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Sunday, 14 May 2017 13:42

Small business M&A requires patience and financial savvy

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Wade Thompson, left, and Neil Brown, right, pose with one of the service vans that Central Interconnect uses to service customers throughout West Michigan.  Wade Thompson, left, and Neil Brown, right, pose with one of the service vans that Central Interconnect uses to service customers throughout West Michigan. Courtesy Photo

As Neil Brown and Wade Thompson considered acquiring Central Interconnect Inc. late last year, they found themselves interested in the opportunity the company presented. 

The two longtime friends decided to go into business together several years ago and then spent a year looking at a variety of deals, Brown said. Their search led them to weigh several potential acquisitions in a range of industries.

Ultimately, after in-depth consideration of three potential deals, they arrived at the Grand Rapids-based audio visual supply company, whose previous owner, Arlen Smith, was ready to transition out of the business. Brown and Thompson spent 18 months working to close the deal before acquiring the business last November, as MiBiz reported at the time.

“The numbers looked good and it was a well-run business,” Brown said of the opportunity to acquire the company. “But it also had some areas for growth and opportunity, so that’s why we settled on Central Interconnect.”

Brown declined to disclose terms of the deal, but he said the transaction was structured with a mix of equity and debt financed through a U.S. Small Business Administration loan with Huntington Bank

The company currently has 28 employees and generates around $5 million in annual revenue, according to Brown. 

Consultants and attorneys contacted by MiBiz for this report note that while the approach Brown and Thompson took with the Central Interconnect acquisition may not be the norm, the deal itself serves as a microcosm of the current market for small business M&A.  

“The things people are looking for before they ever retain me is, ‘Does it make sense from a financial standpoint,’” said Jon Siebers, an M&A attorney at Rhoades McKee PC in Grand Rapids. 

Siebers noted that many lenders tend to avoid financing small business transactions because of their greater risk. 

“Oftentimes, getting finance deals for small business deals can be more challenging than for larger businesses,” he said.

Most of the transactions Siebers has worked on recently include some element of bank financing, while a smaller portion involve some component of seller financing, wherein the acquired party takes a subordinate note. 

The Central Interconnect deal also fit a larger narrative playing out across the country as the population of aging Baby Boomer business owners decides the timing is right to exit their companies. 

“Across the board, for everything I’m working on, it’s retirement,” said Max Friar, the managing partner of Calder Capital LLC, an M&A advisory firm in Grand Rapids. “They’re all tired and the amount of work they continue to do is not helping that. Most (owners) are active in the day-to-day business. Most are dealing in issues with finding qualified help, which makes life more stressful.”

Friar represented Smith, the previous owner of Central Interconnect, in the sale of the business. 

SELLER’S MARKET PERSISTS

When it comes time to sell, owners often have their pick from a pool of buyers, particularly in West Michigan, which continues to be perceived as a strong place for small businesses. 

Personal finance website Wallethub recently named the city the fifth best in America for starting a small business, behind Oklahoma City, Salt Lake City, Charlotte and Tulsa. Grand Rapids was ranked first for average overall growth of small businesses and 21st for financing accessibility. 

M&A advisers contacted for this report echoed the sentiment that small businesses can thrive in West Michigan, adding that the seller’s market remains in place. 

“M&A is cyclical, the economy is cyclical,” attorney Siebers said. “At some point, the economy is going to start to turn and M&A is going to slow down. If I owned a business and I was thinking I wanted to sell in the next five to 10 years, now is probably the time I would do it.”

However, as Friar surveys the landscape for deals in the small business segment, he believes that the market trajectory will continue upward for the foreseeable future. 

“I think we’ve got a longer runway than people think,” he said. “Times remain good and they probably will for a while. We’re in the seventh inning. People are doing business and they’re doing business rationally.”

The new owners of Central Interconnect also appear to feel that way. In the months since acquiring the company, the executives have debuted new product offerings for their commercial phone system clients. Brown said the additions could add around $2 million in annual revenue for the company.

All told, Brown said he’s been satisfied with the acquisition, adding that patience is perhaps the most important virtue he would suggest to other would-be buyers of small businesses. 

“If it’s a business you’re convinced will be a good opportunity for you and maybe the owner isn’t certain they want to sell, I would say stick with it,” Brown said. “I’ve heard that from other people that have purchased small businesses. A lot of times the seller is really emotionally attached so sometimes you just have to wait them out.” 

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Nick Manes

Staff writer

[email protected]

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