In this episode, my guest is Tom Zucker, President and Founder of EdgePoint Capital.
Cleveland based, EdgePoint Capital’s advisors bring up-market executive transaction knowledge and real-world M&A and business leadership experience, enabling them to guide owners and founders through transactions and attract qualified buyers.
Tom will share his M&A insight, including:
- The importance of timing and preparation
- His commitment to the lower middle market
- EdgePoint Capital’s ideal client
- Value of rep & warranties insurance
- An M&A forecast for 2024
- And more
Mentioned in this episode:
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 Tom Zucker, president and founder of EdgePoint Capital. Based just outside of Cleveland, EdgePoint Capital’s advisors bring executive transaction knowledge and real world leadership experience, enabling them to guide owners and founders through transactions and attract qualified buyers.
2023 was a productive year for Edge Point Capital, with 20 successfully closed transactions and being recognized by M&A Advisor for private equity deal of the year in the category of 75 to $100 million size transaction. So, Tom, you’ve had a great year following this, and it’s great to have you here today.
Tom Zucker: Patrick, thanks for having me.
Patrick: Now Tom, before we get into EdgePoint Capital, let’s start with you. What brought you to this point in your career?
Tom: Patrick, thanks for having me on today. I’ve been blessed. I grew up in an entrepreneurial family. My father had a boat dealership, and I got the benefit of being part of a multi generation business. And that experience was transformational for me. And after spending almost a dozen years in the Ernst and Young and Arthur Andersen world, I realized that my heart and my soul was serving lower middle market clientele. Private business owners.
Patrick: And so let’s go into EdgePoint Capital because I mean, you didn’t name it Zucker Capital. So let’s start there. How’d you come up with the name?
Tom: It’s funny. As you start building a business, the intention was to build a company. Build something that wasn’t centered around my individual personality or myself. And so we started serving our clients at the center of it. So we started thinking about, you know, as someone gets to the end of the culmination of their business career, building a business of significance, we thought that edge and point was kind of, you know, two words that really signify as a point of change. So, no magic to it. It worked for us.
Patrick: Well that’s good. And you decided, you consciously, there are some firms that start small, and they scale up over the years as they are successful. You’ve remained committed to the lower middle market, which I really appreciate. What was the thinking behind that?
Tom: I go back to the family roots discussion that I had. Lots of times I’m having discussions with people that resemble my father and my uncle and their business careers, right? Can you relate to the individuals? And the larger you get up, the more sophisticated the transactions. I’ve had the blessing of being part of an IPO, really large assets, securitizations, and quite frankly, they’re not as fun. They’re not as enthralling. And sometimes you don’t add as much value as you might add in a lower middle market transaction.
Patrick: Yeah, and I believe that the issue for us when I look at the lower middle market, is that there’s a huge marketplace of I consider underserved entrepreneurs. I mean, you’ve got the large targets out there, they’re easy to go after, and easy to target. But you’ve got these other owners and founders who they know, and they built their business, but they don’t know where to turn when it comes to a transaction.
And so what happens is, a lot of times, they just, they don’t know any better, they default to some of the institutions out there. They get underserved, and they have to overpay. And so that’s why I really wanted to go ahead and speak with you and EdgePoint Capital, because I really believe you’re filling this need where this may not necessarily be an underserved market, it may be a market that just doesn’t know where to turn.
And so as we look at EdgePoint Capital, let’s talk about what you guys are doing. You’re based in the Midwest. What are you bringing to the table that other M&A advisors and investment banks may be missing?
Tom: Well, let’s talk about table stakes. I mean, I think every really good investment banking firm walks to the table with a deep technical expertise. CPAs, JDs, multiple transactions consummated. They know how to do deals. Check, right? The second category is do you understand my industry?
EdgePoint focuses on business services, industrial, and health care companies. We’ve defined our universe and there’s sub sectors, we have deep expertise. Check. The last one is the hard one. And a big bank in difficult times may come down to the lower middle market and for us, that’s a three to 15 of EBITDA sector size.
But do they have the ability to convey empathy? And empathy is the ability to sit there across the table looking at two feuding family members, and listen. Listen to each point of view and come to a conclusion on how to resolve the issue so that the family stays together and not just somebody won a point.
Patrick: And so with doing that, that gives you context, because a lot of other people are just looking to get the deal done. And it’s more than just feelings. But there’s something to that because I sincerely believe that M&A is not, you know, Amazon buying Whole Foods, which a lot of people think. It’s a group of people choosing to partner with another group of people. And in that you got one plus one is going to equal four or five.
And so I think that’s important to bring to the table and a lot of people overlook is putting yourself in the other one’s shoes. And if you’ve got just a quick sample on, just bring us into a family owned business, and some of the dynamics that you had to navigate them through to get the deal that they wanted done.
Tom: Yeah, I’ll tell a quick story. And again, remember, an investment banker, M&A advisor is nothing more than a fancy term for storytelling. Our job is to tell the story of your company, all warts included, to highlight the good parts and not to focus on the warts. So we had a wonderful business, it was a tool cutting business, and it was owned by a second generation business owner.
Unfortunately, the owner tragically died, it was held in an estate. And so as the business was not doing particularly well at the time of his death, the president of the business, and his very good friend, who was an attorney came in to be the head of the estate. So as we were going through the process of determining when to go to market, the easy answer was now.
The right answer was wait. They had developed proprietary technology that was defining in the marketplace. And so as we paused and we waited, we cleaned up some matters relative to his estate, fixed the financials, and built out a team. That business grew fourfold in EBITDA from the time we began, because we understand the industry.
And we understand where these cutting tools fit into the marketplace, both in a sale and a rental perspective. That business ended up trading. And the nice part about the story when it traded, it traded at an industry high multiple that has not been exceeded since.
Tom: Yeah. And so right time, right place. And the right solution was the 16 year old daughter, who was the primary beneficiary now has the funds that weren’t present at the time of this death, now has the ability to live a life of much more comfort.
Patrick: And a lot of people keep thinking of speed to market and time kills deals. And this is a perfect example is there are more optimal times for those that are patient and have a wider perspective or a holistic look at this thing. And I appreciate what you’re doing there.
Now, with your base just outside of Cleveland, Ohio, a lot of people are gonna think that you’re limited regionally. Let’s talk about that as your service area, where can you reach out to. And why don’t you give us a profile of what your ideal client looks like.
Tom: That’s great. We are a national firm. We’ve got 44 of the 50 states checked off on where we’ve close deals in. I’m looking for the last six. Our ideal client is a privately held owned business. Founder led, family involvement is another characteristic we look for. But we do it in target sectors. And so I mentioned business services as an example.
We break down business services, both in professionally managed services and environmental services, facility services, recurring revenue associated with home care. And then one of the other areas, we’ve spent some time in his vegetation management and what we call professional services and consulting.
And there’s a variety of others that spread off of that. But that gives you an example of the granularity with which we’re approaching the marketplace. Obviously, industrial being in the Midwest, we’ve got a great base of experience there.
You know, we’ve got engineered products, flow metering and measuring, test and measurement, precision machining, obviously steel and steel related products. And on the healthcare side, we’ve got physician practices, we’ve got recurring revenue cycle management, and we’ve got infusion therapy services that we do as well.
Patrick: These are all sectors that some people think, oh, these are huge institutionalized, you know, there aren’t very many companies out there. Contrary to that, these are fragmented industries, and there are a lot more out there than you would think. And that’s why I want to just make sure that owners and founders out there and maybe their attorneys would understand that there are firms like EdgePoint Capital that realizes these fragmentations can be leveraged into your favor and your client’s favor and get you some real fantastic outcomes.
Now, Tom, one of the reasons why we have so many investment bankers today and so many private equity funds is that transactions have gotten a lot more efficient and a lot easier. And it’s largely due to the evolution of reps and warranties insurance, which enable the two parties to take a lot of the financial risk that’s inherent in these deals, and transfer them away. Instead of the parties pointing at each other, they transfer the risk off to an insurance company.
And it has not only saved a lot of deals that otherwise wouldn’t have happened, but it’s accelerating the process of deals all the way up and down market. Now don’t take my word for it. Tom, good, bad or indifferent, what’s been your experience with rep and warranty insurance?
Tom: We’re big advocates of rep and warranty. Almost all of our deals, we’re pushing hard to have a rep and warranty policy. And it’s not to help you, Patrick. Quite honestly, it’s to help our clients. So picture a business owner. It’s a chemical business. You know, the gentleman is 72 years old, he’s not doing well in health.
And he sits there and he goes, I’m trying to sell this business so that my estate doesn’t have any liabilities coming back to it. But I know I’ve had some bad chemicals that have flown through these vats here in this business. Help me get an insurance policy to pull that risk off the table.
And between structuring of the transaction and between putting a rep and warranty policy in place, the owner had very little liability post transaction that allowed him to sell the business in comfort. If he did not have that policy, he told us flat out he wouldn’t sell the business. He wasn’t going to put that on to his descendants and create any risk for them.
Patrick: And firms get this to a lot of deal parties out there. There are risks inherent to these sizable transactions. It’s a fact of life. But as I approach the parties, I just say, look, we’ve got this risk. Do you want this to go away? Or can you live with it? And a lot of times, I mean, they want it to go away and the cost has come down tremendously.
The other innovation that I want to make sure that you know we share with our audience today is rep and warranty was usually just the domain of deals priced from $50 million and up. There’s now rep and warranty for deals as low as a million dollars in purchase price up to $30 million. Those products are streamlined, they’re inexpensive, at like $15,000 per million dollars in limits.
And so it gives deal parties the ability even on just a small add on or bolt on transaction to say, look, I’d rather not live with this worry. I probably will forget about it in a year or two. But let’s just get it sidelined. We’re very, very proud about that. That lower limit market out there was called TLPE, transaction liability private enterprise.
And if you want to learn more about that for cases where maybe a buy side rep and warranty policy isn’t a fit, there’s now a solution that way. Now, Tom, we’re recording this right at the end of 2023. What trends do you see going in, give us your forecast for 2024?
Tom: My general answer is the world is calming down. I’m not sure the world calming down is good or bad. And we’re heading into some black swans and some turbulent times relative to political and you know wars that are happening. From an M&A perspective, deal capital is abundantly available. $760 billion of unemployed private equity. $2.1 trillion of capital sitting on fortune 500 balance sheets.
There isn’t a lack of capital, there’s a lack of opportunity. And so from a supply and demand perspective, I wish there were more sellers that were in the market to meet the demand of the buyers. The buyers have told me consistently, and as you can imagine, private equity is called very often to see what we’re working on.
And they say the quality of the deals in the last 12 months have been significantly less. And the volume of quantity of deals north of 15 of EBITDA have been significantly less. The sub 15 marketplace, we call that, for some, the add on marketplace has been very active and robust.
You know, the fact that we proclaim here today that we’ve done almost 20 transactions this given year, there’s many investment banking firms that they’ve not had quite that favor. And it’s a large part of the market focus and the sector focus that we have. Leverage has come down. There’s a little bit less leverage that was available on transactions.
And we’re seeing good deals, A, A- deals, trading at values that are commensurate with where they were at 2021. So we’re optimistic. We’re beginning to see some of those large deals come back to market. And we’re hopeful that in the upcoming 12 months we have a favorable election with an outcome that’s good for business owners.
Patrick: We’re hopefully getting a more favorable interest rate climate in 2024. But that’s months away from here. One of the things that I just had noticed and I wanted to ask you as an expert in this area is in terms of structure. Are you seeing an adjustment of structure where there’s maybe buyers are getting a little bit more creative, where instead of doing all cash, they’re offering a lot more stock to the seller. And what do you see that way? And what’s your opinion?
Tom: My opinion is strategics have become very, very aggressive. They’re buying many of the assets and paying premiums because they have lower cost of capital than their private equity brethren. And it’s creating a little bit of a gap. And so we’ve seen that. We also see large strategics beginning to divest non core assets, freeing up capital for more strategic initiatives.
When I look at the structure associated with a traditional private equity deal, we are definitely seeing a lot more creativity with the lack of leverage that’s there. The good deals, as I mentioned before, are still getting all cash transactions. And the private equity firms are filling the gap where leverage cuts off.
Patrick: So then there’s still a lot of good things out there. Now, Tom, I also want to point out that with EdgePoint Capital, you guys have some fabulous quarterly reports where you talk about the industry. Talk about your newsletter that you have, because we’re going to then invite people to go ahead and reach out to you to get access to that. But share a little bit about that.
Tom: And we’re big believers in educating our marketplace. So many of the companies in our target marketplace go unrepresented. And we think that’s a very big problem. Many companies in our market don’t properly prepare. And so we spend a lot of time educating the marketplace through white papers and thought leadership and flash reports.
And as you mentioned, newsletters. Those are our outreach to the marketplace to say, please don’t sell by yourself. Get a representative to tell your story and get a premium on the value of your business. And so that’s on our website. We have it fairly well laid out, and to us in addition to videos and podcasts, it’s a great way for us to share the stories and the complexities of M&A.
Patrick: Well let’s get that out for our audience right now. Tom Zucker, how can our audience members find you?
Tom: Edgepoint.com or Tzucker@edge point.com. Or if you’re crazy enough to give me a call on my cell phone, it’s 440-724-5406.
Patrick: And for audience members, if you want to take a look at that, reach out to the show notes or by all means, take this and get a hold of Tom. He has just a wealth of information. And it’s important to have perspective, particularly if you’re a seller out there and you want to see where you stand out there. More information is always a lot better than just going with your gut. So Tom Zucker, Edge Point Capital, thank you very much for being here today.
Tom: Patrick, pleasure being on the show.