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Are you looking to grow your company? Or maybe you’re looking for an exit strategy? In either case, the answer might be in an M&A: a merger and acquisition. Today we talk to M&A expert George Raftopoulos, founder of ROI Cubed, about what you need to know whether you’re looking to buy or sell, and how things like financials, mission, and culture all play a critical role.
Rich: After spending 24 years building a business that began as a college internship, today’s guests sold that business at the age of 44 and retired in 2010, following what some would call the American Dream of selling what he had built.
Having a passion for building successful businesses, in combination with the boredom that comes with early retirement, he founded his new firm, ROI Cubed, to help business owners with their M&A and exit planning decisions.
He also teaches finance to young minds at both the graduate and undergraduate levels at Bentley University in Waltham, MA, where he also obtained his MBA after graduating from Tufts.
He’s also involved in several startup firms. His most recent of which is a company based in Maine working on ropeless fishing technology that will eliminate the need for lobster trap buoys, thereby allowing a lobsterman to fish without putting various endangered species at risk due to entanglement issues.
He holds a corporate value growth advisor license, is a certified mergers and acquisitions advisor, a certified financial planner practitioner, and a certified estate planner certificate. Today we’re going to be digging into what owners need to know about mergers and acquisitions with George Raftopoulos. George, welcome to the podcast.
George: Well thank you for having me, Rich.
Yury: It’s a pleasure to have you on the show, George. So I wanted to start by learning a little bit more about your early days. So from beginning as an intern to selling the business 24 years later, and how did you get to that point? And did it inspire you to get into mergers and acquisitions?
George: Hi, Yury. Great to be with you as well. Well, my early days as an intern were basically inspired by a need. I was really looking for a job when I was in college and I just figured I’d raise my hand at a fraternity meeting and see if any of my former fraternity brothers had a job to offer me. Long story short, I ended up building a career in the financial planning and registered investment advisory field.
And over time I started really being very successful and I started implementing a lot of best practices and running the practice like a natural. Long story short, for various reasons I decided to sell out of the business and I went through that process of selling into the market. And what I found after I sold the business and after I retired is that I had a knack for the understanding of that process of building, growing, and then eventually finding a buyer and selling and transitioning that business. So I figured why not do what I enjoy and what I have experience in and take on a new venture.
Rich: George, we talk about mergers and acquisitions in the same breath all the time. But if you’re at a cocktail party and someone says, “Hey, George, what’s the difference between mergers and acquisitions?” How do you respond to that?
George: Well, there’s really not a big difference between a merger and an acquisition, other than it depends if you’re the target or if you are targeting. At the end of the day, a merger is in a sense an acquisition, but it’s an equal footing of two companies that have now formed into one.
And an acquisition is traditionally known as more of a purchase of a company at the engulfing of a targeted company into the mix of an existing company. And at times the identity of the company that’s been bought is lost into the identity of the company that is buying you, if you will.
But at the end of the day, they’re really both the same. I think the industry just calls it “mergers and acquisitions” to give it a fancy acronym of M&A.
Yury: So based on what you said, I’m interested to understand why would anyone want to be acquired? And on the flip side, why would a business want to acquire another business? Is there a reason?
George: Yep. Sure. Let me address the second piece first. And why would a company want to acquire another business? Well, the target company might have some intellectual property or IP that the buyer is interested in purchasing. Or the selling company where the targeted company might have a market share that the company that’s buying might be interested in getting into, or perhaps equipment or processes that it wants to buy and integrate into its fold. Or at the very least, maybe even just eliminate the competition that’s out there. You see that quite often and they’ll approach a company either through an M&A specialist or through other channels and essentially make an offer. And it’s typically an offer that perhaps can’t be resisted by the company that’s being targeted.
On the other hand, a company that is looking to sell might be looking to sell because it has found itself, perhaps at that point in time in its business cycle, that it cannot grow. It cannot achieve any more market share unless they bring in other capital. Which would in a sense mean that they sell out or maybe the owner or owners have gotten to a point where now they’re thinking about their own retirement and selling to their employees may not be the most feasible solution or the most profitable solution. So they look for a buyer.
Rich: George, when you’re dealing with mergers is a 50/50 split feasible? Are there benefits or drawbacks to an even split like that? Or does it always make sense for one person to have the upper hand, for lack of a better phrase?
George: That’s a very interesting question from this perspective. You’ll never see a 50/50 partnership go without problems in the future. You’re always going to want to have one party had that ultimate authority. And it’s rare, I should say, to find a 50/50 partnership that that will work long-term. Visions change, personal interests change, and so forth.
It is also rare to see a 50/50 merger. It’s not that they don’t happen. It’s not that they don’t occur in the public markets. There are examples in the public markets of a 50/50 merger, but traditionally you have one entity, perhaps the purchaser, that is stronger, bigger, more financially sound that is integrating the other party into the mix, and therefore exchanging not 50/50 in terms of their ownership, but there’s going to be some enact inequities in the process.
Rich: So, if I’m looking to grow my business through merging with another company, either me or the other owner is ultimately going to be the only CEO, in your recommendation, it sounds like. And so one of us is going to have to step down or the other person is going to have to step up, however you want to phrase it, for there to be a higher chance of success. Is that fair to say?
George: Well, I would venture to say that in most instances that I’ve seen there being some sort of equitable merger, at least initially, or co-CEO-ship for a period of time. There is a plan in action so that one entity takes over. And the reason for that is again, it’s very difficult to have two different companies, as similar as they may appear, for the merger. Two different companies, combining that culture, combining all of those processes on a very even keel. So for a period of time, you might see co-leadership, but eventually there will be a change, there is a plan in action. Whether it’s stated to the public or not, there will be a plan where one entity takes over the other.
Yury: George, thank you for sharing that this information. It looks like there may be some issues or difficulties in terms of personal dynamics when two companies merge, or some cultural issues, maybe some basic incompatibilities between the systems and stuff. But what are the other things that you’ve seen transpire during the process of merger and acquisitions that maybe our listeners should look at as a benefit or an opportunity, or some other things that may basically dampen the whole experience?
George: Sure. One thing that comes to mind is cold feet right at the time of consummation of the deal. I have been involved in situations where the seller, for instance, is right at the finish line, we’re just about to make the deal, and they get cold feet for one reason or another. One of the things that you have to keep in mind is that if a seller is selling, they’re selling their dream, their vision, their baby, the enterprise that they’ve grown to a certain point. And the realization that they’re no longer going to own it, that they’re perhaps no longer going to be boss, they may be working for the buyer for a period of time, tends to scare some people off, regardless of the price that they’re walking away with, right at the final minute.
So that is always a concern and that is always something that at least we try to take people, the seller, through a psychological analysis so that we don’t have those problems at the end of the day. Because everybody’s looking to consummate the deal. So that is a problem.
Another problem that you mentioned that I’ll reiterate is a cultural misfit. A lot of times people are only looking at the financial benefits of the merger or the acquisition, and they don’t necessarily consider the true culture of what they’re buying, and perhaps it’s just a total misfit for their company. And unfortunately when you find those types of situations, you could find a deal that just doesn’t go well, and there are layoffs or firings afterwards, which are very unfortunate.
One other issue is lack of due diligence. If the M&A professionals and the team that’s been put together to take the two companies through this M&A process, if there’s been something that hasn’t necessarily been explored or disclosed, whether it be financially or otherwise. For instance, an environmental concern or some bad past lawsuit issues. Those could impact the deal down the road, and those could have a major significant negative impact. And I’ve seen deals get reversed after they’ve been consummated, and that’s not a very pleasant experience.
So I guess if there’s a takeaway there, you want to have full transparency on the deal. You want professionals that are experienced in looking under every single hood that might exist in the businesses. And that goes for the seller doing their proper due diligence on the buyer as well. It doesn’t just go one way. Sellers should be aware of whom they’re selling to and they should be doing their own due diligence.
Rich: That was actually a question that I wanted to raise. And what does the process look like? So obviously you’ve helped many companies through this process, so what are some of the things, I know you’ve touched on a few of them, but what does the due diligence process look like if I’m ready to buy another company, if I’m looking to acquire another company?
George: Sure. So the process really starts before the due diligence, naturally. And that’s finding the buyer, getting an interest, and then negotiating through some superficial financial information that’s provided. And I say superficial, but there’s enough information to come up with a price that everybody can agree to, and a letter of intent is then signed.
The letter of intent is non-binding in certain areas and binding in other areas. The non-binding pieces is, look, we’re going to go some due diligence and if we find something that doesn’t necessarily fit our needs, we have a right to back out of the deal.
The binding aspects of the letter of intent include non-disclosure and keeping the process in secret between buyer and seller and the professionals that are involved. Once that’s been signed and the due diligence process opens, well then there’s a series of questions that the professionals are going to go through. They’re going to go through at least three, if not five years or more of financials. And that includes not just the income statement but also the balance sheet and a cashflow statement to really unearth what has been going on in the company and just to substantiate what the revenues and what the expenses are.
It’s going to be a review of all of their tax documents and all of their QuickBooks entries, or however the books have been kept. And typically having reviewed statements helps the process reviewed financials. Having audited statements for larger deals is probably a prerequisite in some of the larger deals. And when I say larger, I’m talking about companies whose revenues are more than $50 million.
In addition to that, there’s going to be due diligence on things like the employee documents, what documents have employees signed in terms of non-competes, in terms of non-disclosures, in terms of contracts, in terms of benefits, retirement benefits, health benefits. That’s part of the due diligence process.
Part of it also includes IT due diligence, cybersecurity due diligence. Has there ever been a breach, has there ever been in kind of a cyber failure that has caused some sort of a problem or an issue with customers or what have you?
There’s a whole series of things that include legal documents, that include the processes and procedures in the operations of the entity, the sales process, the marketing process, what is the leadership and what is the business plan of the company? So you’re looking at a number of different areas of the company, and sellers have to be prepared for that because it is a deep dive look under the hood. And that’s part of preparing a company for the actual transaction.
Yury: So I wanted to kind of piggyback on this conversation. So if we’re looking at M&A’s as an exit strategy, how do we make ourselves as attractive as possible to a potential buyer? And how far in advance do we need to start preparations to look as attractive as possible?
George: Yury, you touch on a really great point. And that is many sellers who are looking to exit the business start looking at that process maybe a year or two before they want to exit, before they have this hypothetical date. Which typically ends up being way too late in my opinion and other’s opinions. And there’s a reason for that.
You want to prepare the company and you want to make sure that the eight different departments of the company, and that includes the leadership and the second-tier bench. And by that I mean, who else is part of that management team? We want to make sure that they are prepared, number one. And number two, that they are going to be part of that team long-term. Because a buyer is buying that team for most of the time. So you want to look at the leadership of the company. And you want to make sure that that leadership is aligned; its vision, its mission, and what have you.
The reason for that you may ask, well, I’m selling the company, what does it matter to me with the vision? And the mission is because you’re selling that to a prospective buyer. A prospective buyer isn’t just buying the assets, but they’re buying the whole entity, the whole enterprise.
Number two, you want to make sure that you have a business plan. “Well, I’m going to be getting out of the business”, is the response that I hear from many sellers. My answer to that is, you’re getting out of the business with somebody coming into the business. And that business plan that you’ve created, or we’ve created, will help sell the business.
Number three, you want to look at the people and you want to make sure that the people that have gotten you to where you are, are still part of that process in the future. Because the buyer’s buying the people as well. Unless they’re just buying the assets, they’re buying the entire enterprise. Then you want to look at the sales process. You want to look at the marketing process. You want to look at your operations.
For instance, a company that is in manufacturing might serve itself very well both today and at the time of sale, if they’re ISO certified in the area that they’re manufacturing. You want to then make sure that your financials are clean and in order. Perhaps having them review, perhaps having them audit it, depending on the size of your company.
And then you want to make sure that there aren’t any legal loopholes that you’ve left unbuttoned, that there aren’t any lawsuits, that there aren’t any environmental concerns, that there aren’t any other concerns that at the time of due diligence are going to surface.
If you could present to a buyer a company that really is operating like the proverbial Swiss army knife out there by addressing all eight of those departments, you’re actually presenting a company that A) is going to be more attractive, but ultimately B) has more value to a buyer because the buyer doesn’t have to spend time, money, and resources after the sale to put those things together.
Rich: I want to circle back George, to something you mentioned earlier, which is this company culture. And we’ve all read these horror stories in The Wall Street Journal and other magazines and newspapers, about two companies that seem really good on paper. But once you put those two businesses together, maybe one was very creative and another one was very systems oriented, and they hired people based on those decisions. When you brought those things together, you did not get chocolate and peanut butter, what you got is a hot mess. If you see that you’re looking, or if you’re working with a client and there’s obviously a difference of company culture, do you have any advice for the company to make that merger go more smoothly? Or do you just say, you might want to walk away from this?
George: Well, it depends on how much time we have. If we have enough time to help affect and influence the culture, we’ll start taking the appropriate steps. Which might include things as simple as proper evaluations, a proper assessment of each individual employee, and perhaps maybe getting rid of some employees that don’t necessarily add value to the company per se or are keeping the company behind, influencing the employees by putting a proper bonus system, proper fringe benefits system in place. Those will all help the culture long-term, and the culture is really influenced from the top down.
We spend a lot of time and perhaps even bring in professional coaches to work with the owners or to work with the C-suite management so that they can see for themselves what they’ve been doing wrong or what they’ve been doing right to influence that culture. Because again, a happy group, a happy employee, a happy demographic, is going to have a lot more value to a prospective buyer. Especially if they intend on keeping that workforce intact and in place long-term.
Yury: George, everything that you said makes me think about all that preparation work. It feels like it should be implemented almost on an annual basis at any organization, regardless of whether they want to sell to someone. Because everything you mentioned is critical to the ongoing success of any business. Training, your employees, proper assessment evaluation, making sure that your culture is in alignment with your goals and mission and the vision. It feels like every single business owner should practice kind of like preparation to sell the business in order to continue to grow, regardless of what they’re plans are.
George: Yury, you’re absolutely right. And I’ve actually had situations where I was contacted initially for finding a buyer and really marketing the company, and in a sense selling the company, the owner wanted to sell the company and get out. And when I convinced the owner that we needed to go through this time in this process to get things aligned and ready for sale, I also warn them that what you might find at end of our process you may very well find that you’re keeping the company because it could be worth a lot more to you because it’s running itself, as opposed to being in the business. You’re working on the business, as the old saying goes. And it actually did happen to work out that way. And what the seller realized is that now they can actually walk away and have more time to themselves, and yet continue to own the company and pocket the dividends that they’re getting in terms of the company. Its value went up to potential buyers, but we didn’t even pursue buyers because they were having a great time running the business from that point forward.
Rich: That’s awesome. George, I want to shift gears very dramatically right now. I know that you’re working with a new company that’s bringing a ropeless trap to lobstering. Obviously something that might cause waves in a state like Maine. I apologize in advance for that one. Can you tell us a little bit more about that new venture?
George: Sure. Ropeless Systems Inc. is a company that’s committed to addressing the problem that lobstermen and crab fishermen have as it pertains to regulations. Unfortunately, they cannot fish during certain times of the year when certain endangered species, including the right whale, are migrating. Which tends to be the best time to be fishing for lobster because they’re the most prolific during that time period. The problem that the ropes cause in trawls that the lobstermen use is that whales become entangled, they become hurt from the ropes that connect the trawls to the buoys. Well, we’re now in the business of having created a ropeless system that basically has a bag that is activated and fills up with air from a mini scuba diving tank, that’s put onto the trawl and brings the trawl to the surface. It’s a true ropeless system, unlike some of our competitors that continue to utilize rope in their ropeless system, we are a true ropeless program and system.
One of the unique features that we have is in the IP that is with the transponder and the transducer that actually sends out a signal to deploy that bag. The IP that we’ve developed, it’s a very unique IP that has more uses than just ropeless fishing. It has other uses for Naval and defense and marine exploratory areas. The beauty of it is that it’s going to have a huge, positive impact on the economy, specifically the lobstermen and the economies of anywhere where fishing for lobster and crab fisheries is a major part of the economy.
Rich: I saw some great video and photos. What’s the website that we can send people to on that one?
George: It’s www.ropeless.us, and you’ll see several videos on how our product works. It is new technology for what tends to be traditionally a very conservative workforce. Lobsterman do not like new technology, but regulations will probably force them to utilize some sort of a ropeless mechanism, such as ours, if they want to fish during the most prolific time periods of the year.
We’re planning on bringing the product to market around June/July, and again, we’re hoping that it’s going to have very strong, positive influence in the economies that Maine and New England, and then span out to Canada and the rest of the world.
Yury: Fantastic. So the final question, the one that we like to ask all of our guests is, what one thing would you change if you could to improve the business ecosystem here in Maine?
George: That’s really a tough one, because Maine tends to be a very business-friendly state., believe it or not. In fact, it was very highly ranked in a Forbes Magazine study very recently. But if there were one thing that I could suggest that we focus on in the state of Maine, that is the internet and cyber reach of the state. There are many areas of rural Maine that still don’t have adequate internet connectivity, they don’t have proper conductivity. And we’ve seen this with the pandemic with so many students staying home because of the school closings. A lot of students, a lot of families, just didn’t have proper connections to the internet and the ability to connect.
So if we can have an influence in state for the technology and bringing the technology up, and allowing people to have that connection. Which in the 21st century is the way that we communicate. And, you know, we’ve seen it with the pandemic how important technology is. I would definitely suggest that we focus on that.
Rich: Awesome. George, for people who are maybe thinking about M&As, or just want to be able to talk and learn more from you online, where can we send them?
George: Sure. The website is www.ROIcubed.com. And you can reach me right from my website if you have any questions or anything that I can help you with.
Rich: Awesome. George, thank you so much for your time today and for stopping by.
George: Thank you, Rich. Thank you, Yury.
Yury: Thank you. Have a great day.
Rich: A lot of good stuff from George. I was excited to get somebody on who could talk about mergers and acquisitions. If you want a full transcript of the episode or you want any of those links that George shared with us, head on over to our website, fastforwardmaine.com/72.
“And this is the part of the show where we do our “fast takes” what we took away from today’s episode. So Yury, hit me, what’s your “fast take”?
Yury: My “fast take” is pretty simple. Regardless of what your exit strategy is or what you’re thinking about doing with your business, you always should go through the exercise of being prepared to sell it. Because the goal is not to sell the business, but to ensure that it is in the right shape. Ranging from your culture, to your mission, to your sales process, and ultimately how your employees interact with one another and how they carry the mission forward. I think it’s important and ultimately it will contribute to the growth of your business regardless of what you want to do with it. So that is my “fast take”. Rich, what is your “fast take”?
Rich: My “fast take” was the fact that a lot of business owners here in Maine are looking for growth. In fact, that’s one of the reasons why we put together this podcast, it’s for the owners of growing Maine businesses. And very often we think about hiring more people, taking out a loan, line of credit, whatever it may be, but I don’t think enough business owners are considering mergers and acquisitions as a form of growth.
So my big takeaway was maybe take a look around and is there an opportunity for you to grow more quickly through M&A’s. There are potential pitfalls with them, as George explained to us, but they are a great way of more quickly scaling up your business.
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