Navigating the complex world of mergers and acquisitions can be daunting, especially for lower middle market founder-owned companies. But what if there was a more straightforward path to a clean exit?
In this episode, Rob Margeton, co-founder of Ryco Advisors, an Atlanta-based independent advisory firm, explores the vast opportunities within the lower middle market and reveals how Ryco Advisors guides business owners through the selling process for optimal outcomes.
In this episode, you’ll discover:
- The strategic advantage of finding value in overlooked industries.
- How building connections within the private equity community can maximize a company’s sale potential.
- The critical role of transparency and diligence in successful transactions.
- Innovative approaches to mitigating transaction risk with modern insurance solutions.
- Trends shaping the future of mergers and acquisitions in the current economic climate.
Mentioned in this episode:
Transcript
Patrick Stroth: Hello there. I’m Patrick Stroth. Trusted authority in executive and transactional liability and national practice leader for mergers and acquisitions for Liberty Company Insurance Brokers. Welcome to M&A Masters where I speak with 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 my friend Rob Margeton, founder of Ryco Advisors. Ryco Advisors is an Atlanta based, independent advisory firm focused on the sale of lower middle market founder owned companies. Rob, we’ve known each other for years. So it was great to have you on the show with me. Welcome to the podcast.
Rob Margeton: Great. Thank you so much, Patrick for the invite. Happy to be here.
Patrick: Now, as I mentioned, you’re the founder of Ryco. Before we get into Ryco Advisors, and what you’re seeing in the lower middle market, let’s start with you. How did you get to this point in your career?
Rob: Sure. So Ryco Advisors. I’m actually a co-founder. It was my wife and I, and we both had a lot of experience working on Wall Street in New York. She did investment banking and private equity, and I was a managing director at a middle market restructuring firm. So I worked on very large distressed companies.
So think 2008, 2009 when the world was ending, I was all over the U.S. in and out of bankruptcy court. So much larger transactional experience. My wife’s from the south, and we wanted to do something entrepreneurial, so we moved south and we bought a B to B field service business. We actually bought a mobile truck washing company.
Reoccurring revenue. Every two weeks she washed the same dirty truck, and over four years, we doubled the size of that business. Had a really good exit, and we realized there’s Main Street business brokers who probably shouldn’t sell a lower middle market business, and then you have your mid market guys who, from a fee perspective, don’t want to sell a lower middle market business.
So there’s a huge gap in ability and professionalism in that space. So that’s why we founded Ryco, to help that owner sell a real business and be able to go against, you know, the strategics and private equities of the world and have a really good exit for them.
Patrick: Well, let’s start with Ryco Advisors. How did you come up with a name? It wasn’t named Margeton Advisors.
Rob: Sure. So, some people name their business after their street or their you know, favorites, ski mountain. We named it after our two boys, Rhys and Cole, so Ryco.
Patrick: Fantastic. That’s outstanding. And it must have been a real culture shock to go from, I guess, the glitz, the exciting business of Wall Street, down to a truck washing company, but I think that’s just magical, that you found great value in something that a lot of people overlook. And you’ve managed now, how many years for Ryco.
Rob: I think we’ve been in business six, seven years, something like that,
Patrick: And and the years that we’ve worked together and seen a few transactions, you’re really committed to the lower middle market. You have not gone upmarket from when you started. So talk about that. Why the lower middle market as opposed to scaling up as you’re going along?
Rob: Sure. So we will define the lower middle market by size. So typically, two to ten of EBITDA, and most of our things are, say, two to eight of EBITDA. Again, most middle market investment banks want to do five, 6 million EBITDA and higher, and they don’t want to do smaller things and and we’re happy doing those you know, 10 to $50 million transactions all day long. And there, there’s a real need in that space for a real M&A advisor to assist.
Patrick: I think a lot of us have seen that the lower middle market is just an ocean of opportunity with tons and tons of these lower middle market companies where you’ve got owners and founders, they don’t know where to go. And, you know, without a platform for them like Ryco Advisors, they’re kind of left to either their own designs, or they may partner with a strategic that doesn’t have their interests at heart, really.
And so it’s essential that we’ve got a channel like Ryco Advisors out there. Talk about some of the things that Ryco Advisors brings to the table. I mean, in addition to just having the experience and giving these owners and founders, the attention they probably wouldn’t get from other firms, what are a couple of things that you guys are doing that you found really effective?
Rob: So in addition to our experience, we have much larger transactional experience. We’ve also been owner operators of our own B to B service business, so we’ve worked on almost every side of the deal table, and we’re able to exit ourselves. So we bring that and then we are very analytical. We do a lot of upfront diligence on our sellers, on their financials, on the value drivers. We spend an awful lot of time on that.
And then we also have relationships with the private equity community. So I’m a member, and I sit on the board of M&A source, and I chair something called the deal market. And twice a year we get together with 40, 50 either private equity, family office, all lower middle market buying groups, and we build relationships. So now I know a few 100 lower middle market buyers.
So when I look at a brand new deal, it doesn’t matter what industry, I can quickly reach out to these people on a no name, no location basis and understand what they’d pay for it and what they find attractive about the business. So pre-market, I’m already learning what the market is willing to pay. Some people do formal valuations. Valuations are great for estate planning, but it’s not what the market will pay. Many times we’ve more than doubled what that piece of paper valuation says when we go to market.
Patrick: Wow. Okay, and just to break on a little anecdote between you and I, that’s how we initially met, was at M&A Source, which has been a fantastic forum for you know, buyers and sellers in that lower middle market space. And you and I were just standing in line at the deal market, waiting for a private equity firm to become available, and you’re just standing, waiting for your chance to speak, and you and I strike up a conversation, and it’s gone from there.
So there’s a lot to that, I think that’s a great, tremendous value add to that. I imagine a lot of your sellers, they may have a lot of reasons for selling, but the big thing is, look, I’d like to get out of this. How do we do this painlessly, and, you know, obviously maximize. You’re not just staging them up. You’re also going ahead and you’ve got a network of reliable buyers out there. I think bringing that to the table is very, very helpful.
Rob: Absolutely, and a lot of times, most buyers these days are trying to go direct to sellers and offer them what the sellers perceive as a bunch of money, but in reality, they’re getting a really good deal, and they’re leaving a lot of money on the table. So we know what things are worth, how to market them, how to maximize value.
We did a deal recently where, before we got engaged, some buyer went to my prospective client and said, hey, we’ll pay you five times EBITDA, and that sounded like a really good deal. Well, after we got engaged, I reached directly out to that buyer and said, go away. We just don’t want to talk to you. And from five to five and a half times the next day.
And then I went to them again and said, hey, you can be part of our process, but I’m not talking to you yet. A few days later, they went to six times. Well, one turn of multiple for a few days is a millions of dollars for a client. And ultimately we sold it for more than that, but that is the value of having an M&A advisor.
Patrick: Yeah. I sincerely agree. And it’s, I mean, there are a lot of people who want to sell their house themselves, and I’ll tell you, it’s not just bringing the realtor, but bringing in somebody that has market intelligence to help stage a house and get it looking better. And for every dollar that’s spent in getting that preparation of that advisory service, the return is, oftentimes 10x. So, I mean, is a tremendous value add that you’re bringing. Let’s talk about, you know, give us a profile, Rob of your ideal client. Who are you looking to serve?
Rob: So we don’t do tech, we don’t do healthcare. We love everything with a blue collar type flare. Could be manufacturing, distribution, a service business, home service business, again, someone who’s typically north of 2 million of EBITDA, and then we usually represent a founder or second generation owner operator, and then we want to work with someone who we can educate and who’s open to advice.
If we find that they’re extremely stubborn, don’t want to listen, don’t want to provide much data. That’s not a good fit. We won’t even be able to coach them through the process. And we end up turning down 85-90% of what comes to us. And we’re not volume driven, so we’re very picky on who we take on, and we just want to do a really good job when we do get engaged.
Patrick: Well, and it is working for you. You and I spoke just before our conversation here about how you had a pretty robust 2024 when a lot of other people it was a little bit slower, our office included. Are there any geographical limitations?
Rob: I don’t think so. Generally southeast. But we sold something in the Midwest last year, and had a really good exit for our client. So we will get on an airplane when it makes a lot of sense to do so.
Patrick: And also, I think it bodes well for you when you need complete transparency with your seller. It’s almost, you know, between your attorney and your banker, you kind of have to be absolutely transparent. If you try holding something back, then you get the ugly surprises sometime later. So I appreciate that you guys have your awareness out for things like that. Anything else you look for, for a client that you want to serve?
Rob: There are other value drivers in a business where it might be too hard to sell a business if you know, there’s a 90% customer concentration. I’m taking this up to the far end of that. But there are certain businesses which are very, very difficult to sell. Or some kind of specialty trade business that’s all new construction, all project based, the multiple would be very, very low. So there are certain types of things that don’t quite fit our buy box or market and sell it to somebody, but otherwise we’re fairly open.
Patrick: And you’re not cutting any new frontiers in selling businesses. You’re looking for the tried and true, reliable formula. So that way you guys are delivering consistent value, each client you engage.
Rob: Yeah, we run an investment banking process for that lower middle market. So we typically cast a fairly wide net. We go out to a couple 100, up to, you know, five, 600 buying buyers. A lot of times we do an IOI, indication of interest, then we’ll do management meetings, and then we’ll do letters of intent, and then we have a pretty streamlined process. And last say, eight of nine transactions from LOI to close have been 60 days or less.
Patrick: Wow.
Rob: We’re pushing a pretty aggressive timeline, and we’re also going to hold our buyers accountable to the timeline. We do a lot of negotiating before the LOI to really make sure our buyers know what to expect, and we get the best terms we can get.
Patrick: And we’ll talk about one of the things that you do in the LOI, which is unique in the sell side advisory thing. But I’ll segue in with this is that, you know, one of the reasons why M&A has been ramping up over the years and more and more deals get closed, is that the buyers and sellers and these deal parties are able to transfer risk from their transaction away from the parties, okay? And this is financial risk between buyer and seller with the indemnification cost.
The insurance industry came up with an insurance product called reps and warranties insurance, which was originally designed for deals priced at $100 million purchase price and up. It has come down market, and there’s now a new product that can address just the lower middle market. But, you know, don’t take my word for it. Rob good, bad or indifferent, what’s been your experience with rep and warranty insurance?
Rob: Yeah, so we really like seller rep and warranty insurance. We are always trying to push it for sub $20 million deals. You know, every IOI, LOI is, you know, cash free, debt free, minimum net working capital. Then you start scrolling down, and then you see, aha, they want to 10% hold back escrow for 12 to 18 months.
And you know, it on a $10 or $20 million deal that that’s one or $2 million the seller doesn’t get at close. They don’t like that. So at the IOI stage in our process letter, we’re actually saying, are you okay with seller rep and warrant insurance instead of an escrow? Like we’re flagging it there so then we can start that conversation. And there’s a lot of benefits to it for a seller.
One, they can sleep well at night, once the deal is closed. Two it’s pretty cost effective, and we can throw out, you know, almost 10 out of 10 times that escrow. So for paying a small premium, they get to keep all the cash. There is no hold back, and it just makes a lot of sense. And then, from a buyer’s perspective, they don’t have a 12 or 18 month hold back, but they have a six year tail, which is a lot better for their needs.
Patrick: Yeah, I think the other thing is that for buyers, you get more protection. If you’re going without insurance, your maximum financial protection is going to be that 10% hold back or escrow. Well, why not make a 20 or 30% limit on the policy. So on a ten million deal, instead of getting a million dollars in an escrow account, get a two or $3 million limit policy. And as you’ve said, if it’s brought into the negotiations early, it’s just one less contentious point to deal with later.
And, you find that a lot of times the sellers, it’s not that they’re naive, it’s just they’re not experienced, and so they’re not accustomed to the concept of indemnification. And for buyers, I would just think if this can ease through, and the parties can share the cost, they can whoever has leverage in the deal could always impose one side or the other to pay it entirely, but at an average of $15,000 per million in limits, it’s a reasonable expense for the benefits it brings out on both sides.
So on the this lower middle market product is called TLPE, transaction liability private enterprise. It is designed for transactions priced between a million and 30 million in enterprise value. So it neatly fits in that gap from the buy side policies that really don’t like coming down that low in market.
And I think by bringing this through, you get accelerated deal timing and it moves forward, and it’s a simple process to execute. And as we’re going into 2025, Rob, what trends do you see going forward? We’ve got a whole new administration coming in, and we’re just at the dawn of what could be a very, very active economic cycle.
Rob: So I think regardless of the new administration, I think things were generally a little slow last year. People were worried about the estate tax, wealth transfer tax. I think risk is gone now. I think people who were going to sell in 2025 are still going to move forward in 2025 so we have a pretty full pipeline. And I think a lot of other people are starting to have decently full pipelines as well. So I think there’s going to be a lot of M&A in the next two years.
And I know private equity, they keep raising all these new funds. They have lots of committed capital. They have to do deals. You know, last year we went to market with something, two weeks later, we had over 80 executed NDAs. I just went to market with something last week, and I already have over 70 executed NDAs. So the buyers are out there. If you have a high quality business, buyers are going after it.
Patrick: Do you have any preference with the type of buyers that are out there, strategic private equity? Now, we got a whole bunch of independent sponsors out there, search funders. They may be a little bit too small for your clients, but any preference one way or the other?
Rob: Yeah, typically, we don’t go out to search funds, because we want to know someone has money and they can actually transact. Sometimes we’ll go to independent sponsors, depending on the deal, but typically we’re going out to strategics, PE backed strategics, and then if the business is large enough, PE as a standalone platform. So we like to go to buyers who have already transacted many, many times, and they have a good mail strap for closing.
Patrick: And for a lot of your sellers, are your sellers looking for an exit percentage wise, or looking to scale up the operation?
Rob: It really depends on the seller. Most are open to rolling some equity if it’s a really good fit with the buyer and what they want to do. If the buyer doesn’t have a good track record or their return profile is not great, there’s less of a willingness to roll. But some buyers absolutely are like, hey, I’ve taken it to this level. I can’t grow anymore without a growth partner, because I don’t want to keep reinvesting in the business. And then, though, they’ll roll a larger percentage to keep growing.
Patrick: And we’ve established, you’ve got the network of high paying buyers out there, which is what every seller is looking for. So that’s great news out there for owners and founders that are looking for what to do next as they look for the next year or two. Rob Margeton from Ryco Advisors, how can our audience members find you?
Rob: Sure. You can find us on our website, RYCOadvisors.com, or you can email me, Rob, R O B @rycoadvisors, A D V I S O R S.com, and I’m pretty responsive, so I’ll get back to you quickly.
Patrick: Well, great. Yeah, you are very, very responsive. Rob, it’s been a pleasure. It’s great to have you here. I’ve enjoyed and I’m thankful for the work that we’ve done together. I’m looking forward to a lot more deals in the near future.
Rob: Same. Thank you, Patrick, and thank you for having me.
