M&A is about helping clients make their ambitions a reality…
That’s what Bob Goldsmith, Founder and President of Northern Edge Advisors, believes.
In this episode, Bob will unpack what Northern Edge Advisors brings to the table for the lower middle market.
He’ll also share:
- The importance of using a wide pool of buyers
- What it means to be long-term focused
- Why owners should start early with M&A
- And more
Mentioned in this episode:
Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority in executive and transactional liability and founder of Rubicon M&A Insurance Services, now a proud member of the Liberty Company Insurance Broker Network. Welcome to M&A Masters where I speak with leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today I’m joined by Bob Goldsmith, Founder and President of Northern Edge Advisors.
Based in New York, Northern Edge Advisors offers business owners superior financial advice on all aspects of selling a business, from developing strategy to finding a purchaser to negotiating terms. And on each decision along the way, they lead their client to arrive at their ambitions, which is kind of why you’re doing this whole thing. Bob, thanks for joining me today.
Bob Goldsmith: Patrick, thanks for having me here.
Patrick: Now, before we get into Northern Edge Advisors, because you guys have cut a real nice niche for yourself in New York, let’s start with you. Okay, what led you to this point in your career?
Bob: Great. So I started my career long time ago as a foreign policy analyst working on European security issues in the early 1990s. So probably a little bit eclectic. Then after receiving an MBA in finance and international business, I was fortunate enough to be hired by 200-year-old Continental Grain Company, which was one of the largest private companies in the world. Continental sent me to Geneva, Switzerland, and I lived in Europe for the next seven years.
The company was, they were rapidly expanding operations and building and buying businesses across Eastern Europe and the former Soviet Union. I built up the Romanian business and was heavily involved in trading and also in evaluating investments from things like oil seed refineries, to logistics, to port facilities, to manufacturing businesses in Ukraine, Russia, Baltic countries in Central Asia, and actually lots of other places.
After getting back to New York City, one of my more interesting assignments with Continental was to spearhead the firm’s establishment of a biotech company in Texas focused on animal genomics. So I learned a ton at that company. It’s a terrific, you know, 200-year-old privately held company. And then after kind of Continental I was introduced to the owner of a 350 million family-owned New York City based manufacturing business, and then offered the opportunity to run it.
We made a number of asset acquisitions and early-stage investments during my tenure there. So I was there until shortly after 9-11. I’m compressing lots here, Patrick, but basically, I’d always had the entrepreneurial bug, like many of our clients, and I figured I knew enough at that point, to go out on my own. I spent a year meeting with and having lunches with business owners, M&A attorneys, Wall Street bankers, just trying to understand what it would take to provide premier M&A services to family businesses and to closely held private companies.
Really to get their insights, and I was fortunate to have the opportunity to spend time just, you know, learning from people that were in the market. How could you do it better, I didn’t have any constraints. So I wanted to recreate or create something new. My business partner in Northern Edge Advisors was a former senior M&A banker at Goldman Sachs, who had also been the COO of their investment bank in Europe. And together we built a culture and structure that is, I think, very attractive to a talented team of experienced bankers.
Or senior bankers are alumni of Bank of America, UBS, RBC, and other well-regarded financial institutions. Our COO was a managing director at GE Capital. The rest is really history. Since 2006, we’ve closed over 150 transactions across a wide variety of industries and deal sizes. So from inception to where we are now it really has worked out super well for us.
Patrick: You mentioned in the culture. One of the things that strikes me is you’re coming from very large established organizations that have infrastructure and everything. And you made the brave move to step out on your own, which I think that’s a real big leap of faith. So as we speak about Northern Edge Advisors, okay. Let’s talk about that firm a little bit. And basically, how did you come up with the name, and then talk about your commitment, because you guys are in I would call it the middle to lower middle market.
Bob: Yeah, we actually went through this rebranding a couple years ago. And the truth is that we had been considering it for many years before we actually took the step of doing it. It’s quite an investment of time and creativity and thought, and so it’s hard to step away from clients do that. But when the market stopped for a brief period, around March 2020, as you remember, because of the pandemic, we made a list of everything we could work on.
And this project was really at the top of the list, we came to it pretty quickly. And to do the rebrand, we worked with a terrific team, I guess I’m gonna mention a couple of other private companies, why not. We worked with a terrific team at High Tide Agency. And then with Group Gordon, which is a top-tier strategic communications company to capture what we think makes us very special.
Which is our high touch, very relational, client-centric and really non-institutional culture in our ongoing commitment to the North American market. As you know, there, I think there are over 210,000 middle-market businesses in North America, they are often underserved. It’s where I started this business, and poorly advised and we especially and you know, now in these kinds of markets, in these kinds of volatile markets, like the one we’re in now, we really, really get a sense of, you know, the degree to which they’re underserved.
And so our bankers level the field and develop options for owners who have limited experience in negotiating with corporate buyers and highly sophisticated private equity groups. So that’s really the focus of our business. And we took a, we tried to benefit not benefit, we took time that we had, then to really focus on something that was important to us,
Patrick: I think what’s striking is that and this is why I appreciate having you on today is that there’s this sizable share of the lower middle market, where you’ve got owners and founders that they’ve got the skill set to get to a certain size, but then they can’t get any bigger. And you get to that inflection point where you’re too big to be small, but you’re too small to be enterprise.
And if you mistakenly think okay, I’m going to do it myself, you’re either gonna go to a strategic or go to an institutional bank that charges you a lot of money, but like you said, they get underserved. So they don’t really get the bang for the buck. And they just don’t know because they’re busy doing their business, where the resources are for M&A. So that’s why I’m very pleased to talk to you about this. What is Northern Edge Advisors bringing to the table for the lower middle market?
Bob: Yeah, so I’ll go through a bunch of the things, I appreciate being able to do that. And it really has to do with the expertise and sophistication that we have. As I mentioned before, first and foremost, it’s our team, that we’ve assembled from major Wall Street firms and the decades of experience that each of our senior bankers have in the M&A market. I also think we have a unique combination of really exceptional transactional experience and dedication. A focus on solving the issues facing owners of private businesses.
You know, we really excel at referred businesses that have a degree of complexity. And so we excel at navigating that complexity. We have a very high touch attention to family-owned and other privately owned companies. And just to give you some, you know, what does that mean? They’re complicated, right. Conflicts of interest among different shareholders. Conflicts of interest between shareholders and senior management. Transactions subject to public scrutiny, multiple constituencies with differing objectives.
You know, some of our clients have non-financial priorities such as preserving the family legacy, how do we go about doing that? There are intergenerational issues, discretion is paramount very often and foremost, obviously, maximizing value. We use a very comprehensive approach to identifying on average, it’s 180 potential buyers for our clients.
And deep frustration that I have, is that maybe because the pickings were easy over the last couple of years, but so many financial institutions, were just going out to their 30, you know, sponsor coverage, right. Your private equity groups that they were sort of close to. And the game was for the private equity groups to get close to them. You know, we go out to a much wider array, we go across borders, to find them.
And if the proof is in the pudding, or the eating of the pudding, something like 80% of our completed transactions have been consummated with parties not identified by our clients as likely buyers. In other words, and why does that matter? It matters because the deals, more deals get done. And it matters because if you want to elevate prices, what does an owner want you to find?
They want you to find the outlier and we’re really good at that. And then, finally, this is very dear to me. You know, we’re long-term focused, and we don’t hesitate to advise our clients when a transaction does not appear to achieve their objectives. We’re not afraid of switching gears, it may add on three months, but we’re never gonna be caught in the corner.
And I, you know, like our clients, I think, it is sort of the, part of the motive of our rebranding or the focus of our rebranding, really, because we are owner operators ourselves, we’re able to do what is right without feeling the pressure to do what is expedient. And I think that is borne out in the really enduring relationships we have with lots of our former clients, you know, over the years as deals sort of, you know, five years out as we see how it turns out.
Patrick: Did you see any retrading or deals fall off the shelf at the end of 2022? And then they’re just circling around now in 2023?
Bob: I mean, there’s a lot of talk of it. And yeah, there was some of the credit difficulties that deals faced. And then people also talk about some of the pipeline getting pulled back and, and so forth. We seriously did not feel it ourselves. We had, and I’m not, you know, I don’t want to ascribe to too much of that. But the deals that we have had, you know, retrading is serious business, right. It’s a very negative kind of thing to do. So it depends on where your deals are in the process. But I think I think we closed five deals in December, and we haven’t had, we’ve not had retrading on our deals.
Patrick: Well, that’s fantastic. Also, I think that helps is, as a quality firm, you’ve got quality clients, and a lot of times if you’ve got maybe not low maintenance, but quality clients that makes you know, that’s half the battle, in a lot of cases. Talk about the ideal profile for Northern Edge Advisors. Who are you looking to serve?
Bob: Yeah, by the way, Patrick, you’re touching on an excellent point, which is, you know, the advice to give business owners right now is really evaluate, you know, the quality of your financial, of your financials, the quality of the information that you can provide buyers. This is not a time to be, well, it’s never a time to wing it. But this is really not a, this is a time where you need to really be buttoned up.
And I do think that the real preparation that we do with our clients paid lots of benefits later on in the process. So who do we want to serve? We, you know, we represent a broad range of lower and middle market clients that have completed the full spectrum, we’ve completed the full spectrum of transaction types. So full sale, majority, minority sales of company’s assets, or equity interests, mergers and divestitures.
We’re actually been increasingly asked to do sort of divestiture-type sales. The vast majority of the work that we do are sell-side mandates. And I’m really estimating, but I think 75% of our transactions are in the 2.5 to 7.5 million EBITDA range. And there are larger transactions that we’re working on that are well over 10 million of EBITDA, and we love those. But we also love the smaller ones that we work on.
To touch on a point, again, in terms of the clients that we look at which I think it goes to one of your earlier comments, we really, we’re fairly selective with whom we work. And we operate with integrity, and we look for integrity in how a client’s business is managed. And we look for the commitment of the owners to dedicated resources to the process in collaborating with us so we can help them. And that’s not to say that we want to take up too much of their time. You know, they’re all, as you said, I mean, sort of stretched, right.
That’s why some of them are stuck. They’re stretched running the business and having, being pulled in so many directions. But you know, we look for clients that you can’t just ship off some documents to the advisor, and it’s all done. We try to keep them out of it. But it does require time and we want to system organize so that we can collaborate with them and work with them and get the best result for them.
Patrick: Yeah, it’s nice when they’ve got a buffer, which is you, between themselves and the buyer and the buyer’s negotiating team. It makes things a lot less uncomfortable.
Bob: Yeah, I’m gonna probably upset some of the clients. But you know, people often say hire the banker to handle the buyers. And one astute banker said to me, you know, very often given the strong-willed clients that we all have, you sometimes hire the banker also to manage the client.
Patrick: Yeah, you’re managing expectations, which is the real big name of the game with this kind of thing. Now, there are just a ton of investment bankers as they are now close to 6000 private equity firms. I think 10 years ago, there were less than half of that. And a big reason why we’ve got this proliferation is that M&A transactions are just going up exponentially. And the reason for that I’ve got to observe is the insurance industry came in and took a lot of the risk away from the buyer and the seller.
They use a product called rep and warranty insurance, and it avoids the buyer or the seller conflicting with each other. If there’s a breach, rather than pointing fingers or commencing litigation, you’ve got, you just go to a third party that has deeper pockets. And I think it’s done a lot of things to accelerate M&A transactions. But don’t take my word for it. Bob, good, bad or indifferent, what’s been your experience with rep and warranty?
Bob: Well, first, I would say, you know, I’ve read your materials now. And so, you know, I always thought it depended on the size of the deal, and some of the smaller clients maybe wouldn’t want to pay for it. Although I think it may make sense for some, we usually find that it’s, this is driven by the buyers that want it. Mainly, I mean, you said it. The private equity groups who find that it helps them manage the risk profile.
And I think often their banks are the ones pushing them into reps and warranty insurance. But it plays, you know, in a very important role, and it can help the efficiency of deals and, and I think the sector doing reps and warranty insurance is getting more efficient at not holding up deals, so that we can get them done. You know, it clearly helps clean up some of the hassle of negotiating reps and warranties. You know, so while I haven’t seen a ton of it, I’m actually very interested in your product.
So I went through it. And I don’t want to do your job for you. But I actually shared your materials regarding the TLPE with couple of M&A attorneys to get their steer that we’re working with on using this form of rep and warranty insurance for smaller, you know, for the smaller end of transactions that we work on. You know, this is a business where it’s life, lifelong learning. And so if there’s something that will help the clients, we’re going to try to figure out how to do it.
Patrick: We’re very excited with the launch of that. This is, unlike traditional rep and warranty policies where the policyholder is the buyer, and if the buyer suffers a loss, they go right to the insurance company, they don’t go to the seller and they get the claim paid. So all the decisions on which insurance carrier, which broker, how much coverage, exclusively with the buyer. Sometimes the buyer and seller will split the cost but it’s the buyer that drives that decision.
The problem with rep and warranty, traditional buy-side rep and warranty is it’s designed for larger deals. At least 50 million and up in purchase price. What happens for all those add-ons and bolt-on companies that are you know, they’re priced, you know, down in your range, whether it be between 10 and 25 million. It’s cost prohibitive to do a buy-side policy and buyers a lot of times aren’t going to want to go through the diligence.
So now you have a seller who even if they want to get the protection they can’t. Well now one of our carriers CFC came out with a product transaction liability private enterprise which is TLPE. And it is where the seller is the insured. The policy is triggered when the buyer notifies the seller of a breach. That’s all it takes. Seller notifies the carrier, policy is triggered, the underwriters will negotiate with the buyer, pay to claim just as on a buyer policy.
The magic on this one is there’s not extensive underwriting. We underwrite the seller, so we don’t have to underwrite the buyer’s diligence. Which means no $50,000 underwriting fee, no weeks of processing or underwriting call. And even best, the policy just like buy-side policy, the premium rates are based on how much insurance you buy, not the elements of the risk. So in TLPE, you’re looking at a policy that costs 15 to $20,000 per million in coverage.
A $5 million limit policy is less than half of what a $5 million rep and warranty policy is. And so it’s one of those things that we want to make sure we bring out to Northern Edge Advisors and all the sell side representatives because even if the buyer isn’t willing to go with a buy-side policy, the seller still has the peace of mind where they can get protection from the buyer and take care of it that way.
So we’re really thrilled with that. And we’ve been getting literally rave reviews. So I’m looking forward to working with more professional firms like Northern Edge Advisors, and other sell-side advisors where you do have these organizations that you can really serve that. Bob, as we come in, we’re just about the end of first quarter in 2023. Been a little tumultuous. What do you see going forward for the rest of the year? Either M&A in general or Northern Edge Advisors in particular?
Bob: Well, let me, let me give it a shot.
Patrick: We’ll hold you to it, now. We’re recording it, so we’ll hold you to it.
Bob: Exactly. Well, I think like everyone, I’m really hoping that the banking sector will begin a process of stabilizing with the backstop the Fed is providing and the purchase of SVB by First Citizens and other positive developments, as opposed to what you know, the concern is that we’ll have a slow motion banking crisis. Presumably that’s not going to happen but there’s that it’s an area of concern.
You know, to state the obvious combined with higher interest rates banking situation increases the likelihood of recession or a deeper recession. Generally, credit terms that the amount of debt available for transactions and also the treatment of covenants is going to tighten or is tightening. Buyers are already more discerning with respect to acquisitions.
But I think buyers will continue to be active depending on size, quality and sector. So there’s definite focus on buying quality companies within good sectors. You know, A quality deals are getting done at reasonable valuations, not a lot of slippage. It depends on the firm and the deal.
B quality deals are getting done with some softening of evaluations versus the recent past. And if you look at what’s happened in the stock market, you know, we sort of get stuck in these frames of mind, have prices moved. Well, you know, the value of assets is moving. It’s happening in the public market. I think, less so in the market for private businesses.
C quality deals are getting held back from the market for the moment, you know, low growth, cyclical, internal flaws, including controls, if there’s problems with the quality of financial reporting, that’s an issue. Lower middle market businesses have been the most resilient in the market and this is going to continue. The market for add-on and bolt-on businesses remained strong.
We’re finding that directly because PE firms are seeking to bolster their existing portfolios and because of fund time horizons, in other words, it can’t stop. Gotta keep being active. Also, well-capitalized strategic acquirers are making acquisitions in their core business. To go directly to your question, I think the M&A market is like any other supply and demand market.
And so fewer transactions completing in q1 and q2, which has happened, means pent-up demand and more deals in q4 2023, and q1 and q2 2024. So when things sort of heal, yeah, and credit markets heal, when there’s a little more imbalance, you know, all that pipeline of people.
We’re talking about deals, we’re talking about people that have other things they want to do right or need capital or want to retire, that’s really, I think, gonna push pretty heavily back into the market. And I’ve become a broken record on this final point. But for that reason, it behooves every business owner to prepare in advance for when windows fully open.
Like, just, you know, I mean, the things that you do, the things that are important for them in M&A, I think they have to learn about it and particularly, they should be working on making the improvements to their recording reporting operations, quality to their management team, you know, all the issues that could be problematic, I think they should start working with an advisor so that when the windows open, you’re not in sort of, you know, starting at Ground Zero.
Patrick: It never hurts, you can never start too early on these kinds of things. So, Bob Goldsmith of Northern Edge Advisors, how can our audience members find you?
Bob: I hope people catch it. So it’s www.northernedgeadvisors.com. So www.northernedgeadvisors.com. My email address to contact me directly, which would be welcome is bgoldsmith, b g o l d s m i t h @northernedgeadvisors.com. And my direct phone number is 212. I’m in New York. 212-520-8290. And I would also say we have, although I’m in New York, we have offices in Fort Worth in LA and up in Toronto. So we got bankers around the country.
Patrick: You’re in all the important places. Bob, great to have you. Thanks so much today.
Bob: Patrick, pleasure and thank you.