By Marc Kramer
With his round wire-frame glasses and tailor-made suit, Michael Mufson looks every bit the successful business advisor he has been for almost three decades. He is one of the founders of middle-market regional investment banking firm Mufson Howe Hunter and Company, LLC, as well as co-chair of the M&A East 2015 conference, which brings together private equity, investment bankers and the professionals who support them. In the following interview, he shares some of the M&A and business insights he has gathered over a long, successful career.
What was your first professional job?
Mufson: It was working for a U.S. Senator, John V. Tunney from California. He was Ted Kennedy’s law school roommate, was a high-profile senator, and his name was known nationally due to his father Gene Tunney being a heavyweight boxing champion. I started in my senior year of college and liked the idea of … beginning my MBA while working on [Capitol] Hill. Well, a month into my graduate work, the Senator lost an unexpected election and I joined the real world working for Arthur Young, in their national management consulting group. I completed my MBA from George Washington University and stayed at Ernst & Young for five years, picked up my CPA and, fortunately for the accounting profession, I never practiced accounting.
Why did you become an investment banker?
Mufson: From the consulting work I did, I thought that the investment banking business was interesting. … I joined an investment bank at the beginning of the 80s. At the time, there was no real M&A activity getting done because we were coming off double-digit interest rates, oil embargos, inflation and not a growth economy. … Butcher & Singer was prescient in wanting to start to build up its investment banking, and since I could run and construct pooling of interest merger models, they hired me. My wife was from Philly, we wanted to start a family [and] live in an urban downtown, and thought Philly was it. Then the markets opened up in the early 80s. In the next 10 years, the markets drove to 3300. It was a good time to be in the investment banking business.
Why did you start your own firm instead of staying with a larger organization?
Mufson: There are no firms left for me to run in Philadelphia. I thought I would do better in a smaller, highly entrepreneurial organization, since as an investment banker, you are basically operating in an entrepreneurial model. We got into recaps where private investors bought a chunk of the company’s stock instead of going to the private market.
What industries and company sizes do you work with?
Mufson: We work with companies as small as $20 million in revenue and EBITDA of $4 million to 5 million. The total value of the businesses we are involved in is generally between $25 million and $250 million, the so-called lower end of the middle market.
What is the biggest misconception companies have when hiring investment bankers?
Mufson: That we can perform magic. The markets drive value. Investment bankers can position their client to maximize the value at that moment in time. Companies hiring investment bankers for an M&A assignment need someone who is experienced, is comfortable with their business and industry, and knows through experience and quantitative corroboration that the business will likely fetch. When you are selling a family’s multi-generational business, there is a lot of pressure on the investment banker to perform to your client’s expectation — and you better meet those expectations if you are to survive in the business.
What is the hardest part of the job?
Mufson: Being optimistic. … There are so many variables in completing a transaction for a client. It usually is a five- to 12-month process to sell a complex business, and in that period, a lot of economic events occur affecting your client — both good and bad. We were selling a company to a private equity fund, and late in the process, two of their customers announced a merger. All of a sudden, this nice sale became problematic due to customer concentration. The sale process can be quite a rollercoaster ride. You have to be very resilient.
When selling a company, how long does it usually take to close a deal after a buyer agrees to a price?
Mufson: It take anywhere from 60 to 90 days. The buyers’ due diligence requirements today are very comprehensive, and they do a very thorough legal, accounting and industry review. It is hard to complete in less than 60 days.
What are some of the biggest mistakes sellers make?
Mufson: Not spending sufficient time documenting the business so an institutional investor or strategic buyers may conduct business due diligence. Without such a backdrop, going purely on price offered is problematic because you will be beaten down on price due to unforeseen issues with the buyer. Additionally, you should look at the culture of the company or fund [that is] buying, the quality and ethics of the people involved, check references and be cognizant of the leverage being funded. The biggest mistake is that sellers think they can just call us and then we run with it. We have conducted the same exercise as a would-be buyer: Conduct due diligence, create financial models for the business, draft a confidential memorandum and data rooms with hundreds of pages of schedules supporting the business. We in effect simulate the process the seller would need to complete with a sophisticated buyer. That’s why we are confident when we sigh up a client and tell them we will get their deal done. It can happen. Even a small company can attract a large audience because of the amount of PE money and large number of strategic buyers in the market.
What are some of the biggest mistakes buyers make?
Mufson: Not really understanding the goals and expectations of principals of the selling entity. Not winning the hearts and minds of the business they are buying and causing the old management to immediately adapt to the new culture. The best groups are able to get this process accomplished on a timely basis, but without the angst of fighting the old management. There is no magic and it’s a complex process, but truly understanding this dynamic is key. The transition process typically requires keeping the existing management in place for a period. Sometimes people fall in love with a business when the numbers don’t justify the value.
Marc Kramer, a serial entrepreneur and president of Kramer Communications, is the author of five books. Contact him at email@example.com.