Discover the transformative journey of consumer brands into lucrative M&A opportunities…
In today’s episode, join us as we welcome Jason Somerville, founding partner of GW Partners. With a unique blend of operational consulting, financial management, strategic planning, and M&A advisory, Jason and his team are known for elevating consumer brands into prime acquisition targets.
- Dive into Jason’s transition from investment banking to entrepreneurial success.
- Unearth the impact of visiting suppliers on business deals and relationships.
- Learn how GW Partners uniquely prepares companies for optimal sale conditions.
- Understand the role of metrics and benchmarks in enhancing company value.
- Explore how GW Partners’ approach aligns with founder ambitions and business evolution.
To gain more insights from Jason Somerville and learn the art of preparing your consumer brand for a successful exit, tune into this episode on Spotify, Apple Podcasts, or just hit play above.
Mentioned in this episode:
Transcript
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 Jason Somerville, founding partner of GW Partners. GW Partners is a unique firm that combines the best elements of operational consulting, financial management, strategic planning, and M&A advisory services, to partner with consumer brands to transform them into far more valuable and coveted strategic acquisition targets. Jason it’s great to have you here. I’ve been in touch with you and your other partner for a long time. So it’s a pleasure having you today.
Jason Somerville: Yeah, thanks, Patrick. Happy to be here, man. Happy New Year.
Patrick: Happy New Year to you as well. Now, before we get into GW Partners, let’s just start with you. What brought you to this point in your career?
Jason: Man, it’s been a bit of a journey. It’s been good. I kind of did a round tripper is how I like to say it. I started my career in institutional investment banking. So I started with B of A. I don’t know how many of your listeners are familiar with the traditional bulge bracket type of path. But you come out of college, there’s an analyst class. I was in their analyst class, there’s about 100 people, usually coming into a bulge bracket like that. That was a larger one. And then you kind of make your way through. I got promoted.
A lot of people have to go back to B school, but I was lucky enough to be promoted, I didn’t have to go back to B school, which was great. But then I’m sure, I don’t know if they regretted it, but I promptly decided that a big bank was not the place for me. So I think it was about a year after the promotion, I decided to move. Staying in capital markets, I went to a hedge fund in Miami.
It’s called Bayview Financial, which was great because it kind of moved in that entrepreneurial direction. And that was sort of my path I’d say has become increasingly entrepreneurial over my now 20 plus years. That was kind of that first step. And it was an awesome place because it was private. The owners were really smart, dynamic people who I really respected, part of something that grew.
When I started there, we were under 1000 employees, and at our peak, we were over 5500 offices all over the world. When I was there, I was there for over six years, we did about $30 billion of deals, which was awesome. I ran capital markets. So I was kind of, I think most people would look at me as probably number three or four in the company, which was great. And then the financial crisis hit.
And I like to tell people, I was probably half lucky, half good, that I had sort of decided towards the end of that, that I might want to take some time and maybe go work for myself entirely. I tell people, the life of a banker is not conducive to a family. And I had two little kids. And I was not seeing a lot of them. And I decided, you know what, this has been great. I’ve been trained better than anyone I know.
But it’s time to move on. And then that’s when I moved basically entirely into the entrepreneurial world. And I haven’t been a W-2 employee since. So it’s been great. Like a lot of people will tell you, there’s good days, bad days. Some days you wish you had a paycheck that you could rely on and other days you’re so happy you don’t have a boss. So I did a lot of stuff over these last sort of 10 or so years.
When I say the round trip, so I left finance, I started to invest in, buy and grow companies. I did that, all kinds of different sectors. Aviation, construction, I’ve had a couple of different consulting endeavors. Gold mining, all kinds of fun stuff. And then it was actually through, I was exiting a company. This was a company that was actually in the home and commercial modification space. So what we would do is we would build, we would make buildings accessible for people who are disabled.
And so I did that for a few years and I had a company that I grew up and was selling. I kind of got some exposure to that smaller company M&A world. And that’s really what gave me this idea of, I feel like I can bring all of this big banking training, coupled with all my entrepreneurial operational experience and bring it all together and help those founders in a way that I don’t think a lot of people can. So that’s how I ended up in this space.
Patrick: It sounds almost like, with the current news out there, it’s almost as if you’re Bill Belichick and it’s like, I’m gonna go to the community college down here and help them with their football team. With that depth of knowledge and experience, boy, that’s very, very valuable. So you go, and you and your partner go ahead and form GW Partners. Let’s talk about that. And start with this, because you didn’t name it Somerville Capital or Somerville Advisors. How did you come up with a name? And then talk about GW Partners.
Jason: Yeah, so we actually started out under a different brand. It was called Global Wired Advisors. And I think the way we set that up was a more traditional M&A advisory practice. So again, your audience, if you’ve interacted with any kind of intermediary, even the best ones, and we considered ourselves one of the best, it feels sort of transactional, the relationship, right.
It’s kind of when someone comes along, they want to go take their company to market, it takes us maybe 30 days to prep it, then we’re out in the market, usually, you’re under an LOI within a month or two, and then your diligence and closing. Very transactional. And I think that as our business grew, it was successful financially, but we just kept looking at it, Chris, and I, who’s my partner, we kept looking at it, like if we could only get to these companies earlier, right?
If we could only come in, and actually impact the future of these businesses prior to their sale. So we actually had, we had a couple other partners as of like, a couple of years ago, we kind of decided to part ways with those two other partners, and kind of refocus the company on this model that we’re working with now. Which is, I think, that’s why we sort of say we marry up this operational consulting and strategic planning with the M&A advisory.
So, we still do some of that transactional type work. I mean, we’re still open to it if the fit is right. But what we’re really looking for is a partnership. And that’s where the word Partners comes in. It wasn’t chosen at random, even though it’s a somewhat common word to use. We chose it very specifically, because in our arrangements with our clients now, one, two years out from a sale, we basically become a full partner of the business.
We act like a board advisor, we act like an active part of the team. And I think what happens is over time, people just, our clients just start referring to us as though we’re on the team. We’re interacting with all the stakeholders, we’re basically a member of the organization. And then that allows us to, I’d say, get the company ready and improve it, so that it’s in its most optimal state, when it ultimately goes to sell.
Patrick: So you’re not actually formally becoming partners with equity or something like that. You’re partners in name, and then the larger return is probably going to be as that great added value goes, that gets reflected for you. Is that how the structure is?
Jason: Yeah, that’s exactly right. So, we think it’s an even greater alignment with the owner, right. And I think that’s also what defines a partnership, right, is alignment. And so we are, we’re kind of in the trenches, where arm and arm are right there with them to try to build the company. And so that also, right, is very indicative of a partnership. Go ahead.
Patrick: I’m sorry, but I think that’s ideal risk wise, as well, for an owner and founder, because there are a lot of owners that want to get to the next level. Do they all want to sell? Or do they, let’s see how it goes. Maybe they think about selling, but then you may give them some epiphanies, and also they’re having a lot more fun. And they can get at a higher level.
Jason: Yeah. Well, I think that’s the key, right? I think that we look at everything through an acquisition lens, and I think that that’s what drives a lot of our behavior. But I would say it’s not that uncommon, for I’d say the goals to shift as we’re working with someone because, I mean, look, let’s think about real life. In real life, you may sit down and you’re developing a company, let’s say over the course of a year.
In the lifecycle of a company, especially the kinds that we work with, that’s a long period of time. A lot can go on. Now, in our view, hopefully all that’s going on is all positive and historically, that’s the case. But you can see I see it all the time. I see points of view shifting at the founder level. And a lot of times, what you just described is a byproduct.
So they look at and say, okay, wow, I’ve now developed this organization into something that I feel like has even more potential. So now I’m trying to decide, okay, do I go ahead and go to market this year, or do I give it another year or so? And I think our view is just look, we’re along for the ride, we’re here to help you improve.
And even though we get paid most of our compensation, when the company sells, it is in all of our best interests to do that at the right time. So you know, if someone comes along, and they have almost like this 18 month plan, and that turns into a 36 month plan, and that’s because this company is rocking and rolling, and they just want to keep running it, that’s actually better for everybody. So we’re absolutely there being nimble.
And that happens all the time. But I think the other byproduct is, there’s almost nothing we would do looking through that lens, that would make your company worse. It’s pretty much all making your company better. Even if you’re not pulling the trigger on the sale for x more months.
Patrick: I think that, and you’ve got experience in this a lot more than I, but a sale of a company doesn’t mean, the owner of the management team departs and heads off into the sunset. They can go along with the ride and role equity, and be part of that larger venture going forward post closing. And I think because you’re partnering with them, you’ve got those interests in mind, so if they want to see how far they can bring it, you’re right along with them.
Jason: That’s right. Yeah, and it’s funny, we could do a whole episode on just that part of a transaction of the owner, how they’re viewing both pre and post deal. And it’s funny, because we work heavily in the consumer space heavily in the digital consumer space. And I think there’s been a lot that’s gone on over the last three years, good and bad.
And I think that the result is that most acquirers when they’re looking to buy a company like this have kind of come to realize they need this founder to stick around. And honestly, it kind of applies whether you have a $5 million company or a $50 million company. It’s kind of almost the same. They need them to stick around for a lot of reasons, again, we could do a whole episode about.
But that’s absolutely true. So there’s kind of the need, but then there’s also the way you look at the transaction opportunity. You pointed it out. It’s like alright, well, I was having a conversation with a potential client the other day, and in granted life’s full of choices. It’s like, okay, well look, if you structure it a certain way, and you’re willing to say stay on for a couple years to support, you might sell your company for say $30 million.
Now, if you’re trying to do a wham bam, thank you ma’am, get me out of here, you might still sell your company. I’m not saying you might not sell it, but you might only get $12, $15, whatever. So you can choose, well, I’ll take the less money because I want to get out of here or I’ll go ahead and take the larger deal and participate in it.
A lot of times, that’s what it means too, but I’d say more and more post all the pandemic stuff and EComm doing what I would call like a pop and drop, people are more like, hey, I’m not really willing to buy this thing if the founder is not going to be here for a little bit.
Patrick: Yeah, well, I think it’s critical, and we’ll get into explaining your ideal target and who you look to serve. But I think there’s a mindset that you guys are looking through that I’m picking up on is people don’t want their companies, they’re not going to engage with you to get their company. So please give me a good price, I want to sell now.
They have a deeper desire. I want my company to be better. Now if it’s better, and I get a higher price. Great. But I want this to be better. Can you make me better? I get that feeling, because it’s really coming out loud and clear. Share with me your thoughts on that. And then what profile of client are you looking to serve?
Jason: So I think I think that’s a good call out. Where we tend to be a really good fit with founders are those that I think still, they have some passion for their brand still, right? They have some motivation to continue to develop. Now granted, they’re looking at that sort of north star as being an eventual sale.
That’s kind of the place they’re trying to go. But between now and then they have a lot of again, passion and ambition and motivation to want to, you know, make their company as good as it can be over the next one or two years. Most people we work with at least at the moment have kind of that two year sort of, or maybe a little less time horizon. So those are really good fits for us.
And every now and then though, again, an opportunity comes along, somebody wants to sell their business, and it just works. And we’ll go ahead and we’ll take it to market right away. But that isn’t really where we’re focused. We’re focused on working with those founders and making it better. And, for us, the sector we play a lot in and most in is, in that consumer products sector.
Most of the companies we’re working with, when we start working with them are between, say, probably $5 to $20 million in revenue, top line on average. And then, normally, within our sort of while we’re working with the business, typically it would be a two or three times growth would be the expectation. It sometimes works out more, sometimes works out a little bit less, but that tends to be generally where it falls.
So if we think about, if we say, time zero to time 24 months out, what’s the likely growth that we’re looking for, it tends to average out to maybe around three times. And along the way, that’s obviously just financial growth. The expectation is development and evolution is happening everywhere, which is also making their company more valuable.
Patrick: Any territorial restrictions, limitations across the US?
Jason: No, I mean, all over the world, we work with brands all over the world. I mean, that’s one of the things that I love about this sector is that it’s so borderless. I mean, we counterparties service providers, brand owners, I think that what does tend to be a common element is, even if a brand is outside of the US in terms of where it’s based, most of its sales are in the US. Not a requirement, it just again, tends to be how it works out.
And then as far as product categories, I’d say at this point, I can’t think of one we haven’t worked across. We tend to do a lot in beauty, we tend to do a lot in juvenile products, baby products. We do a lot in apparel, home goods. Those are the areas we tend to be most active in. But I think again, that’s more I think, by virtue of there tends to be more brands in those categories.
Patrick: A lot of times, I’ll ask my guests, what are you guys bring to the table that your peers aren’t, but you’ve already covered that in spades. So I’ve got to go a little bit off script here and just ask you another question is just, it always amazes me is somebody brings in an expert like you and where they know their business really well. And they’re banging up against the wall, they want to get to that next level.
And they go ahead and they engage with GW Partners. Share with us any story you have of an epiphany you’ve witnessed, where you’re sitting there with the owner and the founder, and you’re going through operational or financial, whatever. And you say, well, why don’t you try this? Or try that? And they just look at you and say, you could do that? And then you see the light bulb go on.
Jason: It’s a good, good question. So I think a couple come to mind. I would say one, this is something. And if Chris were here, my business partner, he’d be banging the table that visiting your suppliers, like this sounds like so, you would be surprised how many people do millions and millions of dollars of business with a supplier and they’ve never visited them. And it’s amazing how many people never even thought to.
So you’re like, okay, and what they also don’t I think fully appreciate is, especially when you’re dealing with Asian suppliers or even Middle Eastern or Indian, which a lot of consumer products companies are, what they don’t understand is like during those meetings, is when you can make all kinds of really interesting deals. But you can only make them if you’re there.
Patrick: In person. Okay, yeah.
Jason: And so they again, that’s a big one. People are like, wait, that’s really how it works? I’m like, oh, yes, that’s how it works. You have to go, you have to go to dinner, you have to go out for drinks, and then you have to build a rapport. And then once you do, that’s when a lot of more advantageous things like terms and prices and product development come your way. So that’s one that comes up a lot. For sure. I think a lot of times people have epiphanies when we talk about what metrics matter and which ones don’t.
I think another one is sort of like looking at the different margin points within a business. Why each margin point matters, and how the acquisition market looks at it. And they say, wow, I never realized that, you know, even though my gross margin was really good, my, call it my contribution margin, is well below benchmark. And they had no idea they were even below benchmark. They didn’t even know there was a benchmark. So that’s another one that happens all the time, I’d say.
Patrick: I just think a lot of them, they’re just so basic that they get overlooked. It’s like these are truths that are hiding in plain sight. And it takes you know, that voice, that perspective from the outside to bring that on, which is another tremendous value you guys are bringing at GW Partners, which is great. The reason why we are having a lot of volume in M&A transactions at the lower middle market, even micro market level.
And it’s following what’s been happening in the middle market is that M&A deals are more possible now, because buyers and sellers can transfer a lot of risk away from the parties through insurance. And the product out there really is rep and warranty insurance. And don’t take my word for it, but Jason good, bad or indifferent, what has rep and warranty insurance done for your deals?
Jason: Yeah, so I think the unfortunate part is a lot of times we’re doing deals that historically are typically between, say $10, $15 million and up $30, $40 million, is kind of our average. We go up to $100. We’ll do a few a year up at that level. But it’s been cost prohibitive for smaller deals. That’s been the real issues. I spent a chunk of my career in much larger transactions where rep and warranty insurance was very common.
And it wasn’t cost prohibitive. And then I found that when we started working in this lower middle market area, historically, you don’t see it used a lot, and usually because of cost. And I know there are now which we’ve talked about recently, some very interesting alternatives now that we can tap into.
So I’m really excited because there’s been more deals than I can count where the escrows, the holdbacks, the all of those, the indemnifications, and the buckets, and all that become massive, massive sticking points. Especially in founder sales, because most of these founders have not done any sales before. They don’t understand why there even are indemnifications.
They don’t understand, like, they figure it’s just a, thought this was just a final sale. Like no take backs, no returns. And when they find out, I mean granted, we obviously are prepping them. But while a lot of times I think they sort of don’t fully understand it until the documentation starts to fly around. Like, oh, wait a minute, are you telling me that if it’s proven that I breached a rep, that I would have to give back a large portion of the purchase price?
Like wait, that doesn’t seem fair. And we have to then kind of explain what I would call the birds and the bees of M&A. This is why this is the case. And if you get rep and warranty insurance, it takes a lot of that or almost all that off the table. So I’m excited for the developments that are happening in the market where some of these smaller deals can, it’s a real option now.
Patrick: I think we’re very proud of this with reps and warranties where the buyer naturally they don’t want to get stuck buying a lemon. And the seller doesn’t want to be kept on the hook indefinitely post closing for stuff that maybe the seller just forgot or didn’t know about. And it’s out of the seller’s control. So you’ve got that natural tension that happens. With owners and founders, they take it very, very personally.
And what’s been great is while rep and warranty insurance has become literally standard now in deals north of $100 million, there are exponentially more deals that are under $20 million of purchase price that owners and founders could really benefit by having that. And what’s great is there is now a product out there. It’s a sell side product called TLPE, transaction liability private enterprise and is built to write lots of policies.
They want to get by with volume so they make it inexpensive, only about $15,000 per million dollars in limits. There’s no underwriting fee. They make it simple, where it’s an application and some financials. So the documentation process and the diligence process by the underwriters is nominal. I mean it is very, very little. They know what they’re doing. So they’re not passing this through too quickly.
But they take a valued look, but they accept the fact that look, these are transactions that are simple. They’re low risk, and so they should also be low cost. And they can turn around an M&A transaction for a sub $30 million deal in a matter of a day or two. And at a cost, like I said, about $15,000 per million dollars and limits. And that just gets this thing through.
We’re very happy because it’s something that we can bring to the sell side of the table that hadn’t been there before. Before buy side policies are exclusively the province of the buyer. If the buyer didn’t want the coverage, even if the seller paid for it, it didn’t happen. And now we have somebody to protect even writing a policy that covers the escrow.
So the seller could go ahead and just have that escrow covered, they don’t have to cover the whole deal. But with a policy, the intent is you have insurance, you show that to the buyer, no need for escrow. And so we see quite a bit, and that’s why we’re so excited talking to you at GW Partners, because it’s your clients, the ones that we want to serve in this area.
Now, as we’re going through, we’ve mentioned we’re recording this right at the beginning of the year 2024. And there’s a lot out there that could be happening. Jason, I’d love your perspective. What do you see happening in 2024? And this could be either macro, or just with respect to GW Partners in the consumer product space.
Jason: I think macro, 2023, just historically worldwide was a pretty low volume year for M&A. I think a 10 year low, I would say. So what we’re seeing for 2024 is we’re expecting a pretty big snapback and a lot of volume to happen this year. Really, you’ve got a few things lining up. You’ve got the Fed, who is now sort of turned somewhat dovish. I think we can argue over how many rate cuts there might be this year.
But what seems to be kind of the full consensus is that we’re not going to have any more rate hikes, which is huge. Because what that does for buyers, is it now gives them a reason to feel like risk is reducing, right. So the backdrop of the rate hikes last year was you’ve got inflation that was really kind of starting to run away. That’s now stopped, which also contributes to that risk profile.
You don’t have to worry about your cost capital going up. Hopefully, it’s only going to be going down. That contributes to a lower risk profile. And I think just macro economically, you look at how this recession that was predicted never really materialized. And all of the data is pointing to probably not a recession coming this year at all. And the consumer which is whether you’re looking at a consumer products business, or just overall, the consumer is such a big part of our economy, like the consumer is holding up.
Now granted, they’ve got more debt on the balance sheet, there’s a couple of things to be watching and be kind of keeping your eye on. But all of it is lining up for it to be a pretty big year for volume, definitely compared to last year. So I think that the public equity markets have obviously they performed great and 2023. They tend to lead private markets, we didn’t see the same kind of valuation appreciation in private markets in ’23.
We expect some of that will now trickle through to private markets this year. And one of the things that a lot of people would like to talk about on a macro basis is the amount of just cash on balance sheets and cash in private equity firms. And, you know, there’s still between corporate balance sheets and private equity two, two and a half trillion or more of cash. And we know because we get a lot of inbound inquiry from acquirers that that volume has picked up substantially.
And so people now wanting to make sure that if we have deals in market, that they’re seeing them. And then our closer relationships are all telling us, hey, we’re going to be even more active this year. And what’s great about the lower middle market is and actually the lower middle market outperformed the middle market last year in terms of just number of transactions overall because they’re seen as slightly less risky transactions.
Because normally they’re sort of add on type transactions. And so they’re like, okay, and then a lot of people feel like, and historically, the data also bears this out, you can get them for a little cheaper. If we’re looking at average multiples where they trade, lower middle market companies trade at lower multiples than middle market companies do. And so you’ve got sort of a two birds with one stone.
Take a little less risk with smaller bites, pay a little lower price. You’re not paying for as much for earnings. And I think what we see is, that’ll continue this year, except with so many more buyers now feeling better about the risk, they’re going to want to come in. And that should naturally drive up values, because of just supply demand dynamics.
Patrick: Well and I think the other dynamic out there is I had a conversation earlier this morning with another investment banker, where they’re based in the in the Rust Belt, and he just said, look, in my area of Ohio, we have a lot of private companies with owners and founders where the kids are not going to be following them and succeeding them in the business.
And so they’re looking for an exit. And I have a feeling those younger folks that want to go ahead and cut their own path and start their own thing, they’re coming your way. Because they’re looking at getting some consumer products or some smaller ventures and building those up.
So I think that’s a great scenario where we just have a lot of stuff happening. It’s also when you’re smaller, we’ve got less regulatory scrutiny and some other things that tend to hold up those big signature deals that we read about in the paper. Jason Somerville from GW Partners, how can our audience members find you?
Jason: Yeah, the best thing to do is email. You can email me at Jason@gw.partners. You can call me 704-771-2921. And then also, I would encourage anybody to follow me on LinkedIn. We do a weekly deal tracker that we post on LinkedIn, which is really good content, if you want to stay up on all the M&A and venture capital activity every week in the consumer products market. We post that with a little bit of commentary. So I would urge you to follow me there, too.
Patrick: We’re gonna do that immediately. Well, Jason Somerville from GW Partners, really appreciate it. Thanks again for joining us today.
Jason: Yeah, thanks, Patrick. Appreciate it.