Jude David on Mid-Market M&A, Arbitrage, and Building Value from the Buy Side

Joshua Wilson: Good day everybody. Welcome back to The Deal podcast. On today's show, we're gonna have a conversation with one of the originators of the idea, one of the brains behind it. And, uh, we've known each other for a few years. I've interviewed him probably three or four times, built a relationship, and um, now we're doing this together.

One of the cool things I love about media is media relations. Media brings people together, whether it's you and your guests, or you in the audience. So as an audience, we want you to participate in the conversations we're having, uh, with our guests. So all their contact information will be in the show notes, reach out to them, you know, say hello, introduce yourself, and then hopefully this is the deal podcast.

So. Let's do a deal. So on today's show we have Mr. Jude. David, welcome to the show. Did I say it right? 

Jude: You said it right. Good job, Josh. Boom. 

Joshua Wilson: And your wife taught me how to say Lafayette. Did I say that one? Right? 

Jude: If you're from Lafayette, you say Lafayette, but Lafayette works too. 

Joshua Wilson: Got it. Lafayette.

All right. So, uh, Jude, why don't you tell us a little bit about who you are? 

Jude: Boy, uh, husband, father Catholic, Christian. And then a deal maker, started out as a corporate lawyer and, uh, had a real focus on mergers and acquisitions, loved mergers and acquisitions right out of the gate. If you could build a practice doing that in Lafayette, Louisiana and doing nothing but that, I would've done it.

I learned pretty early along whenever you're a corporate lawyer in a, small to medium sized city. Your clients need you to be their everything. Uh, you know, they're not looking for a boutique firm that does just one thing. They're looking for you to do whatever they need. And so you end up wearing a lot of hats, serving a lot of needs for your clients.

But you know, that's not a bad experience. I learned a whole lot along the way about business. Uh, but eventually I decided I wanted to start an investment bank, uh, you know, a merger and acquisition advisory group. Uh, broke off around 2017 to do that and started representing sellers whenever they were selling their businesses, and immediately had a draw to the mid-market.

It's kind of where I'd spent a lot of my time doing deals for law. Did, did some smaller deals as well, but a lot of mid-market deals and it just, it draws my eye a lot. There's a lot of sophistication. That you don't find in, you know, grocery stores and retail shops and gas stations and that sort of stuff.

Whenever you're thinking about, midsize, mid-size oil companies and service businesses and that sort of thing, you'll find a good level of sophistication. Back office. You can find buyers that have some sophistication too, which is really exciting. And so I was drawn to that. Really built our business around that.

Then, uh, back in 2020 decided you know, maybe I'll try on the, the buyer hat too. And so I started a little family office with my brother, uh, and my business partner Eric, and we started buying door and window businesses and, uh, you know, we've, we've continued down that path. Bought doors, windows, millwork all across the country.

And then, uh, most recently we started a crane company. We're gonna be doing cranes out in West Texas on. Oil field, fracking sites and I'm sure there's a lot of new businesses that'll come at us as well. We'll just keep on going. But I've kind of seen all the different sides of the transaction now.

You know, having, having been on the sell side as an advisor, the buy side as as a buyer, and you know, obviously advisor to my team and then, you know, lawyer seeing the legal side of the transaction, you kind of get all three aspects of the deal. 

Joshua Wilson: Yeah. When you originally set out to study law. And you got your MBA and, and you're going through this, this discovery process of I'm gonna help others with deals and then advise others and then start family office and put the buyer hat on.

Right. You've, you've gone through different, maybe seats at the table, at the deal table right. In that journey. Do you, did you have that in mind when you went to law school and MBA school or, or did it just evolve over time? 

Jude: The decision to go to law school I come from a family of lawyers been around law my whole life.

But I was a finance major at LSU whenever the housing market collapsed back in 2007. And so that, that's right when I was getting out of school and. You know, I would've loved to go work for Goldman Sachs or, you know, one of the big groups up in New York and, and have a little time on Wall Street coming right outta college.

That would've been a really interesting little turn in my career. And then, you know, maybe bring that back to Louisiana. During the housing market collapse, half of those big firms, or half of the people at those big firms in Wall Street got laid off. And then, you know, several of the firms went out of business all at once.

And so there were no jobs to be had. Uh, you know, they were laying off really experienced folks at that time. And so it made a lot of sense. Go back to law school and NBA school. You know, try to get a whole bunch of degrees to put on the wall, but have a lot of opportunities as well. And at the point that I went through law school, it made a lot of sense to practice law and learn.

A lot in my career. Gain a lot of experience along the way. There's no better experience that you'll get in business and deal making than seeing everything that goes wrong. And there's no better way to see everything that goes wrong than being a corporate lawyer and having your clients bring it all to you and dump it in your lap.

Joshua Wilson: One of the conversations we had recently was time per hour, right? There's a different mindset of time per hour versus, you know, as deal maker in scale. Walk us through that journey as you learned, uh, the different levels of deal making. 

Jude: Absolutely. I, uh, I've learned a few times in my career. I'm not a great employee.

You know, I have a lot of ideas, a lot of. Vision about how I think things should go and ways that we could improve things, and I think in business. People want their employees maybe to challenge them on ideas a little bit, but for the most part to do what they're told and, and, be able to make everything click, and I get that as a business owner because I've got a lot of employees and I need them to go do the things I'm asking them to do because I'm usually the one with the vision and I'm trying to execute that vision. If I have a lot of renegades who are pushing back it, it's really difficult to execute on a vision.

Um, and so. Some people are really good at that and they love, being a cog in the big machine and, turning that screw because they've been told to turn that same screw over and over again. And it's so incredibly valuable to the organization to be the best at your role that you can possibly be.

I just wasn't very good at it. And, and I wasn't very fulfilled doing it. You know, in the various jobs that I had where I was an employee, a big part of that in practicing law came because. You bill by the hour, which means that the amount of money you can make depends on how many hours your rear end is sitting in the chair.

How long are you sitting at that desk? Billing hours, and it's, to some people that's incredibly motivating because it's, oh, I know exactly what my worth is and how many hours I need to sit here to make the kind of living that I wanna make. To me, it's incredibly demotivating because you're constantly having trade offs between.

Family time and office time and you know, what I'm trying to accomplish, accomplish where I should be. If you're at home, you feel like, gosh, I, I should be billing hours right now. Maybe I need to get to the office and bill hours. If you're billing hours, maybe you're feeling like I need to be at home with the family.

Uh, and it's really hard to prioritize things in life, set the right priorities, God, faith, family, and then, firm after that, all the, uh, all the important things. And. To me I never wanted to have a career again after I left law where I was getting paid for my time or for the amount of time that I was sitting at my desk.

I wanted to be able to bet on myself a little bit more, and, get big wins or big losses based on how successful I am at what I'm doing. And so that happens right out of the gate with the investment bank, you know, helping business owners to sell. We get paid on a success basis. So if we sell your company.

We make a lot of money doing it. If we don't sell your company, we make nothing. And honestly, we're in the hole because we've invested a lot of time and money into selling your business. Uh, if we didn't get it done, we lost money on that deal. Mm-hmm. And so, you know, we only eat if we bring. Food home for the client.

And so that, that's the big, uh, exciting incentive to me. You know, I love the idea of, well, let me go succeed and then we'll all succeed together. And then, you know, it's even more so in the buy side whenever I'm, acquiring companies, if. If I can put together a better mousetrap, a better vision, a better way to piece things together we can win even more.

Very often in business, whenever you acquire multiple companies, two plus two doesn't equal four. Two plus two might equal seven. Or you know, if you already own a company and you're acquiring a company, it might be worth three times earnings on the market, but it's worth five or six times earnings to you.

And so. If you can figure out those different ways to create value through transactions, you can be really successful at it.

Joshua Wilson: Man, this is a life lesson that, that I'm learning is one is know your value, right? So you went from hourly to betting on yourself. You're like, okay, I'm gonna get more into, you know, m and a advisory and investment banking.

You took a risk of going, I know one plus one equals, two, when you're doing your, your hourly rate, you know, if butts in seat, you can bill and you can make that going to something where there's uncertainty if you don't bring home a deal. You don't eat right? So there's betting on yourself and knowing, knowing your value of what you could bring to the deal table there I think is really important.

But you also mentioned knowing your value in terms of your own organization. This company might be selling at a two X, right? But to you it might be worth a five x. So there's automatic value built into that. How do you know essentially what you're worth and what that company may be worth to you if you acquire that?

Jude: That's a great question. So. A lot of deal experience to understand it. Somebody just starting out at it, it's about deal comps. You know, you have to be able to go look at the different industries. What do different industries trade for? And then, you know, the different sizes of company within that industry.

So, let's say you find a manufacturing business you like manufacturing businesses on the small end might trade for two to three times. Ebitda. You get to a mid-market manufacturing business, it might be six to seven times ebitda, and you get to a mega manufacturing business, maybe it's north of 10 times ebitda.

And so once you understand the sector that you're in and then the comparable transactions within that sector, you can understand what things are worth. So for us. When we first started out, if we acquired a business for three times, it's probably because it was worth three times. Whenever we'd acquired enough businesses and bundled them together and really created something cohesive out of them, and we're a bigger fish, well now we trade at six or seven times.

That's fantastic because if I go out and I buy. A company at three times that I can bolt into what we're already doing and make it a part of our organization, assuming we can keep that EBITDA alive that those net earnings alive, those, we paid three times for 'em, but now they're worth six or seven times in our hands.

Uh, so that's the easiest version of it. It's the arbitrage that instantly happens in the deal, assuming you can pull them into the fold and make them a part of your company. Yeah. But there's other versions of that too, sometimes. A company has a skillset that is not particularly marketable whenever selling it to the public, but that skillset would be more valuable to us.

Because we need those skills in-house. You know, sometimes you see that with advisory businesses marketing firms or legal advisory or financial advisory. You know, maybe the principles and the employees of a firm are really good at what they do, but not great. Deal makers, not great marketers of themselves, and so they never figured out a way to make a lot of money, even though they're very skilled at what they do.

A family office or a private equity group might need those skills in-house. We need an in-house marketing team or an in-house finance team or an in-house legal team. We can pull that in knowing that if we hired that firm, it would cost us a million dollars a year in legal fees. But having that in-house, it might only cost half a million in legal fees.

Now it makes a lot of sense to have an in-house firm. And, and so there, there's a couple of different ways you can, you can find that value, but yeah, you have to know what it's worth in the market versus what it's worth to you. 

Joshua Wilson: So let's use that example. So let's just say we're, we're working with a, a family office or private equity group, and they're, they're looking for growth opportunities, bolt-ons or maybe growth through a acquisition, right?

So we're, we're taking a look at their strategy. How would you approach that to help them determine what where maybe they could be buying to increase their value or increase their return? 

Jude: The simplest one is always different things in your vertical, so if you're a manufacturing business making widgets.

Somebody else makes similar widgets. Those are the easiest synergies to create. Can we make widgets together? Save on some back office costs, save on some machinery costs, have a combined footprint, you know, a smaller manufacturing space because we're manufacturing things together. Maybe even one of the companies has some excess capacity on their machinery.

We can pick up some of the production of the other company. Well, now we've really saved some costs by combining things together. So those are the simplest ones when it's the same sector, same vertical, uh, whatever the case may be. So that's, that's your, your one plus one equals three kind of scenario.

You also have vertical integration, and so you can look at things up the chain and down the chain from that company. Let's say, my, my company builds doors. We build a lot of wood doors, and if I want to go buy a wood processing company, you know the company that sells wood to us, perhaps owning the wood processing company and the wood manufacturer and combining those together, we could create some synergies.

Well, how do I know that they're buying raw lumber and processing it into a saleable good. We're buying that saleable good and turning it into a door. Well, I bet we can save a few steps. We owned the facility that's, doing the raw wood. If nothing else, we can pick up all of that profit along the way because we own both pieces of it.

Uh, and so that's the vertical integration version of it. You know, there's also just a pure holding company mentality that, that a lot of private equity firms have as well. You know, we can have even unrelated businesses that are all under one umbrella, but assuming. We can combine a lot of functions and a lot of expenses.

We can create synergies that way. We have one really good back office, one good legal team, one good HR team, one risk and compliance team, but that's serving all the different businesses under the umbrella. And, uh, and you can find ways to create value there too. And then maybe even you find ways for some of those.

Related companies to work together on certain projects. Uh, you, you see that a lot in, uh, in the trades or in construction businesses. I've seen a lot of private equity firms do that where they'll buy a general contractor and they'll buy a plumbing business and an electrical business and an HVAC business.

And you, you have all those in the umbrella. Well, wouldn't you know whenever you go bid that big project, Hey, we've got a lot of services we can bundle for you. That's really interesting. You bought a lot of unrelated businesses that are just really in a holding company structure, but you had a lot of ability to make 'em work together 

Joshua Wilson: for private equity, family office.

What are some of their tactics, strategies? Why would they buy businesses? 

Jude: Yeah, so the, the whole big, uh, segment of buyers you know, I guess I'll break it down by segment. You have your strategic buyers. And your financial buyers for your largest two. And then on smaller transactions, you also have lifestyle buyers.

Uh, we, we don't deal with a lot of those here. Uh, our transaction size tends to be a little bigger, but if you had a, a mom and pop business, a retail store restaurant, something like that, very likely you could find a mom and pop buyer who comes in. It's called a lifestyle buyer. They're looking to step into your shoes and become you.

They want to run the business. They want to live and breathe everything that has to do with the business and become, uh, the kind of person that you are running the business. And so, uh, the things they're thinking about are what kind of income can I take out of this business? Am I able to live, pay all my expenses?

That sort of thing. We, we don't deal with a lot of those. We deal with the other two categories, predominantly your strategic buyers and your financial buyers. Strategics. It's just what you think people in your industry. Who have a need for your type of business. You know, if, if you have a building material product, home Depot might be a strategic buyer for your product.

You know, if you build computers, Dell or Lenovo might be a strategic buyer. For your type of business. And they are a bigger company. They see value in what you're doing and your customers and your products. Maybe you build it better than they do and they want to adopt your technology and so they go buy what you have and make it a part of their business.

That's very simple. Whenever you're thinking about what motivates a strategic buyer, it's a question of what makes their business more valuable and, do you have a better technology? Do you have better customers? Uh, do you have better ratios? Uh, when you think of financial metrics and ratios, sometimes that's all it is.

You might have a publicly traded company who is out on the hunt because the market says that their PE ratio is a little bit outta whack. And if they go buy a company with a significantly better PE ratio, or, you know, assume their margins are out of whack, and they buy a company with significantly better margins.

It might make their overall blended PE ratio or margin just that much better. And so bolting you in makes them as a company a little bit stronger. It can be as simple as that. Financial buyers are a whole different animal. Mm-hmm. Um, you know, they're looking for an investment and, uh, sometimes there's a real blend between these two categories because a lot of financial buyers already have a platform business and they're looking to bolt things onto that platform business Well.

If you're a financial buyer and you own a platform business, well now you're also a strategic buyer because you're trying to grow the business that you own. Financial buyers are looking for a return on their investment. Typically, financial buyers have investors, you know, those, those might be pension funds or insurance companies, or you know, other types of large pools of funds that are investing and they invest for three to seven years.

Meaning they will give their money to a private equity group and say you have it for 3, 4, 5, 6, 7 years, just depending on the terms of that fund. And here's the internal rate of return we're expecting whenever we get those funds back. And, you know, what does that do for private equity buyers? They are motivated to go hit the terms of their contract with their investors.

And so they're looking for deals that will help them to hit the terms of that contract. If they have a three year fund life and a 20% required return per year, they're looking for very short term hits. Can I buy something, get in, make a few changes, and flip it for more and get a 20% per year return? What happens if you want to sell to someone who has a three year investment outlook, and maybe you're a year into their fund, by the time they get around to buying you.

They have two years to buy you and turn around and flip your company to someone else. There's no long-term vision that they're gonna bring to the table, uh, in order to hit that kind of exit. They're looking at how do I cut expenses? How do I take this same business but squeeze those margins a little bit?

Uh, so that way we can turn around and flip it with a little bit higher, uh, valuation because we got that EBITDA up a little bit. You know, the longer term funds are a little bit better. Whenever you have, say, a seven year PE group, they can make a little bit longer more strategic decisions about, what it is that they're looking to do to grow the business over that timeframe.

And then there's a whole other category called family offices, which are, you know, a little bit more patient capital. You know, they, they tend to, uh, not have any investment timeframes or mandates because. You know, they're investing either their own money or they're investing the money of a family or a, you know, a small conglomerate of families who are a lot more patient with their capital and willing to invest for the long term.

All of those folks in the, in the financial buyer category though, are motivated by returns. I mean, this is an investment for them. It's not a lifestyle business for them. It's not how do I make my own business stronger? It's, I want to buy this business because I think it's a good investment. 

Joshua Wilson: Yeah. So in competition, do strategic and financial buyers ever wind up competing at the deal table?

Jude: Oh, all the time. 

Joshua Wilson: Yeah, all the time. Now, how do you set that up? 

Jude: Strategic buyers tend to move a little bit slower. So we have to be very strategic in the deal process. Sometimes we will give sneak peeks to a few strategic buyers that we're particularly fond of, uh, even before the official launch date of a deal.

And that's just deal experience. We've done this enough times that we know you know, when we go into a deal process and we're trying to create a lot of time pressure, we're launching on a certain day, we're telling the buyers they have four weeks or five weeks to put in their offers, and then we're pitting them against each other and trying to get the best valuation for the client.

We've experienced it enough times that we have really good strategic buyers that just don't make the deadline at the end. And so. Identifying that in advance, you know, seeing those buyers that might have an issue with the deadline. We might give them a sneak peek by a couple of weeks, uh, you know, start building up the deal.

Let them socialize it to their teams a little bit. Mm-hmm. And, uh, and get a little bit further along in the process. That way they make the deadline by the end. I'm sure the financial buyers would feel like that's cheating, but. Who cares? Yeah. We're looking for the best outcome. 

Joshua Wilson: Yeah. And we're in this situation, you're representing the seller, so you're exactly, your responsibility is to do what's best for the seller in the, in this instance. When it comes to sharing this information, how do you go about sharing the information but remaining confidential? Or how do you prevent them from going straight to the buy or, or, you know, how do you, how do you create this competition?

And confidential. You know, how do you, how do you do that? 

Jude: Yeah. Every buyer gets vetted in advance, so you know. First off, if, if they're not a buyer with the ability to transact and we don't have a good level of confidence that they can transact, uh, and that they have genuine interest, they're just not even getting past the teaser stage to be able to see anything, uh, you know, the teaser doesn't show who the company is.

It's just very broad strokes information. Uh, but once we've vetted the buyers and we feel very comfortable. Uh, and we're ready to move to that next stage. Every buyer signs a nondisclosure agreement, so they are agreeing to keep all confidential information confidential. You know, NDAs are helpful, but they are certainly not bulletproof and information does get leaked.

In some deals. It's a small percentage whenever you're dealing with. Folks that have a lot of deal experience, people who are active in the m and a world know that they need to keep things confidential or else they won't get opportunities anymore. But it happens. I mean, we, we've had deals before where that happens, and so we're also careful about revealing confidential information at the right times.

Mm. You don't want to load a whole data room and give it to all of the different buyers that are in the early stage of the deal process. And then you have. Eight, 10 buyers get that information and only one of them becomes your ultimate buyer, because now eight different buyers have all that information and you know, they might be in related industries and they use that information to compete against you.

Uh, we're very careful and strategic about what information we're going to release early, what's the important information. And there's ways to, you know, give the information they need without necessarily giving the secret sauce. And so, you know, buyers are gonna. I'll give you an example.

Buyers can be very concerned about customer concentration. Mm-hmm. This is one we see in every deal, and they want to know, does any customer represent more than 20% of revenue? Why does that matter to the buyer? Well, if you have a 40 or 50% customer and they walk out the door, suddenly the whole business is gone.

And so that matters to every buyer, and they're going to ask the information about who the customers are and how much concentration there is, and. Yeah, very early along. If you're sensitive about customer information, you know, we can give a redacted list and say customer one has this percentage, customer two has this percentage, customer three has this percentage.

Uh, and the top three customers are all large companies, large cap companies with, no payment issues. Well, that's enough information for them to get to an LOI and become the ultimate buyer, but not so much information that they could do anything with it. 

Joshua Wilson: For sure. One of the things that, um. And this might be a later episode, so you just let me know.

Hey, Josh, that's gonna be a later episode. Uh, talk to me about deal arbitrage. Are we able to talk a little bit about what arbitrage is in, in the deal making world? 

Jude: Of course. Yeah. Okay. So, financial buyers in particular are motivated by arbitrage, but strategics as well. Mm-hmm. I'll give you an example.

You know, I, I said a building material product that you sell to Home Depot earlier. If you use that as the example and we continue down that path. Uh, if Home Depot is a publicly traded company and their price to ebitda, and I'm making up numbers, I don't, I don't have any clue, but let's assume their price to EBITDA is 15 times.

They're looking at their stock and they know exactly what their worth is and how they calculate that. If they find your building material, manufacturing business, and they think they can get it for eight times ebitda. They have what's called arbitrage of seven times. They're getting almost double what they paid for.

And so in their hands, it's worth a lot more. You might say that's unfair. Oh my gosh. Why would I give them all that arbitrage? Well, because the market says your business is worth eight times it doesn't say it's worth 15 times. Right? Home Depot is worth 15 times earnings because they're a publicly traded company and they're massive.

And so. What you can do is find the best price available out in the market by running a competitive deal process. Mm-hmm. And you know, it's a pretty good chance. Home Depot is gonna come in and try to land somewhere in that range of what you're finding elsewhere. But if you know that you've got 15 times for their earnings you can try to push that multiple a little bit.

Maybe they're willing to pay a little bit extra. So sometimes you can find that strategic buyer's willing to pay a little bit more, but, uh, financial buyers do this too. Yeah. You know, if it works on the smaller end of the spectrum, normal mid-market businesses might be worth between five and seven times earnings, kind of depending on your sector.

And smaller businesses. Let's say you're in manufacturing and you're worth six times earnings because you do 50 million in revenue, a small manufacturer might be worth three times earnings because they only do 5 million in revenue. Well, if that. Financial buyer who owns the six times revenue business, goes out and buys the three times I'm sorry, the three times EBITDA business.

They're able to have that arbitrage whenever they integrate it into their business. 

Joshua Wilson: So as a strategic buyer, let's just say we're working with a group and we want to explore arbitrage, and we, we have Home Depot in mind, or name any, you know, group. It doesn't matter. But we know that they're 15, 15 x and we find a company.

That would be a good fit, and we find them and they're lower value, maybe three. Three x, right? So we know that there's value in that buy. So how could a strategic buyer use that strategy to maybe buy and execute later on to Home Depot? 

Jude: If you recognize an industry that has low multiples on the low end and high multiples on the high end, you can build a whole strategy about acquiring smaller businesses and growing them into a bigger business that has a higher multiple.

Mm-hmm. Uh, you know, my, my company Stately Doors and Windows has kind of done that in the door window and millwork business. It's one where you see two to three x multiples on the low end and you see seven or eight x multiples whenever you get squarely into the mid-market. And then whenever you get, on the high end of the mid-market, it might be over 10 x.

And so that made it a really good industry for us to get into. You know, we're able to acquire a lot of businesses at that lower end of the range and whenever we pull them into the, the stately mix, they get to be a little bit bigger and, and a part of the stately family. 

Joshua Wilson: When we talk about mid-market, kind of give a range for, you know, deal size or value, like what constitutes something being mid-market?

Jude: That's a great question. Everybody's got a different answer, 

Joshua Wilson: right.

Jude: So it's, it's definitely smaller than large cap. So whenever you think of your home Depots of the world and your Lenovos of the world and your, your big blue chip companies, definitely smaller than that, but it's also smaller than your.

Even your lower Fortune 500 companies mm-hmm. Or Fortune, 3000 kind of companies. Those large companies are large cap. You get a level below that, and that's probably not even quite in the mid-market yet. You're still talking small, smaller, in large cap stocks. Um, most folks would say anything above 250 million in revenue is outside of the mid-market.

So you're looking at 250 million in revenue down. Where the lower end is, and you know, where you get from mom and pop business into the mid market is where the biggest debate is. You know, we tend to think it's businesses over 10 million in revenue, but I think it's probably a little more sector specific than that because some sectors you'll have 10 million in revenue and, 500,000 to a million in ebitda, that's probably not a mid-market business.

But if you're 10 million in revenue and 2 million of ebitda, now you're starting to get there. And so, um. EBITDA drives most transactions and and buyers think of the mid-market BA based on transaction value. Financial buyers like to see businesses in excess of 10 million of enterprise value.

We're seeing some financial buyers play in the five to 10 range these days because interest rates are up and deal flows down. Uh, but 10 million seems to be that sweet spot where you get to a large crop of financial buyers. And so to get to that. 10 million enterprise value, you're looking at at least 2 million of ebitda.

Joshua Wilson: Okay, so we we're seeing enterprise and ebitda, right? So there's two different value metrics that people could look at at a company. Do different. And we, one day, we'll, we'll go into, we'll dissect. The differences between the two, but I think more importantly for this conversation is buyers what, you know, the strategic buyers, financial buyers, when they're looking at this, are they looking at EBITDA or enterprise value?

What are your thoughts? 

Jude: So the easiest way to gate keep transactions Yep. Is ebitda, you know, if, if, you know whether we're on the sell side and we're trying to figure out how marketable as a business, or if you're on the buy side and you're trying to. Figure out whether an opportunity fits your parameters.

The easiest way to gauge that is ebitda. Now a challenge there is a lot of business owners don't really understand what their EBITDA is, and so you can really shoot yourself in the foot if you're a seller. Uh, by using the wrong financials, and it can happen either direction, it can happen because you state it too low and now you've excluded yourself out or you've stated it too high and you find a deal that you like only to then find out that it's not quite as lucrative as you thought.

We see that all the time. You know that, that business owners think their financials are better than they are, and so we're very careful to screen that out on the front end. There's, the biggest issue is timing of revenue and expenses. Buyers look on a gap basis, generally accepted accounting principles.

And that's the way you compare companies, apples to apples. You use gap to try to figure it out. Well, a lot of businesses do things on a cash basis and you know, let's say you're a business that takes deposits from your customers. If you have a banner quarter. And you go get deposits from 10 customers and those deposits amount to $5 million, like you're on cloud nine, you think this is gonna be the best year ever.

And you slam all $5 million of cash into revenue and say, wow, look at how great our revenue was. And all that flows down to ebitda. 'cause you have no expenses related to all this new revenue that you have. Only problem is it's not revenue. Uh, it doesn't get recognized as revenue until you've incurred the expenses that are associated.

With that revenue. Uh, and so GAP is very particular about that. Timing. It's very important because it throws margins way outta whack. If, doors and windows are such a good example we've seen this so many times. When we go to acquire a business, we might put it in an offer on a business to we really like, and they're showing gross profit margins of 60% and you go, oh that's good Margins on a, on a door manufacturing business.

But then whenever you back out those deposits, you realize the margins are 20%. You go, oh, it's a different story. Oh, this is a, this is a hard business to be in. And we're gonna lose interest pretty significantly at that point. And so it's so important whenever you go to sell you don't wanna waste your time, you don't wanna waste your money, uh, you don't want to get hooked on a buyer and, and, benchmarked on a, on a purchase price that is just fictitious, like that purchase price was never going to happen because it was based on made up numbers. And so it's really important to get your numbers right before going to market. Uh, we're very careful to do that with our sellers. Worst thing we can do is put all the effort in to finding the right buyer, only to find out that deal was never gonna happen.

Joshua Wilson: For sure. For sure. Jude, in future episodes, we're gonna go over, you know, enter enterprise value ebitda. We're gonna go over more into the, the mind of arbitrage, which is really fascinating, something that you and I are having a lot of conversations around. But, uh, for today, what's a good way for people to connect with you?

We're, you know, what's a, what's a good path for that? 

Jude: Yeah, so our website is fa mergers.com. That's F-A-M-E-R-G-E-R s.com. Uh, my email is jude@famergers.com. So you can definitely find us there. Uh, I'm also on LinkedIn, Jude Daveed, spelled just like David, but pronounced Daveed 'cause we're a little bit French.

And, uh, being from South Louisiana, uh, you can find many of those places. Love to talk to you. 

Joshua Wilson: Cool. Jude, thanks for coming on fellow deal makers. As always, reach out to our guests, say thanks for being on the show and, uh, find a way to do a deal together and, uh, all you out there. We'll see you all on the next episode.

Cheers.