm your host, Pete Vera. And today I'm excited to bring on Jeff Villewaugh, known as the Acquisition Professor. Jeff has 45 years of M &A and operating experience, has closed over $2.6 billion in transactions. served as CEO of a leading textbook distributor, and now coaches entrepreneurs on how to buy profitable businesses and exit at maximum value. Jeff, so excited to have you here. Welcome to the podcast. Jeff Villwock: Thanks, Big. Great to see you again. Pete Vera: Yeah, you too. Yeah, I love your background. did a good amount of research for the show. We talked a few times as well. Can you start off by sharing your business journey? ⁓ think listeners will find that fascinating and there's some highs and lows throughout your career. Jeff Villwock: Sure, so I knew at a very young age I wanted to be an investment analyst. Those are the guys that get on CNBC and say, I expect this company to earn X number of dollars in the next quarter, or I've got a buy rating or a sell rating. That was the guy that I wanted to be at a very young age. And so got my degree in economics from Southern Methodist University and immediately started. with a regional brokerage firm as a junior analyst. So the first career, I'm on my fourth, but the first career was about 25 years as an investment analyst. And I ended up as one of the top five healthcare analysts in the United States, according to the Wall Street Journal, and was running the healthcare research group for Robinson Humphrey, which in Atlanta, which is part of Solomon's Smith Barney and Citi Group. So I left that in about 2000 to start an investment bank to do deals, primarily in healthcare. And so that launched basically a 20 year effort to do deals. And so I've represented tons of people on the sell side, a few companies on the buy side during that stretch of time. And in 2019, I got a call from a former investment banking client. And he said, Hey, I've got this business. think I want to buy it. And I've absolutely no idea how to do that. Can you help me? I said, sure. And that's what I do. So, you know, he sent me the material. I got back with him and said, Hey, A, I know exactly how to get your deal done. B, you've got a new business partner. And C, why don't you let me run it as a CEO? And this was a $35 million textbook distribution company. ⁓ with health science textbooks. So we sold virtually every medical school, nursing school, major college and university, all the major ⁓ healthcare providers like Mayo Clinic and HCA and all those guys, because they've got libraries. And we sold the textbooks. And so I ran that as CEO for four and half years. We exited in ⁓ late 2024. And I'm now in the process of starting my fourth career. And that is to ⁓ find businesses to buy primarily in health care services. Pete Vera: Awesome. Yeah, man, what an interesting experience during COVID as well. Jeff Villwock: ⁓ yeah, we closed this in June of 2020. Just think about what was going on in June of 2020 and realize all of our customers, colleges, universities, they were all shut down. There was not a single college or university open in June of 2020. And whether that was foresight or stupidity, I don't know, but we closed the deal. in June of 2020 and frankly Pete, you we had to get it financed three different times. Pete Vera: ⁓ man, ⁓ Jeff Villwock: Because of the disruption in the capital markets, our first lender dropped out seven days before closing. The second lender dropped out about five days after we were supposed to close. And so I needed to find a lender that didn't care about COVID. And so I found a family office that just wanted their pound of flesh. And ⁓ we got the deal done with them. Pete Vera: Wow. Wow. Yeah, what a tumultuous journey during that. Jeff Villwock: ⁓ that was unbelievable. Can you imagine spending six months on an acquisition being within a few days of closing? I mean, all the documents are done. And the second time, I had already signed all the documents as the buyer. ⁓ The seller had signed all the documents with this finance company and they woke up one morning and said they couldn't do the deal. Not fun. Don't recommend it. We did get it done. Pete Vera: Yeah, man, horrible. Yeah, you got it done. You persevered and found another lender. Did COVID affect the valuation of the company at all since it was physical book? Jeff Villwock: No, I really didn't. The university market snapped back very quickly. We didn't lose a beat. mean, the fall semester started a little late. Normally it starts in August. That year it started more in September, mid to late September. But sales volume was the same. mean, kids that want to be doctors are highly motivated. Pete Vera: Yeah. Jeff Villwock: Alright, they're going to go to school regardless. Same thing with nurses. I mean, so you didn't have kids dropping out of, you know, a medical school. As soon as the medical school decided they could be open, everybody was back. Pete Vera: Yeah, okay, that makes sense. It was a pretty resilient business model. And when you sold the business, how was that process? Are you exited? Was there any kind of lessons learned from that experience? Jeff Villwock: Yeah, I mean, two main lessons. One is we made ⁓ a strategic investment in ⁓ technology. There's realizing, you know, book sales are going digital. No surprise. You know, that was one of the reasons that the original founder of this business wanted to exit. And, you know, and we thought we could handle that. Well, at the end of the day, we spent a ton of money on technology that, you know, surprise, surprise the developer. didn't really deliver on. And, you know, it's the old adage, you know, if they tell you it's going to take a dollar and take six months, it's going to take two or $3 and it's going to take two years. I mean, it's, know, and unfortunately we got, we got caught in that. On the book side, at the same time, post COVID, there was a major shift at the university level towards digital content. And part of that was driven because Students were no longer buying as many textbooks as they had 10 years earlier because they'd gotten so expensive. So Amazon had a thriving business of selling used textbooks. Students would share textbooks. And the problem for the student was they were often two, three versions behind. And the professor says, hey, let's go to page 154. in his version that's page 154 and everybody else's version at someplace else. So the school started working with the publishers to say, we want on day one, we want digital content that we can give to our students. So every student will get the book. Won't be in textbook form, but every student will get the book, which frankly makes some sense. So that business, we needed to wind down because the market was clearly going away rapidly. we unfortunately, I mean, we had a process to sell the digital business, but the print side, we simply needed to wind down, which we did. Pete Vera: Hmm, I see. Yeah, so it was more of a, it was a natural kind of flow to eventually exit. Jeff Villwock: Yeah, that's exactly right. Unfortunate, but we didn't see any other alternatives. Pete Vera: Gotcha. And then you transitioned into advisory work primarily, right? Or... Jeff Villwock: Yeah, mean, coming off a written house, I was saying, okay, so what do I want to do when I grow up? And I realized I just had my 72nd birthday, but what do I want to do when I grow up? And healthcare services just kept on calling my name. So I took a couple of months to really review what's going on in healthcare these days, because I hadn't been in the research games since 2000. and talked to a bunch of people and figured out, know what functional medicine, also sometimes called integrative or regenerative medicine, is really the future growth vehicle for healthcare services. And so, you know, I've been looking for companies, I've, you know, signed seven LOIs last year. Five of them blew up in due diligence. You know, one of them, the seller decided not to sell. And, uh, and, and the last one, lost their medical director and one of their key marketing people as we were going towards the closing date. So zero for seven. That was not fun. Uh, we made an offer yesterday on a very nice business and, um, you know, I've teamed up with a physician. And, you know, so basically a two man team and, you know, and it looked like we're going to get that one. So. Pete Vera: I'm Jeff Villwock: Yeah, we'll see. Pete Vera: Yeah, ⁓ that's awesome. you alongside coaching people on buying businesses, you're doing it yourself. Jeff Villwock: ⁓ I'm doing it myself. That's right. yeah, and you know, through, you know, Carl Allen's dealmaker wealth society, I'm one of his coaches. And so I've got two different teams that I'm coaching. so I probably see 30 to 40 deals a month between what I'm originating myself and what other people in that program are bringing to me to, you know, coach and talk through what do I do with this business how do I get this finance can I get it financed so that's a lot of fun I enjoy that Pete Vera: Yeah. Yeah, I that's awesome. having that operator experience, former CEO leading a company too, I imagine that combined with your wealth of experience from your earlier careers gives you... Jeff Villwock: Yeah, question. I mean, that's very helpful. mean, you know, for some things to look out for. And so you can find the red flags really, you know, very quickly. Pete Vera: Mm-hmm. Yeah, ⁓ definitely. Yeah, speaking of red flags, what are maybe some things to watch out for? Say an existing business owner is trying to grow through acquisition. What makes a good target versus a bad one? Jeff Villwock: Yeah, great question. So if you're a business owner and you've got a business of enough size, and it doesn't have to be huge, but hopefully you're doing at least a million dollars in operating earnings or EBITDA, and you want to go out and buy something to scale that business, that's a great strategy, a fantastic strategy for a couple of reasons. One is, if you're growing organically at 10 % a year, I mean to double your business is going to take over seven years. If you compound it 10 % it'll take seven years. All right. If you buy another business. doing the same amount of earnings that you're doing, you double it overnight. And then you can grow at 10 % a year. So, you know, and the other beauty of acquiring another business as part of your growth, you know, if you're at a million dollars in Ibiza, for instance, you know, your multiple is probably going to be about three and a half. If you're at five million dollars in Ibiza, your multiple may be eight. It may be 10 times earnings. So not only do you grow the actual cash flow, but you're also exponentially growing the value, your value, the equity value of the business. Pete Vera: Yeah Jeff Villwock: So, but yeah, what do you have to watch out for? Yeah, make sure there's some compliments between the two businesses. Yeah, there's a lot of people doing ⁓ home services right now. So they'll get into A-Track. and then they can buy an electrical contractor. Why does that make sense? Well, because the same patient, or it's patient, sorry I'm a healthcare guy, the same customer base, you know, uses both. How about roofing? Still in the house. So you don't necessarily, if you're in the HVAC business, need to buy another HVAC company. If you can do that and extend your geography, terrific. But if not, take your current geography and expand the number of services that you can provide to the same customer that you have today. It's a great strategy. The thing you have to watch out for is ⁓ what I call integration risk. Okay, when you're buying any company, whether it's your first one or your 10th, Pete Vera: Hmm. Mm. Jeff Villwock: When you walk into the company you just bought, realize that everybody that works for that company assumes they're going to get fired. Pete Vera: Wow. Jeff Villwock: New owner coming in, I've known Joe for 20 years. Anxiety level goes through the roof. And that happened at Rittenhouse. It'll happen anywhere, anywhere, anywhere. And so the first thing that a buyer needs to do is confront that head on. Not making any changes, at least for the next 90 days. I always recommend that. You spend that 90 days getting to know your people, building a relationship with them, building trust with them. And worry about growing the business and all the efficiencies that you want to get. Worry about that on day 91. And that'll serve you very, very well. But when you're looking at a deal, whether it's your first one or your 10th one, I mean, the most, most deals fail to be acquired because the numbers aren't the numbers. Pete Vera: Mm. Mm. Jeff Villwock: What do I mean by that? They give you a financial state. And there's going to be all these adbacks to get their earnings to be as high as possible. Some of those adbacks may be completely legitimate. Pete Vera: Yeah. Jeff Villwock: I've seen one guy in a home service construction business two years in a row had $350,000 to $400,000 in adbacks because he was doing an addition onto his house. That had nothing to do with the business. Okay, so why is that a bad thing? I mean, obviously that's not going to happen after you buy it, but why is that a bad thing? Well, it's a little thing called tax fraud. Pete Vera: Yeah, wow. Jeff Villwock: It's not a legitimate business expense. He's taking it on a tax return. You buy the stock of that company and the IRS comes in a year later to do an audit. You're a cook. Pete Vera: Mm. Jeff Villwock: All right. So you need to understand that, okay, if the guy was doing that, he needs to keep the company, you take all of his assets and structure it as an asset purchase rather than a stock purchase. And at least that gets you one step away from the fraud that he was doing. I lost a deal. Remember I told you that one deal fell away. The seller decided not to sell. Pete Vera: Mm. Jeff Villwock: He had taken a multi-million dollar EIDL loan during COVID. Pete Vera: Mm-hmm. Jeff Villwock: 30 year, 3%. And did he use that in the business? Absolutely not. You know, they put several hundred thousand dollars in their pocket. Pete Vera: Can't beat it. Jeff Villwock: They took the rest of it and invested in annuities. You know, so at least a seven year hold period. When he finally figured out that he couldn't play games with the SBA and move that somewhere, or just sell me the assets and he would keep the company and continue to make his little payments. When he figured out he had to repay that loan at closing, he said, no, no, I'm not doing that. Pete Vera: Hmm. Jeff Villwock: So, you know, and he had two business partners, including his wife, who were about to retire. Sorry guys, you now can't retire. Anyway, stuff happens. So due diligence is very, very important. Make sure you know what you're buying. Make sure you can integrate what you're buying. Make sure that the systems that you have in your current business can talk to the systems in your existing business. Hire somebody as an advisor. Pete Vera: Yeah. Yeah, yeah, red flags. Jeff Villwock: You know, that does integration management. They're experts at figuring out systems and processes to make sure that the business can continue to run well and that you can continue to manage it. I mean, you know, the business I made an offer on yesterday is in the state of Texas. I'm not moving to Texas. My partner is in Utah. He's not moving to Texas. Well, how in the world are you going to manage a business in Texas? Pete Vera: Mm-hmm. Jeff Villwock: Well first, in the first 90 days, both of us are going to be down there a lot. And we're going to put systems in place. So when I wake up in the morning, whether it's on my iPhone or my laptop, I'm going to be able to see exactly what happened in that business yesterday. Exactly, you know, what each employee did in that business yesterday. And on a weekly basis, we'll get a different set of KPIs. On a monthly basis, we'll get a different set of KPIs. And so if something is going haywire... We want to know about that now, not when somebody does a financial statement three weeks after the close of the month. You know, you're on May 2nd. You're not going to know what happened until late June in most businesses. So we put in the systems to make sure that we know what happened, you know, on May 2nd, on May 3rd. Pete Vera: Yeah, smart. Yeah, great advice. I appreciate that. That was a really good answer. Yeah, so let's switch tracks and go say the business, they bought a bunch of businesses, they grew their EBITDA from 1 million to 10 million EBITDA, and now they're gearing up to sell to PE expecting a much higher. Jeff Villwock: Perfect. Pete Vera: higher multiple EBITDA arbitrage no longer 3, 4x, now they're shooting for 10x. What are some things that business should do to properly prep for a successful exit? Jeff Villwock: Great question. So if a business is properly structured for that transaction, you can get the 8 or 10x. If private equity comes in and they realize that it's not structured that way, maybe you get 6x. I mean, so we're talking about a huge difference in valuation of being properly ready versus not properly ready. Okay, and your broker or your investment banker, at 10 million you should have a high quality investment banker, ⁓ not a broker. To do your deal, ⁓ they should start prepping you. way ahead of the time that you want to get this to market. So if you're thinking about selling and you're two years away, that's perfect. That's when you should start selling, getting ready for sale. Okay. So, you know, then fast forward. Okay. We're, we're in, you know, almost in May of 2026. Let's say I wanted to sell in May of 2028. All right, what do I need to do in the balance of this year and all of next year to get ready for an exit in 28? Well, first you're to want to make sure that your 2026 and 2027 numbers are clean as they can be. Pristine numbers. The biggest thing you want to do is to reduce the risk. Pete Vera: Mm. Jeff Villwock: to the buyer. If you're looking at a business and it's very risky, you're going to set a value here. If you are looking at the same business and it runs like a Swiss watch, guess what? You're happy to pay up here because the difference between these two is the risk of a buyer having to take the business that's not run very well and put in all the systems in place. Pete Vera: Mm. Jeff Villwock: So, and generally, I mean, this is not a two month process, it's not a six month process. I mean, it's really a two year process. And to the extent that, you know, you don't have two years, all of a sudden you get a medical diagnosis and you need out in six months. And you do what you can do, but the same principle applies. You want to reduce the risk to the buyer. You want your systems to be world class. You want your accounting to be world class. You don't want somebody coming in here and looking at your accounting and saying, ⁓ my gosh, you told me that you had operating earnings of $10 million. No, you really had operating earnings of $7 million. Pete Vera: Mm. Jeff Villwock: So, you know, and if you're on the buy side, looking at these deals, especially tiny deals, I was coaching a guy, I don't a couple years ago now, brought me this lawn service company. On paper, looked fantastic. Fantastic. He's earning four or $500,000 a year. Nice, nice, nice business. All right, and so, you know, I asked for the bank statements. And I knew what the guy was taking out. He was taking out $150,000 a year. But he was earning $450,000 a year. Pete Vera: Mm. Jeff Villwock: And so I asked for three years for the bank statements. So I took the bank balance at the beginning of the period, the bank balance at the end of the period. And I just asked a couple of questions. How many distributions did you take or how much in distributions did you take over the last three years? Answer, none. How much do you think your capital spending was over the last three years just for maintenance of all your equipment? said, oh, I don't know, $50,000 a year. I said, okay, so in three years, you had $450,000. Now you were earning $150,000, so you $300,000 extra. Three years of $100,000 is $900,000. Minus $150,000 for your CapEx. That's $750,000. Question, where's the cash? Pete Vera: Mm. Jeff Villwock: You hadn't taken any out. His bank balance, by the way, at the end of the three-year period was actually lower than it was at beginning of the three-year period. Pete Vera: Mmm. Jeff Villwock: There should be $750,000 in the bank. wasn't there. That was a real quick process. I mean, and again, that's a kind of, you know, I didn't need to hire an accountant. Pete Vera: Yeah. Low on smoke. Jeff Villwock: We never got to the point of hiring accountants or lawyers on that deal. The guy had no freaking idea. what he was earning. His wife was doing the books. She was not a bookkeeper, obviously. So, you know, those are the types of things most deals that fall apart in diligence will fall apart because the numbers are not the numbers. Pete Vera: Hmm. Yeah. Huge, huge lesson. So that, that may be the, the number one thing to focus on is, is getting your clean, your financials in clean order. Jeff Villwock: Yeah, I mean, if you're a seller getting ready, for God's sakes, get a CPA. mean, somebody who's, you know, if your best friend is, you know, your part-time controller, that's nice, but not when you're getting ready for sale. Hire, you know, a real controller or a real CFO. You can do that on a part-time basis or fractional services. I've hired fractional CFOs before. they're not cheap. They're a whole lot cheaper than taking 6X for your business rather than 10X for your business. Make the investment and get your books situated. So by the time the seller, excuse me, the buyer is looking, you've got three years worth of really good financial. Pete Vera: Hmm. Jeff Villwock: And if you don't, at least have two years that are pristine. And explain it in year three. Yeah, my brother-in-law was the controller. We changed that out because we knew we needed a higher quality. And now we've got this accounting firm doing this for us and they've done a fantastic job. Pete Vera: Yeah. ⁓ that's great advice. Two to three years. Yeah, I think that's a good timeline too. Just also for other things that's gonna really increase the value, right? If they're, you know. Jeff Villwock: Exactly, exactly. So, I mean, what's the last sprint of growth, for instance, that you can get out of a company? I represented a company at one point. I met the CEO years earlier. He called me one day and said, Jeff, I've got a private equity group pounding on my door. ⁓ They want to buy the business. I think I want to sell it. Can you represent me? ⁓ sure. So we went through the process with the private equity group and we're getting towards the closing, not at the closing, towards the closing. And I said, Rick, you don't want to sell this business. to which he looked at me like, what, are you crazy? You get paid when I sell this business. Yeah, I understand. You don't wanna sell this business. And here's why. You're gonna work for this guy, because that was part of the deal. You're gonna work for this guy, and I guarantee you, in less than six months, you're gonna be pulling out your hair, screaming and yelling, and you're gonna be miserable. I said, look, I've got an alternative for you. I've done all your financial models. So I didn't leave that up to the company. I've always done my own financial models when representing a seller. And I now know that you got enough free cash flow. And this happened to be in an air ambulance business where they flew patients around the literally around the world and leered jets. And I said, you you can buy a new or used leer $750,000. Alright, you can put down $150,000 $200,000 in cash. and we'll get the rest financed. You can add a new airplane every three months. A new airplane is two and a half million in revenue, it's $500,000 in incremental EBITDA. I think I can help you double this business in the next two years. And then, Sheldon. and he thought I was smoking crack. Pete Vera: Yes, yes, yes. Jeff Villwock: Absolutely impossible. I'm a one-armed paper hanger. I can't do any more than I'm already doing. I don't want you to do any more than you're already doing. The limitation on your business is not you. The limitation on your business is how many planes you have. There's plenty of demand. You just need new planes. So I finally convinced him. We took that business from $10 million in revenue to $23 million in revenue in 23 months. Pete Vera: Wow. Jeff Villwock: And then we sold it to private equity, different private equity guy. And he walked away, you know, and I was paid, you know, and then an A fee, was paid a percentage of the upside and valuation that we created. But after all those fees, after tax, if you looked at what he would have done two years earlier to what he did when we sold it, he was just under 10 times more in his pocket after tax. Pete Vera: Wow. Jeff Villwock: So what was the difference? We got this thing ready for sale. There's something that we could do to goose the growth engine in that last year to make this a much more exciting business, a higher growth business. Pete Vera: Mm-hmm. Jeff Villwock: Now, it's the buyer's responsibility to then take that and continue going down that path. But we showed him and he executed on a growth path that was fantastic. Pete Vera: Keep going. Yeah. Jeff Villwock: So if you're selling a business, get ready. Figure out what you can do to, know, there's an old adage or saying in the investment banking world, you want to put lipstick on a pig. ⁓ What can be done to make your business look more attractive to a buyer? Do that. Pete Vera: Yeah, great advice, great lesson too. You don't want to lay off the gas when you're gearing up to sell. In fact, if you can show growth, then you're going to potentially 10x the value. Jeff Villwock: Yeah, and you just said something which is really important. So many owners, when they decide they want to sell, they've got one foot out the door already. You know, they're talking to me as, know, I want to buy their business. And I said, great. In fact, I had one last year. You know, show me your Q1 numbers versus Q1 a year ago. Oh, you're down 30%. Really? They work. I'm not touching that. I'm not touching that with a 10 foot pole. So, if you're selling, it's a race to the end. Like a marathon. I mean, they're gonna go at a certain pace, but once they see the finish line, they're gonna kick it in the high gear, if they've got that year left. get, you know, finish strong. Same thing with selling a business. Make sure you finish strong. Pete Vera: Yeah. ⁓ great, great, great psychology there too. I think that's, that's really valuable and not common, unfortunately, especially in the small business world with sellers. Yeah. And then on that two year timeline too, they can start to reduce the customer concentration if that's an issue or the owner dependence. Jeff Villwock: They're a small business world, yep. Exactly right. Precisely. Figure out what the buyer is not going to like and fix it. Customer concentration is a big one. If you're doing business with only Target and Walmart, or if you're doing business only with Amazon and 5 % of your business is eBay. That's a huge risk to a potential buyer. So what can you do? mean, can you create your own website and put in a Shopify site and start moving your customer base to there from Amazon? You know, and sometimes some businesses, you can't do that. but just realize that to the extent that you can identify the risk. Your job is to reduce risk for a buyer. That's it. Pete Vera: Yeah. ⁓ love it, Jeff. Well, thank you. I know we're up on time here. We could probably keep talking forever, but I really appreciate all your insights today. Fascinating conversation. Where can listeners, if they like this episode as much as I have, where can they learn more and find out about your work? Jeff Villwock: Well, my name's right there. And my website, I was very creative. It's Jeff at, that's my email address rather, Jeff at Jeffvillewalk.com. So that's it. Send me an email. And Jeffvillewalk.com is a website, so you can go to the website as well. Pete Vera: Great. Yeah. Awesome. Yeah, I'll leave that in the show notes. Thank you so much for coming on today, Jeff. It was great talking to you. Jeff Villwock: You bet these. It's been a pleasure.