In this episode, I’m joined by Peter Cook of Everingham & Kerr, a mergers and acquisitions advisory firm that specializes in providing intermediary services for lower-middle market companies and entrepreneurs.
Peter will share his philosophy around transparency and will also discuss:
- His take on reps & warranties insurance
- Insights from his firm’s 35-year history
- His firm’s ideal target
- 2023 predictions for 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 the 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 Peter Cook, Director of Everingham & Kerr. Founded in 1988, Everingham & Kerr is a merger and acquisition advisory firm that specializes in providing intermediary services for lower-middle market companies and entrepreneurs. And if anybody has been lucky enough to be on Everingham & Kerr’s feed showing their activity, they are prolifically active in the lower middle market M&A space. So it’s a real treat to have you. Peter, thanks for joining me today.
Peter Cook: Thanks so much, Patrick. Appreciate it.
Patrick: Now, before we get into Everingham & Kerr and just this voluminous amount of work that you guys are doing, let’s start with you. How did you get to this point in your career?
Peter: Well, it’s been an interesting ride, Patrick. I started out as an attorney, way back when, and practiced for about five years. Was a member of the New Jersey Bar, and really was disenchanted with what I was doing. It wasn’t very exciting for me. And lo and behold, went to a Christmas party met somebody that was a big investor in a startup company in the mid 90s. And very shortly thereafter, joined that company and found out that, you know, sales was a great spot for me.
And we grew that company, to such a point where, you know, we did get angel investment. I ended up, the company was in New Jersey, but I ended up opening our West Coast office in Spokane, Washington. And I lived in the Northern Panhandle of Idaho, which is far cry from where I’m from, which is Brooklyn, New York. And, you know, that was a wonderful ride. You know, that was about 10 years and took me around the world, and met so many people along the way.
And then got involved with mergers and acquisitions with some colleagues from the UK portion of that business. And I’ve been doing this for about 15 years, 10 of which has been with Everingham & Kerr and frankly, you know, I have no regrets. You know, probably should have gotten into it sooner. I’m having a lot of fun. It’s very interesting. No deal is, no two deals are like, and yeah, so that’s, you know, a long and winding road.
Patrick: Well I think it’s great because it gives you a broader perspective on transactions on a whole variety of levels. And it gets you to where you’re going. Let’s talk about Everingham & Kerr, and give me the history because they started in 1988. So this was way before private equity and M&A was, you know, as prominent as it is today. But let’s talk about that. And, you know, start by how’d they name it. Is it just the founders?
Peter: Yeah, the firm was started by Bob Everingham, and shortly thereafter, a gentleman named Bob Kerr became his partner. Both Bobs are retired. And Bob’s son Dan Everingham is one of the managing partners managing, directors. Joe Vanore is the president and another managing partner. But, you know, we over the course of this is our 35th year, which I guess is a long time for, you know, an M&A advisory firm. The industry has changed a lot, the market has changed a lot, private equity has changed a lot.
But our niche, for better or for worse, has been the lower middle market. I mean, we’re not a Main Street business broker, in the sense that we, you know, we don’t sell dry cleaners on Main Street or pizza places or restaurants or bars. We’re really following an investment banking model, in the sense that we, you know, put together a sim and we go out broadly to strategic buyers, private equity buyers and entrepreneurial buyers. And, you know, while you know, we don’t have some wildly unique methodology, we have a great process.
And, you know, we’ve worked with many Manufacturing companies, distribution companies, business services of all types, even professional services companies. And, you know, we have had some great success. And I think, you know, one of the reasons for this success is to on the sell side. We also, you know, we do some buy-side work, absolutely. But it’s predominantly sell side. One of the reasons for the success is real transparency between ourselves and our client, in terms of being aligned, when it comes to most importantly, likely valuation.
You know, there’s nothing worse than, you know, having two different views, especially if they’re very far apart on, you know, what a company is likely to fetch in the market. And so that’s one of the most important things. So we really try to vet our sell-side clients to make sure that, you know, they have a good understanding. I mean, we don’t have a crystal ball, but you know, 35 years in the business and seeing, you know, ebbs and flows in, you know, one concept or another, and in the world of M&A, we have a, you know, pretty good sense of, based on size of company type of company, certain nuances within a particular company, generally, you know, how the market will respond.
And so, if somebody has a notion that they, you know, must get $10 million for their business, as an example, but everything points to, you know, four to 6 million, you know, we’ll let them know that. You know, because it’s important, because then it just becomes an incredible waste of time. And so we can offer guidance in that regard. You know, the simplest piece of advice is, you know, increase your earnings. Easier said than done. But, you know, that’s what we do. And I think that’s one of the biggest strengths is that type of transparency.
Patrick: Well, I think that, you know, this is culturally because I’m coming from the west coast, and you’re over on the east coast. But, I mean, the culture on the East Coast is, you know, brutally honest. And we’re just a lot, a little gentler with that to, you know, to the detriment. And I think, it’s important because, you know, this is why I want to owners and founders to find organizations like Everingham & Kerr because they get to a point of inflection where they’re too big to be small, and too small to be enterprise.
And so it’s okay, how do we get to that next level. And some people are looking for a big exit, and that big exit may not be coming. The sooner they learn that, and maybe think about another type of transition, rollover, some equity, and then maybe that bigger bite is down the road. And I think that separates you, I imagine, from a lot of the other players out there.
Peter: Yeah, I mean, it could be I mean, there’s other, obviously, there’s plenty of players in what we do. You know, unfortunately, there’s entities out there that, you know, charge a lot more than we do, as far as, you know, an engagement thing, for example. Such that, you know, an entity like that could actually make a living just on the engagement fee, without actually executing the sale of the company for the success fee. Unfortunately. You know, we have a, we believe, very reasonable engagement fee, but you know, we make our money when we sell the company.
And so it behooves us to be very honest, upfront. And, you know, look, you know, some of my clients that become clients today, I may have met 10 years ago. So, you know, it behooves us to let them know, you know, you really should do X, Y, and Z, to put yourself into position to achieve sort of the thresholds that you’re looking to achieve valuation-wise. It’s interesting, even in the lower middle market, and this is one of the things that’s changed over the last 30 years, even 20 years. That, you know, despite the fact that our deals are generally, generally sub $100 million. Often they’re, you know, two to $50 million.
Over half of the buyers of let’s just say, last year, we had 38 transactions. Over half are private equity groups. So it used, when I first started, it used to be the case of private equity would say, oh, you know, we’re only interested if they’re doing at least 20 to 25 million in revenue and, you know, four or 5 million in EBITDA. You know, but they whisper you know, you know, if you have something smaller, you know, just let us know. Now, I mean, you know, it’s become sort of very, very common that private equity groups of all sizes, frankly, like, even some of the bigger ones will look at companies of any size, you know, as bolt-ons or add ons to platform companies that they already own.
And in that regard, you know, it offers opportunities. And by the way more and more, as you know, private equity groups are owning more businesses every year. Year over year, they’re, they’re buying more businesses. So it offers for the right seller, you know, a lot of the sellers, either they don’t know anything about what is about to take place, or they may have some false notions, like, for example, that a private equity group is a quote-unquote, financial buyer. And therefore, they’re not going to be putting forth an offer that’s as high as a strategic buy. Okay.
At this point, it’s really a fallacy. It’s wrong. In fact, some of the private equity groups that I’ve worked with recently, you know, in recent years, they may be more strategic than a strategic in the sense of you have valuation. And when those private equity groups have portfolio companies already doing what that particular seller is doing, they’re acting strategically as well. So that’s one of the misconceptions, in addition to just generally, you know, conceptions about valuation.
But when you tell people, you mentioned equity rolls, depending on the age of the seller, the shareholder or shareholders, and you know, what they’re looking to do, how long they’re looking, you know, to stay with the company, it offers some great opportunities to roll equity. Key, you know, you know, habitability for the, quote-unquote, second bite of the apple. Remain with the company and help that new partner, grow the company, which can be very exciting.
Patrick: I think if you’ve got a passion for a particular industry, you mentioned manufacturing, you’re really into it. And then you wonder what it’s like at the next level, and there’s a skill set and resources to get you there. And all of a sudden, you value, you don’t have to do everything. You just want to be a contributor and be part of the ride. And that’s, I can imagine, that’s a lot of fun. With where you’re based over there on the Atlantic side, I mean, are you limited in that geographic region, or are you all over the place?
Peter: We’re, you know, we’re all over the place, really. So, you know, I have clients in Michigan and California. I, you know, sold the company a couple years ago, in Idaho. And, you know, the North, you know, New England and the Southeast. All over, really. It’s just, we tend to, because of the fact that we’ve been around for 35 years, and we’ve been, you know, we’re very disciplined in plugging in contacts into our database, you know, which is incredibly valuable. You know, it’s not just companies and prospective clients, it’s lawyers, it’s bankers, it’s CPAs. And as a result, you know, a lot of these folks have been getting our stuff for years, literally. Decades, you know, go back to when email became, you know, sort of, you know, commonplace.
Patrick: Novel, the novel channel, yeah.
Peter: Yeah, like the mid-90s. Yeah. So, therefore, you know, we get a lot of referrals. And so, you know, a large number of our, say, sell side, and even some buy-side referrals, you know, they may be within a few hours of Philadelphia, just because that’s where those centers of influence are, you know. But no, we have clients, you know, all over the country.
Patrick: See, I think that’s a great value add that you guys are providing is the depth of your database. Now, you know, a lot of buyers, and if you’re a, you know, target company, you know, you may know, one or two prospective buyers out there that maybe, you know, hey, you can approach them. It’s like, you may have 200. And all of a sudden, that just opens a whole new world of possibility. And you also probably know, the real players from folks that will, you know, run a process, but really, they’re not as interested.
Peter: You know, I’m convinced that, you know, if you’re a company that let’s say, is sub 10 million EBITDA and some 5 million EBITDA okay, you have a strong company, but it’s relatively small, okay. And you may not be as sophisticated as a larger company that’s 50 million in revenue and or 100 million or 200 million. You may not have all of the software platforms and all of the tools that a growing company or a more sophisticated company has, you really have to throw a wide net. So, you know, we go to volume, rather than, you know, on the flip side, if, you know, if you’re a 25, 30 million EBITDA company, chances are you’re probably already owned by private equity group.
But if you’re not, you know, that process of sale of that company is different, because it’s a far smaller, usually, it’s a far smaller denominator. Okay. Which I think, I don’t know, I think that’s a disadvantage. I mean, generally, I think the more the more the merrier. You know, the more you can, you know, within the bounds of reason, you know, the more you can create competition for not only price, but terms, the better. And I think it’s very suitable for, you know, sub 10 million EBITDA companies to go to volume.
Patrick: Okay, that makes perfect sense. Peter, give me a profile, we talked a little bit about this, but give us a profile. Who’s your ideal client? Who are you looking forward to serve?
Peter: Yeah, so we’re not, we don’t hold the flag out saying we’re specialists in this or that. You know, you see a lot of firms saying, like, you know, we only do medical equipment, you know. Or we only do this type of thing. And meanwhile, those types of things, you know, often they’re a very attractive company. So that’s why they say they specialize in them. It’s really, we’re generalists, and if you’re providing, you know, quality products, for example, in manufacturing, I just had a deal very, you know, very positive result.
You know, a, it was a, you know, CNC machining company, it’s contract manufacturer, so, it’s not branded products. You’re making parts for your, you know, customers to print. But, you know, high quality, you know, company in terms of being AS9100 Certified, ISO 9001, all of this certifications, etc. And, you know, they, they also had very nice EBITDA margins. And so somebody like that is a great client. You know, business services.
You know, if you’re providing services, especially, you know, that are, you know, maybe tech services, data room entities, data room providers, where, you know, every everybody, every buyer, especially private equity, you know, loves to see recurring revenue. Okay. So, you know, if you’ve got some aspect of that going on, you know, frankly, the, you know, the higher the multiple, you’ll get within the then typical bounds. Okay. It’s not some, you know, it’s not the sky’s the limit. Okay. But it’s, you’ll tend to get more.
Patrick: Gotcha, gotcha. Well, one of the ways that, you know, a lot of these M&A transactions have been accelerating, particularly, you mentioned private equity, was that the insurance industry came in and brought a product that took away a lot of the risk between the parties. And this is the indemnification risk where the buyer, if they suffer financial loss, because the disclosures or the reps and warranties from the seller warn accurate. Those inaccuracies lead to a post-closing loss to the buyer.
Buyer would either claw back from the seller, or just suck up the escrow or whatever, and move on. There’s now a been a product called reps and warranties insurance, that’s come in, looked at the two parties and said, show us the diligence, show us the reps, we agree there’s this much risk for a couple bucks, we take it away from you. And that’s really helped out a lot on the larger side. Peter, good, bad or indifferent, what experience have you guys had with rep and warranty insurance?
Peter: Yeah, so I mean, in my world, in our world, it’s a relatively new concept. And so there’s not been a lot of exposure to it. I can’t really speak for my colleagues at my firm, but I’m pretty sure that they’ve just sort of learned about it. But, you know, it seems, it seems like it could be a very viable alternative. You know, of course, in terms of the escrow amounts, you know, if you want to call it a negotiation among lawyers, it’s, you know, I’m at 25%, oh I’m at 10%. And then, you know, then you end up in 15, or 18%, but it’s a game of ping pong between lawyers.
And you know, I’ll be chiming in the background, you know, with, you know, the lowest percentage possible on the sell side, obviously. But having this concept unveiled to me, it’s compelling because whatever percentage you’re talking about, okay, in terms of getting put into escrow for the other negotiation, and one of the others is for what term, okay? So, you know, it can be 12 months, it can be 24 months, it can be 18.
But, you know, your seller client, you know, understandably is like, wait a minute, 1.75 million of my consideration for the company is going to be sitting in escrow and I can’t touch it. And then you can provide them with this type of alternative, that it, you know, basically eliminates that completely. They get to put the vast majority of that 1.75 million as in the example I gave in their pockets for a relatively de minimis expenditure on this type of insurance. I think that’s a tool in my toolbox now. Okay. And I think that a lot of folks will take advantage.
Patrick: Yeah, we started talking about this when you and I met a little over a month ago. There’s the launch of a new product. It’s a sell-side rep and warranty policy, but it’s built for companies that are being purchased between 1 million and 30 million, and the purpose is to come in there, replace the escrow, take away that indemnity obligation. The policy is triggered when the buyer suffers a loss, they notify the seller, seller notifies the insurance company, underwriters will dispatch an attorney to go and negotiate with the buyer and do the settlement.
And instead of having you know, 10% or more of funds being tied up in an escrow, now, seller gets all their money. And the buyer has peace of mind because hey, there’s an insurance policy, so there’s remedy. It’s a rep and warranty insurer, which has great faith in claims payment. Claims payments in rep and warranty industry compared to any other line of insurance is a head and shoulders above. And so what happens is now the buyer gets not only some protection, they get more protection, because a lot of times their only protection is whatever they hold in escrow, which is 10, 15, 20%.
You could insure a $10 million deal for the full 10 million. And arguably, the buyer can get all their money back if there’s a real egregious fundamental rep. And add a cost of $15,000 per million in limits, I think, you know, for sellers, this is just a great way to as you said, you want to unlock 175 or 1.75 million, and that may only cost you, you know, 55 to $75,000 for a $5 million limit policy, it makes a great case. And the more we can go ahead and work with organizations like yours, and get the awareness out, that’s what we want to do.
Peter: Yeah, and especially, as you brought up that often, it’s very, very attracted to the buyer as well. And in fact, you know, it can be negotiated that, you know, premium is split in some way. So, yeah, I see it as something that I am going to interject. Because I mean, like my colleagues at my firm, I mean, you know, we don’t go away, we don’t disappear into the shadows when we go into due diligence. And, you know, oftentimes 100% of the time, I’m reviewing purchase agreements, and I get to put my old lawyer hat on.
But, you know, in terms of, you know, and depending on the lawyer, you know, I mean, I try to tell my clients, you know, you gotta use somebody that does this type of work, okay. They’re supposed to swear in front of the bar, that they’ll only take on projects that they know about. But, you know, I’ll often chime in put forth, you know, my suggestions, and this is just one of those a new thing that I will be suggesting, you know.
Patrick: That’s fantastic. We love when we get new tools coming. We’ve had too many situations where you had a sub $10 million company that wanted rep and warranty insurance and the buyer just didn’t want to get it. It was too expensive at the time or other things got in the way. This is a nice elegant solution. It was just lower price. And that’s that’s why we like it. So I appreciate the opportunity to share that information with you and the audience. Now, Peter, I mean, time is flying by. We’re already you know, almost seven weeks into to 2023. So, first quarter is almost done here. What trends do you see now that we’re over that January one holiday hangover. What do you see going forward either on a macro basis or for Everingham &Kerr?
Peter: Yeah, um, you know, we heard the whispers about recession you know, probably for most of 2022. And that, oh, no, what’s coming in 2023? etc? And, you know, look, it could be either no recession, or it could be a mild recession. Frankly, we’ve seen some pretty dark times, or what could have been very dark times, namely, say, 2008 right. And we weren’t really impacted in a devastating manner whatsoever. And of course, you’ve got the interest rates, they are up okay.
But people forget that they were so low, they were never as low as they were. Yeah, it’s just that people get used to, you know, those rates, and you know, they’ve gone up a couple clicks, and then it’s like, oh, my God, what’s going to happen? And meanwhile, back when they were at these levels in the past, you people forget quickly, you know, that they were saying back then, oh, my goodness, these rates are so low. Like, you know, money is more expensive, you know, for for the lenders, you know, for the buyers, of our sellers.
In some instances, I’m seeing, you know, especially with the private equity groups, they just have a lot of cash. So it’s just, it’s there, you know, it’s more equity than debt, you know, and that’s the adjustment that they’re making. And they just need to deploy that cash. Obviously, when you have the cash, and you could borrow at, you know, a very, very low rate, that’s even better. But long story short, we haven’t seen, you know, deal flow as far as new clients coming on board, you know, lessening, you know, or, you know, dropping because everyone’s so scared.
We haven’t seen that yet. I mean, ask me in six months. I, you know, I just haven’t I haven’t seen, like, the disaster that so many people talk about. I mean, so there was a lot of chatter last year, absolutely. But, you know, as I think I mentioned, that was a record year for us. Okay, so 38 transactions beat the prior record, which was the year before at 30 transactions. So that answers your question to a certain extent. I don’t see that dropping off a cliff in 2023. Knock on wood.
Patrick: Well, Peter Cook from Everingham & Kerr, how can our audience members find you?
Peter: Well, my email address is PWC as in Peter William Cook, firstname.lastname@example.org. That’s probably the best way to reach me. And then our you know, you could also go to our website and get my direct line on there as well.
Patrick: Well, fantastic. Well, it’s a real pleasure. And I would say for owners and founders out there that are looking to get to the next level and there’s going to be a tremendous amount of resources and expertise and experience there at your, at your fingertips. And I really appreciate Peter coming out today. Thanks again for joining me.
Peter: I really appreciate it, Patrick. Great speaking with you. I do like talking about this stuff. God forgive me. No, but it’s a pleasure and hope to speak with you soon.
Patrick: Fantastic. Well, thank you so much.