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Interview with an Investment Banker: Timothy Sznewajs of D.A. Davidson and Co.

Interview with an Investment Banker: Timothy Sznewajs of D.A. Davidson and Co.
March 15, 2021 by Chase A. Stuart, Office Managing Partner | J.C. Brown, Of Counsel
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 second of the series and summarizes Chase’s interview with Timothy Sznewajs of D.A. Davidson and Co. J.C. Brown also participated in this interview.

Tim is a Managing Director and Head of Diversified Industrials Investment Banking at D.A. Davidson and Co., where he focuses on Infrastructure Services and Building Products & Construction Materials. He has served the lower middle-market in the infrastructure sector for nearly 20 years and is responsible for originating and leading numerous high-profile infrastructure industry transactions.

Chase: Tim, thanks for joining us. What are the biggest surprises family-owned or founder-owned businesses experience when they go to sell their companies?

Tim: The M&A process, even in the lower middle-market, has become a very formalized set of practices, procedures and routines that, if done properly, moves swiftly and ideally should happen in a time efficient manner. Given the efficiency of this process, I find that the average family or controlling shareholder of a founder-led business many times experiences a disconnect between the emotional and sometimes difficult decision to sell and comes to terms with that relative to how quickly a transaction process may move.

As it relates to surprises from a process standpoint for business owners, it’s really a lack of knowledge about the process and certain steps to take to maximize value, which usually catch business owners and entrepreneurs off guard. These steps are not necessarily complicated but have to get done before a company gets into the market to maximize the value of the transaction (for example, a quality of earnings study, determining and reducing historical working capital averages, documenting key employment agreement terms, cleaning up debt-like items, etc.). It is important to remember there are things that can be done in advance as an owner or a seller to maximize the outcome of the M&A process and working with the right advisors can set a selling party up to achieve that good outcome.

Chase: How do you manage expectations on process timing as the advisor for someone looking to sell their business for the first time?

Tim: It really depends on the goals and objectives of the seller and the type of transaction they are trying to achieve. Generally, I like to break the process into three different buckets:
  • Stage 1 – This is the stage from our firm’s initial engagement as the seller’s representative until we get into the market, including all the preparatory work in terms of performing due diligence, preparing marketing materials and intelligently selecting the buyer community for this transaction.
  • Stage 2 – Hitting the market. This is the meat of the sale process; from the time of first outreach until a party (or parties) is selected for exclusivity.
  • Stage 3 – Confirmatory due diligence, final transaction documentation and closing. 
I am hesitant to provide definitive guidelines on timing as every deal is unique. What is realistic for most companies is roughly six to eight months to complete the transaction process.

Chase: You have particular expertise in the infrastructure services and building products industries. Can you tell us why you like working with owners in those industries?

Tim: These industries present a meaningful swath of overall U.S. GDP and economic activity; depending on how you slice it, anywhere from 8 to 10% of GDP. So, it is a very large pool to swim in as a service provider in terms of being able to effect transactions on behalf of sellers.

These businesses truly are essential services. Whether you are providing maintenance and support to wastewater treatment plants, highway and bridge infrastructure, utility grid infrastructure, etc., these are the kinds of businesses that can’t be sent overseas for a cheaper manufacturing process. In many ways, they are very permanent in our economy. Of course, there are changes and efficiencies that are created all the time, but it is a relatively stable sector of the U.S. economy.

My clients, and by extension my team and I, get to see tremendous facilities built, which are providing critical infrastructure components and keeping our economy running, many times in the background. Many businesses with whom my colleagues work are perhaps less tangible (software or a service that disappears into the ether after it is provided), but there is a sense of permanence to the individuals with whom I work and the companies they have built.

Finally, this industry is an entrepreneurial industry. I love working with entrepreneurs because they think about the world differently. They are doers, and it is fun to be around them. We have plenty of that in this industry.

J.C.: For folks looking to sell their business, what factors make 2021 a good year to have such a transaction?

Tim: That’s an interesting question, and one I receive all the time. It depends on the end market of the company within the infrastructure economy. There are elements of the infrastructure market right now that are unattractive, which are not receiving a lot of investment, such as dense urban core construction, hospitality and multi-family. So, it is not the best time for everyone universally. By contrast, there are many segments that are experiencing an increasing amount of investment. A belief that with the vaccines, as well as other mitigation strategies, here in the U.S. in the second half of 2021, we are likely to see a substantial expansion of economic activity on both the consumer and the business level. You think of the concept of pent-up demand within our economy, where the consumer represents as much as two thirds of economic spend in the U.S. There is an expectation there will be growth simply because it has been so constrained over the last 12, 13, 14 months.

The second thing certainly is a very accommodating fiscal and monetary policy in the U.S. at the governmental level. With not only the stimulus from 2020 but now the 2021 COVID stimulus passed in early March, these bills represent over the span of 13 to 14 months about 125 to 140% of annual government spending on top of the normal levels of government spending. You have policies at the federal level, monetary and fiscal, that are promoting growth in the near term on top of latent pent-up demand. This will translate to private-sector growth and private companies in infrastructure will benefit.

Purely from an M&A perspective, it is probably difficult for a private business owner to comprehend the level of private equity capital available to be invested. With the Dow at 31,000 as of early March and with asset inflation occurring and expected to continue in the U.S., there has been a constant allocation on a percentage basis of dollars to private equity. All that money needs to find a home. There is therefore a tremendous amount of capital and a tremendous incentive for those who manage that capital to see it invested. That is driving a strong level of acquisition activity as well as (particularly for the industries we are discussing) impressive and robust valuation levels. So even in what is perceived broadly as a down economy, valuations have not only held, but increased in some instances. If now is the right time for a business owner in their personal situation or in the life of their business to find a partner to help them accomplish their objectives, then yes, this is a favorable time to go into the market and transact.

J.C.: At D.A. Davidson you sell to both strategic and private equity funds. How do you advise your clients on whether they are a better fit for a financial buyer or a strategic buyer?

Tim: That’s a good question and certainly one that our clients wrestle with all the time. I would include a third category—the private equity-owned strategic. Increasingly, because of the prevalence of private equity, we see many of the firms who are the natural acquirers or logical consolidators in the industries we serve, while being operating businesses and technically a strategic, are aligned with or partnered with private equity. I like to counsel clients to think about the market exactly in those three areas: a straight private equity fund that will be a de novo investor into your business; a strategic business that maybe has private equity backing which might bring the best of both worlds, if that is what you are looking for; or a straight strategic acquirer.

I really try to focus on goals and objectives for a seller—their outlook and horizon for their own personal career, objectives for the management team they have built around them, and their appetite for risk. If you believe in your business, have conviction going well out into the future in terms of the upside and you have the flexibility to reinvest a portion of your sale proceeds (even though you are going into the market to seek liquidity), selling to a private equity fund could be a great strategy. Many sellers who have partnered with a private equity-backed buyer have experienced that their investment they rolled over into the transaction created a significant chunk of incremental value for them later on. If they can take some proverbial chips off the table but still maintain an investment in that business, private equity or private equity-owned strategic can be a great fit.

Another area where private equity can be a great fit is where sellers see value that can be created in their enterprise in the future through an M&A strategy in partnership with a deeper pocketed financial partner. Especially in the middle- and lower middle market, private equity can be very effective in helping businesses and management teams grow via acquisition, whether to expand geographically or to add on a service line. A tremendous amount of value can be created through M&A for equity owners through an M&A strategy. Those that not only have the risk appetite and financial flexibility to rollover, invest and let it ride with the next enterprise, but also want to use M&A as a strategy for growth, can benefit from partnership with a private equity fund in a way that a strategic buyer can’t assist.

Where I see sellers having a really good fit with strategic buyers is simply where scale matters: where you get real benefits from a consolidated back office that can invest in technology to make your business more efficient. Maybe being national or multi-regional gives the company a leg up on customers or on the types of services you can provide. In many instances, a strategic is the best fit.

In many of the transactions I see, sellers are open to either model, and the main driver for them, in all candor, is valuation. We try to bring all three options into the process and tell sellers to consider the options and make a decision once we receive buyer feedback. It can come down to who shows up as a buyer, cultural fit and the comfort level of the individual. Sitting across the table from that counterparty, they consider questions like, “Does this feel like a good combination?” and “Are they individuals with whom I can do business?”

J.C.: When you go on your pitches is there a lasting message you want to leave with your client that differentiates D.A. Davison from everybody else?

There are a lot of great service providers out there, whether it is transaction attorneys, CPAs, investment bankers. The things I try to focus on with business owners are:
  1. Industry expertise – We understand your business. We have transacted business of similar type. We understand the thought process, the behavior of the buyer community and those things that both drive value and detract from value for your company. Only someone who understands the industry, the nature of the business model and the past and present behavior of buyers in an industry is able to deliver that type of value, and we very much pride ourselves on delivering that for clients.
  2. Our individual focus – We operate as a team; but when I am with a client in a pitch, I can confidently say to them that not only myself but the other individuals around the table from D.A. Davidson are along for the entirety of the M&A journey with them. We do not have a model where someone goes out and sells and others execute on it. D.A. Davidson’s business model and fee structure results in us being closely aligned with the clients we take on, making sure we can drive a quality outcome from start to finish. I take a lot of pride in the senior level attention we give to our clients on every transaction, in order to make sure they get the full benefit of knowledge that I am representing D.A. Davidson will deliver. I wouldn’t claim to be all that different, I suspect, than the other interviews you’ve done with my colleagues, I think they would say something similar. However, we confidently put our actions behind our words, and our former clients will attest to that.
Regardless of advisor, these are two characteristics that any business owner / seller should focus on when thinking about hiring an investment banking firm as an advisor.

J.C.: That’s great and I can see how that would resonate with a seller, so I thank you for that.

Tim: Thank you.

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.

J.C. Brown is of counsel in the Ice Miller's Business Group. J.C. focuses his practice on private equity and venture capital funds as well as strategic investors in various transactional matters. He also focuses heavily on business development, opening up opportunities and adding value to Ice Miller’s client relationships.

Stephanie Flackman is an associate in Ice Miller’s Business Group. Stephanie earned her juris doctor from Seton Hall University School of Law and bachelor’s degree in neuroscience from Muhlenberg 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.

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