ASG Partners' interview with David Hanson, Managing Director, Lynwood Capital Partners
Lynwood Capital Partners, Inc. is a private equity firm focused on acquiring or investing in middle-market businesses with revenues of $5 - $75 million. The firm and its principals have a successful 20-year track record of operating and growing such companies in a variety of industries. In this interview from ASG Partners' Spring 2008 Newsletter, ASG Managing Partner Paul Keller interviews David about what Lynwood looks for in an acquisition.
What are the characteristics that Lynwood Capital looks for in businesses they acquire?
It is hard to lay out any hard and fast parameters. We really are generalist investors, and we sometimes surprise ourselves in what we aggressively go after.
We like fundamentally strong businesses with good people. We like simple and niche. We've been doing this long enough that we have various sentiments and biases, and we judge companies and situations against these. We don't waste anyone's time pursuing a company if, after talking to the broker and learning some very rudimentary info about a business, we know it wouldn't be a fit for us.
It surely helps if a Seller has audited financial statements, although it costs a little more. It also helps if a Seller can articulate, and provide evidence, if possible, that the Buyer can grow the business. Very few professional investors want to acquire a business that can't be grown. And for the record, we don't mind if a company doesn't show perfectly. We try to be good listeners and tailor our proposal to situation at hand and meet the various financial and intangible objectives of the Seller.
How many opportunities does Lynwood review in a typical year?
We look at over a thousand companies a year, easily. We probably actually visit with about one per month, and we typically make offers on the same number. If we visit, we're serious and probably have had at least one call with the Seller.
Of those, how many letters of intent (LOIs) do you submit? How many do you close on?
Unlike some of the folks we compete with, we only provide an LOI if we are confident we can finance and close. We don't view a LOI as the place to start the negotiation. Consequently, we do a fair amount of homework upfront and do our best to really get to know a company, and the people situation. We compete with folks who brag about how many LOIs they submit and execute with sellers and try to make a case that they exercise discipline by only closing a percentage of the LOIs they execute, but this is usually because they try to re-trade the deal even if there aren't material findings during the diligence phase - which sometimes there are.
Is the current economy impacting the number of opportunities, LOIs and closings?
If the Buyer is experienced and has a track record and strong relationships with financing partners, the present economy and financing environment shouldn’t make any difference.
What is Lynwood’s typical financing structure, and what types of partners are involved?
Most buyouts or recaps are going to have three flavors of capital on the balance sheet: 1) Some sort of Senior Loan and Revolver (probably from a bank or a non-bank funding source), 2) Subordinated Debt, Mezzanine Debt and/or Seller Note(s), and 3) Equity. Obviously, these three flavors can be sliced and diced into 31 flavors, but those are the three main categories.
An experienced Buyer will do all they can to make their own financing process transparent to the Seller, but the Seller will need to participate in a couple of meetings. The joke we always tell a Seller is that once they've answered the very same question about 15 times, the deal is probably close to closing.
At Lynwood we spend a fair amount of time cultivating and deepening the relationships we have with existing financing partners in portfolio companies. We also identify with whom we'd like to partner with because as generalists, we're never quite sure what kind of deal is around the corner, and we really strive to bring the best financing partners to each new investment. All firms have biases and size parameters and various redlined industries.
What kind of an impact - if any - has the "credit crunch" had on Lynwood’s acquisition practices or criteria or partners?
We're steady as she goes. We've been investing since 1990, so we've seen high levels of activity and excesses and lows. We rely on our long-standing financing partner relationships and track record to get deals done in unsettled financing environments. I might also add that in this cycle, the big deals are the ones most impacted by changing or more limited financing alternatives, not the so-called middle-market - at least in our opinion and from what we see from our vantage.
What are some of the potential issues that can come up and unwind a deal in progress?
There are a few "syndromes": There is the inexperienced broker syndrome. There is the inexperienced attorney syndrome, sometimes exhibited in the form of the buddy-attorney syndrome. There is the misunderstanding syndrome. There is the usual and customary syndrome. There is the underachieving financial performance syndrome.
We would much prefer to negotiate and deal with a Seller who has both an experienced broker and corporate deal attorney, who both have done lots of deals and do that to make their living. These two professionals help ensure a deal that should get closed will get closed. Otherwise, both Buyer and Seller waste a great deal of time, the proverbial wheel is re-invented over and over again with regard to routine issues (escrow, holdback, indemnities and various technical and important points in a 30-50 page purchase agreement). This basically defines what I had earlier termed the usual and customary syndrome. What really is normal course in the deal world would be totally new to an estate attorney or a slip and fall attorney who has earned the trust of the Seller over time, but doesn't do corporate transactions for a living.
On another topic, the Seller should be sure they deliver the financial performance they say they will because the Buyer has based their structure, their valuation and their financing on the Seller's forecast of the future.
Lastly, realistic expectations allow Buyer and Seller to achieve their objectives. Each company is a different organism and professional advisors really help add perspective on what is likely the most important financial transaction in the Seller's business life, and one that they likely will only do once. A professional investor Buyer is just that, and typically has a measure of objectivity, and is probably a lot more dispassionate about issues. This asymmetry should be kept in mind by all.
In your opinion, is the current market a buyer’s or seller’s market and why?
With professionals representing both Buyer and Seller, I think that any market, including the current one, represents a level playing field. There are so many professional buyers and investors in the marketplace that valuations are still high by any historical measure. We know that financing is available for us and others who have been in the business of acquiring companies for a while and have a track record.
For more information about Lynwood Capital Partners, visit Lynwood Capital's web site.
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