Today we hear straight from the CEO of a corporate advisory firm with a unique approach to M&A transactions. Find out why anonymity is a big part of their MO, and how their non-traditional view of business valuation got them to sell a business for 28 times EBIT! This episode is helpful listening to our business brokers and advisors out there who are looking at new ways to add value to their clients.
- An overview of Oasis M&A
- We’re big on client confidentiality and anonymity
- We have a different approach at valuation
- We sold a business at 28 times EBIT
Joanna: Hi, it’s Joanna Oakey here and welcome back to The Deal Room podcast brought to you by our commercial practice, Aspect Legal.
Last week, in part one, we talked about Michael’s own business growth and sale experience, and the lessons he has learned in hindsight. If you missed that episode, we recommend you go back and have a listen to it after this episode.
But in today’s episode, in part 2, we’re taking a closer look at how Oasis works and their unique approach to M&A transactions. This is definitely helpful listening to our business brokers and advisors out there who are looking at new ways to add value to their clients. So don’t go anywhere, here we go!
An overview of Oasis M&A
Joanna: Michael, thank you so much for coming back to chat to us again on The Deal Room. In the last episode, we took a walk through your own personal experiences of building and selling your own business, and then a second bite at cherry of sales that gave you a different perspective.
Today, what I’d like to do is talk a little bit about the model that you use in assisting your clients in selling their businesses or buying. I think you work on the buy side too. Is that right?
Michael: Yes, predominantly on the sell side. But we do a little bit of buy side work as well.
Joanna: Yeah. Okay, so maybe just give us a quick overview of Oasis and what you’re doing now and who you work with.
Michael: Yeah. Oasis is a corporate advising firm established in London by the founder John Wilcox Jones, who continues to work and operate at London. There are three branch offices over there: one in Regent St. in London, one in Falmouth and one in Reading.
We opened the office here in Sydney. This is our 11th year, so just over 10 years ago. We work nationally out of our office here in Sydney. We got transactions going on in most states, and we’re probably 90 percent engaged by the shareholders of established private companies who are looking to consider their options around an exit.
We do quite a bit of advisory work around succession, and around should I sell, shouldn’t I sell, when should I sell. But predominantly, we’re transaction people.
Joanna: Can I just talk about that sort of client breakdown? What does it look like in terms of what’s the target size of client or deal size?
Michael: Enterprise value range for us is about 5 to 100 million. Typically, we’re looking at businesses that are making a million plus EBIT, up to probably 10 EBITDA.
I think down the smaller end, I mean the dominance hierarchy is extremely relevant in M&A. There are many more smaller deals going on than the larger deals, so we have a predominance of 5, 10 and 15 million-dollar type deals.
Around the smaller end, we’re less interested in earnings and more interested in the sector and what’s going on. So, we’ve represented some very small businesses who we sold to very large businesses because we like the sector and we think there’s consolidation going on and we think there’s attractiveness in the assets. It’s not just all about the numbers.
Joanna: Are there any sectors on your target list at the moment that you can talk about?
Michael: Yes. Well look, we love manufacturing. We like specialist niche manufacturers. We’re representing a number at the moment. We’re in touch with many more.
Manufacturing gets a bad rap in Australia. But in fact, the reality is there are lots good, emerging manufacturing businesses in Australia that are producing world class products. They’re extremely attractive to the right kind of acquirers.
We like technology. We’re particularly interested in technology businesses that have got good IP, but probably lacking a bit of distribution, and a merger can solve distribution challenge and can actually provide the vendor with a number of assets that are going to make a huge difference to them and they can take a de-risk. So that’s been a good area for us technology, I would say a decade. And you know, we’re probably at the beginning of a digital revolution in real terms. That includes machine learning, AI, so we like that sector.
We certainly like the chemical sector. We like the chemical cleaning sector would you believe.
Joanna: Right. Okay. I mean that’s quite niche.
Michael: Yes, and what we’re seeing there is a number of large companies, who are very acquisitive and quite a large number of emerging midsize businesses run by baby boomers, who are going to have to retire in the next 10 years, so we see consolidation in there.
I could go on and on. But certainly, we think Australia is in quite a good place going forward. We don’t share the doom and gloom that a recession is inevitable.
Joanna: Well, it’s interesting you say that, and I think what we should do is have you back for another podcast Mike, and talk about the outlook for 2019. Because I think that will be a really interesting area to focus on.
We’re big on client confidentiality and anonymity
Joanna: Bringing it back to Oasis, I’m extremely interested in these areas that you’re talking about that you’re seeing opportunity or consolidation in. But maybe if we just talk about how Oasis works. You talked a little bit about this in the last episode that we spoke on together, where were you talking about your back story.
But maybe if you can walk us through what is it that Oasis does and how are you different? How is your approach something different to other corporate advisors in market?
Michael: Yeah. One of the ways we’re different is that John Wilcox Jones, our founder, established in the mid-80’s that the number one concern for an owner was not having it revealed that they were considering an exit.
We don’t just talk about confidentiality at Oasis. We talk about anonymity. We maintain our client’s anonymity until quite late in the process. We only consider revealing of our client’s identity once we got a very well qualified shortlist. We don’t write information at random and we don’t exchange that big fat document often for a confidentiality agreement, which is often breach and extremely difficult to get any kind of redress.
Deals are done in stages. We get to understand our client’s asset very well and we have a lot of information that we collect. But we slice and dice that and redact it.
The most intelligent thing we ever ask a potential buyer once they’re qualified is what further information do you require to go to the next stage. We are only interested in providing information that ticks their boxes at each stage, rather than a big brain dump.
We only give information that is commensurate with the level of qualification that’s gone on. And certainly, we wouldn’t be giving information away that we would consider sensitive, commercially sensitive, and we would be pushing that can down the road to due diligence.
We’re providing useful information, but we’re trying to limit the impact of that information if the deal doesn’t go ahead. That’s a key part of our MO.
Because the reality is that if we have a target list of 60 or 70 potential acquirers, we’d be very lucky if more than five or six of those have fared income.
And so why would we tell 30 people or 40 people or 50 people what we’re doing, when in fact we really only need to tell five or six at the most. And we can probably get indicative offers off those guys.
Joanna: I find this a really interesting discussion in terms of how much information you had across and when. Have you seen this played out poorly before? Do you recall any examples?
Michael: There was quite a sizeable regional meat producer in New South Wales that a corporate advisory firm were representing. Within a few days of them going to the market, they were sending a big fat information around with lots of sensitive information including key clients.
That business was pulled into a crisis meeting with one of the large grocers here and asked to explain itself. That was an extremely embarrassing and highly volatile situation for our client.
Well in fact, it wasn’t our client. They became our client later after they had sacked the original broker. But that’s an example of what can happen.
The other example is that staff and management, not just customers, but suppliers can find out. An owner doesn’t want to be fielding those questions when in fact there’s no deal that had been agreed, and they may not sale.
I think we’ve got to be very careful as advisors who we tell what and when. I think to rely only on an executed confidentiality agreement I think is inadequate really.
We have a different approach at valuation
Joanna: Yeah. All right, great. Okay. So we’ve got the anonymity side of your services and the process or the thought behind release of information. Are there any other strategy that you employ?
Michael: Price is key. Everyone wants to know what’s a business worth. And I actually listen to a podcast recently of yours that dealt with pricing, which was interesting.
Our view on pricing is that it’s very difficult to price, to accurately price or to be definitive about what a business is worth. You’ve got all the standard discounted cash flows, price earnings, multiples on EBIT – all these standard methodologies.
Largely, I would say, in the world we live in, which is a 5 to 100 million-dollar enterprise value. Our view is that there’s such disparity between what buyers will pay for a business that it’s almost impossible to accurately say definitively what a business is worth. It’s worth different amounts to different people, very legitimate.
The reason for that is the acquirer will perhaps derive synergies. The more important those synergies and the more of them there are, the more they’re often prepared to pay. That’s a big variable in the equation.
Our view on valuation is rather than waste a lot of time doing a desktop valuation, you’re better off looking at the market and saying okay what similar transactions have been done, under what prices have those businesses have been sold at and what’s the range.
You’ll find, if you look at any sector, I would say at least 9 out of 10 sectors we look at or areas that we look at, at least 9 out 10, there’s huge variations.
Joanna: How do you get that data then? Because I think getting data, from my perspective and many people I talk to, it can be a little bit difficult unless we’re dealing with entities that have to report publicly, say listed entities for example. So how are you seeing ways to get the data?
Michael: Yeah. I mean there’s lots of listed entities doing deals. So first of all, you’ve got to look globally. You can’t just look in Australia because there isn’t really enough deals often. But you can certainly look globally and there are various data feeds that we subscribe to and our offices in London subscribed to.
You can pull data together and aggregate it reasonably straightforward. The issue is interpretation of that data and its application to the specific situation.
There are lots of listed companies who have to report their deals and they’re buying small private companies often. The multiple of the transaction paid is relevant because they bought a private business and there’s normally a delta between the price earnings for a private business and the multiple that the acquirer is paying at.
You get 6, 7, 8, 10 of those and you aggregate, and you take out the outliers. You begin to get a range. Now does that mean that you’re going to get offers in that range? No. But it’s something to compare an offer to. It’s intelligence that’s useful. We use those. We use that information.
We recently moved an indicative offer from 6 million to 10 million based on our research that I’ve just described to you. We put it in front of the buyer and said, “look, we think you’re off market. Tell us where we’re wrong. Here is the information we’ve got.” And they couldn’t. We began to walk them up and they accepted that.
It’s not a panacea. It’s part of the equation.
But I’ll give you an example. Of the last five deals we’ve done, four of those deals had a difference between the first and second offer of a minimum of 50 percent, and in three cases 100 percent. So double, right? And legitimate. The alternative offers were fared income. They weren’t tie kicking. But they saw a different story.
They weren’t able to meet, for various reasons, they weren’t able to meet what the most strategic and motivated acquirer was able to do. That story gets played out a lot. That throws traditional valuation methodology out the window.
Joanna: Yeah absolutely.
Michael: The reality is, with valuing a business, particular small to medium sized private businesses, there is no market for that business.
If you’re on the stock exchange, your shares are traded every day. If you’re a small private company, there is no market. You have to go and create that market, and you create that market through research.
That market is changing. Every three or four months, that market changes complexity in chain. So one minute you got a bunch of people who are acquiring, the next minute they’ve already bought, they’re out the market and you’ve got other people that weren’t acquiring who are in the market. This is an organic research-driven marketplace.
The reality is there’s probably only one or two, or maybe three genuine buyers at any one time for your business. And therefore, the job is to get to those people, to acknowledge that you might get three different offers from three people.
There are no bad offers. You can reject them, but they’re not bad. They just are.
That’s the job, in our view, of an advisor, is to get to that market, which is the equivalent of looking for a needle in a haystack at a point in time.
I think when you do that, you stand a great chance of eventually surfacing that particular acquirer that’s active. They know what they’re looking for and why. And guess what, your client happens to tick those, some, if not all of those boxes, becomes quite attractive.
Then I think you can end up with an above average outcome. Not guaranteed. You can guarantee to do the work. You can’t guarantee the outcome.
Joanna: And do you have any examples? I just love hearing the stories. I mean we hear a lot of times from advisers perspective them saying that they’ve gone and spoken to someone, and someone’s giving them an indication the value of the business, and they’ve had to you know talk them down basically, give them the reality of where the market is that’s not at the valuation that they’d been provided in the past.
We sold a business at 28 times EBIT
Joanna: What about on the flip side? Do you ever see businesses coming in and just not recognising the value that they’re sitting on?
They’ve been given a desktop valuation that hasn’t recognised the assets in their business to a full enough extent.
Michael: It’s such a contentious issue, valuation. There is so much time and energy wasted on it potentially. We try and stay neutral on that. We’re not sure. We can give you a lot of information, but we just don’t know until we’ve done the work.
I mean certainly we would look at evidence, certainly we would look at what vendor attitude is, certainly we would look at deals that have been done in the marketplace that are similar that we could perhaps draw inference from.
But for the reasons I stated previously, you’re going to a fresh market and you’ve got to speak to people. You’ve got to establish who’s active and you’ve got to find out what they’re looking for and why.
We sold a business once for 28 times EBIT. None of us were thinking about that. But that’s what happened in reality.
We sold a business quite recently where the first offer, on an earnings basis. There were only two real players in the market. One was New Zealand-based. One was Australian-based. Our client was a South Australian business.
In real terms, the guy who bought the business paid 11 million, and the guy who was second couldn’t get past about five and a half, five and three quarters.
They were both genuine, both legitimate, both active, ticked all the boxes. There was only two of them. We went to a hundred.
Now in reality, the reason for that was because one was going to graft that business into its existing operation, and therefore was not really interested in the gross profit and the net profit. He had much more to play with.
The New Zealand guy had to run that business as it was, and therefore was bound by the net profit and didn’t have as much room to play with.
Both legitimate. Nothing wrong with either offer. But the reality was there was much more room to maneuver, and much more appetite with the guy. And there’s a good example of a delta of nearly a hundred percent.
Joanna: That’s a very clear tip, isn’t it? Let’s not focus so much on value in the market. Let’s go find the strategic buyer who’ll pay a far greater multiple of whatever is in the market.
Michael: Let’s do the work. Let’s speak to people. Let’s not unnecessarily divulge identity, but let’s see what’s going on in the market and let’s qualify them, draw up a shortlist and see who’s left.
We can be surprised to the upside and we can be surprised to the downside.
The market will occasionally shun an asset that looks extremely good on paper, but for whatever reason the market shuns it. And this is a reality.
The vendors are increasingly going to deal with, in the next 10 years, if the baby boomers retire. We see a big shift of the wealth as private businesses have ended. We’re going to see many more vendors than there are buyers in the market. But I think vendors are increasingly going to have to start to establish an intelligent plan B to just a trade sale being the only option.
Joanna: And if we could, I’d really like to come back to your 28 times EBIT sale. That sounds amazing! Can we just very quickly, just talk about that as a business? How did you get such a high multiple? What was happening?
Michael: We didn’t get 28 times. We’ve got eight million. Now it converted to 28 times. But we didn’t pitch it we want 28 times.
How do you value an IP rich business with lots of technology and smarts, but their earnings are negligible? So the way to value that business, I mean valuation methodology easily run out when you’re not making a profit. It’s a nonsense to suggest the business is worth nothing if you made nothing.
The reality was that this was an IP rich business in the software sector. There was an extremely motivated, strategic acquirer and this piece of kit, this software, completely ticked their boxes on many different levels. And they asked us what the client wanted, and we went back to the client and said, “look, we don’t really do valuations. What do you want?”
And we did say, “the richest deal we can find anywhere in the world is 28 times at this point, for a similar operation in Canada.” And we said, “28 times suggests eight million.”
And he said, ” I’d be happy with six.”
And I said, “well look, let’s start at eight. We think we can defend that and see where we go.”
And the buyer, there was a long pause and then he said “okay, we’ll do it.” So the deal got done at eight million cash. I mean I don’t know what you call that really. I mean how do you price that, I don’t know.
If he stayed in that business and had come to us two years later and said I want to sell it now. Now I’ve got earnings of a million. We still might not be able to get eight million.
If that acquirer had gone and solved his problem elsewhere, and there was no one to replace him, you then back to a much more humdrum analysis potentially.
This is the volatility I think that we’re dealing with that the owners and advisers and we in the industry have got to begin to accept. There’s going to be volatility around pricing and pricing is elastic.
One of the mistakes I see with owners is where they come up with an irrational number that solves their succession and retirement issues. But bears no relation to the asset they’re trying to sell. We see that a lot.
“I want 10 million.”.
“Okay. Well, that suggest 20 times earnings. Do you make enough?”.
“I know. But I need ten million.”
“Okay. Well, what’s that got to do with the business?”
Managing expectations, what does that look like? What’s the range that we could expect? And then how do we expose ourselves to being surprised to the upside?
Well, I think to do that we’ve already explained that you probably go wide and try find that strategic buyer who’s motivated.
Joanna: Okay Michael, thank you so much for all of your time today talking about your approach at Oasis. It’s been a really interesting journey through the way you approach things. If our listeners want to contact you, what’s the best way to do that?
Michael: You can jump on our website www.oasisma.com.au or you can email me at [email protected] .You can speak to one of my colleagues, Warwick or Leigh any time as well. We’ll be delighted to have a chat with anybody that’s interested in talking to us.
Joanna: Absolutely. Fabulous. For anyone who is on the move at the moment and didn’t quite get the chance to jot that down, don’t worry. We are linking to it all in our show notes.
Okay great, Michael. Thank you so much for your time.
Michael: Thank you.
Joanna: That’s a wrap for our two-part series with Michael Mcgrath of Oasis M&A. In this episode, we zoomed in on how Oasis works and how they approach dealmaking differently from other broking firms.
If you’re interested to learn more about this unique approach to business exit, you can reach out to Michael at www.oasisma.com.au or check out our show notes at www.thedealroompodcast.com where we’ll link through to their website. There you will also find a full transcript of this podcast episode if you would like to read it in more detail.
I hope you enjoyed what you heard today. If you did, please subscribe to The Deal Room on Apple Podcasts or your other favorite podcast player to get notifications straight to your phones whenever a new episode is out.
Thanks again for listening in! This has been Joanna Oakey and The Deal Room podcast, a podcast proudly brought to you by our commercial legal practice Aspect Legal. See you next time!
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