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ChimpChat S1:E5 – Interview with Michael Schuster of Cross Keys Capital


Welcome back everybody to the series of interviews with industry leaders and Industry experts. Today we are joined by Michael Schuster who was a managing director of at Cross Keys Capital, which is Investment Bank located in Fort Lauderdale. Welcome to show Michael. Thanks Jeff. Appreciate it. Alright, so let’s get right into it covid-19 is all anybody can talk about and clearly the economic shutdown, turned down or slow down as had an impact on the investment world talk to me about what that has and what is immediate impacts you’ve seen and we’ll kind of go from there. So obviously it’s, you know, just shaken up the markets and financial markets, especially the one that we participate in has to do with that of selling of businesses. Different than the stock market when your people looking at investment banks who obviously guide Investments for companies and public and things like that. We primarily specialize in representing sellers of businesses and Private Sales. Those sales are typically to buyers. These buyers are often strategic buyers or private equity we’re a huge feeder for those. So, I’ll address those markets, and everything is just been put on pause. That’s literally what’s happened. That doesn’t really, you know, frightened us to the extent that it’s perfectly natural that financials, you know companies will hit the pause button when any type of event like this occurs. Even though we’ve never seen an event like this you can compare it to other similar events such as you know, 2008 financial crisis, 9/11 event, you know, everyone just hits. You hit the pause button until see you mentioned that you deal with the sale of businesses. Specifically, you represent those selling their business. What kind of range of businesses are you currently representing? So typically, Cross Keys Capital represents sellers of businesses typically owner, founders or management teams who are looking for investments, equity investments or exits. We generally it’s a broad range, but we generally serve the lower and Middle Market which is companies that have 10 million dollars of Revenue and above and typically under 200 million. Okay, so, 10 to 200 million is the general rate and now people are pausing now. I assume it’s not the sellers that want to pause things. But rather the buyers that are looking to pause things from a kind of take stock. Is that primarily correct? And what do they see and when do they plan on hitting the resume button? So that’s exactly right. The buyers many of the buyers these transactions will apply some level of Leverage in the acquisition of companies, even though they have large funds that have plenty of cash sitting on the sidelines every investment or almost every investment involves some level of leverage, which is borrowing and they do that from different types of language banks that consumers will go to but there are banks and lenders out there who Leverage anytime shake-up in the financial Market those lenders are not going to lend their going to stop lending. Until they understand the market exactly what’s going on before they start blending it and so that’s the main driver for why these business processes that we’ve been involved in have all come to a point of let’s just wait. So, you mentioned that you work with a lot of private Equity firms and strategic buyers. It’s primarily I guess the two markets you are developing a relationship with sell the businesses that you have. I know private equity funds. They had a like a banner year, you know, they raised tons and tons of money. They’re looking to spend it. Are they not going to look to spend it in the future or what? Do you want to spend a just need to know what’s going on before they spend.You know history will be able to look back and really talk about what happened during this covid-19 crisis, but what the financial? it’s end and most of what I’m reading is speculating will happen is that we should when things level off and start to you know, improve and this awful period we’re in now calms down and everyone starts to get back to work and is safe to go back to work what we think we’re what the markets are talking about happening is that there will be an immediate, you know return very quickly to who activity that we’ve seen pre the virus crisis. And the reason for that is going into this, you know, everyone’s talked about the economy being extremely strong at least in mergers and Acquisitions and the transaction world most companies. If not all we’re in very good shape. Very strong balance sheets lots of cash sitting in those balance sheets going into this to address specifically what you were referring to at least in the private Equity side. Those private Equity firms have been out raising funds and had record fundraising years to the last two and three years. So, the amount of what they call dry powder that’s money sitting on the sidelines waiting to be invested. Acquisitions has hit an all-time high in 2019 18 and 19. So, you know that money has to eventually be deployed into Acquisitions. Generally, that money is not used to help prop up what they call portfolio company. So there’s a companies they already own so, you know, we anticipate or at least are hopeful when we get back to business again that those private Equity groups are going be looking to resume Acquisitions and spending that money that So ultimately they’re willing to spend the money, but I know that in the private Equity area the multipliers the valuations keep going up and up and up because there’s so much more money out there in the private sector. It’s kind of impacted pricing in a very meaningful way. So, from a seller perspective, it’s been fantastic from by effective it just you know, it’s harder to find the deals. My question is how much is this? How much is covid-19 going to impact the valuations. I mean it has to be impacted at least a little bit, right? I mean, there’s no doubt about it whenever a market gets shaped soaking up the way this market has an IU are shins going to be impact. You know the strength of companies and it’ll take time to look at and look back at the trailing earnings and the trailing revenues and how bad this impact was and depending on how certain companies came through this period of covid-19 will absolutely change the valuations that were paid pre covid-19 versus post. scope and you know as middlemen investment bankers in the middle of these transactions will be working closely with buyers and sellers to understand what that market really means. Because you don’t know what revenue will be after the fact. I mean like they the down term. I mean like let’s say it was a series of restaurants clearly restaurants been some of the hardest hit in what’s been going on over the last few weeks have been will be hit continue to debate yet heard hard until things really do return to normal. How do you even begin to start figuring out what that looks like? Because if the strength of the company is there and it’s even in a mostly recession-proof business do you base it on prior sales? Do you praise it on the short term? So, I mean, how do you even start to look at that? I mean I am marketing guys that makes them pretty for a living. I even know how to even look at what that looks like. So, you just asked a very interesting question and that’s the question. Everyone is asking on both sides of the transaction and Market will determine what it will be. I often use the example that when we get a buyer and seller involved in a transaction. There’s always you know a level of expectation and there’s always a negotiation and takes likes and that’s called the mark that’s what the market does the market reacts to what somebody thinks is worth the value things are worth what people someone’s going pay for it. That’s right. So, whatever that is going to be it will determine itself. We don’t make the market. We just work in it as in And look I think you know you’re starting to get into that area of questions about valuation and I mentioned earlier that there are a lot of companies sitting with a lot of cash to spend. Will they be opportunistic absolutely, we’re already receiving in. You know, the last three days, you know communications clearly from many of these private Equity groups and strategic buyers who are actively you know doing acquisitions. They’re making it quite clear to us. They are here if we’ve got prospects or clients sitting in a situation now where they feel they can’t get past this and before they do anything and jump off a cliff that we should bring those companies to them and that’s being you know, very opportunistic. I think other people may refer to that as being a vulture but pretty much call what you want. It’s a condition to situation now in the market but the circumstance exists whether we like it or not, I mean, you know and it if to use your words before person business falls off the cliff finding someone to help bail you out. Even if it’s a deal that yet ordinarily wouldn’t want to take if it’s a choice between that and first sometimes you go with the deal that’s better. So, I think it’s fascinating that they’ve got the cash. They’re ready to jump in and feels very similar to conversations that I’ve had with friends and clients and colleagues that they’ve got cash sitting on the sidelines in just the pure, you know, the typical kind of stock market traditional investment market, but they’re ready to put it into play because you know, the Dow was at 29,000 now it’s at 19,000 and they’re liking things to stabilize a little bit sort of the putting things on pause the way your buyers are putting things on pause and that your buyers but the buyers of your of your client you represent the sellers, but how they’re putting things on pause until they kind of a better idea then they’re ready to jump on and the opportunistic be like, hey, I’ve got money. I’m not going to advantage of that, take but I got some money. Absolutely and you know, we really as again as advisors to our clients were working with each one of them staying close communication time where we’re doing this interview, you know last night the covid-19 bailout program got voted on and we’re all making sure that we read up on that and understand what it means so that we can help our clients get anything available to them into play as quickly as possible to keep the strong companies. We were representing strong and not see them deteriorate to the point that you know could have been avoided I just utilizing some of the things that may be in that bill. So, you know, we want to be very close to our clients keep them as viable as possible as strong as they can be many of our clients were very, I’m going into this. That’s why we were out marketing them to buyers at those high multiples you talked about if we can bring them through this period and you know, come out of it with similar strength and there’s a good chance that we’ll be able to continue their process without a huge deterioration. I would even think you’re representing a company that was able to weather this with either without a blip or minimal blood. It would almost increase their overall value. I would think because they’re showing how truly quality the company is. So, it’s any acquisition would be less risky no? You’re absolutely right and some of the businesses that we represent now are considered. Dental services and they’re actually busier now than they were pre the crisis. So, you know, if that keeps up it will show a real test of time and be very valuable should we ever have a or face a similar crisis to this again? So, you know, this is an interesting time and it will be a case study in the future to look back on. Other companies I happen to do a lot of Aviation and have a high concentration that area now those businesses are suffering greatly. However, there’s understand, you know part of this bailout package is a huge carve-out for the aviation industry how that impacts them. And what happens is yet to be seen but it just depends on the business. Some of them will actually become more valuable. Others will not the ones who are suffering and just can’t hold on in there. Aren’t enough, you know programs out there for them to carry them through from the government and then those companies before, you know, they just make decisions that you know our past point of return, you know, we may be able to help them as well. So, let’s put for a moment. I know that you like to meet. Prospective sellers up to five years out prior to their sale so you can help them get ready for sale. Okay. I know that that’s we chat about that in the past. So, my question to you is let’s say you’ve met somebody who felt that they were three years out. You met them a year ago. They were four years out. They said hey, I’m going to hit 65 in four years after that I’m done. I want to sell out. I do 30 million a year. Right in your wheelhouse. Okay. How do you counsel those people? How do you help continue? The preparation process is this add-on years till their sale or is this kind of does that not change their timetable? It just changes how they’re going about the prep for sale. Well, that’s a great question. I like to ask a question. That’s good. You’re you so you’re right. We like to meet people. Three to five years out from their exit rather than the same year that they want to sell. Sometimes. You can’t avoid that and that’s usually a sale of a different kind but the best sale in the best way to get the maximum value for your company is to be well prepared for an exit to engage with advisors and professionals who can help care you and get you ready. Remember if you’ve got a company in the size that we’re dealing which is middle. Our minimum markets, you know, you’re got a company between a 10 million and hundred a and fifty million of sales. Buyers that are going to acquire you are not an individual investor. It’s going to be some private equity groups or strategic buyers from a large company much bigger than you are who’s going to be approaching remember they are professional liars. It’s what they do and if you’re going to go it alone and you don’t have transactional experience the experience may not be a good one. We want you to have the best outcome possible. So that’s why like to meet you that far in advance to get you ready for that so-called Exeter transition from your business and most business owner Founders that we need and represent our people who have acquired wealth throughout their lifetime and they expect to have the same quality of life when they retire or go into their next investment or whatever it is they’re going to do And in order to do that, we’ve got to maximize the value. Most of their wealth is still sitting inside their business. So how do we convert that equity so that they can have that type of exit strategy and retirement accustomed to the same lifestyle they had while they own their businesses. Well getting them ready is a key component to that. Right now most of the companies that we represent currently and have been in the market with are those type of companies who been preparing. So if they were in good shape and following their advisors, you know advice throughout The last two three four years then chances are they’re going to be able to write this out just fine and when business when we all get back to work again, they should have a good opportunity to exit your question about whether that’s going to happen, you know, three months after we come out of this or ads on an extra year is you have to be safe. It could add on some extra if the markets don’t respond So the advice isn’t changing the only thing that might change as it might affect the timetable, right? I mean so and so it might mean you retire at 66 65 or of those whatever that looks like. And again, that’s the part that you still don’t know but it sounds like if someone really was Toto sort of in the middle process of their time with you they were they did reach out to you for years prior and they’re in year two of the four year process. Us their timetable shouldn’t be impacted greatly because they are doing the normal thing that they’re getting their business ready for sale. Whereas the people that are little bit closer. They might be a little bit more affected by whatever the blip however long this particular last sound, about right? Yeah. That is correct. All right. So overall it sounds like things are weird but not scary for you in the sense that because there is so much an issue. You should wear dry powder out there. There are people out there to look for deals. They’re looking to buy businesses. They have been tasked with this money to go out and buy businesses. So, at the market that you’re playing in that 10 to 200 range. There still should be okay what happens to evaluations? We don’t really know but business is still happening. And these people are still investing. They’re just hoping to get better deals and they would have gotten three months ago. You’re exactly and know I look at it really like two groups of situations now. You’ve got the ones that have to get through this period and then see where the market settles in and continue the process to hopefully get their Trend transaction done. And the other one is the group of people who are struggling or having a hard time. And helping those people make those tough decisions and making sure they know all their options before they hit the point of no return button. So, you know, if there’s people out there who are talking to their attorneys and accountants and asking those tough questions about what do I do to make payroll next week or next month? You know, they need to explore all options now during a time like this. We’re very optimistic that if you’re strong enough to hold on do everything you can to keep your and like company attacked Dumpty once you fall off the wall. It’s hard to put those pieces together again, so don’t let your company get dismantled if there’s a way to keep it together and intact get through this and they’ll be a market for business. COVID things, but if you can’t make it then explore all your options with your advisors looking for even if it’s an option of last resort, there may be somebody out there who want the Goodwill and customer lists and certain things that you have that could still have value in this situation. They’re opportunistic. Well, you don’t want to think about the vultures the opportunistic people that are out there, but it sounds like that’s a decent option, but overall, I mean from what I’m hearing from you. Although things are on paused. No one separately doom and gloom now. mean it’s not people are concerned rightfully. So, but at least from your perception and of the markets that you’re dealing with there’s not a frantic component. It’s simply let’s see what happens and go from there and there’s money out their people want to invest people still want to sell they still want to be involved which is it’s pretty reassuring. I mean from a small business owner myself. That’s pretty exciting to hear that at least and that level people aren’t freaking out. You know, we’re we are optimistic and we’re hopeful because in these situations don’t want to make rash decisions or tell as an advisor. You don’t want to advise your clients to make decisions that could be detrimental to them later on I think to work through but the reason why we have this confidence and why we feel This stick is because of the strength coming into this mess. The buyers the private Equity groups the Strategic buyers out there who acquire companies we’re in very good shape. We were not seeing a deteriorating economy in the MMA world. We were seeing of lots of strength record fundraising years. I mean, you know, we have to go through this awful period and it’s a setback for most, but it would be very unusual to find us slide into a place. We don’t want to be we have to be optimistic and believe that with all that activity that was happening before covid-19 that we can ramp back up again after. And an accomplished some of the good things we were doing I think timing is everything. I mean had this happened ten years prior just a year and a half after you know 2008 Khan bank that would have been much scarier because the economy would not have been strong people would not have been as poised to weather this storm. So, I think that’s kind of kind of interesting to think of as Bleak as it may be. I’m sort of reminded of some of the parts of a Anne Frank that you know that am Frank is you know that as Bleak as things can be this actually came at a really good time from a an overall kind of global and American economic health perspective because we are a little bit more poised to weather the storm. So, it’s kind of interesting kind of take on it. So, thank you so much. This has been incredibly interesting. So why don’t you take 20-30 seconds tell everybody about You about Cross Keys and what you obviously we learned a lot about you. But to talk about is how you make me get ahold of you. I’m going to put your contact information in the description, know, the description down below but go for it. Thanks. I appreciate it. And thanks for taking the time Jeff to ask questions about what’s going on in our little piece of world Cross Keys capital is a great lower middle and Middle Market Investment Banking firm. Based in Fort Lauderdale because we’re Florida-based about half of our transactions are in Florida, but we handle businesses Nationwide and generally represent sellers of businesses owner Founders or management teams may be looking for a management buyout or some type of equity investment for growth. And we really love helping those people. It’s what we do. We’re a boutique firm. We’re not like a big Wall Street firm. And we really provide value and we’d like to believe we provide a lot of value to our owner found clients that we work with. We are in terms of transaction size in Southside Investment Bank the largest in the State of Florida and we’ve won a number of awards you can to our website Cross Keys and see all the awards we’ve won. And also representative transactions all the transactions we closed or up on our website. You see the various. streets that we work hard, we work in all different Industries and love to help anyone out there who’s just even evaluating their options either now or in the future sounds good. I will point out that Flying Chimp did not design the Cross Keys Capital website, although we should have, we should talk about that another time Mike. I couldn’t help it couldn’t help it Mike. Thank you so much for joining me today, and I’ll talk to soon you. Thank you, be safe and be well. You to everybody be well, and we’ll see next time.

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