Summary

In this conversation, Jon Stoddard interviews Thomas Smale, founder of FE International, discussing the evolution of M&A services, the challenges of competition, the importance of due diligence, and the expectations of cash in business transactions. Thomas shares insights on how FE International has carved a niche in the market, the qualifications of buyers, and the significance of future earnings potential in valuations. In this conversation, Thomas Smale discusses the critical aspects of business longevity, the importance of quality of earnings, and the evolving landscape of business valuations. He emphasizes the need for educated sellers and transparent communication during the valuation process. The discussion also covers outreach strategies for buyers, understanding strong offers, common pitfalls in transactions, and future trends in mergers and acquisitions, including the rise of partial business investments.

Takeaways

Thomas Smale founded FE International in 2010 to fill a gap in M&A services for tech businesses below $100 million.
The firm has grown significantly, completing over 1200 deals worth over a billion dollars.
M&A services require a comprehensive approach, including financial, operational, and legal due diligence.
Experience and transaction history are critical factors for buyers when choosing an M&A firm.
Qualified buyers typically have cash on hand or secured financing before engaging in a transaction.
Sellers are generally advised to expect 70-80% of the purchase price upfront in cash.
Due diligence is extensive, often involving hundreds of hours of work to ensure financial accuracy.
Quality of earnings assessments are crucial for understanding a business's future cash flow potential.
The competitive landscape in M&A is constantly changing, with many new entrants failing to sustain their businesses.
SBA loans can complicate transactions due to longer processing times and less experienced buyers. The future of the business is crucial for longevity.
Quality of earnings is essential at every business level.
Sellers today are more educated about their business value.
Clear communication with sellers is vital during the valuation process.
Strong offers often come from buyers who know their strategy.
Buyers must be qualified and serious about their cash availability.
Transparency in financial audits is key to successful transactions.
There is a significant amount of capital available for acquisitions.
The trend of partial business investments is on the rise.
Hiring an M&A firm can provide a competitive edge in finding deals.

 

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Transcript: 

jon_stoddard (00:01.133)
Welcome to the top M&A entrepreneurs. Today, my guest is Thomas Smale from FE International. Thomas has started this company in 2010. He's done over one billion in transactions and that equates to about 1200 deals. And he's in the UK, so welcome to the show, Thomas.

thomas_smale (00:19.631)
Hey John, thanks, thanks for having me on.

jon_stoddard (00:21.893)
Go, so we gotta go back. We know each other from a while back, I don't know, seven, eight years ago, tried to buy a company on FE International. It was unsuccessful, but we got down to, you know, all the way down the LOI and then the investor and the seller kinda, well, the investor kinda pissed on the seller's couch and decided to split up. So we do have some a little bit of history.

thomas_smale (00:49.05)
Yeah, so back then, I would have been, or we would have been in the UK, that was primarily our location. Now I'm actually in our head offices in New York. I'm currently in San Francisco. We also have an office in Miami. So we have three US officers now, and still a team in London as well, but I'm generally in the US.

jon_stoddard (01:06.553)
Beautiful, beautiful. So let's talk about how you started FE International, you know, why, what was going on right in that environment, what were you doing before and why did you start?

thomas_smale (01:20.19)
Yeah, so back in 2010, I graduated college that year. So I started it because I wanted to start a business. In 2010, if you owned a tech business, so you had something in the SaaS software, e-commerce, digital media, content space, there was no M&A firms that would represent you if you had a business below $100 million in valuation. It didn't exist. There were marketplaces, if you had a $200 business,

If you had a $25 million valuation business, no one would speak to you. So your options were either try sell it yourself, find a local business broker who's used to selling warehouses and restaurants and get them to represent you, or try and persuade a really big investment bank like Goldman Sachs or JP Morgan that they should represent you. But they didn't do $25 million deals then and they certainly don't do them now. So the gap was just lack of representation.

for those business owners. But there was a huge amount of demand. So when I started out, we were doing very small deals. I wrote a book about buying and selling online businesses in 2010. And off the back of that book, we got a lot of inbound interest from people saying, hey, I have this successful online or tech-based business, but there's nowhere to sell it. There's no firm that will represent me. So that's what I launched was a firm to represent sellers. We've grown from there.

Across everything we do now, we have about 150 people. Like you said, we've done over a billion dollars in transactions. That's over 1200 deals in total. We've worked with a lot of sellers, we worked with a lot of buyers, and we've just been around for quite a long time now, as far as the industry goes.

jon_stoddard (03:07.053)
Yeah. Curious, is that book, what was the name of that book? You remember it?

thomas_smale (03:13.29)
I do not. We did various versions of it. So we did lots of things that funneled in, ultimately to M&A service. But the intention was not to launch an M&A service, but I think if you build a, which is what we did, build a community very early on, if you build a community, they will tell you what they want. And they told us what they wanted was an M&A service. So that's what we launched.

jon_stoddard (03:14.874)
Ha ha ha!

jon_stoddard (03:38.093)
So what do you mean M&A service? I mean, traditional M&A service is you'll find somebody that owned a company or you sold a company and then they'll say, hey, I know how to help people help them get a bigger exit, life-changing exit, and they work through the process, even working backwards saying, well, you're a multiples only three. If you want $5 million in your bank, you need to do this.

thomas_smale (04:04.27)
Yeah, so we work with primarily sellers, but we also work with buyers who are trying to find a company. We'll work with them to find something that fits their criteria. But where we work with sellers, sellers generally come to us and say they want a evaluation to start the process, which is something we generally offer for free. So anyone that has a business that we would represent will provide evaluation, give them an idea of where they're at. The catalyst for that, like you mentioned, can sometimes be their approach.

came to them said, hey, I want to buy your business. And it their interest in a potential sale. Or they have some sort of change in life circumstances, which means that they need to sell. Or sometimes, like, most business owners, they just want to make money, and they want an exit because they'll be financially successful. So come to us, assuming they're happy with our valuation, that we provide them, we then sign an

of them and we managed the process all the way through from financial, operational, legal, technical order, which we do upfront through to preparing sales materials for the business. So prospectus, some people would call it a SIM. We then reach out to buyers. We have a process of reaching out to buyers in our existing network who we know want to buy a business like the one we're representing. But we also do a lot of outreach to potential strategic buyers,

public companies, anyone or any company we think could be a good fit. So we get basically anyone who would be interested in buying that business in the world, we hopefully speak to. And then we will negotiate hopefully multiple offers and then coordinate the process from due diligence through to closing.

jon_stoddard (05:55.593)
So I'm curious how you stand out now because there's an entirely new crop of competitors out there. I'm not talking about the smaller ones, like the $200 ones. I'm just a whole crop right in that same space that you're in.

thomas_smale (06:12.89)
It's definitely true. I'd say a lot of them would necessarily say they're copycats, but we were definitely the market maker early on. We were trailblazers. There were some other firms doing something similar to what we did, but we very much created the market. We were very early in creating authoritative content. I've been interviewed on podcasts for the last 13 years. I've been speaking on stages for 13 years. We've produced all sorts of different content. So

content over the years to educate sellers, buyers and anyone interested in the industry. I think ultimately, while there is a lot of competition, when it comes to choosing an M&A firm, one of the most important criteria is experience and the number of transactions a firm has done in your space. So if two firms look exactly the same, if one has sold 50 businesses like yours and it's been around for 13 years as well.

I'm one has sold two businesses like yours and been around for two years generally speaking we're gonna Win that You are right. There is a lot of other competition Corrupts up what we generally find is a lot of competition Comes and goes we've seen if we did this book us five years ago, and you said who are your main competitors? Five years later. Those are all completely different because a lot come into space thinking M&A is easy. It's an easy service to provide and they think

i'll come to like a fb international are too expensive so i'll solution to grow market share is charging half the fees but spoiler that doesn't work like providing a good m&a service is expensive we invest a lot into our. Process we have very good people we have offices all over the world.

thomas_smale (08:13.29)
I'm with a very small team, but we generally do over a hundred deals a year. There's a lot of work and infrastructure that goes Into that. So you are right. It is a competitive space, but competition I guess like in anything a business doesn't necessarily mean good competition. It's just more noise

jon_stoddard (08:32.116)
Yeah, what's expensive? Yeah, what's expensive? You're talking about 10-15% of the sale?

thomas_smale (08:36.97)
It depends on the deal size. We generally start around that level and then tear down. I wouldn't necessarily describe us as expensive. I think it's more the fact others try to charge say 3% on a $2 million deal and the economics at scale do not exist at that level. You can't hire good people who have experience doing M&A and provide a comprehensive service as that's all you're charging. You can provide a marketplace

a self-serve platform with some like free tools and easy to use DIY materials. But the art of good M&A is not learning how to put together like a letter of intent or a purchase agreement or finding buyers who are kind of emailing you directly saying you wanna buy. You have to do a lot of outreach. You have to do a lot of phone calls. You have to do a lot of qualification. Negotiations are very complex.

that they're not they're not simple particularly when you're negotiating with multiple parties and there's a lot of expertise that comes with experience and you can't I mean you can't buy this experience by hiring people who have 20 years of Wall Street experience but the experience that comes with knowing which buyers are qualified which buyers are not qualified who's gonna be a good fit who's most likely to kind of complete a successful process so there's a lot that goes into it

providing nice looking templates and things like that which a lot of people think a lot of people think well our M&A firms gonna be replaced by AI and automated systems like ultimately no it can definitely help streamline part of the process but it's not gonna replace the the true value which is kind of experience from real people who have done it thousands of time before

jon_stoddard (10:29.413)
Yeah. Let's talk about those buyers. Who's qualified? Who's not qualified? I mean, there's a recently a rash of, well, it's been going on for a while, but a rash of, Hey, buy no money down kind of thing. Who's qualified? Who's not a qualified buyer?

thomas_smale (10:46.75)
So firstly, we're really strict and we continue to get more and more strict because as you say, there's more and more people entering the industry and more and more people entering the industry who are not qualified and believe they can buy a business with no money down. And while I'm not saying that's impossible, it's not saying that we accommodate, it significantly reduces the risk of a deal completing. Generally speaking, what we would describe as a qualified buyer is someone who or a company that has.

cash on hand to do the transaction, or they already have a lender lined up who's committed to the transaction. And they've actually reviewed the deal in detail. So not just a letter of support like, hey, I'm Thomas' banker, I confirm Thomas has $10 million unwants to buy a business. It has to be they've reviewed the business we're representing, they've reviewed the financials, they reviewed other things.

me if I'm the buyer, my financial position. So we'll look at that. And then also buyers who, at least for us, this is our qualification process, will happily follow our process. Because a lot of buyers will go through courses or they'll hear something from a friend or they'll have a background in a different industry. And they'll come in and they'll say, we're only going to buy the business if we can follow this process. We don't deviate from our own process within reason.

there's some discretion in there, but we're generally having like hundreds or thousands of buyers look at every business we're representing. There's a lot of work that goes into qualification process. We won't accommodate people who don't have cash, but I don't know, want to fly in and meet the seller on day one. There's a lot of time races and time kickers out there, so we won't do that. So first qualification is will follow process. We believe they're

conversation or their understanding of the business. And they also have capital or proven access to capital. Not I plan to buy this business and then I'm going to use a sell or no a bank loan and like a friend that's going to give me some money. That's not who we're looking to work with. Yeah, at least

jon_stoddard (13:09.133)
Yeah, so I can vouch for that because when we were looking at that business on F.E. International, we had to prove a screenshot of $7 million in an account that we were trying to buy a $2 million business. Yeah. What, when you say it's not impossible to do those no money out of talk, those are extreme examples, and I always say that those are extreme, then they're not impossible. What are you talking about there? Are you saying that does happen?

occasionally?

thomas_smale (13:39.79)
not not not not through us but I'm sure they do happen somewhere where there's maybe like a distress sale like if someone's literally ready to shut down their business maybe there's a world where they're happy to give it away for no money down and sell or financing in my experience nobody and it probably wouldn't be an extreme to say literally nobody with a actual genuinely good business that's growing has a team in place is in an industry that's going to be around for a long

jon_stoddard (13:44.257)
Yeah.

thomas_smale (14:09.75)
that a way to a buyer who doesn't have any cash because firstly, they have no real need to do that. And secondly, there are plenty of buyers willing to buy that business who do have cash. So that's not to say there's not a possibility to get financing on a deal. But generally speaking, we guide sellers towards the expectation that our buyers are going to pay 70 to 80% of the purchase price upfront. So on a $100 million deal, we might expect

jon_stoddard (14:12.914)
Yeah.

thomas_smale (14:40.03)
75 million. But we certainly wouldn't advise a seller to accept a deal which is say $10 million down on that same transaction. So I'm sure it's not important. I wouldn't want to talk in absolutes and say it's impossible to buy a business with no money down. But at least anecdotally, I don't think you're getting access to good businesses for that. And as a M&A firm with a good reputation who's been in the industry for a long time, we generally

don't represent the kind of lower cohort of unsuccessful businesses, which maybe the seller needs to exit, but we don't want to represent those businesses. Or don't represent businesses.

jon_stoddard (15:22.553)
What kind of cash are you looking down for a business? I mean, I know it's a case by case baseness. If you put a listing up there and you get 10 offers, some's 10% cash down, some's 50% cash down. What are you looking for? Is it?

thomas_smale (15:38.29)
Yeah, so generally, like I said in the last answer, 70, 80% would be the average. We do many deals which are 100% cash. If we get 10 or more offers on a deal, which we generally expect for a high quality business, we'll have 10, and that's qualified offers. It's not uncommon to get 15, 20 qualified offers. Generally speaking, the higher cash down, the more likely that deal is to happen with that buyer. If you are in a competitive bidding process

for 10% down. You have zero chance of ever winning that deal. If you're at 50%, it's highly unlikely. Generally speaking, there's going to be some cash buyers in there, and there's going to be some buyers at 70 or 80%. Where a buyer who's offering 70 or 80% can win against a buyer who's at 100% down is if there is a believable possibility that the seller can walk away with substantially more than the 100%

Down buyer with either an earn out structure or no or some sort of future growth Which is why we're not necessarily bias, but we tend to focus on experienced buyers who have a proven track record because if you've So bought five businesses before you've doubled them and then sold them and you say to a seller Hey, I want to pay 70% down, but I'm gonna pay you X% of Upside so you can potentially make more It's

that you have the ability to pull that off. If you're a first-time buyer who has kind of read a few posts on LinkedIn, you've borrowed $10 million from some friends and family and you hypothetically think you know how to grow a business, that's highly unlikely. Almost no sellers are going to go for that. They're just going to view the upfront cash as the guaranteed amount. So it's certainly not impossible to buy a business for, say, 70% down.

going to be doing that and you're competing against cash buyers, which you almost always will be, you need to very much prove that you have the ability to grow that business and probably even present a roadmap. Quite often buyers of that level will say, well, here's what we're going to do with the business or here's another similar business we own. We know we can drive customers so we know we can grow it. That's quite common, particularly from bidders who end up winning even if they're not necessarily

jon_stoddard (18:09.093)
Yeah, are you, I mean, it doesn't even sound like you're doing any financial buyers that come with an SBA loan because everybody that's using SBA is thinking, oh, you know, I'm just going to put 10% down. But you're saying you got 10, 15 different offers and most of those are going to have 50 to 75% cash.

thomas_smale (18:30.69)
Well, keep in mind with SBA, you yourself only put in generally around 10%, but the actual cash the seller receives is significantly more than that. Usually around 90%. So we do do some SBA deals. The challenge with SBA in a competitive process is, and this is a generalization, generally by using SBA are less experienced than those who are not using SBA.

jon_stoddard (18:40.977)
Right.

thomas_smale (19:00.89)
and have cash and SBA is generally the slowest process you can have versus cash buyers. So while technically it's possible to close SBA and say 60 days, the majority of those deals take 90 to 120 days being being realistic, whereas cash buyers, even on say like a let's say 100 million dollar deal, when we worked on recently, you can close those deals in 60 days with

jon_stoddard (19:15.593)
I did

thomas_smale (19:30.85)
as you have cash on hand, but that's impossible with SBA. And obviously, SBA also has an upper limit. So you can't buy a $50 million business with an SBA loan, even if you wanted to. We don't do that many deals below 10 million in valuation or 5 million in valuation specifically where SBA is more prevalent. So it's not that we would ignore SBA. It's just that generally you're not going to be competitive. It does not mean it's a fantastic

jon_stoddard (19:57.656)
Right.

thomas_smale (20:00.69)
one of the best things, the part of the reason I'm in the US, I think America is great at supporting entrepreneurs. I truly believe it's the best place in the world to build a business. And things like the SBA loans for acquiring businesses, it's a fantastic program. But our job when we're representing sellers is to get them the best possible deal that has the highest likelihood of closing. And generally speaking, SBA deals do not fall into that.

versus other competitive offers.

jon_stoddard (20:33.313)
Just money loves momentum. And if you're coming with 75% cash, which usually from equity, from a strategic buyer versus a financial, first time financial buyer. Okay.

thomas_smale (20:44.77)
Yeah, exactly. You're just gonna win because you're like a proven winner. Everyone loves a winner, particularly in the US.

jon_stoddard (20:51.553)
Yeah, that is very true. How much due diligence do you do on these companies that you're solid? If it's a first time seller, they decide to go with FE International. What are you doing from them? What are you looking for?

thomas_smale (21:03.99)
We do a lot. So essentially what we put together is a quality of earnings like you would expect from a PWC or Deloitte if you hide them to audit your own business. So

jon_stoddard (21:16.393)
Does that cost, is that included in the commission you make or is that upfront? Yeah.

thomas_smale (21:22.65)
It is included. It depends on the transaction. Sometimes we'll have a retainer in there, depending on the state of their financials and the size of the business. So sometimes there is a retainer to cover that process. Sometimes it's part of the fee and it really depends on the level of work. But it's generally from our side, and we track all of this obviously by the hour, hundreds of hours of work, more than 100 hours of work from accountants. And most of our team

KPMG Deloitte, they come from big accounting firms and they're used to doing quality of earnings reports. We will do that to make sure financials are legitimate and accurate. And a lot of sellers, even if they don't realize they get their numbers wrong, it's not necessarily malicious, but sometimes even their accountants can be wrong. So just having an accountant alone does not necessarily mean your numbers are going to be accurate. One of the biggest

and this is why we've always refined that over the years, is financials not adding up. So many, many years ago, we got very strict with audit and we do not negotiate with sellers on the level of due diligence we do upfront. So it's generally a multi-week hundreds of hours from multiple people in our team. We also do operational, technical, legal, and other due

thomas_smale (22:52.35)
exactly what we're doing, but I want to be in a position where every business we represent, you could buy, not do any due diligence, and the business would be as it was represented. Obviously, my legal caveat is you should always do due diligence, but the spirit of what we're trying to achieve is a situation where nothing a seller has represented or we've included in our prospectus is factually incorrect. So if we say a business is making $5 million

is proven it makes five million dollars STE. You don't go through due diligence and find out what actually makes two million. That does not mean that you will like every business we're representing because sometimes people just don't like the business model, they don't like the industry, they don't like the seller, they don't like the strategy, but our job is not to make a judgment on what people like. Our job in due diligence is to make sure that the business is legitimate. And ultimately, that's how you build at least my belief is

That's how you build a firm that's been around for 13 years in the industry, whereas a lot of others go out of business in two. We have a reputation for good deals. But I might feel like they have to overpay or pay a premium to win deals that we're representing. But ultimately, if you buy a legitimate business, you grow it and you sell it for three times what you paid in five years time. To your point about momentum, you can be extremely successful.

little bit on the way in because you couldn't buy that business privately and persuade the seller that their business is worth 50% less, which is what a lot will try. But as the industry to your point has got more competitive, it's much harder as a private buyer, it's much harder now to persuade sellers to sell because they all have access to huge amount of content that companies like us provide.

jon_stoddard (24:46.153)
Yeah, let me ask you about that. Bring back the audit and the quality of earnings. Audit is verified in the books. And just make it a clarification. It's like quality of earnings actually makes a call on the future potential of the earnings. Do you actually do that?

thomas_smale (25:03.07)
We do and again, the extent we go into as quality of earnings will depend on specifically the business, how long it's been around. But no, we do because what, see, a business is only worth the value of its future cash flows. Obviously all you have at time of sale is what it's been making in the past. As a buyer, you have to have firm belief that business is going to continue into the future. So if that is, for example, you have a business making $10 million a year.

$10 million comes from one client and that one client is on a rolling annual agreement and it can't be transferred to a new buyer. That is significantly more risky than the same business with 100 clients paying say $100,000 a year. We will have three-year agreements with automatic extensions and those agreements can be reassigned. So yes, it definitely is something we look at, particularly our valuation stage as well because if you look at those two businesses

by side. On paper they look very similar. They both make $10 million but the business with 100 customers paying 100,000 a year with three-year contracts and an assignment clause is going to be worth significantly more than the business with one client with no automatic extensions and no way to reassign that agreement. So yes, we do and it's important because your existing financials

jon_stoddard (26:24.657)
Yeah.

thomas_smale (26:33.05)
future of the business is what really matters. Lots of businesses made a lot of money over the last couple of years during COVID, for example, and are now making nothing. So it is important you think about the longevity as well.

jon_stoddard (26:48.333)
Where's that line? Because when you get smaller, is the lower middle market or is it just a small SMB? Where does it get important where that quality of earnings comes in?

thomas_smale (27:00.77)
I think it's important at every level. So that's why we don't represent businesses which are worth $100,000, because, honestly, it's not worth the physical expense of going through that process would not make sense. So I don't think that I think at any level, whether you're buying a business or selling a business, I think it's essential. I mean, it would be different if we're talking about you have $1 billion and you're looking at a business that is valued at a million,

that level you can afford to do less due diligence and you can kind of take more of an educated risk. But if like most buyers you're only ever going to buy one to five businesses, lifetime or in your entire career, it doesn't matter if that business is a million dollars or a hundred million dollars, you still need to establish quality of earnings and make sure it's stable and consistent and will grow in the future. Obviously the amount of work that

like varies because of the trouble and this part of reason we do in house we've seen clients who have spent I think I saw a transaction a couple of years ago is a $3 million deal the buyer hired hired a big four accounting firm to do quality of earnings and I think they spent half a million dollars which is relative to the size of the deal is is not what we call it crazy like is a good level of diligence but that to me is is overkill for saying that

size so there's the balancing

jon_stoddard (28:32.153)
unless he saw an opportunity where he could turn that into a $50 million company in two to three years, right?

thomas_smale (28:38.09)
But that's true. But I think what a lot of people and going back to the earlier point about like competitors in the industry, what a lot of people don't realize is that actual good advice and good talent that can do that quality of earnings is not cheap. So we provide it as cost effectively as you can. But you could also go hire one of those kind of M&A firms that will charge you say 3% for a $10 million deal and then go pay for your own quality of earnings. And by the time we've done that,

up in a much worse position and you're definitely out of pocket for the quality of earnings and the business still might not be sellable. So that's why we offer everything in-house. We've always found that's the best

jon_stoddard (29:19.593)
Well, tell me a little bit about how you do valuations with these companies. And then let's say it's assuming everybody comes to you and goes, they feel it's worth more than it actually is. What's that process like? So, I'm going to go ahead and say, I'm going to say, I'm going to say, I'm going to say, I'm going to say, I'm going to say, I'm going to say, I'm going to say, I'm going to say, I'm going to say, I'm going to say, I'm going to say, I'm going to say, I'm going to say, I'm going to say, I'm going to say, I'm going to say, I'm going to say, I'm going to say, I'm going to say, I'm going to say, I'm going to say, I'm going to say

thomas_smale (29:31.91)
Yeah, so they firstly over the years, I think thanks to podcasts like yours, sellers are becoming more educated. So 10 years ago, almost every seller wanted more business, sorry, more for their business than it's worth. Today, sellers are better educated. So it's way less uncommon that someone comes to us now. We value their business at 25 million. And they say they want 250 million. Or they believe their business is worth 250 million. That's uncommon.

We, within our valuation team, we look at a lot of data. We use a lot of valuation models. We pull in data points from every business we've sold in the past. We look very heavily at comps. And to my earlier point, why it's important to hire an M&A firm that sold a business like yours, if we have sold 50 businesses like yours before, our valuation is going to be significantly more accurate than the firm that's ever only ever sold to, uh, just because the reliability of that

is going to be better. So we've relied very heavily on comps and businesses we've sold in the past. Hence why if you came to us and say, Thomas, I have a restaurant, it makes $200 million a year, can you sell it for us? We would say no. Not necessarily because it's about business, but I don't know what a restaurant generating $200 million a year, if that even exists, I have no idea if that's reasonable and we don't have the expertise. So we just wouldn't do it. So we've relied very heavily on comps.

lot of data modeling, but it's a very objective data driven process. There's not a, we think it's worth 25 million, you think it's worth 50. Okay, let's go ahead. There's obviously an element of discretion, but again, you don't build a reputation like we have if you give either bad advice or if you always just appease sellers, because yes, we could go list that

jon_stoddard (31:15.353)
split the middle and put the number out there. Yeah.

thomas_smale (31:32.55)
0.1% chance of selling it. All you're going to get at the end is a frustrated seller who's wasted a bunch of time and frustrated buyers who are like, well, I bid $25 million, which is a great offer. The seller said no because they want 50. You're wasting everyone's time I would definitely not still have a business 13 years in if that's how we acted. Obviously, valuation is not always an exact science So it doesn't mean we're always right, but I'd say generally speaking our accuracy is

businesses, which is a good thing about having close 1200 deals. We have a lot of data on a lot of different business models, all different sizes, different industries.

jon_stoddard (32:12.793)
Yeah, how does that conversation go with a seller? You come up with the valuation, let's say it's $10 million, and then you get 15 deals on the plate, the highest ones, $9 million. I mean, how is that conversation going? It is what it is, or what?

thomas_smale (32:30.35)
So firstly, one of the things we do within our team is we make very clear to, we're very clear with the seller who we've spoken to. So it's not, oh yeah, we've run our like magic hidden process. Here's 12 offers, take it or leave it, pick the best one. We will go through how many people we reached out to, who we reached out to. So they know that we've reached out to, I guess the spirit of what we're trying to achieve is reach out to anyone who would possibly be a good fit for acquiring that business.

at the very least the seller believes they're getting the best possible offer that could be achieved in the current market. They've viewed all of our sales materials up front, they know what we've prepared, they've helped us prepare that, so the business is presented in a way that they understand and agreed with. Once you've got to the stage where you have, in a very objective way, the best possible offers on the table that could be got for that business and the seller understands

personal decision. So if we've said 10, the best we can get is nine, which is uncommon, but it might be the case. Then it's really down to their decision whether or not they want to take nine. I would say almost every seller in that situation will take nine, assuming they believe that the process has been comprehensive. And the reason the best bid is nine is because it's not because we've only called five buyers and just put the first offer in front of them

And that's ultimately what you get from the I guess the cheaper M&A firms Yes, they charge you that three percent, but they might only get your on that same deal They might just get you a seven million dollar offer So yes, you save money in terms of the dollar value of fees you pay But the net amount you walk away with is significantly less because it's physically impossible to do enough Strategic outreach at that percentage point. You just physically can't hire people with the

technical ability to do that outreach and have the conversations on deals at that level. They're just too complicated and there's many educated buyers out there who kind of know the right things to say even though they're not necessarily qualified.

jon_stoddard (34:38.555)
Let me, let me.

jon_stoddard (34:45.573)
Yeah, let me ask you about this outreach. So you get a new listing and it's a good business and it should go fast. So you reach out to your list. I don't know how big your list is now, the possible buyers, but you also do outreach to new buyers. Well, I mean, what does that look like? You just have somebody on your team saying, hey, this company might be a good fit for them. But if you start this sales process, I mean, there's a time period where they go, okay, send me the information. I've never bought from you.

before and, you know, they're just not, they can't move fast enough versus somebody that's been on your email list.

thomas_smale (35:25.19)
Yeah. So firstly, we generally set a time where we're going to run this process, which is most of our deals, we will set a timeline for bids. It's not a first bid gets it. Because if it was first bid gets it, it would almost always sell to the first buyer on our list who has done deals with us before and makes a first offer. So we always run a process with reasonable deadlines. So on say a $50 million deal, it might be a four week deadline

first bids and then final bids a week later or two weeks after that. So we're very clear when we reach out upfront. Generally speaking, if a buyer is qualified and has the ability to do a transaction, they are not going to take weeks to review materials. And if they do, they're probably not qualified. So one way of knowing if a buyer is qualified is how long they need to make a decision. If they have M&A in their strategy and they have cash available for M&A, then they will review things.

and get it done. But we reach out to anyone that we believe would be a potential good fit for the business and we work with a seller to put that together so we don't necessarily reach out to their 10 closest competitors without telling the seller first. We will make sure they're on board with that approach. Often a lot of it is private equity firms and private equity firms, the nature of their business, they have to deploy capital. Most private equity firms are open about what they've

thomas_smale (36:55.29)
a business in say the ed tech space, we will reach out to private equity firms who have acquired other ed tech businesses and say you have, and this is very personalized, this is not just we blast out 10,000 emails to a list of private equity firms that you can download from like a no like a data provider, these are one-on-one emails and calls from our team in New York. So this is not like an offshore task that we do at scale.

of view. If it's a good fit, they'll always have a conversation and serious rise in the private equity space or otherwise are used to there being a process and a timeline. If we reached out and didn't have a timeline, they wouldn't take it seriously. So to your point, if you don't say there's a timeline, they'll say, yeah, yeah, we'll review it and get back to you and you won't hear from them ever again. So we're very strict with timeline and because we will get multiple authors, we're not bluffing with our timelines. So if you're,

late and you think, well, deadline's four weeks, but we're going to submit our, we're going to do our fair school after five weeks and submit a bid after seven. The business will already be under offer by then and you're going to have missed out. But that only works if we do good enough outreach to get those buyers on the table. Hence why we focus so much on multiple bids. And then you have to leverage. You're not in a situation where there's only one buyer and they haven't got back to you yet. We'll hopefully be at the

need to worry about that one buyer because there's ten others who have already submitted an offer and are adhering to the timeline.

jon_stoddard (38:32.533)
What do you average in a number of bits? Is 10 to 15? Per...

thomas_smale (38:36.83)
10 would be a good average. Sometimes it could be significantly more. Sometimes it could be less. Where it's less, that's generally because someone's come in and offered full asking price. So we genuinely will not...

Keep running a process if a buyer makes a really good offer and their offer is contingent on the seller accepting it. So, I sometimes...

jon_stoddard (38:59.334)
I gotta ask you about, yeah, if somebody's offered full asking price and it's cash, what does that person or company look like? And what are they doing in the background? And why would they offer, you know, $10 million in cash for full ask?

thomas_smale (39:15.47)
It could be anyone, but generally speaking, in no situations, they know exactly, they either have a similar business or they've spotted something with the business that they know they can do to improve or grow it, which may double it overnight. And that might be something that only they have the ability to do, maybe through a contact or a client or some sort of contract negotiation. Yeah. But people are very rarely offering, say, 10 million.

asking pricing cash, they'll close in 30 days if they're a first time buyer, they don't really know what they're looking at and they just think the business looks good. Generally speaking, they know exactly what they're going to do. It's a really good fit with their existing portfolio and they don't want to miss out. So they're not going to offer 5 million upfront and then kind of 5 million over the next 10 years because while financially upfront, that's

thomas_smale (40:15.51)
a deal at all so it makes sense to make a strong offer and then back themselves to grow the business. That's usually what happens in a case where you have a very strong offer, it's a buyer that knows exactly what they're going to do with the business and it fits with their strategy.

jon_stoddard (40:29.993)
Yeah, so it's like playing poker. If you look around and you're looking for the person that least experienced, it's probably you.

thomas_smale (40:37.231)
Yeah, well, it's exactly.

jon_stoddard (40:40.373)
Yeah, yeah. Where does it fall apart? Usually, where you see, and I mean, you've gone through this process 1200 times and you probably create these frequently asked questions or you strengthen where it falls apart. Where did it, where does it fall apart?

thomas_smale (40:57.45)
So in the, I guess, early days, and the same, we've constantly been improving its buyer qualification. So buyers who say they have the cash or don't have the cash aren't actually serious. Audit, so there being discrepancies in financials. We've essentially almost entirely eliminated that at this stage, so we don't have deals that fall through because there's a financial discrepancy. So it's very, very uncommon for deals to fall through at this stage. I would say, if they do,

thing is some form of externality, which has affected the business in a negative way during the marketing process. So maybe they've lost their biggest partner or their biggest supplier, or if they're a SaaS business, they've had a bunch of churn, or something like that. So it's generally a material change in the business outside of the control of the seller is the most likely thing to develop a process.

If you're buying elsewhere and you were buying privately you were not buying through FE the most common reason will Almost definitely be financial discrepancies because you will find them in almost a hundred percent of deals And we always we always find financial discrepancies in our audit process almost a hundred percent of the time They'll always be even if it's like a hundred dollars. There's always a discrepancy. Yes, I would say Even with the best accountants. They'll still miss things

jon_stoddard (42:15.894)
Always, 100% of the time.

thomas_smale (42:27.47)
There's always discrepancies. So if you're doing a deal privately, the variables you're going to be dealing with are inaccurate financials and the, I guess, emotional side of a seller who does not have professional representation. Part of our job is navigating the process with the seller from an emotional and personal perspective. So making sure they understand what's in effect.

jon_stoddard (42:49.259)
H-Ho!

How important is it to be clear and transparent about those material differences in audits quality of earnings? I mean, for instance, I always give this like, you know, somebody came to me the other day and I go, they told me that they changed the CPAs within just the last year. And I said, you know, you need to be transparent about that because your numbers completely changed. You're gonna wanna know that, yeah.

thomas_smale (43:03.133)
Wicked.

thomas_smale (43:18.97)
say you have to be transparent. Sometimes people interpret numbers in different ways for various reasons. And in that case, when we present our financials, it'll often be not necessarily pages, but there'll be footnotes. So we have followed X methodology for reconciling why invoices. So at least it's clear, because there's lots of different ways you can do things from a financial

thomas_smale (43:48.95)
knowns or caveats we're always up front with them so you at least there's no surprises going into the process. But generally speaking private sellers they just don't know there's a discrepancy because there's a discrepancy. It's not a misunderstanding of methodology it's just they forgot a $10,000 invoice or they thought their numbers were cash flow but they're actually a cruel or vice versa. Usually a much more simple error than anything else.

jon_stoddard (44:18.773)
Yeah, where do you think this is going in the next 10 years with the headwinds of banking, SBB, 11% interest rates? This is for SBA loans, I know you're not doing that, but all of a lot of macro headwinds. What's gonna happen? Who is gonna be taking the lead because they have cash? Will they be the private equity, have the advantage, or where is it gonna be?

thomas_smale (44:45.21)
I think as deals get bigger, so kind of up to that, say $250 million range, which is where we kind of currently cap out, private equity firms are very much leading the way on those larger transactions. So, I mean, the way I look at it personally is we've done over a billion dollars in transactions right now in the US, as of like today, there's around $3 trillion of dry powder in private equity looking to acquire businesses. So, we're not even in the same universe

of all of that capital, even if we do another 10 years of FE and we do $100 billion of deals, we're still not making a dent in that three trillion. So I think the way to consider it as a seller or something in the industry as an industry observer is there's a vast amount of capital out there. Things like SVB are short-term inconveniences, but the reality is for the majority of firms,

your cash of SVB, you can access it again. So unless you are an investor, you probably don't really lose anything. Yes, cash is a little bit harder to get hold of, but there's still creative ways to do deals. And often for private firms, I mean, they have cash on hand. So how much debt costs doesn't really affect the fact they have that capital to deploy. So that three trillion, three trillion goes a very long way. There's a lot of transactions that need to happen. That's just a currency.

jon_stoddard (46:10.453)
Yeah, yeah, yeah, it's a hundred billion. Yeah, one billion is pretty small.

thomas_smale (46:15.15)
Exactly. That's just the current snapshot. So that's the way I look at a big picture, like SVB, yes, it's a blip and it's frustrating if you were a client of SVB. But the reality is they were a very, very small percentage of even just the US banking system, even though they skewed more tech, which is obviously what we represent primarily. But that doesn't change what they were doing, the non-existence of them going forward. So it's not suddenly

acquisition strategy of private equity firms sat on, if you have $50 billion, you're not saying, oh, we're not going to buy businesses anymore because SVB went out of business. I don't think that's really happening in any boardrooms. Unless you were like reliant, you had a $45 billion line of credit with SVB, that would be a little bit different. But I don't think that that's very much edge cases. That's not the average.

jon_stoddard (47:11.773)
Yeah. Well, let me ask you one more question. There's a new trend of buying partial businesses, like the microquire. I know they're on the smaller end, but are you seeing any other kind of trends in that area where they just buy partial? Yeah. Yeah. Yeah. Yeah. Yeah. Yeah. Yeah. Yeah. Yeah. Yeah. Yeah. Yeah. Yeah. Yeah.

thomas_smale (47:29.51)
To an extent we definitely have interest in I'm saying the reason there's more interest in that is there's a lot of people out there who Have capital that they want to deploy They don't necessarily want to operate a business themselves Right operating a business sounds great and it sounds fun and like if you have a a day job I can see the attractiveness But operating a business is a very big commitment particularly if you're taking on board debt or you're borrowing money or whatever or you're even using your own cash it's a Lifetime of the business commitment. You can't go in

there's not really any such thing as a passive business regardless of what people might say. So yeah, I think the rise of people interested in investing in just elements of a business is the fact. A lot of people will have exits in the tech space, they will sell their business for a hundred million dollars and they'll say, what do I do now? Do they want to go buy a restaurant? Do they want to buy real estate? Similar to me, they don't know anything about restaurants in real

in the tech space, but they might not necessarily want to invest in buying a business outright. So often they'll launch a fund and they'll say, okay, my fund is going to kind of help fund the next generation of entrepreneurs like me, or they're going to want to buy partial stakes of a business, help a founder continue growing their business. They generate some kind of cash flow and ROI on their investment, but don't have to run the day to day. So I think it's primarily just the generation of entrepreneurs.

in the tech space who have had successful exits, they want exposure, but they don't necessarily wanna operate the business themselves. So that's definitely a growing area. And also search is getting more creative with how they search and how they approach businesses. What we found, we actually have quite a few clients who retain us as buy side representatives to approach targets on their behalf.

And the reason that's powerful is it's anonymous. So firstly, if I, and this maybe this sounds arrogant, but if I email someone, chances are they'll reply because they can look me up and say, okay, Thomas is legit. I was at Bloomberg yesterday, sorry, last week talking about SVB. So if you Google me, that's what you're gonna find. People will reply to my email. So that's what makes buy side search very powerful. Buyers will retain us because they know sellers will reply to us

thomas_smale (49:59.33)
them anonymously for the most part to get interest from sellers. So I think that's going to be a growing industry, call it kind of search at scale, but not necessarily doing it yourself. You hire an M&A firm like us, we can get you a lot of targets because we have a credible name. People know who we are and people will apply. So we've seen a bit of a growth of that recently because if you're a good operator and you have access to cash, finding the deals is difficult. It's a very

So if you hire someone to represent you, you might be the only one looking at that business, which is helpful.

jon_stoddard (50:35.593)
Yeah. Beautiful. Thomas, thank you so much for being on the top M&A entrepreneurs. I really appreciate this.

thomas_smale (50:41.57)
Thanks for inviting me, it was good to catch up after so many years.

jon_stoddard (50:44.713)
Yeah, yeah, I think it's been seven to 10 years. Yeah. One, all right, we're doing this. Hold on.

thomas_smale (50:48.477)
long time

thomas_smale (50:53.57)
Thank you.