Dylan Seals: I’m the Co-producer of The Boardroom Buzz. I am excited about what we have for you. We're going to play the audio from a film we made at the AzPPO conference. Paul gave their keynote speech this 2024 back in March and we've gotten a lot of great response from it there at the conference in Mesa but also as we released it on Potomac TV. I'm excited to play that audio for you guys here. Know that if you want to see some of the visual aids, if you want to see some of the presentation, it exists in full color and living color on Potomac.tv, you can check it out there. Paul and I wanted to release this as audio as well. Enjoy this episode and without further, ladies and gentlemen, Paul Giannamore.
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Paul Giannamore: You guys put on a good show out here. I don't come to a lot of these things anymore and I'll tell you that this is a big one. It's good to see everyone. I see some yawning out there so I know it's early. I'm going to try to use some props and get this thing exciting. My job is M&A advisory and I've been doing it for over twenty years.
What I'm going to talk about is effectively one big idea, probably the most important thing I've learned over decades, which is extremely applicable to folks who may not even be in the process of buying or selling a business. In the capacity of my job, the most important decision I make as an M&A advisor is whether to negotiate or to auction. If you think about the sale of any asset in the world, there are two ways to do it, either a negotiation or an auction.
There is a third way. You've got a fixed price process. You can go to Starbucks in the morning, buy a cup of coffee for $3. You don't want to pay $3, take it or leave it. For the most part, every asset is sold either through a direct negotiation or an auction. The most important decision I make in my day-to-day job is whether to negotiate or to auction.
For you folks, what I want you to always keep in mind as we have this discussion is that the most important decision you'll make when you sell any asset is the process by which you sell that asset. My first foray into this was, years ago, my family was living in the West side of Chicago, and discovered that we had a very valuable violin that had come over with us from Italy. It was made in Cremona in the same shop that Stradivari worked in the 1700s. We had no idea how much this thing was worth. My father got the bright idea and said, “We could use some money so let's sell this bad boy.” The problem was it's a rare musical instrument and none of us had any idea how the hell to do that.
My little sister decided to head out on an expedition on the internet, which was quite new at the time. She went onto the precursor of Craigslist and decided she was going to put it online, “Violin made in 1717, old as shit, and probably worth a lot. Who wants to buy it?” She got a lot of interesting offers, a lot of interesting trades, for sure, package deals, a chameleon named Lester, an RM80 dirt bike, a new VHS video recorder, but she didn't come up with some great cash offers.
My father's next idea was to go see his friend who ran a music shop named Gus. We went in and we saw Gus. Gus, a sweet old man, looked at it and said, “I have never seen anything like this but it's got to be worth about $30,000.” That was a lot of money back then because the house I lived in, I don't even think it was worth $100,000 at the time. He said, “I've never seen one of these before but I can probably sell it for you.” I was like, “Dad, I don't think Gus is our guy.”
The next step was to go down to the University of Chicago. I went to the music conservatory and I thought, “There are orchestras here. There's got to be people that know what the hell they're doing when it comes to musical instruments.” I talked to a professor there and he said, “It's a valuable instrument you got there and I know a collector.” I said, “Okay.” He set me up an appointment, I went to this collector's home, and as I sat there, the collector looked at the instrument and said, “I am interested in this.”
He went into the back room, he came out with a bag, a canvas bag, I distinctly remember it, and it had $50,000 in cash in it. Remember, I was a young kid. This was probably 1991. That was a lot of money. He looked at me and he said, “I will buy this instrument right now for $50,000 in cash but you've got to accept this deal right now.” Unfortunately, I didn't have the authority to do that.
When he made that offer time-bound, attempted to use a closing move on me, I got a little bit nervous. I stepped out and I said, “I've got to talk to the family about this.” I appealed to higher authority and said, “I'm not the decision maker. I got to step off. I got to talk to my parents.” I went back to the professor and I said, “Professor, I don't know what to do.” He offered me $50,000.
Between the time I left his home and the following day when I saw the professor, the collector called and said, “Tell that kid I'll give him $65,000 and that's my final offer.” Now, I'm thinking to myself, “I am in the process of negotiating with a collector. My sister is a total bust on her online sale process. My father's still hanging out drinking coffee with Gus. What should I do?”
The professor said, “I do know that there are instrument auctions that take place oftentimes in New York. We have in Chicago. There's a company that deals with these rare instruments, maybe you should talk to them.” I got their phone number, placed a phone call. My father worked for an airline so it was super easy for me to travel back then. I took a violin, which, at the time, I knew to be worth at least $65,000 and put in my backpack and got on the plane. I went out to New York, I met with the auction house, they looked at it and said, “This thing will sell at auction for approximately $100,000.” That was music in my ears.
I learned about the auction process. Eventually, we engaged the auction house, which sold the violin for $105,000, which was worth more than the house I lived in at the time. It was hitting the lotto for my family. It was the first experience I'd ever had with an auction. Since then, I've been to scores of auctions around the world. I've sold companies at auction. I've been to farm auctions. I've been to watch auctions and art auctions now. When I think about the sale of a business, it comes down to 1 of 2 ways, direct negotiation like with the art collector or through the auction house. There's not a clear-cut way of doing it. It takes a lot of judgment to determine not only the profile of the seller but also the buyers.
We're going to do a few thought experiments. Ultimately, what I want to do is I want to walk you through a sell-side process. I'm going to walk you through a sell-side process where there's no negotiation. You read these books like Donald Trump's book or Chris boss's book and any of these negotiation books are always talking about things like making counter offers, anchoring, methods of influence, and win-win negotiations. For the large part, on Wall Street, most of these businesses are sold without negotiating at all.
As a process setter, as an M&A advisor, my job is to do two things, I'm negotiating substance, I'm negotiating purchase price in terms, but I'm also negotiating process and the process is what effectively gives you leverage in a sale process. We're going to do some very basic experiments and then I'm going to add some complexity here so that we can see how this works in real life.
I want to start with this jar of cash. It’s not as valuable as a violin but there is money in here and this is going to be a real auction. We're going to start with an auction. I'm going to auction off this jar. Professor Richard Thaler did this in the ‘70s to demonstrate what's referred to as The Winner's Curse. That's what we're going to talk about. I'm going to give us a quick example of a single round closed bid auction.
Here's how this is going to work. Let's say, for example, there's $40 in this jar. You guys will make a bid. You guys have pen and paper out there. I want everyone to make a bid. This is a real auction. Money is going to change hands here so do this right. Whatever the amount is in here, the highest bidder in this single round auction will ultimately take this. If there's $40 in here and you bid $45, you owe me $5. If there's $40 in here and the highest bid is $20, I owe you. Mark your bids down, guys. Let's do this. Who wants to participate?
Audience: $5
Paul Giannamore: Close bid. We're going to do this close bid. This isn't going to be an open outcry auction, although those are more fun, for sure. I want to try to demonstrate a principle. Everyone that wants to participate, write down a number, what you think. I'll pass this around. You guys want to take a look at the jar, pass that around.
Remember, a roll of quarters is $10, a roll of dimes is $5, nickels are $2, pennies, of course, are $0.50. While we are taking a look at that jar and we're going to bid on that, we're going to do two things. We're going to auction this jar of coins and then we are going to do a quick negotiation. I'm going to need some volunteers. Maybe do some guesswork, write your bids. You, my friend, what's your name?
Audience: Ben.
Paul Giannamore: Let's do a quick direct negotiation of this jar. How much will you give me for that?
Audience: $21.49
Paul Giannamore: How about I counter you at $35? It's a good jar, good coins, and fresh coins. I went into the bank. They thought I was crazy. I was like, “Can I get rolls of quarters?” They're like, “What the hell?”
Audience: It doesn't look like there's 30 quarters in there. I'd say that's a little high. Let’s split the difference, maybe $26.
Paul Giannamore: I'll take your $26. Is there anyone out there that would give me more than $26? What would you give me for it?
Audience: I'll give you $80.
Paul Giannamore: $80, done. Any time we get involved in a negotiation, particularly direct negotiations like this, you always want to think about changing process rules. One of the things that you'll experience, if you guys go out there and buy small businesses, you guys want to go out and buy a small pest control business, inevitably, you're going to talk to an owner who is going to not be running a formal process and he's going to say, “I agree to your terms.” You're going to get all excited and then he's going to turn around and he's going to do exactly what I did, he's going to shop your offer, and he's going to say, “I've got this offer from this guy. He's going to call all his friends up and say, ‘Who's going to do me better?’”
There are things, and we're going to talk about this as we go through some examples, about some shutdown moves. One of the things you could have said to me is, “I'm negotiating with you exclusively under the understanding that if we come to an agreement, you will not shop my deal.” There's a legal onus on me. I can't do that. Otherwise, you have a cause of action. There are a variety of shutdown moves that we use in these processes that we're going to talk about. Who has bid more than $20 for that, raise your hand? Who's at $20? Who's at $25? Who's at $30? Who's at $35 for the jar of coins? What did you bid, sir?
Audience: $32.50.
Paul Giannamore: Did we have anyone higher than $32.50?
Audience: $33.20.
Audience: $39.99.
Paul Giannamore: It sounds like we're going to call $39.99 as the bid. There’s actually $22.50. You were the closest in that jar. That experiment demonstrates The Winner's Curse in an auction. This is what's called an English auction, which is an ascending price auction. As the price goes up, whether it's open outcry or sealed bid, the price goes up and ultimately, the winner of the auction pays more than the ultimate intrinsic value of the asset being conveyed, which we love when we're selling businesses, especially when the business is yours.
On the one end of the spectrum, when you think about selling a business, on the far end of the spectrum, you have what's called a formal controlled auction. I want to demonstrate to you how this works. This is the textbook example of how a controlled auction works and selling a material asset. You'll notice that in the controlled auction process, we'll get to a final purchase price and you're not going to see any negotiating whatsoever, you'll see negotiation of process.
Similar to an auctioneer, when you're selling a business, the core responsibility of the M&A advisor is to stand up and set the process like an auctioneer would. What you're hoping to see is competition on the other side of the table pushing up the price. When you have direct negotiation, it's cross. He and I are going back and forth, that's cross table negotiation.
When you're running an auction, you want same-side negotiation or pressure amongst buyers. This is a small stage. I have never done anything like this before so I'm going to experiment but I want to get some volunteers because I don't have slides and people make better props. When I asked for some folks to come up here, can I at least get one volunteer to be a client? What's your name?
Audience: Tucker.
Paul Giannamore: Tucker, you are my client. We're going to use a real example. We're going to use ServiceMaster’s 2019 acquisition of Nomor in Europe. It was the second largest independent pest control business in Europe at the time. It was acquired by ServiceMaster in September, 2019. You look like the people that I want you to represent. You are going to represent Norvester, which is a Norwegian private equity firm that owned Nomor. That means you can't smile. You have to look constipated, Definitely, don't laugh. You got to look Swedish. Nice to meet you, Tucker.
You're the client. This is going to be a little bit silly here but I'm going to try to do this anyway. I want to demonstrate how a controlled auction process works. Tucker here is the client, Nomor. It's a business that engaged us in 2019 and I went up to Stockholm and they said, “Paul, we want at least $180 million for our business is what we want. This is our reserve price. Would be happy about getting $190 million and we would crack a smile if we were able to get $200 million for it.”
I looked at the business and I said, “$180 million is an appropriate price.” They said, “Could you do $200 million?” I've never been burdened by a false sense of modesty so I said, “I'm up for this challenge. We're going to try for $200 million.” Whenever we take a business to market, we think about it from the standpoint of, on the sell-side, you are the process setter. Your first question is, “Do I negotiate or do I auction?” There's a variety of different factors that would cause you to make the decision one way or the other.
Nine times out of ten in my business, when you sell an asset, you're choosing to auction or do a combination of the two. I need ten additional participants and this will go quick. You won't have to say anything. Can I quickly just get ten folks up here? I promise, I'll make you sit down quickly. I just need you for props perspective.
We prepare a business and we put together sell-side materials. Typically, in this market, when the private equity is involved, 50 or 60 participants. We're out to 50 firms. We've got this business, are you interested in buying it? They get an opportunity to review the materials, they put together their financial models, and, at the end of the day, they are required, the first step in the process, because we are the process setter, the auctioneer, we say, “On such and such a date, you guys have to tender a bid, an indicative offer.” You're effectively buying your way into the auction by presenting an offer that begins to get into the ballpark.
When we did the Nomor transaction, I'm going to use real numbers here, right out of the gate, the majority of the offers clustered between $150 million and $159 million. We typically begin with the lowest offer and that's the working man over here. We got the first round, we got the indicative bids, we've got a big stack of these things, we look through them, and then we go to the lowest bidders and we start to have conversations about whether or not they're serious about doing the transaction and if they will move, revise their offer forward.
All of these folks did, the Orkin man in this particular case. Realistically, it was Orkin in the process. Rollins, I'm glad to ask you to depart from the process. What we do is because we have process rules, we have to enforce them. You didn't make it into the mix, you are out. You get booted from the process. This is how this works. There's no negotiation here. It's asking the acquirers to revise their offers forward.
After the first round, we went through a second round, and got rid of some buyers. By the third round, it was time to have management meetings. In order to get the opportunity to sit down with management, you have to make another bid. Folks, bid forward, revise your bids, due on Monday. In this particular case, unfortunately, the lady here, thank you for participating. You guys have been excused from the process because the acquirers revised their bid forward $150 million, $155 million, $160 million, and $165 million.
This is a closed sealed bid, English auction, ascending price auction, and no negotiation, just asking them to revise their bid forward. Every time they revise their bid forward, they get a treat for doing that. They get further information on the company. They get more access to management. In order to survive, they have to continue to revise their bid forward. If they do not, they will be booted from the process and not have the opportunity to effectively finally bid on the business.
As we continue to go through this process, we got another round. Doug, thank you for participating. You didn't make it. Now, the purchase price, we're now in the $180 million. You guys have made it up into the $180 million. I'm pretty damn close to the reservation price where the client needs to be. I was very happy that Tucker, the Swede or the Norwegian, told me where they need to be and ultimately where they want to get but we are still a far cry from this.
A French firm represented by the gentleman here in red, Kyle, decided they were going to use a shutdown move in August of 2019. They were pissed. They were tired of bidding. They came in and basically said, “We are offering $186 million. You have 24 hours to accept or reject our bid. It is an all-cash. We'll close this deal in two weeks.” You're at $186 million and the rest of you are between $180 million and $185 million. Now, we had somewhat of a dilemma on our hands because the $186 million was a great price. I wasn't sure where we're going to get these other guys to go but we still had three bidders that were tightly clustered.
Tightly clustered bids in an auction process where you want to be. You don't want to see huge disparities between price because auction theory tells you you're going to get the second price plus a little bit. When you've got tightly clustered offers, I was feeling good. We let that offer expire and we came back the next day and said, “On Friday, we're going to the final round.”
Final round is when all of these gentlemen, the French guy, you stormed off. Kyle, I appreciate you participating. You were pissed. You were like, “The hell with it, I'm out of here.” We lost him. Our price just fell. It was the first time in that auction that we had a descending price because $186 million was the top, all of a sudden, it fell, and we're like, “Shit.” Now, I'm sweating a little bit but it's cool. We said, “On Friday, we need final round bids.”
There's an important reason why we do this and it's one of the things that is fricking maddening when you're out there trying to buy a business from a single operator. Let's say you're out in the middle of Arizona and you want to buy a company, the negotiations go on forever. You negotiate the price. Now, you're negotiating something else. “What are we going to do with my aunt? My daughter still works for the company.”
There are a million things they keep coming and coming and it's a thousand paper cuts. We've done zero negotiation, we didn't do a counter offer, we didn't use influence, we didn't give two shits about win-win, nothing, it's an auction, and ascending price. We're controlling the process. We're controlling the timing. Now, we say, “Final round bids are due on Friday.”
We say final rounds because, in a lot of ways, in an auction, the final round is somewhat like a marathon. You see the New York marathon, these dudes are running for hours, and you're like, “Holy shit. What is going on?” All of a sudden, they see the finish line and they start to sprint. You always want to show the buyers the finish line because they hold back. They will inevitably hold back. What we're going to do is attempt to show them the finish line.
Friday, you guys tender your bids, your bids came in. Final round bids, citing day, Friday. I'm up in Stockholm, we get the final round bids, we opened up the papers, and we were at $189 million, $191 million, and 193 million. Now, I was internally satisfied. It was a textbook fantastic process. Rightfully so, the clients wanted the big $200 million and I thought there was an opportunity to get it but I had a problem. Tucker, I typically don't ask clients for advice but for today's purposes, I'm going to. What do we do? We've got $189 million, $191 million, and then $193 million. You want $200 million. We told them it's the final round, they put in their bids, what can we do?
Audience: Apart from holding another auction?
Paul Giannamore: Let's talk about that. How would we do that? What would we do?
Audience: End this auction without incurring too many expenses. I don't know what kind of expenses go on in an auction like this and then hold another auction. Put it up for auction again.
Paul Giannamore: That's an interesting idea. The problem is, instead of doing what my sister did and putting an ancient violin on Craigslist predecessor and waiting for somebody to pop up, we've gone out and we've hunted. We found all the best buyers. There are 50 likely buyers of this company on the planet and we just ran them through this intensive auction process. We're already above our reserve price.
We want it at $180 million. We're pretty damn happy with the $190 million but we want $200 million because we only get to do this once and we're going to extract every single nickel out of these buyers. It's not their money anyways. These are publicly-traded companies. Let's ramp this up. Faced with that, we decided to do exactly what you said, we ran another auction but here's how we did it. We talked about an English auction, which is an ascending price auction. There's a variety of auctions, there is a Japanese auction.
How many have heard of a Dutch auction? Have you heard of a Dutch auction? A Dutch auction is an auction process, which is a descending price auction. A Dutch auction, for the last 110 years or so in a small town outside of Amsterdam, the reason why this auction has this name, the Dutch auction, is because a small town outside of Amsterdam is the global clearinghouse for flowers. They sell flowers in a descending price auction. They do, last I looked, $2.3 million cut flowers, change hands every single day at this auction.
What they do is they start at a high price and it descends until somebody pushes a button. I don't know how much flowers cost but let’s say the bulbs are $10 and it goes $10, $9.50, and $9. When somebody hits the button, they choose how much the quantity of the flowers they want to buy. When they're done, the price keeps falling until the market is cleared.
In this particular case, we've already said final bids so these guys are all expecting final bids. There was no way to go back to them and say, “Pay us more money.” Like the French, they would have said, “The hell with you. We're not playing anymore.” I couldn't negotiate anything but I could change the process. Remember, I'm the process setter. I am the auctioneer. We changed process. What we did is we said, “We're going to now do a Dutch auction.” We took the final three bidders and we started at $220 million and I went first here to Mr. David Buckley and I said, “David, the bid now is $220 million. You're at $189 million. The bid is at $220 million. You have four hours to accept or reject this. If you reject it, it goes to the next party.” It'll keep coming around but the price will continue to fall until somebody hits it.
$220 million, 4 hours, and you tell me. “Not so much interested.” Quite frankly, he didn't want to pay $224 million anyway so he didn't care. It's not his loss. He’s like, “I'm not paying $224 million, let somebody else take it.” Mr. James, we go to you. Now, I got to move the price down, $215 million, you got three hours except to reject.” You rejected. Now, I go to Joe. Joe, $210 million, 2 hours, except or reject. This process went on through the night until we finally got back to David here, which is ServiceMaster and when it came around to them, it was $200 million, they hit the bid, closed. It was a binding transaction at that point in time.
By bringing the Dutch auction into process, what it did is it put every participant in this process that had worked months, spent hundreds of thousands of dollars, flown around the world, and went to all sorts of meetings, it put everyone at risk of losing the deal. At what point do you want to lose the deal? When it got down to $200 million, ServiceMaster looked at it and said, “It makes financial sense. If we let the price fall again and somebody else takes it, somebody is going to buy it for a few bucks less and we're going to lose out.” That's how a controlled auction works.
That is a transaction that I'm extremely proud of. We were runner up finalist for the European middle market deal of the year that year for the use of the ascending price auction and the Dutch auction in combination in order to get that transaction done. That's a very elegant way to negotiate the sale of a business without negotiating anything. You just let the process run and you have it. You were a happy Norwegian dude. Look at that smile on your face over there, I like it. Thank you, guys.
That is a classic example of a fold control auction that doesn't happen much in the private markets, particularly in pest control. We probably run one of those once per year. The majority of transactions are sold in a combination or what I call a modified auction or a quasi-auction so it takes combinations of the two. You can pull off controlled auctions with sophisticated corporate buyers. The less experienced buyers in the mix, the less they tend to adhere to process rules. Some of them won't even participate in an auction because it takes a certain skillset to be a buyer in an auction. You've got to understand closing moves and how to negotiate process yourself.
In pest control, in general, the majority of these deals are a combination of a controlled auction with some elements of a negotiation. I would say, typically, almost every transaction that we do, we would start out in a very similar manner, materials go out into the market, and acquirers are given the opportunity to bid. They go through successive rounds of bidding. Most of these sale processes are closed bid or sealed bid auctions. As a seller, whenever you're selling an asset, one of the most important things you can do is conceal information. You want to conceal information. You do not want parties to know how many parties are participating.
I probably could have run that with one bidder. I literally probably could have one bidder there. The bidder would have not known how many other bidders are there. They would have thought there are 3, 4, or 5 others and I could have run that Dutch auction. It's likely we would have ended up with very similar results by shading what's in our pocket, effectively concealing information. That's one of the most important things that you can do as a seller and it's one of the things that these small sellers often do not do.
When I look around the M&A market here in pest control, in general, you can make an ungodly amount of money if you understand how to go out and buy these businesses on the relative cheap if you learn how to fight the auction so to speak. I see it happen every single day, you can go out and buy these businesses on the relative cheap, build up massive businesses, turn around, and sell them. Those opportunities are there. I could babble on for a long time but this is a good time for me to take an intermission break. Do we have any questions?
Audience: Traditionally, does the seller always set those processes?
Paul Giannamore: That's a great question. The seller should set the process but the seller often does not and that's where the seller gets into problems. Whoever is able to set the process rules has tremendous leverage in any sort of a process. The theory is you're selling an asset, it's a unique asset, there's one of it, and you should have a variety of different buyers that are able to compete. If you're a sophisticated buyer, you're always not only trying to negotiate the substance of the deal but you're trying to negotiate process.
There's a variety of different things. We'll use that jar again as an example. One of the things that he could have done is try to pin me down and do exclusive negotiations with him. Let's say that you're buying a business, you’re talking to the old-timer, he's ready to sell, and you guys are in final negotiations and then he tells you, out of the blue, “Somebody else called up and is interested in the business.” For you, that's not great. Competition is never good. What you want to do is try to convince these sellers to not bring competition into the mix, but inevitably it happens.
There's a lot of things you could do. You could basically say, “I'm not going to give you a final bid here because I don't want you to shop it. Here's what I'm willing to do. Let's get your attorney on the phone and I'm willing to write an offer right now. I'm going to tender it tomorrow at 10:00 AM. You tell the other buyer to tender that offer tomorrow at 10:00 AM both of them in sealed envelopes delivered to your attorney.” It has to be a precise number and the highest number will win. Neither envelope can be opened unless both envelopes show up now.
Why would the seller do that? The seller shouldn't do that but that's you on the buy-side trying to control the process. You're negotiating process. What you're doing now is you're putting the seller in a position where the attorney, by codes of professional conduct, has to do exactly what you guys agreed to. He's got to take both of those letters, got to open them up at the same time, and the highest bid has to win.
What that does is, if you win by a nickel to go out and shop it, there's no more back and forth, there's no more auction, there's nothing, and that's it. That's a shutdown move but that's an example of you controlling the process. Always, when you're buying an asset on the buy-side, you should constantly be thinking to yourself, “How can I control this process?” Most people aren't thinking about it. They're reading Donald Trump's book and they're like, “I'm going to counter the offer. I'm going to anchor. Methods of persuasion and all this sort of shit.” At the end of the day, what matters is negotiating process and substance. Who else we got out here?
Audience: What’s the final bid prior to going to the Dutch auction? Were they bidding still even when you moved it into a Dutch? Are the final offers binding all the way through? If your Dutch auction falls below those binding offers, you can still get them?
Paul Giannamore: Great question. Once we move into the next round, everything before that is null and void. Those guys are out the door. It's a risk. There was certainly a risk there. I said I probably could have pulled it off. With one buyer and potentially we could have. It's probably a risk I wouldn't have taken in that particular case because if you've got one buyer at the table and he gets pissed and he's like, “I'm not participating in this,” then that's it. I've got a busted auction and I'm calling buyers up saying, “We were friends last week. Let's talk again.” That's not a good way to go on the next date. Any other questions out here?
Audience: What do they call you? Number two, what's your cut?
Paul Giannamore: They call me a lot of things and they're not always nice.
Audience: You've got a company. You say, “I want to sell my company.” How do they find you as the person that's going to negotiate or take care of the sale? Are you a realtor or do you fall into like a category like that?
Paul Giannamore: That's a good question. These are all great questions. When I graduated from university, I had no idea what the hell I wanted to do. I graduated from Cornell and my friends were going through recruiting and they were doing something called investment banking and I could barely spell it. I was like, “I don't even know what this is.” It was the late ‘90s and Wall Street, as you guys remember, what happened in the late ‘90s, the run up to the dot-com bubble. Investment banks were literally pulling kids out of the Taco Bell drive thru window to do financial models back then. It was insane.
I got a job at Lehman brothers, which, of course, is no longer with us, and I did that for a few months. I met some folks on the CSFB, the Credit Suisse First Boston deal team. A few months later, I went up to CSFB in London and did that for a few years. I went to the private equity world. I went on the buy-side, what a lot of sell side guys do. I was on the sell side.
When I worked at Credit Suisse, I worked for a guy named Frank Quattrone, who was the number one tech banker on the street doing mergers and acquisitions, advising Microsoft, Cisco, Gateway, Dell, and all those companies. I did that for a few years. I went on the buy-side, work for private equity, and then myself and a partner got together and put together this firm. We didn't know shit about pest control, by the way. I didn't even know it was a business. I knew it from like watching Seinfeld, Stan the exterminator. I didn't even know it was a business. I'd heard of Orkin before but I had no idea.
I remember doing deals and I got a call one day and a colleague of mine who I'd worked with for a long time was on the West Coast and he said, “I need help on this transaction. It's a pest control company and it's being sold to a company called Terminix.” I was like, “Okay.” He's like, “You live out there. Can you get involved and help us?” That's my first introduction to pest control. This was back in 2003. The guy that sold that business, this was in the DC metro area, he and I became friends.
He introduced me to a lot of folks and I started looking around, I'm like, “Here I am doing tech deals. Competing with all these guys are way smarter than me. There's no one doing this in these boring, mundane blue-collar industries.” You got a guy who used to be like, “I was a pest control guy and now I do deals and has no idea what he's doing.” I'm like, “This is fantastic.”
I jumped into it and since 2003, we have done million-dollar deals. We advised on the Rentokil and Terminix merger. We did all their antitrust dispositions. When the merger was needed to face regulatory approval, we sold off their European assets in the UK, half that business. That's my recurring revenue business. I sold it to ServiceMaster, they were doing the merger, and they're like, “Can you sell it again?” I came back in and sold it off. I sold it for less the second time though.
How do they find me? Some people wish they couldn't find me now. I have been doing it for twenty years so a lot of folks know me. Usually, when we do a deal, the way that we work, we take a percentage of the transaction and I try to make as much money as I can. A huge percentage, that doesn't always work, but we take a percentage of the transaction. What we do is a lot of our clients engage us years in advance.
You have a company that does $20 million in revenue, for example, and they'll say, “Paul, five years from now we want to sell and we want to make sure we're doing all the things that we need to be doing.” Our team will run a financial model. We'll start to look at numbers. We talk about strategies, so on and so forth. Five years later, we're ready, and we pull the trigger. A lot of our clients, years ago, I remember back in 2015 or 2016, I was telling clients to wait. By the time 2019 came along, I was like, “Everyone needs to sell because this is insanity.” Now, things are slowing down a little bit. I hope that answers your question. Who else we got?
Audience: You described a pretty elaborate auction process for what's obviously a large company. You're undoubtedly aware the vast majority of acquisitions in this industry are probably less than $2 million. What does a process look like that if you're selling a 1, 2, or 10-person company?
Paul Giannamore: That's a great question. Let's say that you've got a $2 million run-of-the-mill pest control business. You want to think first, “I've got one asset, it's a $2 million business. Who are the likely acquirers for this business?” The market has changed. When I started back in 2003, it was Rollins, ServiceMaster, Orkin, and Terminix, that's it. Those are the only two companies out there. Back in 2003, and 2004, the Brits came in and bought Ehrlich, which is out in PA, for $120 million or $130 million. That put Rentokil on the map because for the prior 30 years, they were only doing $25 million a year in the US.
Rentokil shows up in 2006. Anticimex doesn't show up until 2016. Of course, now we have the proliferation of all these private equity-backed platforms. Back in the day, it was duopoly, two buyers. Of course, you have local players. You've got the family businesses. In my experience, and I hate to offend, they often don't have either the capacity to pay or the willingness to pay or they want to pay you with your own money. I'm all about getting as much cash at the closing as I can.
If you've got a $2 million pest control business, you want to first off understand specifically who the actual potential buyers are and you want to cast a wide net. It doesn't take a rocket scientist to figure that out. Anyone with a couple of brain cells and a phone book can figure out, “Here's who are the buyers.”
The most important thing you can do though is run a competitive process and you can do this on your own. You made a fabulous point about the fact that this textbook-controlled auction process is not ideal for a $2 million business, which it's not but you can take a lot of components from that. If I had a $2 million business and I was an owner and I'm like, “I'm going to do this myself.” I would put together some basic materials, I would show the final last three years of financials, I would clean it up, and I would show the cashflow.
I would demonstrate all the positive aspects of the business, the level of recurring revenue, the relative pricing, and all those things that buyers would want to see. I would have the various buyers execute a confidentiality agreement and then I would say, “Here's some materials on my business. If you could put together an indicative bid by the 15th of the month so I can understand what your level of interest is, that would be great.”
What I would do is I would say, “Buyers, on your indicative bid, I need to know the dollar amount. I need to know the deal structure. I need to know how you're going to finance this. Do you have money in the bank? Are you going out to borrow money? Is your aunt Sally giving you the cash? How are you doing this? What's your statement of intent? What are you going to do with the people? What are you doing with me? What are you doing with my people? How are you going to integrate this thing?” There's a variety of questions that you can request to be put into an indicative offer.
You could set your own process. You could reasonably say to the buyers, “I am going to take all the offers and here's how the process is going to work. I'm going to begin with the lowest offer, I'm going to go to that guy, and I'm going to tell him what the high bid is. I'm going to ask him if he would like to beat that high bid in order to stay in process.” If he doesn't beat that high bid, he's eliminated from process and I would make sure that I do exactly what I say and adhere to my own process rules. I would boot the guy from process. That way, go to the next one.
There are a million different iterations of running a quasi-informal auction that you could do but that would be a very clean and easy way to get it done. Start with the bottom, see if you can get him above the top, if he doesn't go, you eliminate him and you go to the next one. A lot of sellers get in the traps of they fall in love with a particular buyer. At the end of the day, they think, “This is a great cultural match. I want to do business with this particular buyer.” They fall in love and then they're willing to concede things that they otherwise shouldn't.
At the end of the day, what they do find out is, more times than not, in my experience, I've been doing this for twenty years, billions and billions of dollars-worth of these deals, I hate to offend, but more times than not, once things dried and money's changed hands, you move on with your life as a seller. Your employees are like, “They didn't care about you as much as you thought they did because you were signing their paychecks so they don't love you that much.”
The buyer, all of a sudden, if you sold to Terminix, management changed every sixteen months, all of the old agreements were null and void anyway. Branch managers change and people change. People forget. The boss comes in and yells at somebody. The next thing you know, you're like, “Shit, why did I leave a million dollars on the table to do deal with a seller and I'm not even dealing with the same people and my employees don't like me?”
If you actually do take the risk, sellers take a lot of risk. You guys are the ones that are not able to get your kids’ Christmas presents while you're growing these businesses over the years. You take a lot of risk. You should attempt to maximize the seller of your business. You got to be ruthless. I always tell sellers, “Be agnostic as to who the buyer is and let the money and the terms speak.” That's an informal process.
When I'm representing a client, I wouldn't go to the lowest bidder and try to get them above the highest. If you were a seller trying to do it yourself, that would be one of the ways that I would recommend do it because it's very clean, it's easy, and it's a process you understand, it's a process that they understand. There’s not a lot of things they can do to screw with you if you follow through that process. Who else we got?
Audience: Are there any set rules in this game or laws or what you can and can't do?
Paul Giannamore: They say the only rule is there are no rules. Yes, there are. Depending on the jurisdictions, quite frankly, they can become very important. Let me give you some examples. Sellers are oftentimes their own worst enemy when they try to sell their business because there's a lot of fluffery and bluffing, “I got all these offers and all this sort of shit.” You can read through that very quickly. You should never lie.
Sometimes, when you're trying to sell an asset, you might want to bluff and say, “I got an offer for $2 million and you're at $1.5 million,” but you don't have that $2 million offer. You’re better off concealing information than outright making a material misstatement. In the United States, you can get away with that, for the most part. In most civil code countries, if I tried to do that in Europe, that's a big no. We’re going right to court for even insinuating that.
The rules are whatever you set as the auctioneer, as the process setter, within the legal and regulatory boundaries of good faith dealing with the counterparties and all of those normal things that come with contract negotiations. I find that once you get good at this, you don't have to lie or bluff because concealing the information or running an auction is all you need to do. I'm going to take one final question and I'm going to close this out.
Audience: Is there a revenue amount where you become attractive?
Paul Giannamore: Obviously, the bigger you are, the more attractive you become. In any given market, there's a need to buy a $500,000 in revenue or an $800,000 or $1 million business in revenue. I would say that you start getting above $5 million, you become more scarce. There's some scarcity value there. You're a $5 million business or $10 million, you're becoming more scarce the bigger you get. There are no hard and fast rules. It depends upon the geography.
If you've got a lot of private equity activity and they're doing a lot of tuck-ins in one particular area, for example, the southeast right now, there's a ton of activity there with a bunch of private equity firms, the million-dollar guy is in a much better shape than the million dollar guy in Wyoming or Montana or Illinois for example. I'm getting all sorts of hand signals so I'm getting booted from the stage as per usual. I appreciate everyone joining me. Thank you for having me out here. I wish you guys the best.
