Episode 039
Jay Hernandez, Raymond James | M&A Market Dynamics: Essential Preparations for Buyers and Sellers
In the latest episode of the Karma School of Business podcast, Sean Mooney, alongside Jay Hernandez from Raymond James, dives into the nuances of the M&A market. They offer actionable insights for both buyers and sellers, emphasizing the critical importance of preparation. The conversation also veers into personal territory, with Hernandez sharing a culinary life hack involving sous vide cooking for achieving the perfect steak.
Episode Highlights: 1:22 - Introduction to Jay Hernandez and his M&A background 8:21 - Analyzing the current state of the M&A market 14:22 - Advice for sellers on engaging with investment banks 24:08 - Tips for buyers on preparing for investment bank interactions 29:03 - How investment banks handle new Letters of Intent (LOIs) 34:12 - Jay's culinary life hack: sous vide for the perfect steak
For more information on Raymond James, go to www.raymondjames.com
For more information on BluWave and this podcast, go to www.bluwave.net/podcast
Episode Highlights: 1:22 - Introduction to Jay Hernandez and his M&A background 8:21 - Analyzing the current state of the M&A market 14:22 - Advice for sellers on engaging with investment banks 24:08 - Tips for buyers on preparing for investment bank interactions 29:03 - How investment banks handle new Letters of Intent (LOIs) 34:12 - Jay's culinary life hack: sous vide for the perfect steak
For more information on Raymond James, go to www.raymondjames.com
For more information on BluWave and this podcast, go to www.bluwave.net/podcast
EPISODE TRANSCRIPT
Sean Mooney:
Welcome to the Karma School of Business, a podcast about the private equity industry, business best practices, and real-time trends. In this episode, we have a very insightful conversation filled with things I wish I knew while I was still in PE, speaking with Jay Hernandez, head of the industrial technology practice at Raymond James, and one of the very best investment bankers I know.
This episode is brought to you today by BluWave. I'm Sean Mooney, BluWave's founder and CEO. BluWave is the go-to expert of those with expertise. BluWave connects proactive business builders, including more than 500 of the world's leading private equity firms, to the very best service providers for their critical, variable, on point and on-time business needs. Enjoy.
It's great to be here with my friend Jay Hernandez, and Jay Hernandez in real life.
Jay Hernandez:
In person, yeah. In the flesh.
Sean Mooney:
This is a rarity, and so I'm super excited. And I think as the listeners of this podcast might pick up, Jay and I have known each other for quite a long time, back in the days where we both probably had brown hair.
Jay Hernandez:
Yeah.
Sean Mooney:
But for our listeners, Jay, I'd love if you could share just a little bit about your background, your origin story, et cetera.
Jay Hernandez:
Yeah, well, it's kind of a long story as far as how I got from where I started to now major director at Raymond James. But when you start back, my first job out of undergrad was PWC Public Auditor, had worked on a number of companies, did that for a couple of years. Got introduced to the capital markets, really, in the late '90s, early 2000s with IPOs and .com boom. I was out in California at that time, and really took off to investment banking after that. I went to grad school, like I said, sort of a traditional route. Went to grad school, came out as an associate within investment banking.
But I think where I differed from the most is I went middle market. So I've been doing investment banking now for just about 20 years, and where I focus is on industrial technology. So think of companies within test and measurement automation, process [inaudible 00:02:09] controls, really the industrial internet of things. And with Raymond James now for a little over three years.
Sean Mooney:
That's great. And Jay, that's where you and I really got to know each other, is I was investing in industrial technology companies, and you were one of the top investment bankers then, and certainly probably the right now.
Jay Hernandez:
Well, we were one of the first, I think. You guys were one of the first on the investing side, and not many people knew what it was back then, and we were trying to maybe put a definition around it for a long period of time, until maybe about 10 years ago everybody settled on industrial technology. So yeah.
Sean Mooney:
Now it's got a name, and now there's actually private equity competition. Back in the day, it was just Danaher and maybe Thermo.
Jay Hernandez:
Right, exactly. Yeah, the players have changed and expanded.
Sean Mooney:
So that's no doubt good for you with a larger universe of people really engaging in it. And we'll get into that in a little bit. But maybe before we do that, Jay, this has been this topsy-turvy world, really in constant topsy-turviness, if that's a word, since 2020. And every year I've been saying "This too shall pass," and every year it does, and then something else comes up. So we've built a lot of character, but net-net, things continue to make progress and certainly evolve.
So given your expertise, you've got this rare vantage front-row seat looking at the M&A markets, particularly as it thinks about where we spend a lot of times mutually in the private equity industry within strategics as well, and then also within just the broader kind of M&A ecosystem. So Jay, I'd be really interested, what is your perspective on the M&A markets? How are they doing, and what's the near-term lens into where they're going, perhaps?
Jay Hernandez:
Right. Well, the overall is the markets are good, but when you put them in the context of the last two years, they look less than good, or they're muted, if you will. And part of that was because coming out of COVID, you had this huge swell of deal activity, particularly in the M&A side, really kind of pent-up from that height of COVID period and then unleashing itself over '21 and the '22. But I mean, that was historical high levels at that point in time, and unsustainable in reality. And so when people look at last year versus this year, yeah, they see it down by 20% with regards to deal volume. But if you look back over a longer period of time, we're actually at par where we were pre-COVID periods, if you look at 2015 to 2019. So overall, the markets are still holding up, and there's still a fair amount of activity.
But where I'd say the big change is, is really the psyche of the market, the amount of movements that's happening, whether it's the Fed raising the interest rates now over 12 times, going at now five and a quarter to five and a half, you have inflation concerns, although that's abating a little bit, which is good. You also then have a labor cost issue with regards to lack of labor and the wage price amounts there. So there's been a lot of noise in market, which then affects buyers and sellers alike.
And so what we're seeing now is, again, deals are getting done, but they're taking a little bit longer to get through a process. The gestation period is another month, two months, three months, it could be. And lot of that has to do with, because the buyers are digging down that much deeper into the opportunities they're looking at and the businesses that they're diligencing. It's more of a trust but verify type mentality these days.
Sean Mooney:
It's an old-school market.
Jay Hernandez:
Right, and properly so. I mean, we've seen this time and time again when you're looking at cycles either before, during, or even coming out of cycles, buyers want to turn over every stone. And so that's where we're seeing the big impact in the M&A market right now. Not so much on the overall deal activity if you look over a longer period of time, but again, more on the processes and the psyches of buyers.
Sean Mooney:
I think you said a lot of interesting things there, Jay. And one, I think bringing perspective to where we are and where we have been, and I think everyone always thinks the new high of anything is always going to be that new standard. And in some ways there's a lot of uniqueness to this market, but a lot of this is history repeating itself. And so as I think about 2021, which was this big mad deal rush year, a lot of it was like 2012. And what was the commonality was you had this big tax scare, they're going to meaningfully increase taxes, so sellers upon sellers rushed to the market because they thought that their taxes could double.
Jay Hernandez:
Right.
Sean Mooney:
And so we pulled forward, almost like full future vintages of deals all into 2021.
Jay Hernandez:
Yeah, that's what we've been saying quite a few, is if you look at 2021, same as 2012, it essentially was two years' worth of deals compressed into one year for 2012, because people were pulling things forward in 2020. It's because things were coming back so strong, and there still was a fair amount of low cost of capital with debt and just the amount of overhang on the equity side. But again, trees don't grow to heaven, so those levels are always going to be unsustainable. And so we always have to think, when the market comes down, is that really a down from an overall historical level, or is it just down off of a peak amount in a small period of time?
Sean Mooney:
And it's back to the mostly normal past. The other thing I really liked that you pointed out is that in general, the world moves in cycles. And this last cycle may have been longer, at least in my opinion, based upon a very accommodating perpetual, near-perpetual Fed cycle where they just kept money cheap and free for a decade. But as you and I think back to not so past, and we talk about, "Oh geez, we've really seen the world," but you and I aren't that old, we're still young and spry.
Jay Hernandez:
Yeah, at least young at heart, if nothing more.
Sean Mooney:
Exactly right. But what's happening now in terms of buyers digging in, we'll talk more about that, or things taking longer... That's kind of what the normal was for a long time.
Jay Hernandez:
Yeah, I mean, the run and gun offense of a process or a deal process really hasn't been the norm for over history. You can see it in fits and starts, certainly in 2021, a little bit in the '22. Maybe you saw it before the recession, 2005, 2006, a little bit in 2007 when the market really, at that point in time, was at an all-time high and people wanted to get deals done quickly. But it comes back down to things regress to the median, which is fine, and that's the way that markets should be.
Certainly we would love to things have flying off the shelf and do 20 deals in one year, but in reality, things are going to come back to more historical levels, whether it be deal flow, whether it be diligence amounts, whether it be cost of capital, valuations, and all those are effectively going to come back to a normal level. And now maybe that normal level is a little bit higher than it was 10 years ago because you're building off a higher platform, but they will even out over time.
Sean Mooney:
And that's why I love this saying, "This too shall pass," right? And it's something where it's... And people always think "This too shall pass" is only limited to the bad times, but it also equally applies to the good times. And it's that whole perspective of, the good times have their moments and they come back, and the bad times have their moments and then they pass through as well. And this kind of craze or this peak, this "Everything's up into the right world," typically would happen every six to eight years.
And like you've pointed out, I think, very appropriately, it was right time, it was right before the Great Recession. And before that it was right before the .com bubble in 2021. So this happens, but it's more usually in a six to eight. So I think what we're seeing is more of what's already happened in history repeating itself, albeit the world is different in different ways right now, but that's a topic for another conversation. So one of the things I'd be curious is, along that line that nothing's even and flat and regular, within this landscape of M&A, where are you seeing maybe more activity and/or less activity across the spectrum?
Jay Hernandez:
Well, certainly there's pockets of the market that are more busy than others, because rarely do you see any point in time where all the markets are firing at full blast. Right now, we're seeing still a tremendous amount of activity in what I call the mission-critical or the regulatory driven markets. So you have a lot within aerospace and defense, you still have a lot within building products. There's the infrastructure that's actually pushing that along very nicely. Commercial industrial services there, those have always been strong markets even during recessionary periods.
Certainly industrial tech, where I focus and I spend all my time, those are compulsory products and/or services, whether it be sensors going into food and beverage manufacturing or automation within manufacturing or warehouse automation. Security and safety is another one where we're seeing a significant amount of activity, and maybe that's another one that's a bit countercyclical. So there still are a very strong amount of activity within certain pockets, but even the ones that are a little bit slower, it's on a relative basis again, where they're stepping back just a slight bit, but again, back to historical norms, not maybe what we saw in the last two years.
Sean Mooney:
I think those are great points. And then once again, bring in very important perspective for anyone listening to this, is that the world in life is a distribution, and it's the distribution of highs and lows, but it's also distributions of some industries performing better than others. And when we add all these up, like you said, it's still a pretty good year.
Jay Hernandez:
Yep.
Sean Mooney:
So let's not get too doom and gloomy. If we're able to look, you can find the pockets of light and growth, and that's happening right now. And certainly the same things that we see as well, the flywheel of the economy seems to be getting going a little faster and a little faster, or maybe not even faster, it's just more consistently in motion versus kind of maybe it felt a little bit more like a washing machine where it's back and forth. It was moving left and right and left and right. Now it seems like the wheel's spinning in one direction. And so are you seeing some of that in terms of momentum?
Jay Hernandez:
Yeah, we are. I mean, absolutely. We're seeing that for sure. I mean, if you go down in detail or in the deep dive and look at the clients that we're working with, the companies that we track, whether it's private companies or even the public companies that we follow, many of them that released their public earnings over the last few weeks, their order books are extremely strong and solid. And they're finding the green shoots for those opportunities and pursuing them.
Because again, they're still a fair amount of demand out there, whether it be B2B, B2C is still very strong, the consumers are holding up their spending better than most people would expect. And so you have a good amount of momentum moving these things forward, maybe not at the pace it was a few years ago or at the pace that people would like to see as what they consider normal, but it's still forward and it's still positive. And that's what we are seeing firsthand in all of our clients and all the companies that we're tracking.
Sean Mooney:
I think that's another great perspective, and spot-on. And as we maybe think and take that one step further, there's deals happening in the market, absolutely. The debt markets seemingly have come back, maybe not as high, maybe not as kind of outlandish in terms of the terms, but they're there. So we have preconditions for M&A, and at the same time, as you pointed earlier, while it's back, it's still just a little different than what it was. So I'd like to think about the world probably too often through the context of playing a card of hands or a game. And the conditions on the field are a little bit different and the conditions on the table a little different, so you got to maybe play the hand a little differently.
So you've seen probably thousands of deals at this point that have cycled through, and I don't mean to age you that much, so let's say hundreds.
Jay Hernandez:
No, it's probably closer to thousands, yeah.
Sean Mooney:
I've seen thousands, you've seen hundreds. But you've seen the times through cycles, you've seen and you're living in the current now. If you are a seller of the business and you're performing and there's an opportunity to come to market, what are some of the things that you wish sellers knew before they pick up the phone and call you?
Jay Hernandez:
Well, to your point, there is a market out there. There are buyers who are extremely active to find opportunities, and whether those are private equity buyers or corporate buyers, they're still in business. The lending market is there to support the financial sponsors. Again, maybe not to the levels that we saw when the heyday and the cost of capital was a little bit higher, but they are still there, and they're in business to put money out to work.
So the fundamentals for the market are alive and kicking. As I mentioned before, the psyche of the participants has changed, and particularly on the buyers, and where that's changed a lot is the areas that they're digging into and the depth of which they're digging into. And so what we are telling our clients and prospective clients and any company that we have a relationship is, it's never too early to prepare for that event. You always have to be prepared.
That's the case in any given market, but right now, the importance of that is exponential. And I go back to a quote from General Patton. I grew up in a military family, so bear with me. But the quote is, "A pint of sweat saves a gallon of blood," meaning that the more preparation you do upfront, the more you will be able to succeed when the lights, cameras are in action or on, or the bullets are flying by you in a battlefield. And so that's where we are guiding our clients at this point in time, is I don't think that you can do things three months before a process.
Engage your advisors, engage your experts well in advance, and it could be even a year or two in advance, and look at it from across company operations in all functional areas. So financial operations, legal, tax, environmental, all those things need to be shored up and lined up before you even think about going out to market. Because buyers are churning over, essentially, a lot of stones in their diligence, and are asking a lot of tough questions.
And sellers need to be prepared. If they're not, those punches are going to land fairly hard. I got to believe that you're seeing the same thing at BluWave based upon the work that you do with connecting companies with the consulting experts or the advisory experts. You guys have to be seeing that step up in a meaningful way right now.
Sean Mooney:
A hundred percent. And I love what you brought up there, because it's so important. It's just, you kind of prepare for success, and you got to be working in advance. And the more you do that, the more luck you tend to have in business and life, but also M&A processes.
And a couple things. Certainly at BluWave, what we are absolutely seeing from the very best of the best private equity firms is that they are spending more time making sure things are absolutely buttoned up so that they're prepared to move as quickly as possible through an M&A process. And that was something that we did when I was in private equity, is we would spend as much time selling a company and preparing for it as we would buying. It's like, "We're going to get every data room, every data set, anticipate every question," because every time we knew that we hit pause on an M&A process, you could see the valuation tumble.
Jay Hernandez:
Right. Or, it's another way, the level of skepticism in the buyers' minds start to ratchet up.
Sean Mooney:
Yeah. And people probably unfairly start seeing ghosts and they start getting nervous. And so if you are confident and you know your questions and you know your preparation... So we're seeing, absolutely, private equity firms take really meaningful activity before they even get going. And then the other big craze is we're seeing them bring in extra hands to help process the data. So bringing in an extra interim CFO during a sale process so that their CFO can either just handle the M&A requests or just close the books, and one's doing the other so that you can run with speed and certainty through a process.
So I think that's a great point, and maybe taking the next step further, during the peacetime of the world and everything's up in the right and it's 75 degrees and sunny, you would tend to call your investment banker three months before you're going to hit go, and it all was good. Is that the same thing now as well?
Jay Hernandez:
No, it's changed, for sure. And we've seen this over time, and we think we'll see it... Well, we're seeing it now, and I think we're going to see it for quite some time in the future is, and what we're guiding our clients through and what we're actually seeing them reach out proactively is, engage your advisors as early as possible. And there are many instances where we've been engaged a year in advance. Did a deal last year, a company called Thermo Systems on the automation side, where the owners engaged us a little over a year in advance to help get them prepared.
Because we have seen it time and time again, we can help them determine "Here's the players you need to put on the field," whether it be, again, environmental operations, financial, HR, tax, legal, whatever the case may be. So we're getting brought in much sooner than we have seen before. It's not that three months again, it's 12, and sometimes even further advanced than that. So we can be that advisor in the long term to help guide them through that preparation phase.
Sean Mooney:
That's, once again, excellent advice. I think particularly now where we talk about the world is, it's spinning, it's moving in the right direction. It might be going a little left and right, like our GE washing machine or something, but it's moving more and more in the right direction. And I think a lot of, certainly from the PE perspective, we would look for signals where we would say, it's like you're launching a rocket, you need to have all the lights green. And right now maybe seven of the 10 are green, but at some point they're all going to be green, and when they are, you want to be ready to hit launch.
And so I think your advice is really good, particularly if you're thinking about exiting your company in the foreseeable next 12 to 18 months. You should probably be talking with an investment banker right now so that when that light is green, you're getting an early start, because there's going to be a lot of companies falling right after that.
Jay Hernandez:
Yeah. Well, it's an important thing. Again, preparation is always important regardless of any market, regardless of any process. But again, given the psyche of the buyers, the skepticism, there's a fair amount of skepticism in the system. You can't deny that. The more prepared you are, the more ready you are to answer the questions, answer them cohesively with full punch in there and with full detail behind it to be able to support the statements you're making, the more confidence you're putting into the buyer's mind. And as you do that, to your point, that excitement, that competitive nature of a process really starts to ramp up, which then equates to, or translates into, valuation.
Sean Mooney:
I think it's spot-on. It's this idea of, you need to know yourself before you're asked who you are. And that often means doing diligence on yourself. We're seeing surging demand from RP clients for very specialized providers for the sell side, market studies for things, certainly the QofE standard operating procedure. But even things like, "We're going to look at our taxes." The whole tax world has changed in terms of particularly state and local sales tax. So it's due diligence on yourself before you're going, and it's going to be a lot smoother ride. It's not the fun stuff, but...
Jay Hernandez:
No, and again, it's the reason why we are pushing this narrative and getting accepted, and people are understanding it fairly quickly is, hire us as soon as you can. This is what we do 365 days a week. Some people collect stamps, I do deals. We can help you navigate that preparation phase. Here's your areas where buyers are going to dig in. We know these types of businesses, whether it's, again, automation, you need to have POC accounting all tied up, as an example. Do you have that tied up? Has it been pressure tested by a QB provider? No. Okay, here's what we need to do. Here's what we need to do on legal, here's what we need to do on tax and so forth and so on.
So it's, again, maybe a little bit of self-serving here, but the earlier you do that, the earlier you bring a partner aboard like ourselves, like Raymond James, that has done this thousands upon thousands of times, the better you're going to be prepared and the better you're going to be able to punch off your front foot from beginning to end in a process.
Sean Mooney:
And I think that that advice, certainly the private equity firms are going to get this. And where I think this advice really needs to hit home is I think through the perspectives and the wisdom you've shared here is it's particularly with the family-held sellers where they don't do this professionally. They're not used to preparing, like we would say we're preparing for sale the second we bought the company. And some PE firms have that more than others.
But if you're a family-held business, this advice is extremely important. Get your bankers in early. But then the thing that I would never see on the buy side is they often wouldn't listen to their bankers. They would, "I'm not going to do that. Your job is to be my QofE provider." I'm like, "No, no, we're not accountants." So the last piece of advice, I think, on this topic as I reflect on all the mistakes I've made in my past, and there are volumes of them, is your bankers are going to give you really good advice, and listen to them and do something about it, because they know the advice that they give you has ROI.
And they're going to give you that advice because they want to be a trusted advisor for you, but also the incentives are aligned. The better that you do, the better they do. And so not only are they doing this because they've built trusted relationships over time, but there is real mission, there is real incentive, there is real alignment of them that you should listen to. And I think the private equity firms, they get this, because they're professional buyers and sellers of businesses. But it's the family-held businesses I really want to double-stamp on this, that this is really, really good advice.
Jay Hernandez:
Thank you. I wholly agree.
Sean Mooney:
So let's flip the coin here. And so we've talked about what the sellers know. What do you think buyers, you wish they would know before they call you? Hopefully as far in advance as possible?
Jay Hernandez:
Yeah, that's an interesting part of the equation. I think what we always talk to buyers about is "Come prepared," which is maybe a glaring glimpse of the obvious, but what we mean by that is if you're interested in a type of business and a type of market, do your homework before you get there, before you get an opportunity in front of you. Because sellers are a lot more sophisticated than they were even five or 10 years ago, and certainly more than they were 20 years ago, where they understand, "Yeah, money is good and I want to get the value and the return that I rightly deserve on my company or my investment, but industry and operational experience and expertise is a meaningful part of the equation these days."
They don't want to have someone in here that they have to explain or educate up on their market, or have to explain their business to every single conversation they have one day after another. They want groups that have really done their homework, but more importantly, shown a real interest in investing in these type of businesses, in supporting these type of businesses going forward. And that's a big area where it's a difference, again, over the last five or 10 years that we've seen.
And I think for sure, in any process buyers have to shoot a straight, that is golden rule number one. We track, we know this for a fact because we have a database that goes back 15-plus years now where we track all of our interactions with buyers, private equity or corporate, even down to the partner level. And so we know what they do, we know how they act in a process, we know what to look out for.
And as groups start to present themselves over a period of time, you can map out the trend, or you can almost map human behavior. Sounds a little creepy, but that's what it is. And so you can tell, "Okay, here are the groups that are going to actually stand up to what they say and move forward with it, and here's ones that you need to keep a closer eye to." I think most of the people are in that first group for sure, but you always have to be careful about how you play the game and how you play the system. You certainly want to be mindful and doing it right for your own investors or your LPs, but you need to make sure that you're doing it right for the company that you're looking at, because at the same time, you're going to be their partner going forward. You need to have that relationship built up on trust and strength from the beginning.
Sean Mooney:
You've said a lot of really important things there, Jay. And as I reflect on my prior life, a lot of it resonated, and one, as you think about particularly times like now, but really any cycle, whenever we were exiting, and you're sitting around the investment committee "table"... And we were looking for three things. It was valuation, speed of close, and certainty of close, and it was three things. It wasn't one.
And particularly in times like now, valuation is always important. You got to be in the zip code. But what then becomes really important is speed of close and certainty of close. And whether you're a private equity seller or a family seller, that's really important, particularly now. And so I can imagine people showing up to your processes and they haven't done the work, they get a seat at a management meeting, and they don't even know the acronyms, let alone anything, you kind of have to say, "Is this..."
If I were a seller, it's like, "Are they really going to be our partner?" And then two, "Do we really think they're going to get to the finish line with certainty and speed?" And so that, psychologically in my mind, as you said that, was really ringing true and probably making the hair on my neck stand up a little bit.
Jay Hernandez:
Well, and it's what we think we bring a tremendous amount of value to the table. Because at any point in time in a process, you ultimately are trying to make a perfect decision with imperfect information presented to you, whether that's at the IOI stage, you get a bunch of letters, here's the valuation, some perfunctory type comments in there about how great we are.
But unless you have the background and be able to track the data of those groups and of the interactions, you're starting to say you're shooting blind, because someone can put a big number on the table, "Yeah, they look like a great buyer, we want to bring them in." But if over time you track them to say, "Listen, that's a great number. Here are the concerns we have," and here's "Yeah, we can bring them forward, but we need to make sure they're in a box," or "We need to pressure test X, Y, and Z." Because to your point, those three columns of valuation, certainty and speed are always important, certainty even more so now. Are we standing in front of a buyer group and individuals within those buyer groups that are going to do what they say and get it done?
Sean Mooney:
I'd be really curious, and this goes in the box of all the questions I wished I could have asked you when I was actually in an auction of yours. So what is your response or your colleagues' perspective when you would see, particularly during a time now that we live in, you see a two-page indication of interest come in from someone you've never met with a off-the-charts valuation and to probably try to get a seat at the table for the management meetings?
Jay Hernandez:
Well, we always... I learned this long time ago from a senior partner who brought me up. You pressure test everything. So we get those letters, and even during good times, we get those letters and we punch holes in it as much as we can as far as getting on the phone with that prospective party. And we did it when you were at private equity. I can still remember some conversations, actually. "Okay, Sean, what's your background here? Have you ever done a deal in this space? What's your thesis? What's your investment strategy coming in? How can you support this number and advocate for getting a seat at the table?"
By putting a piece of paper, a two-page indication, that's table stakes. You need to stand up to that, and you need to be able to stand up to the questions that we're going to put in front of you. Because if you don't, and you can see through it fairly quickly, then you may get a seat at the table, but your position amongst the others may be hindered because of that.
Sean Mooney:
I think that is great advice for anyone in the private equity industry, particularly people who are coming up who haven't gone through maybe these past cycles. When that two-page letter, probably with a number of other investment banks might've gone through, just based upon the momentum and the velocity and the number on the page, realizing that in some place someone is going to just put that big number there because they're buying everything.
That world has changed, so I think the people coming up, the thoughtfulness that goes in, the engaging with the data room, asking the questions before even IOI stage matters and is listened to and is really scrutinized by the best investment bankers in the world out there. So I think that's great advice in terms of a way to approach not only this market, probably every market. And we kind of lose perspective as you reach the top of every cycle.
Jay Hernandez:
And again, you can't decouple those three columns of valuation, certainty, and speed of close. But valuation really is, again, only one-third of it. And the certainty piece of it is a paramount aspect of today's conversation, and I think will be for the foreseeable future. Because again, sellers are getting more sophisticated. Buyers need to get more sophisticated with regards to the companies they're going after, the markets they're going after, to show that they do deserve a seat at the table more so than just an additional nickel, a dime, in their indication amount.
Sean Mooney:
And I think that's, once again, right on. And before we turn the page to a topic that's much more near and dear to our hearts and fun, the last thing I just want to point on is something you said that really made me think and react, this idea that what you do now is going to be remembered forever, not just now. And there are tendencies when markets become disrupted and disruptive to try to re-trade, to try to do things maybe you wouldn't be so proud of to kind of get it back by putting a big number out there.
But in the world that we live in today, this data-intensive world, everything is remembered. When you said that, it made me harken back to probably a lot of conversations that we've all had, whether it's from a mentor or a parent or a coworker, in that it takes a lifetime to build a reputation and literally 30 seconds to ruin it.
Jay Hernandez:
Right. And I don't want to mischaracterize the market and the buyers out there. I mean, 99.999% of the groups that we deal with and the buyers that we deal with are straight shooters and do exactly what they're going to say. Now, they may not do it exactly the way I want them to do it, but they have logic and reason behind that, and you can understand that.
But again, as we progress and as we advance as a market and things become a lot more data-driven and conversations become a lot more advanced and sophisticated in detail, and the audience on the seller side becomes a lot more educated and advanced, those interactions, those actions, become that much more important for sure.
Sean Mooney:
Yeah, and it's just a great thing to think about, because you're a hundred percent right. Of all the PE firms we work with, it's 99% of them I'd say I'd love to be involved with them, I'd love to work for them, and they're really good. And it's just a reminder that when times can get tough, sometimes outlier behavior comes out there. And just remember, it's one of those things that kind of keeps you on track, even when temptation is kind of starting to peck in. And there was this great Oscar Wilde quote that I always thought was kind of hilarious, but also really telling where he'd say, "I could resist everything but temptation." So don't be Oscar Wilde.
Jay Hernandez:
Right.
Sean Mooney:
So let's turn the page here. And one of the things that I think we've had fun with each other over time is that we're both connoisseurs of life hacks and gadgets and gizmos and things that make your life maybe a little bit more easy, a little more fun, a little more enjoyable. And we'll trade these things back and forth and we'll say, "Have you seen this?" We're like, "What, have you seen this?" And I'm like, "No, I haven't seen that. I need this." And then my wife will be like, "Why are there boxes from Amazon showing up?" It's like, "Well, I spoke with Jay."
Jay Hernandez:
I've gained the reputation sometimes in my house of being the first adopter on a lot of techie things, for sure.
Sean Mooney:
But that's fun. So I'd be curious, what is one of your latest kind of life hacks that you've adopted that just makes things a little more better?
Jay Hernandez:
So there's a lot of them, but one in particular. So I grew up in Arizona, and Arizona, much like here in Nashville, and I think probably the better part of the southwest, we love to barbecue. We love to get out in our grill and sit in our backyard. But I also admit I'm not the best barbecue guy. I mean, I can take a steak and turn it into a beef jerky without even trying, because you overheat it or you leave it on the grill too long. And so what I found, and I forget how I kind of stumbled upon it, but the sous vide, which, apparently a lot of commercial kitchens use it, but I was introduced to it probably about a year, year and a half ago. And that's been a lifesaver for me.
For those who don't know what it is, it is a heating instrument that you put into pot or a bucket of water. You heat the water up to a certain temperature, and then through a vacuum seal, you put a steak in a vacuum seal and you submerge the steak into the water. And based upon the temperature you cook it at or you set for the water, it cooks to medium rare, medium, a little bit more than that, depending on your preference. Then you tap it there, and you could just leave it there all day long, it's not going to overcook.
And then when you're ready, you take it out, take it out of the bag, put it on the grill, flash sear it, two minutes on each side, and it looks like a perfect five-star Michelin steak. So it's idiot-proof for me, which is perfect. So that's been my big find, and I've used it, even during snowstorms I get out there, because you're only getting outside for two minutes.
Sean Mooney:
Oh my gosh.
Jay Hernandez:
And it makes me look good when we're hosting. I've had my wife's, her mom turned 80 not too long ago, and so we hosted their party, like 18 people over, just threw 18 steaks in there, was able to enjoy the party, put them on this grill, and rave reviews.
Sean Mooney:
I didn't even think about that. A, I think that's very on brand for an industrial technology and instrumentation investment banker. So wonderful tool, and I love that idea. And what I didn't even think about is, yeah, you can get the perfect medium rare, which I've been in pursuit of my entire life, and rarely have I ever gone there. I'm very good at overcooking.
Jay Hernandez:
I'm right there with you, yeah.
Sean Mooney:
So you get it perfect, but I didn't even think about that is you can get it perfect, but it's already... You just have it ready and it's good to go and you just sear it.
Jay Hernandez:
Right. It is the lowest easy lift for getting a perfect steak.
Sean Mooney:
That is the game-changer. And so in addition to the perfection that I always pursue and never get, but the idea that now you're a Michelin star chef with 20 people in your household.
Jay Hernandez:
That's my words. I don't know if that's what their thoughts are. But yeah, it's been a lifesaver because again, I love cooking outside. Even during the brutal winters that we have up in Boston, I'll still get out there, and this makes it just much more enjoyable. Like I said, when you're hosting a party, you're not a slave to the grill trying to get that perfect steak. You can enjoy your guests, and your guests can enjoy you, and go out there for a couple minutes and you come back with great food.
Sean Mooney:
What do you use? What do you typically cook in it? Is it chicken and steak, and?
Jay Hernandez:
Oh, I sous vide everything. You put cereal, I'll sous vide it. I've been known, I've been accused of sous vide-ing way too much, but everything from seafood to chicken to steak. If it's protein, you can sous vide it.
Sean Mooney:
I need to have some negotiations with my wife after this conversation to see if I can add that to the arsenal. We have way too many things in our backyard, and so I've been doing the much more imperfect way, where you just cook it really, really low temperature, and you can only do a few at a time, and it takes 50 minutes. So this is the game-changer. And what I didn't reflect or really understand is it's not only the perfection of what you're trying to do, but you just give yourself so much time back in life.
Jay Hernandez:
Right, yeah. I'm not a person that has a lot of patience as well, so I'd love to think I could sit out there and babysit or chaperone a grill for five hours, six hours to do it right, what you see in competitions. But yeah, I don't have that patience, and certainly with two young kids, I don't have that time. So this is a way for me to hack it.
Sean Mooney:
And it still gives you the plausible deniability that you have to be out by the grill by yourself with a beer in your hand.
Jay Hernandez:
True. You still have to be out there.
Sean Mooney:
So it's win-win, I think this is something that everyone should be doing. I'm going to add it to my life, because you still don't lose that time where you say, "I have to be watching a grill by myself with no interruptions."
Jay Hernandez:
Exactly.
Sean Mooney:
"Can I please get another beer?"
Jay Hernandez:
It's perfect, yeah.
Sean Mooney:
All right, Jay. Well, this has been an amazing conversation. I have literal pages of notes here. I've learned a lot. I got to ask you some questions that I wish I could have on the other side. So thank you so much for spending the time here, being here in Nashville, and I look forward to catching up with you in Boston.
Jay Hernandez:
Yeah, no, it's always great to see you and always enjoy the time we spend together. Maybe we need to do more of it, for sure. But thanks for having me.
Sean Mooney:
Absolutely. Thanks.
Special thanks to Jay for joining. If you'd like to learn more about Jay or Raymond James, please see the episode notes for links. Please continue to look for us anywhere you find your favorite podcasts, including Apple, Google, and Spotify. We truly appreciate your support. If you like what you hear, please follow, rate, review and share. It really helps us when you do this, so thank you in advance.
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Welcome to the Karma School of Business, a podcast about the private equity industry, business best practices, and real-time trends. In this episode, we have a very insightful conversation filled with things I wish I knew while I was still in PE, speaking with Jay Hernandez, head of the industrial technology practice at Raymond James, and one of the very best investment bankers I know.
This episode is brought to you today by BluWave. I'm Sean Mooney, BluWave's founder and CEO. BluWave is the go-to expert of those with expertise. BluWave connects proactive business builders, including more than 500 of the world's leading private equity firms, to the very best service providers for their critical, variable, on point and on-time business needs. Enjoy.
It's great to be here with my friend Jay Hernandez, and Jay Hernandez in real life.
Jay Hernandez:
In person, yeah. In the flesh.
Sean Mooney:
This is a rarity, and so I'm super excited. And I think as the listeners of this podcast might pick up, Jay and I have known each other for quite a long time, back in the days where we both probably had brown hair.
Jay Hernandez:
Yeah.
Sean Mooney:
But for our listeners, Jay, I'd love if you could share just a little bit about your background, your origin story, et cetera.
Jay Hernandez:
Yeah, well, it's kind of a long story as far as how I got from where I started to now major director at Raymond James. But when you start back, my first job out of undergrad was PWC Public Auditor, had worked on a number of companies, did that for a couple of years. Got introduced to the capital markets, really, in the late '90s, early 2000s with IPOs and .com boom. I was out in California at that time, and really took off to investment banking after that. I went to grad school, like I said, sort of a traditional route. Went to grad school, came out as an associate within investment banking.
But I think where I differed from the most is I went middle market. So I've been doing investment banking now for just about 20 years, and where I focus is on industrial technology. So think of companies within test and measurement automation, process [inaudible 00:02:09] controls, really the industrial internet of things. And with Raymond James now for a little over three years.
Sean Mooney:
That's great. And Jay, that's where you and I really got to know each other, is I was investing in industrial technology companies, and you were one of the top investment bankers then, and certainly probably the right now.
Jay Hernandez:
Well, we were one of the first, I think. You guys were one of the first on the investing side, and not many people knew what it was back then, and we were trying to maybe put a definition around it for a long period of time, until maybe about 10 years ago everybody settled on industrial technology. So yeah.
Sean Mooney:
Now it's got a name, and now there's actually private equity competition. Back in the day, it was just Danaher and maybe Thermo.
Jay Hernandez:
Right, exactly. Yeah, the players have changed and expanded.
Sean Mooney:
So that's no doubt good for you with a larger universe of people really engaging in it. And we'll get into that in a little bit. But maybe before we do that, Jay, this has been this topsy-turvy world, really in constant topsy-turviness, if that's a word, since 2020. And every year I've been saying "This too shall pass," and every year it does, and then something else comes up. So we've built a lot of character, but net-net, things continue to make progress and certainly evolve.
So given your expertise, you've got this rare vantage front-row seat looking at the M&A markets, particularly as it thinks about where we spend a lot of times mutually in the private equity industry within strategics as well, and then also within just the broader kind of M&A ecosystem. So Jay, I'd be really interested, what is your perspective on the M&A markets? How are they doing, and what's the near-term lens into where they're going, perhaps?
Jay Hernandez:
Right. Well, the overall is the markets are good, but when you put them in the context of the last two years, they look less than good, or they're muted, if you will. And part of that was because coming out of COVID, you had this huge swell of deal activity, particularly in the M&A side, really kind of pent-up from that height of COVID period and then unleashing itself over '21 and the '22. But I mean, that was historical high levels at that point in time, and unsustainable in reality. And so when people look at last year versus this year, yeah, they see it down by 20% with regards to deal volume. But if you look back over a longer period of time, we're actually at par where we were pre-COVID periods, if you look at 2015 to 2019. So overall, the markets are still holding up, and there's still a fair amount of activity.
But where I'd say the big change is, is really the psyche of the market, the amount of movements that's happening, whether it's the Fed raising the interest rates now over 12 times, going at now five and a quarter to five and a half, you have inflation concerns, although that's abating a little bit, which is good. You also then have a labor cost issue with regards to lack of labor and the wage price amounts there. So there's been a lot of noise in market, which then affects buyers and sellers alike.
And so what we're seeing now is, again, deals are getting done, but they're taking a little bit longer to get through a process. The gestation period is another month, two months, three months, it could be. And lot of that has to do with, because the buyers are digging down that much deeper into the opportunities they're looking at and the businesses that they're diligencing. It's more of a trust but verify type mentality these days.
Sean Mooney:
It's an old-school market.
Jay Hernandez:
Right, and properly so. I mean, we've seen this time and time again when you're looking at cycles either before, during, or even coming out of cycles, buyers want to turn over every stone. And so that's where we're seeing the big impact in the M&A market right now. Not so much on the overall deal activity if you look over a longer period of time, but again, more on the processes and the psyches of buyers.
Sean Mooney:
I think you said a lot of interesting things there, Jay. And one, I think bringing perspective to where we are and where we have been, and I think everyone always thinks the new high of anything is always going to be that new standard. And in some ways there's a lot of uniqueness to this market, but a lot of this is history repeating itself. And so as I think about 2021, which was this big mad deal rush year, a lot of it was like 2012. And what was the commonality was you had this big tax scare, they're going to meaningfully increase taxes, so sellers upon sellers rushed to the market because they thought that their taxes could double.
Jay Hernandez:
Right.
Sean Mooney:
And so we pulled forward, almost like full future vintages of deals all into 2021.
Jay Hernandez:
Yeah, that's what we've been saying quite a few, is if you look at 2021, same as 2012, it essentially was two years' worth of deals compressed into one year for 2012, because people were pulling things forward in 2020. It's because things were coming back so strong, and there still was a fair amount of low cost of capital with debt and just the amount of overhang on the equity side. But again, trees don't grow to heaven, so those levels are always going to be unsustainable. And so we always have to think, when the market comes down, is that really a down from an overall historical level, or is it just down off of a peak amount in a small period of time?
Sean Mooney:
And it's back to the mostly normal past. The other thing I really liked that you pointed out is that in general, the world moves in cycles. And this last cycle may have been longer, at least in my opinion, based upon a very accommodating perpetual, near-perpetual Fed cycle where they just kept money cheap and free for a decade. But as you and I think back to not so past, and we talk about, "Oh geez, we've really seen the world," but you and I aren't that old, we're still young and spry.
Jay Hernandez:
Yeah, at least young at heart, if nothing more.
Sean Mooney:
Exactly right. But what's happening now in terms of buyers digging in, we'll talk more about that, or things taking longer... That's kind of what the normal was for a long time.
Jay Hernandez:
Yeah, I mean, the run and gun offense of a process or a deal process really hasn't been the norm for over history. You can see it in fits and starts, certainly in 2021, a little bit in the '22. Maybe you saw it before the recession, 2005, 2006, a little bit in 2007 when the market really, at that point in time, was at an all-time high and people wanted to get deals done quickly. But it comes back down to things regress to the median, which is fine, and that's the way that markets should be.
Certainly we would love to things have flying off the shelf and do 20 deals in one year, but in reality, things are going to come back to more historical levels, whether it be deal flow, whether it be diligence amounts, whether it be cost of capital, valuations, and all those are effectively going to come back to a normal level. And now maybe that normal level is a little bit higher than it was 10 years ago because you're building off a higher platform, but they will even out over time.
Sean Mooney:
And that's why I love this saying, "This too shall pass," right? And it's something where it's... And people always think "This too shall pass" is only limited to the bad times, but it also equally applies to the good times. And it's that whole perspective of, the good times have their moments and they come back, and the bad times have their moments and then they pass through as well. And this kind of craze or this peak, this "Everything's up into the right world," typically would happen every six to eight years.
And like you've pointed out, I think, very appropriately, it was right time, it was right before the Great Recession. And before that it was right before the .com bubble in 2021. So this happens, but it's more usually in a six to eight. So I think what we're seeing is more of what's already happened in history repeating itself, albeit the world is different in different ways right now, but that's a topic for another conversation. So one of the things I'd be curious is, along that line that nothing's even and flat and regular, within this landscape of M&A, where are you seeing maybe more activity and/or less activity across the spectrum?
Jay Hernandez:
Well, certainly there's pockets of the market that are more busy than others, because rarely do you see any point in time where all the markets are firing at full blast. Right now, we're seeing still a tremendous amount of activity in what I call the mission-critical or the regulatory driven markets. So you have a lot within aerospace and defense, you still have a lot within building products. There's the infrastructure that's actually pushing that along very nicely. Commercial industrial services there, those have always been strong markets even during recessionary periods.
Certainly industrial tech, where I focus and I spend all my time, those are compulsory products and/or services, whether it be sensors going into food and beverage manufacturing or automation within manufacturing or warehouse automation. Security and safety is another one where we're seeing a significant amount of activity, and maybe that's another one that's a bit countercyclical. So there still are a very strong amount of activity within certain pockets, but even the ones that are a little bit slower, it's on a relative basis again, where they're stepping back just a slight bit, but again, back to historical norms, not maybe what we saw in the last two years.
Sean Mooney:
I think those are great points. And then once again, bring in very important perspective for anyone listening to this, is that the world in life is a distribution, and it's the distribution of highs and lows, but it's also distributions of some industries performing better than others. And when we add all these up, like you said, it's still a pretty good year.
Jay Hernandez:
Yep.
Sean Mooney:
So let's not get too doom and gloomy. If we're able to look, you can find the pockets of light and growth, and that's happening right now. And certainly the same things that we see as well, the flywheel of the economy seems to be getting going a little faster and a little faster, or maybe not even faster, it's just more consistently in motion versus kind of maybe it felt a little bit more like a washing machine where it's back and forth. It was moving left and right and left and right. Now it seems like the wheel's spinning in one direction. And so are you seeing some of that in terms of momentum?
Jay Hernandez:
Yeah, we are. I mean, absolutely. We're seeing that for sure. I mean, if you go down in detail or in the deep dive and look at the clients that we're working with, the companies that we track, whether it's private companies or even the public companies that we follow, many of them that released their public earnings over the last few weeks, their order books are extremely strong and solid. And they're finding the green shoots for those opportunities and pursuing them.
Because again, they're still a fair amount of demand out there, whether it be B2B, B2C is still very strong, the consumers are holding up their spending better than most people would expect. And so you have a good amount of momentum moving these things forward, maybe not at the pace it was a few years ago or at the pace that people would like to see as what they consider normal, but it's still forward and it's still positive. And that's what we are seeing firsthand in all of our clients and all the companies that we're tracking.
Sean Mooney:
I think that's another great perspective, and spot-on. And as we maybe think and take that one step further, there's deals happening in the market, absolutely. The debt markets seemingly have come back, maybe not as high, maybe not as kind of outlandish in terms of the terms, but they're there. So we have preconditions for M&A, and at the same time, as you pointed earlier, while it's back, it's still just a little different than what it was. So I'd like to think about the world probably too often through the context of playing a card of hands or a game. And the conditions on the field are a little bit different and the conditions on the table a little different, so you got to maybe play the hand a little differently.
So you've seen probably thousands of deals at this point that have cycled through, and I don't mean to age you that much, so let's say hundreds.
Jay Hernandez:
No, it's probably closer to thousands, yeah.
Sean Mooney:
I've seen thousands, you've seen hundreds. But you've seen the times through cycles, you've seen and you're living in the current now. If you are a seller of the business and you're performing and there's an opportunity to come to market, what are some of the things that you wish sellers knew before they pick up the phone and call you?
Jay Hernandez:
Well, to your point, there is a market out there. There are buyers who are extremely active to find opportunities, and whether those are private equity buyers or corporate buyers, they're still in business. The lending market is there to support the financial sponsors. Again, maybe not to the levels that we saw when the heyday and the cost of capital was a little bit higher, but they are still there, and they're in business to put money out to work.
So the fundamentals for the market are alive and kicking. As I mentioned before, the psyche of the participants has changed, and particularly on the buyers, and where that's changed a lot is the areas that they're digging into and the depth of which they're digging into. And so what we are telling our clients and prospective clients and any company that we have a relationship is, it's never too early to prepare for that event. You always have to be prepared.
That's the case in any given market, but right now, the importance of that is exponential. And I go back to a quote from General Patton. I grew up in a military family, so bear with me. But the quote is, "A pint of sweat saves a gallon of blood," meaning that the more preparation you do upfront, the more you will be able to succeed when the lights, cameras are in action or on, or the bullets are flying by you in a battlefield. And so that's where we are guiding our clients at this point in time, is I don't think that you can do things three months before a process.
Engage your advisors, engage your experts well in advance, and it could be even a year or two in advance, and look at it from across company operations in all functional areas. So financial operations, legal, tax, environmental, all those things need to be shored up and lined up before you even think about going out to market. Because buyers are churning over, essentially, a lot of stones in their diligence, and are asking a lot of tough questions.
And sellers need to be prepared. If they're not, those punches are going to land fairly hard. I got to believe that you're seeing the same thing at BluWave based upon the work that you do with connecting companies with the consulting experts or the advisory experts. You guys have to be seeing that step up in a meaningful way right now.
Sean Mooney:
A hundred percent. And I love what you brought up there, because it's so important. It's just, you kind of prepare for success, and you got to be working in advance. And the more you do that, the more luck you tend to have in business and life, but also M&A processes.
And a couple things. Certainly at BluWave, what we are absolutely seeing from the very best of the best private equity firms is that they are spending more time making sure things are absolutely buttoned up so that they're prepared to move as quickly as possible through an M&A process. And that was something that we did when I was in private equity, is we would spend as much time selling a company and preparing for it as we would buying. It's like, "We're going to get every data room, every data set, anticipate every question," because every time we knew that we hit pause on an M&A process, you could see the valuation tumble.
Jay Hernandez:
Right. Or, it's another way, the level of skepticism in the buyers' minds start to ratchet up.
Sean Mooney:
Yeah. And people probably unfairly start seeing ghosts and they start getting nervous. And so if you are confident and you know your questions and you know your preparation... So we're seeing, absolutely, private equity firms take really meaningful activity before they even get going. And then the other big craze is we're seeing them bring in extra hands to help process the data. So bringing in an extra interim CFO during a sale process so that their CFO can either just handle the M&A requests or just close the books, and one's doing the other so that you can run with speed and certainty through a process.
So I think that's a great point, and maybe taking the next step further, during the peacetime of the world and everything's up in the right and it's 75 degrees and sunny, you would tend to call your investment banker three months before you're going to hit go, and it all was good. Is that the same thing now as well?
Jay Hernandez:
No, it's changed, for sure. And we've seen this over time, and we think we'll see it... Well, we're seeing it now, and I think we're going to see it for quite some time in the future is, and what we're guiding our clients through and what we're actually seeing them reach out proactively is, engage your advisors as early as possible. And there are many instances where we've been engaged a year in advance. Did a deal last year, a company called Thermo Systems on the automation side, where the owners engaged us a little over a year in advance to help get them prepared.
Because we have seen it time and time again, we can help them determine "Here's the players you need to put on the field," whether it be, again, environmental operations, financial, HR, tax, legal, whatever the case may be. So we're getting brought in much sooner than we have seen before. It's not that three months again, it's 12, and sometimes even further advanced than that. So we can be that advisor in the long term to help guide them through that preparation phase.
Sean Mooney:
That's, once again, excellent advice. I think particularly now where we talk about the world is, it's spinning, it's moving in the right direction. It might be going a little left and right, like our GE washing machine or something, but it's moving more and more in the right direction. And I think a lot of, certainly from the PE perspective, we would look for signals where we would say, it's like you're launching a rocket, you need to have all the lights green. And right now maybe seven of the 10 are green, but at some point they're all going to be green, and when they are, you want to be ready to hit launch.
And so I think your advice is really good, particularly if you're thinking about exiting your company in the foreseeable next 12 to 18 months. You should probably be talking with an investment banker right now so that when that light is green, you're getting an early start, because there's going to be a lot of companies falling right after that.
Jay Hernandez:
Yeah. Well, it's an important thing. Again, preparation is always important regardless of any market, regardless of any process. But again, given the psyche of the buyers, the skepticism, there's a fair amount of skepticism in the system. You can't deny that. The more prepared you are, the more ready you are to answer the questions, answer them cohesively with full punch in there and with full detail behind it to be able to support the statements you're making, the more confidence you're putting into the buyer's mind. And as you do that, to your point, that excitement, that competitive nature of a process really starts to ramp up, which then equates to, or translates into, valuation.
Sean Mooney:
I think it's spot-on. It's this idea of, you need to know yourself before you're asked who you are. And that often means doing diligence on yourself. We're seeing surging demand from RP clients for very specialized providers for the sell side, market studies for things, certainly the QofE standard operating procedure. But even things like, "We're going to look at our taxes." The whole tax world has changed in terms of particularly state and local sales tax. So it's due diligence on yourself before you're going, and it's going to be a lot smoother ride. It's not the fun stuff, but...
Jay Hernandez:
No, and again, it's the reason why we are pushing this narrative and getting accepted, and people are understanding it fairly quickly is, hire us as soon as you can. This is what we do 365 days a week. Some people collect stamps, I do deals. We can help you navigate that preparation phase. Here's your areas where buyers are going to dig in. We know these types of businesses, whether it's, again, automation, you need to have POC accounting all tied up, as an example. Do you have that tied up? Has it been pressure tested by a QB provider? No. Okay, here's what we need to do. Here's what we need to do on legal, here's what we need to do on tax and so forth and so on.
So it's, again, maybe a little bit of self-serving here, but the earlier you do that, the earlier you bring a partner aboard like ourselves, like Raymond James, that has done this thousands upon thousands of times, the better you're going to be prepared and the better you're going to be able to punch off your front foot from beginning to end in a process.
Sean Mooney:
And I think that that advice, certainly the private equity firms are going to get this. And where I think this advice really needs to hit home is I think through the perspectives and the wisdom you've shared here is it's particularly with the family-held sellers where they don't do this professionally. They're not used to preparing, like we would say we're preparing for sale the second we bought the company. And some PE firms have that more than others.
But if you're a family-held business, this advice is extremely important. Get your bankers in early. But then the thing that I would never see on the buy side is they often wouldn't listen to their bankers. They would, "I'm not going to do that. Your job is to be my QofE provider." I'm like, "No, no, we're not accountants." So the last piece of advice, I think, on this topic as I reflect on all the mistakes I've made in my past, and there are volumes of them, is your bankers are going to give you really good advice, and listen to them and do something about it, because they know the advice that they give you has ROI.
And they're going to give you that advice because they want to be a trusted advisor for you, but also the incentives are aligned. The better that you do, the better they do. And so not only are they doing this because they've built trusted relationships over time, but there is real mission, there is real incentive, there is real alignment of them that you should listen to. And I think the private equity firms, they get this, because they're professional buyers and sellers of businesses. But it's the family-held businesses I really want to double-stamp on this, that this is really, really good advice.
Jay Hernandez:
Thank you. I wholly agree.
Sean Mooney:
So let's flip the coin here. And so we've talked about what the sellers know. What do you think buyers, you wish they would know before they call you? Hopefully as far in advance as possible?
Jay Hernandez:
Yeah, that's an interesting part of the equation. I think what we always talk to buyers about is "Come prepared," which is maybe a glaring glimpse of the obvious, but what we mean by that is if you're interested in a type of business and a type of market, do your homework before you get there, before you get an opportunity in front of you. Because sellers are a lot more sophisticated than they were even five or 10 years ago, and certainly more than they were 20 years ago, where they understand, "Yeah, money is good and I want to get the value and the return that I rightly deserve on my company or my investment, but industry and operational experience and expertise is a meaningful part of the equation these days."
They don't want to have someone in here that they have to explain or educate up on their market, or have to explain their business to every single conversation they have one day after another. They want groups that have really done their homework, but more importantly, shown a real interest in investing in these type of businesses, in supporting these type of businesses going forward. And that's a big area where it's a difference, again, over the last five or 10 years that we've seen.
And I think for sure, in any process buyers have to shoot a straight, that is golden rule number one. We track, we know this for a fact because we have a database that goes back 15-plus years now where we track all of our interactions with buyers, private equity or corporate, even down to the partner level. And so we know what they do, we know how they act in a process, we know what to look out for.
And as groups start to present themselves over a period of time, you can map out the trend, or you can almost map human behavior. Sounds a little creepy, but that's what it is. And so you can tell, "Okay, here are the groups that are going to actually stand up to what they say and move forward with it, and here's ones that you need to keep a closer eye to." I think most of the people are in that first group for sure, but you always have to be careful about how you play the game and how you play the system. You certainly want to be mindful and doing it right for your own investors or your LPs, but you need to make sure that you're doing it right for the company that you're looking at, because at the same time, you're going to be their partner going forward. You need to have that relationship built up on trust and strength from the beginning.
Sean Mooney:
You've said a lot of really important things there, Jay. And as I reflect on my prior life, a lot of it resonated, and one, as you think about particularly times like now, but really any cycle, whenever we were exiting, and you're sitting around the investment committee "table"... And we were looking for three things. It was valuation, speed of close, and certainty of close, and it was three things. It wasn't one.
And particularly in times like now, valuation is always important. You got to be in the zip code. But what then becomes really important is speed of close and certainty of close. And whether you're a private equity seller or a family seller, that's really important, particularly now. And so I can imagine people showing up to your processes and they haven't done the work, they get a seat at a management meeting, and they don't even know the acronyms, let alone anything, you kind of have to say, "Is this..."
If I were a seller, it's like, "Are they really going to be our partner?" And then two, "Do we really think they're going to get to the finish line with certainty and speed?" And so that, psychologically in my mind, as you said that, was really ringing true and probably making the hair on my neck stand up a little bit.
Jay Hernandez:
Well, and it's what we think we bring a tremendous amount of value to the table. Because at any point in time in a process, you ultimately are trying to make a perfect decision with imperfect information presented to you, whether that's at the IOI stage, you get a bunch of letters, here's the valuation, some perfunctory type comments in there about how great we are.
But unless you have the background and be able to track the data of those groups and of the interactions, you're starting to say you're shooting blind, because someone can put a big number on the table, "Yeah, they look like a great buyer, we want to bring them in." But if over time you track them to say, "Listen, that's a great number. Here are the concerns we have," and here's "Yeah, we can bring them forward, but we need to make sure they're in a box," or "We need to pressure test X, Y, and Z." Because to your point, those three columns of valuation, certainty and speed are always important, certainty even more so now. Are we standing in front of a buyer group and individuals within those buyer groups that are going to do what they say and get it done?
Sean Mooney:
I'd be really curious, and this goes in the box of all the questions I wished I could have asked you when I was actually in an auction of yours. So what is your response or your colleagues' perspective when you would see, particularly during a time now that we live in, you see a two-page indication of interest come in from someone you've never met with a off-the-charts valuation and to probably try to get a seat at the table for the management meetings?
Jay Hernandez:
Well, we always... I learned this long time ago from a senior partner who brought me up. You pressure test everything. So we get those letters, and even during good times, we get those letters and we punch holes in it as much as we can as far as getting on the phone with that prospective party. And we did it when you were at private equity. I can still remember some conversations, actually. "Okay, Sean, what's your background here? Have you ever done a deal in this space? What's your thesis? What's your investment strategy coming in? How can you support this number and advocate for getting a seat at the table?"
By putting a piece of paper, a two-page indication, that's table stakes. You need to stand up to that, and you need to be able to stand up to the questions that we're going to put in front of you. Because if you don't, and you can see through it fairly quickly, then you may get a seat at the table, but your position amongst the others may be hindered because of that.
Sean Mooney:
I think that is great advice for anyone in the private equity industry, particularly people who are coming up who haven't gone through maybe these past cycles. When that two-page letter, probably with a number of other investment banks might've gone through, just based upon the momentum and the velocity and the number on the page, realizing that in some place someone is going to just put that big number there because they're buying everything.
That world has changed, so I think the people coming up, the thoughtfulness that goes in, the engaging with the data room, asking the questions before even IOI stage matters and is listened to and is really scrutinized by the best investment bankers in the world out there. So I think that's great advice in terms of a way to approach not only this market, probably every market. And we kind of lose perspective as you reach the top of every cycle.
Jay Hernandez:
And again, you can't decouple those three columns of valuation, certainty, and speed of close. But valuation really is, again, only one-third of it. And the certainty piece of it is a paramount aspect of today's conversation, and I think will be for the foreseeable future. Because again, sellers are getting more sophisticated. Buyers need to get more sophisticated with regards to the companies they're going after, the markets they're going after, to show that they do deserve a seat at the table more so than just an additional nickel, a dime, in their indication amount.
Sean Mooney:
And I think that's, once again, right on. And before we turn the page to a topic that's much more near and dear to our hearts and fun, the last thing I just want to point on is something you said that really made me think and react, this idea that what you do now is going to be remembered forever, not just now. And there are tendencies when markets become disrupted and disruptive to try to re-trade, to try to do things maybe you wouldn't be so proud of to kind of get it back by putting a big number out there.
But in the world that we live in today, this data-intensive world, everything is remembered. When you said that, it made me harken back to probably a lot of conversations that we've all had, whether it's from a mentor or a parent or a coworker, in that it takes a lifetime to build a reputation and literally 30 seconds to ruin it.
Jay Hernandez:
Right. And I don't want to mischaracterize the market and the buyers out there. I mean, 99.999% of the groups that we deal with and the buyers that we deal with are straight shooters and do exactly what they're going to say. Now, they may not do it exactly the way I want them to do it, but they have logic and reason behind that, and you can understand that.
But again, as we progress and as we advance as a market and things become a lot more data-driven and conversations become a lot more advanced and sophisticated in detail, and the audience on the seller side becomes a lot more educated and advanced, those interactions, those actions, become that much more important for sure.
Sean Mooney:
Yeah, and it's just a great thing to think about, because you're a hundred percent right. Of all the PE firms we work with, it's 99% of them I'd say I'd love to be involved with them, I'd love to work for them, and they're really good. And it's just a reminder that when times can get tough, sometimes outlier behavior comes out there. And just remember, it's one of those things that kind of keeps you on track, even when temptation is kind of starting to peck in. And there was this great Oscar Wilde quote that I always thought was kind of hilarious, but also really telling where he'd say, "I could resist everything but temptation." So don't be Oscar Wilde.
Jay Hernandez:
Right.
Sean Mooney:
So let's turn the page here. And one of the things that I think we've had fun with each other over time is that we're both connoisseurs of life hacks and gadgets and gizmos and things that make your life maybe a little bit more easy, a little more fun, a little more enjoyable. And we'll trade these things back and forth and we'll say, "Have you seen this?" We're like, "What, have you seen this?" And I'm like, "No, I haven't seen that. I need this." And then my wife will be like, "Why are there boxes from Amazon showing up?" It's like, "Well, I spoke with Jay."
Jay Hernandez:
I've gained the reputation sometimes in my house of being the first adopter on a lot of techie things, for sure.
Sean Mooney:
But that's fun. So I'd be curious, what is one of your latest kind of life hacks that you've adopted that just makes things a little more better?
Jay Hernandez:
So there's a lot of them, but one in particular. So I grew up in Arizona, and Arizona, much like here in Nashville, and I think probably the better part of the southwest, we love to barbecue. We love to get out in our grill and sit in our backyard. But I also admit I'm not the best barbecue guy. I mean, I can take a steak and turn it into a beef jerky without even trying, because you overheat it or you leave it on the grill too long. And so what I found, and I forget how I kind of stumbled upon it, but the sous vide, which, apparently a lot of commercial kitchens use it, but I was introduced to it probably about a year, year and a half ago. And that's been a lifesaver for me.
For those who don't know what it is, it is a heating instrument that you put into pot or a bucket of water. You heat the water up to a certain temperature, and then through a vacuum seal, you put a steak in a vacuum seal and you submerge the steak into the water. And based upon the temperature you cook it at or you set for the water, it cooks to medium rare, medium, a little bit more than that, depending on your preference. Then you tap it there, and you could just leave it there all day long, it's not going to overcook.
And then when you're ready, you take it out, take it out of the bag, put it on the grill, flash sear it, two minutes on each side, and it looks like a perfect five-star Michelin steak. So it's idiot-proof for me, which is perfect. So that's been my big find, and I've used it, even during snowstorms I get out there, because you're only getting outside for two minutes.
Sean Mooney:
Oh my gosh.
Jay Hernandez:
And it makes me look good when we're hosting. I've had my wife's, her mom turned 80 not too long ago, and so we hosted their party, like 18 people over, just threw 18 steaks in there, was able to enjoy the party, put them on this grill, and rave reviews.
Sean Mooney:
I didn't even think about that. A, I think that's very on brand for an industrial technology and instrumentation investment banker. So wonderful tool, and I love that idea. And what I didn't even think about is, yeah, you can get the perfect medium rare, which I've been in pursuit of my entire life, and rarely have I ever gone there. I'm very good at overcooking.
Jay Hernandez:
I'm right there with you, yeah.
Sean Mooney:
So you get it perfect, but I didn't even think about that is you can get it perfect, but it's already... You just have it ready and it's good to go and you just sear it.
Jay Hernandez:
Right. It is the lowest easy lift for getting a perfect steak.
Sean Mooney:
That is the game-changer. And so in addition to the perfection that I always pursue and never get, but the idea that now you're a Michelin star chef with 20 people in your household.
Jay Hernandez:
That's my words. I don't know if that's what their thoughts are. But yeah, it's been a lifesaver because again, I love cooking outside. Even during the brutal winters that we have up in Boston, I'll still get out there, and this makes it just much more enjoyable. Like I said, when you're hosting a party, you're not a slave to the grill trying to get that perfect steak. You can enjoy your guests, and your guests can enjoy you, and go out there for a couple minutes and you come back with great food.
Sean Mooney:
What do you use? What do you typically cook in it? Is it chicken and steak, and?
Jay Hernandez:
Oh, I sous vide everything. You put cereal, I'll sous vide it. I've been known, I've been accused of sous vide-ing way too much, but everything from seafood to chicken to steak. If it's protein, you can sous vide it.
Sean Mooney:
I need to have some negotiations with my wife after this conversation to see if I can add that to the arsenal. We have way too many things in our backyard, and so I've been doing the much more imperfect way, where you just cook it really, really low temperature, and you can only do a few at a time, and it takes 50 minutes. So this is the game-changer. And what I didn't reflect or really understand is it's not only the perfection of what you're trying to do, but you just give yourself so much time back in life.
Jay Hernandez:
Right, yeah. I'm not a person that has a lot of patience as well, so I'd love to think I could sit out there and babysit or chaperone a grill for five hours, six hours to do it right, what you see in competitions. But yeah, I don't have that patience, and certainly with two young kids, I don't have that time. So this is a way for me to hack it.
Sean Mooney:
And it still gives you the plausible deniability that you have to be out by the grill by yourself with a beer in your hand.
Jay Hernandez:
True. You still have to be out there.
Sean Mooney:
So it's win-win, I think this is something that everyone should be doing. I'm going to add it to my life, because you still don't lose that time where you say, "I have to be watching a grill by myself with no interruptions."
Jay Hernandez:
Exactly.
Sean Mooney:
"Can I please get another beer?"
Jay Hernandez:
It's perfect, yeah.
Sean Mooney:
All right, Jay. Well, this has been an amazing conversation. I have literal pages of notes here. I've learned a lot. I got to ask you some questions that I wish I could have on the other side. So thank you so much for spending the time here, being here in Nashville, and I look forward to catching up with you in Boston.
Jay Hernandez:
Yeah, no, it's always great to see you and always enjoy the time we spend together. Maybe we need to do more of it, for sure. But thanks for having me.
Sean Mooney:
Absolutely. Thanks.
Special thanks to Jay for joining. If you'd like to learn more about Jay or Raymond James, please see the episode notes for links. Please continue to look for us anywhere you find your favorite podcasts, including Apple, Google, and Spotify. We truly appreciate your support. If you like what you hear, please follow, rate, review and share. It really helps us when you do this, so thank you in advance.
In the meantime, if you need to be connected with the world's best-in-class professional service providers or people or anything else, give us a call or visit our website at bluwave.net. That's bluwave.net, and we'll support your success. Onward.
THE BUSINESS BUILDER’S PODCAST
Private equity insights for and with top business builders, including investors, operators, executives and industry thought leaders. The Karma School of Business Podcast goes behind the scenes of PE, talking about business best practices and real-time industry trends. You'll learn from leading professionals and visionary business executives who will help you take action and enhance your life, whether you’re at a PE firm, a portco or a private or public company.
BluWave Founder & CEO Sean Mooney hosts the Private Equity Karma School of Business Podcast. BluWave is the business builders’ network for private equity grade due diligence and value creation needs.
BluWave Founder & CEO Sean Mooney hosts the Private Equity Karma School of Business Podcast. BluWave is the business builders’ network for private equity grade due diligence and value creation needs.
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