Executive Vice President Carolina Acquisition Partners

Why an Exit Strategy is Crucial

Helping small business owners realize their life’s work is one of the great joys of M&A…

But what does it take to have generational impact on owners and founders?

Jeff May is the executive vice president of Carolina Acquisitions Partners, which was formed to fulfill a need in the underserved market segment of business owners without succession strategies.

Jeff is here to share why planning an exit strategy is critical.

As Jeff says, “Is your business ready for you to not come back tomorrow?”

We’ll also cover what Jeff looks for in a client, reps & warranties insurance, 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 Jeff May, Executive Vice President of Carolina Acquisition Partners. Based in High Point, North Carolina, Carolina Acquisition Partners was formed to fulfill a need in an underserved market segment of business owners without succession strategies. And Jeff, you and I met, and I met a couple of your team, probably late 2022 in San Diego. It was a real pleasure to meet you, today, welcome to the podcast.

Jeff May: Thank you, Patrick. It’s great to be here.

Patrick: Now, Jeff, before we get into Carolina Acquisition Partners, let’s just start with you. What brought you to this point in your career?

Jeff: Yeah, well, it’s been a while Patrick. But when I graduated college, I got into public accounting. And I lived in Florida. So I became a CPA in both Florida and North Carolina. And that was back in the days before accounting firms had consulting divisions. And so I worked on a lot of small to medium sized family owned businesses. And you did audit, tax, you did the whole nine yards. Consulting wasn’t really called consulting, you know, but you wound up doing that.

What I discovered is just like in school, I did not like audit. Auditing was boring. And what I now realize is it was looking backwards. And I didn’t like looking backwards. The tax side of things was certainly necessary for these clients. And there were parts of it, the strategy, parts of it were, were interesting. But generally, it wasn’t very exciting. But what I did find is that I really, really enjoyed working with the owners of the companies on their strategy and growth plans, solving, you know, big problems, major issues.

That was, that excited me, and it was forward looking. I found that building relationships was easy, for me, unlike maybe real accountants. And I think growing those relationships was very rewarding and satisfying to me. Developing trust with them was as well. So I had the opportunity after more years than I thought it would be to leave public accounting. I became the CFO of a very successful family restaurant chain in North Carolina.

And when I got there, we had about 30 locations. And when I left we had over 60. So that’s where I really learned, you know, I thought in public accounting that I had new business. But again, I really didn’t until I got on the other side of the table and dug in. So that’s where I learned about how business worked, I enjoyed the challenge of growing the company, building the team improving things, and just really loved it.

About 10 years ago, I left there. And since that time, I’ve consulted with dozens of companies, small businesses, mostly family owned. The kind that I’ve really been around, you know, my whole career. And so during this past 10 years, I’ve participated in several buy-sell transactions. And I had never done that previously in my career. And I really just fell in love with it, and I saw how all the experience that I had really added a lot of value to that process, rather than just being a transaction.

You know, I had just seen so many things, businesses should do right, that they do wrong. And so that was great. And so since how I got here is that since I enjoyed small business so much. Enjoyed relationship building, you know, growth, and helping solve problems, I just decided to spend the rest of my career however long that is helping small business owners to realize their life’s work.

Patrick: You know, I’ve got to tell you that, you know, personally for me, I consider mergers and acquisitions as the most exciting event in the lifecycle of a business. There are some people that would say, you know, going public, you know, an IPO that would be real, real exciting. I was like, well, that’s kind of like being picked in the first one on the NFL Draft.

I mean, it’s exciting, but you haven’t proven anything. You could still be considered a bust. When you’re doing, you know, a transaction like this, I mean, there’s very few things that have life changing, if not generational impact on owners and founders. And if you’re able to help facilitate and make that event happen, either, you know, smoother, happier, whatever.

I mean, who wouldn’t want to be able to participate in that? So I’m completely in sync with you. It’s a lot of fun, it gets your juices going. So we transition over to Carolina Acquisition Partners, which you’re real clever with the name CAP. How did they come up with the name, and where did they start?

Jeff: Well, it’s, I’d like to say, there’s a lot of magic to that, Patrick, but you just start with the first word, Carolina, you’ve already given it away that we’re in High Point, North Carolina. And so that’s where that part came from. And, of course, Chapel Hill, that’s when you hear Carolina and North Carolina, that’s what people are usually talking to. So that’s, you know, that’s kind of a big deal around here. Acquisition was because we were founded with a more narrow purpose, than you will hear later in the podcast about the different things that we do.

But we were simply created to acquire and run businesses, you know, for our own selves which we intended to turn into a fund and have by now. So we have other, you know, other people who are investing with us. And then the partners part is, you know, it wasn’t one person. So we had partners. So it’s just that, it’s that simple. So as I, as I described, you know, my background, you know, it just fits very well with, you know, with smaller to middle-sized companies.

But, you know, it’s also a very underserved market. And we looked at under, because of our collected background and experience, we looked at underserved as a real opportunity. And a great thing for us, because we’re not in there competing with as many people. We also knew this going in, but continue to confirm that there’s a reason the market is underserved. It’s really hard. Most of the companies or many of the companies that are smaller of the size we’ve been talking about, they’re less sophisticated.

They don’t have the systems in place, you know, just they don’t have as many things standardized, they haven’t had to do that, you know, it’s a lot of times it’s run by one person, calling all the shots and so. But when the reason that I think this market fits us very well, besides the opportunity, is that we know how to find those opportunities inside the company to make the improvements. To add systems and processes in our experience, makes us able to be side by side with them and actually make that happen.

And, you know, of course, we do that with our own portfolio companies. You know, the idea of being that we’re going to be able to buy companies at a better multiple, when they’re not as sophisticated and are smaller. And once we get to build them past that 2 million EBITDA mark where everybody else is looking, then, you know, we’ve created a lot of value there as well for our wealth.

Patrick: That’s what I want, why I really wanted to talk to you today and talk about Carolina Acquisition Partners. There are so many owners and founders, they have a skill set to get a certain size, but then, you know, they’re too big to be small, but they’re too small to be enterprise. And they can’t get through that inflection point, they need some outside help.

And if they don’t know about organizations, like Carolina Acquisition Partners, a competitor or some strategic, or they’ll go to an institution that is looking for something bigger, that won’t serve them properly. They will, they’ll charge them a lot of money, but they won’t get into the place they want to be. And I appreciate what you’re doing. You’re not taking the easy road with a lot of these organizations that could scale in 90 days with just, you know, implementing some technology or putting in some accounting or financial controls.

There’s a lot more, you know, rolling up the sleeves and getting your hands dirty. And it sounds like you guys are not afraid to do that. So talk about that a little bit. In that what does CAP bring to the table to the lower middle market? You had just mentioned a little bit. What else do you bring to the table for this segment that’s underserved?

Jeff: Yeah. So, Patrick, what we bring is pretty broad and fairly deep, and it could potentially get to be too much in the weeds to talk about. So I’ve worked a bit to try to keep it at a high enough level. And, you know, of course, I’m always willing to talk about it more if somebody wants to. But you know, as you said, there’s so many baby boomers out there that are ready to exit, but their business is not necessarily so.

You know, when you and I were talking recently, I told you the question that I like to ask in the beginning and it really gets people’s attention is is your business ready for you not to come back tomorrow. And it’s a pretty stark, you know, reality to some people when they go to answer that question. And that question goes towards so many things. You know, is the business ready for you to sell? Is it ready for you to pass away and not come back tomorrow, unexpectedly?

And you know, and that should give, certainly give some concern. But CAP Advisors, and I know, we’re talking about Carolina Acquisition Partners, and I’ll explain a little bit more about that here in a minute. But CAP Advisors can help these companies give a yes answer to that question. And that entails, you know, a variety of things. So let me tell you and the crowd, a little bit about Carolina Acquisition Partners, and what we have under our umbrella.

So we have CAP Equity, and CAP Equity is where our portfolio resides. So when we buy a company and add it to our portfolio, it’s under CAP Equity. CAP Investments is where our fund is. So that’s the funding mechanism for our portfolio that we add. CAP Management runs the portfolio companies. So to the extent as much as possible, we want the companies to be run on the ground there. But so, but at a minimum, there’s a reporting level there and supervision of some sort.

Hopefully, not much, unfortunately, sometimes much more than we anticipated. So we try to get out of that. And then CAP Advisors, that’s the company that I run. CAP Advisors, at its highest level, it buys and sells businesses, and helps the owners to be best prepared to do either of those. On the buy-side, we buy for our own fund. But we also buy, and that was our intention in the beginning. What has happened quicker than we anticipated is we’ve got other entities, other companies, family offices, that are asking us to buy for them.

And we really would be standing and acting as their acquisition arm. So if somebody’s only going to buy a company, fold one in every two or three years, then you know, it can be difficult to go out and hire you and go out and hire a team, you know, there’s going to be looking at sourcing all the time. And then if the owner or the key people try to do it themselves, it distracts them from the rest of the business.

So I think part of our selling proposition of our services is that we can take that off their plate, they can continue to run the business like they always have. And we can prepare them to, you know, to be ready to buy and absorb. It’s just as important to be ready to buy a company as it is to be ready to sell your company. Because you know, if you go out there and you buy a company tomorrow, you own it. And if you’re not ready to land, you know the airplane smoothly, you’re going to be in trouble.

You could be at risk at ruining what you have and what you just bought. So we help consult and train on implementing operating systems. I mentioned this to you the other day. That is just so key in everything we talked about today having an operating system that limits firefighting. And if just to make a little more clarity on the operating system, what it is, it’s not really software as much as it is setting, you know, documenting values and the purpose of the company and then longer term plans, medium term plans.

You know, yearly and quarterly goals, meeting structure, you know, a bag of tools that helps you, you know, evaluate this and that. You know, people and knows. And so it is a, it’s just putting a process in place, that when you get to work every day, you have a plan. And you know, and you have a vision, you can look out and say, okay, 10 years from now, here’s where we want to be.

And everything we do drives it rather than you get in the car in the morning and drive and show up and say okay, now what. Which is what happens a lot of time if you don’t have that. So that’s one of the things that we help do. We also sell. That is not our focus, right now. It’s more, I sometimes I say accidental sellers. We’re more, that’s usually a longer process. So I’m developing those relationships with companies of people who may be, you know, starting to think about that.

And, you know, because it takes some time for them to, you know, really realized the best value by putting certain things in place. But the other thing I wanted say about our own fund, we’ve talked about us having our own portfolio. Our intention in our own portfolio is to buy and hold generally. In our fund we have an exit mechanism for people who want to operate more like you know, traditional PE.

But we really want to attract more people who want to invest in businesses that are going to just keep giving cash flow, will keep growing those businesses, and but we do have an exit mechanism just in case, you know, life changes, and they have to get out. And then the other sell-side is, you know, we will sell on the for the outside parties that it’s whatever, you know, whatever they’re looking for. So planning an exit strategy, as I said ahead of time is critical for you to realize the most out of your business.

So we’re trying to, you know, cultivate those relationships. Now, there are, besides an operating system, there’s several value drivers that make the business more valuable. Like the lack of sales concentration, where you’ve got so much risk in one or two customers. Or having a, probably the number one, is having a management team in place that can run the business and you don’t have to take every phone call. That is critical. And that’s probably the biggest challenge for most business owners.

But it’s my job to convince them that it’s much better for them, if they start that process now. And you know, as I say, here, one thing you can do is if they put those things in place, they may actually decide that they can keep the business and not have to. They can get away without having to totally, you know, get out.

So one of the things that again, I think that we do it a little differently than some people is we can go in and assess the company, make the recommendations, but not stop there. We can help them actually implement those initiatives, because everybody on our team has done that before, or at least all the principles. We’ve had that experience. So if you keep the business, that’s another place our consulting arm comes in.

Generally, the same attributes that make a business ready to buy and absorb, or ready to sell, also, are the things that will make your business more profitable, if you keep it. So I’m a bit agnostic to which of those routes they go down because they’re all good. And you know, and we can help them do that. The last one is what I call, I heard this from a commercial on the radio. Quit the job and keep the paycheck.

Patrick: Oh, good. That’s kind of nice.

Jeff: Yeah. So we help, so we’ll also help businesses interested in keeping and growing, implement those efficiency, operating systems and other systems that add value. And we do that through our consulting practice. So that is a kind of a, hopefully a high level view of all the things that we offer at this time.

Patrick: That is a huge list. Quick question for you. Can you paint a picture of the ideal profile? Who are you looking for at CAP? I know you’ve got the different divisions and everything. But overall, what’s your appetite? Regionally? Industry? Size?

Jeff: Yeah. So here’s a few things, Patrick, thanks for that question. So preferably, non-owner management. But that is a bit elusive. But it’s also in different degrees. So, you know, what we find is that most businesses, or at least most brokers that are selling will tell you oh, yeah, the owner is barely involved. And they’re only working about 80 hours a week. And so we’ve also found that our target range on EBITDA is like 250,000, maybe on the low end to as much as 2 million. 2 million is where that breakpoint is that we will try to get beyond.

Patrick: What does that translate in purchase price? Real quick for me.

Jeff: We are trying because of the size of these, we’re trying to stay in the two to three range on multiple of that number. And the average has been more so around three. We’ve had a few that we stepped up on just because it was more strategic. But that’s about where it is. So just multiply whatever that is by three. So, you know, most of our purchases have been in that million to 2 million range.

Patrick: Gotcha. Okay.

Jeff: We like service businesses, and other non-asset heavy businesses. Now remember, I’m talking now about our fund. Because that’s where we like to live. We can do more, obviously, if we’re not out spending so much on cap x. So manufacturing is something we actually have a lot of expertise in. Not myself, but one of my partners. But that’s not something that we’re, you know that we’re buying ourselves at this point, unless it’s really liked.

We also like to find companies, obviously, we want to find companies that we can quickly add value. So many of those, as I described earlier, don’t have the systems in place. And we can see, you know, we can go in there pretty quickly see, hey, we can do these three things, and we can increase the profitability and the value and it just makes it a lot more fun. But on the buyer side on our buyer clients, then we’re totally agnostic to what industry it is.

You know, our research spans a to z. We don’t know yet about every single industry, but we’ve got some really sharp people that, you know, with the research that we have, we can quickly learn, you know about certain industries. And but usually these buyer clients or people, we’ve known a while, and we’ve advised them on, you know, on their business for some time.

And then they just decided, hey, let’s try an acquisition strategy, as opposed to wholly green fielding, you know, every location. Because it’s tough, when your revenue starts out day one at zero. And they’re seeing, you know, if we can go out and be skilled and find some good deals for them, then that’s been a real positive thing. So we’ll customize that to every client.

The other thing we’ll do, and those are contractual kind of arrangements, Patrick, where they, we have a monthly retainer, and we have regular meetings and present deals to them. But we also are in the process of creating relationships, when we go to conferences. Like where I met you. Where the other PE firms or family offices, we find out what they’re looking for, and then, you know, we can be able to just pitch someone off deals to them, as well.

Patrick: You mentioned earlier on, you know, as part of your assessment into consulting and looking for integration, you’re looking at risk. And that’s been a big issue in mergers and acquisitions is the, I’m not gonna say the presence of risk. But now the absence of risk, where the insurance industry has stepped in and taken risks away from the buyer and seller, rather than, you know, buyers don’t want to be stuck holding a lemon.

And sellers don’t want to be left on the hook indefinitely to a buyer for something that might blow, post-close. And so there’s always been this tension. The insurance industry came in and said, look, we will insure the seller reps for the buyer. So buyer, if there’s a breach of these reps, that costs you money, don’t go to the seller come to us, we will pay.

That has enabled buyers to have peace of mind that they can collect in the event there is a breach. Sellers get a clean exit and it’s been a real elegant solution. But you know, don’t take my word for it. You know, Jeff, with Carolina Acquisition Partners, good, bad or indifferent, what has your experience been with rep and warranty insurance?

Jeff: Yeah, that’s a great subject. I’ll tell you, sometimes, it would be beneficial to us to buy the stock of a company. And, you know, at that point, it’s when your risk, certainly, you know, you’re buying all the previous sins of that company. And so, you know, risk becomes a big factor. Let me say that on the sell side, that’s usually where our transactions have been much larger than what I’ve described about what we’re looking for.

And so the policies are available, generally in those type things, but they’re extremely expensive. And the biggest challenge I found, there’s who’s going to pay for it. You know, the seller and the buyer arm wrestling over who’s going to actually do that. But at least the market is there, and it’s available for them to do that and work it out.

But in my world, what’s really been interesting is that prior to meeting you, you know, and talking about, you know, some options that you have. There really just wasn’t a way to make it happen in the smaller deals. You know, I’ve had brokers in seminars and even people that I know, well tell me that, and it makes sense that the underwriting risk, just can’t match up well with a reasonable premium, you know, that anybody can afford and make it make sense.

So for us, we’ve had to walk away from some deals where the owner just refused to sell the assets, and we’ve refused to take the risk. So you know, so I was really, certainly excited to meet and talk to you about what I suppose you’re gonna share with us now.

Patrick: Exactly. You set me up perfectly. Thank you so much, Jeff. Now what we’re very thrilled with is there is a new product out there. It’s called Transaction Liability Private Enterprise TLPE. It is a rep and warranty policy and it is designed for transactions that are priced, purchase priced between a million and under $30 million in enterprise value. Which is right in you know, down the fairway for Carolina Acquisition Partners.

It is a sell-side policy. The seller is the name insured on the policy. The policy is triggered when the seller receives notice from the buyer that there’s been a breach and the buyer is looking for recovery of those expenses as a result of the breach. So just like a buy-side rep and warranty policy, the claim isn’t paid out of the sellers pocket. The buyer will notify the seller. Seller notifies underwriters.

Underwriters will assign counsel and they’ll negotiate a settlement with the buyer. And therefore, the seller does not have to worry about a clawback, buyer gets that same source of remedy. And you’re not going to have to go into litigation or squeeze blood from a stone pursuing the seller. And it’s a very elegant way to go. This facility is priced, and this is the best part about it.

The facility is priced between $10,000 and $20,000 per million dollars in limits. So the more coverage limits you buy, the lower the cost per limit becomes. So in most of these scenarios, we’re seeing premiums that are under $50,000 for a $5 million limit policy on some of the smaller deals. There is no underwriting fee. So the two sides don’t have to worry about haggling for the cost of underwriting. The cost of diligence.

This is all taken care of, and is designed to make these deals that otherwise would not be eligible for insurance to get some kind of protection. And that’s what we want them to do. It’s a very quick process, it’s only a matter of an application being completed and reviewed. And then you get the price and then you move on to closing. So it is one of the areas that we’re very thrilled to be able to come to organizations like Carolina Acquisition Partners, as well as sell-side advisors and investment bankers who have the same challenge.

And now they can bring value to their services and help their clients move forward to a close. Now, Jeff, as I mentioned, we just wrapped up the first quarter of 2023, we’re moving into the rest of the year. What trends do you see either, you know, for Carolina Acquisition Partners, or M&A in general?

Jeff: We feel like with financing rates going up, you know, as they have been over the past, and it looks like they might be there a while, we think that’s probably going to slow some of the PE activity where major debt pieces are used. You know, I just think it’s going to make it harder for those numbers to work. Yet, I still think, I don’t know, we still think there’s gonna be plenty of activity out there.

Even in that space. I do think that the economy slowing can certainly affect a lot of the sellers who are thinking about selling. Now, you’ve probably seen this, you know, post COVID, there were so many companies that had their best year in history by about three, and all of a sudden, they all want to sell, of course at last year’s number. And that was something that you know, you really have to be careful of and watch out for.

But I do think that two things. I think it potentially will cut down on the number of transactions when people have more of a choice. So if it’s a 40 year old, who maybe they were opportunistic, and thought, you know, hey, if I can hit a home run, I’ll get out and go do something else. But, Patrick, I think there’s a good number of these baby boomers that are just tired.

And, you know, just like I guess, you know, if the market is down in the stock market and somebody is retired, you still have to dip in there and take money even though maybe they wish they didn’t. So I think there’s still going to be plenty of people that the multiple they get, or the number that they get is not as important as them getting some rest and enjoying the rest of their life. And that certainly, certainly is reality, I think.

For us, we use a very small amount of debt, if any. Some deals, we don’t use any debt at all. And so for us, and there’s still a lot of money out there. So we really don’t, we think there could be some effects. But you know, we’re still relatively small, I think we are going to keep busy.

Patrick: Jeff May, from Carolina Acquisition Partners, how can our audience members find you?

Jeff: So my email is jmay@capinvestments, that’s c a p i n v e s t m e n t s.net.

Patrick: And it’s .net,  not .com.

Jeff: Yeah, .net, not .com. And the next one is even a little more confusing is the website is cap.investments, period. Put that in the browser and our website will come up. And you know, the rest of contact information and all that kind of stuff. The way to contact me is inside the website or my email is great.

Patrick: You guys have a very intuitive, user-friendly website. I can definitely attest to that. Well, Jeff May from Carolina Acquisition Partners. Thanks again for being here. Really nice meeting you. Thank you again.

Jeff: You, too, thanks a lot. Appreciate it. My pleasure.


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