The “Interview with an Investment Banker” blog series features Chase Stuart, who interviews investment bankers working across a variety of industries, geographies and markets. This blog is the third of the series and summarizes Chase’s interview with Brian Alas of Boxwood Partners.

Brian is a Managing Director at Boxwood Partners, specializing in M&A advisory services. He has more than 12 years of experience providing advisory services to both private equity and strategic investors in a variety of sectors, including consumer products, transportation and logistics, and franchising.

Chase: What are the biggest surprises that family-owned and founder-owned businesses experience when they go to sell their businesses? How do you, as their advisor, manage expectations?

Brian: The biggest surprise is just the amount of time, energy and effort that goes into selling your business the correct way. Our clients typically only get the opportunity to do this once, so we take the extra time upfront to ensure they are prepared. Most of our clients are surprised with not only the amount of data needed for the diligence process, but also the level of detail that accompanies buyer diligence requests.

As a way of managing expectations, we try to tell our clients about the “why.” A common request is historical revenue and EBITDA for the last 10-15 years. On the surface that may seem irrelevant for a fast-growing business, as the company it was 10 years ago is very different than the company it is today. We then explain that buyers, and ultimately the buyer’s lenders, are really concerned about how the business performed in the last recession.

More often than not, there is usually a good reason for requests during a diligence process. Getting our clients to understand the “why” of the request and the context of the deal tends to get our clients over that initial hump.

Chase: You have particular expertise in the franchise space. Can you tell us what makes those deals unique and some of the reasons you enjoy working with franchisors?

Brian: We got our start in the franchise space with sweetFrog, a frozen yogurt franchisor. As we started doing an analysis of the broader landscape, we shifted our focus a little bit to home-service franchisors. We really like the space for the same reasons the buyer universe finds these businesses attractive—service-based business models that are providing an essential or recurring service around the home. In addition, many of these businesses have built a great brand through robust digital marketing campaigns, driving significant lead generation for their franchisees. Moreover, franchisors have some attractive operating models including recurring royalty revenue, high free cash flow conversion and vendor rebate programs.

From a macro perspective, there are a few key themes including: (i) an aging housing stock, (ii) low interest rates, (iii) millennial homebuyers entering the market and (iv) dual-income households.

Much of the millennial generation has yet to buy their first home. Combine that with low interest rates, and we think the number of first-time millennial homebuyers could explode within the next ten years. In addition, there are more dual-income households than ever before with multiple family members working full-time. As a result, you are seeing a shift from “DIY” (do-it-yourself) to “DIFM” (“do-it-for-me”) as it becomes more about the opportunity cost of time for dual-income households.

Chase: Many businesses are sold based on a multiple of earnings of EBITDA. How do you view the multiples being used to buy businesses in 2021? For owners or operators looking to sell their business, how strong of a year is 2021 to go to market and sell their business?

Brian: Key drivers in 2021 for transactions involving founders and owner-operators are the availability of capital, low interest rates and potential tax policy.

There is significant “dry powder” on the sidelines after strong fundraising by the private equity community over the last few years. Combined with low interest rates, PE firms are eager to put money to work. In addition, sellers must consider capital gains treatment under a Biden administration and how any change in rates would impact the after-tax returns on a potential exit.

Right now, the multiples are high, and that’s a direct result of where interest rates are and how much money is on the sidelines. Those are two of the factors that lead to elevated multiples.

COVID was the ultimate stress test for just about every company. There are many businesses that are significantly exposed to discretionary spend. If your business’s revenue was down less than 15% during COVID, your business is probably an “A” business. The way we think about it, a reduction in revenue during the pandemic of 15% or less is an “A” asset, a reduction of 15% to 25% is a “B” asset and “C” assets saw a reduction of 25% to 40%. If a business lost 50% of its revenue during the pandemic, then it is likely back to the drawing board.

Depending on how your business fared in 2020, then 2021 can be an interesting year for you. People are looking for high quality assets that were not as exposed to COVID or proved an ability to pivot and/or adapt to the COVID environment. Because of this, 2021 could be a very interesting year for these businesses if their owners are considering selling.

Chase: You work with a lot of owner-operators and founders who are going through a sale for the first time. How does Boxwood differentiate itself from other financial advisors?

Brian: At Boxwood, we take a very high-touch, data driven approach to our transactions. We spend a lot of time, energy and effort upfront to get the numbers right, ask all the hard questions and truly understand the objectives of the transaction.

If the objective is to bring on a partner and grow the business, then that is one set of expectations. If the objective is to sell the business and retire, then that is a separate set of expectations and a different approach to the process.

We have a very good track record demonstrating our ability to adapt and cater the process to the client’s wants and needs, to ensure that there are limited surprises and to manage expectations the entire way through.

Chase: How do you advise clients on whether they’re a better fit for a financial buyer like a private equity fund or a family office, or a better fit for a strategic company?

Brian: It really comes back to figuring out the ultimate goal of the transaction. When we sit down with a founder, owner or entrepreneur, we give them a preview of all different types of buyers. We show them the options, the pros and cons and various structures buyers may present. But it really comes down to the seller’s ultimate goals. We can make an argument for any of these buyers at any given time, depending on the seller’s goals. But in most situations, the sellers don’t know what they don’t know, so we work to inform them and help them understand their options.

Ultimately, it has a lot to do with finding the right cultural fit and knowing where the seller will work well, and this all comes from our experience in the private equity community and with strategic buyers.

Chase: Thank you for your time, Brian.

Brian: Thank you, Chase.

Click here to view the other "Interview with an Investment Banker" blogs.

Chase Stuart is a partner in Ice Miller’s Business Group. He represents a variety of private equity funds, family offices, independent sponsors, mezzanine funds, and privately held businesses. He provides strategic and legal advice in their investment and general corporate strategies, including leveraged buyouts, mezzanine financings, growth capital transactions, early and late stage private equity investments, and secondary transactions. He represents family, founder, and entrepreneur-owned businesses as general corporate counsel and as a sell-side advisor. He has represented a variety of companies in sectors such as technology, manufacturing, health care, aerospace and defense, gaming, and business services.

Craig Ganter is an associate in Ice Miller’s Business Group. Craig earned his juris doctor from Rutgers University Law School and bachelor’s degree in mathematics and economics from Lafayette College.

This publication is intended for general informational purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstance.