The Downside of Selling to Private Equity With Mark Zweig
January 19, 2024 |
About this episode
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In this episode featuring Mark Zweig, we explore the aftermath of selling his company, Zweig Group, to a private equity group. Zweig Group, known for serving the architecture industry with magazines, reports, and trade shows, achieved remarkable growth, landing three times on the Inc. 5000 list. At its peak, the company reached $19 million in revenue. However, Mark’s sale to a private equity group unfolded as a cautionary tale, showcasing the potential pitfalls when partnering with the wrong acquirer. This wide-ranging episode offers insights on how to:
- Productize a service business.
- Distinguish between a client and a customer.
- Leverage the power of open book management.
- Turn employees into owners.
- Capitalize on mezzanine debt.
- Protect your culture in a transition of ownership.
- Limit your downside risk after you sell.
Show Notes & Links
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Definitions
Adjusted EBITDA: Earnings before interest, taxes, depreciation, and amortization, adjusted to reflect the profitability of your business in a buyer’s hands. Typical adjustments that may drive up reported EBITDA would be things like executive compensation (assuming you’re paying yourself more than it would cost to replace you with a general manager), personal travel, automobile expenses, one-time extraordinary expenses (such as a lawsuit), etc.
Due-Diligence: This is a comprehensive appraisal of a business or investment undertaken before a merger, acquisition, or investment. It seeks to validate the information provided and uncover any potential risks or liabilities.
Note: In the world of mergers and acquisitions (M&A), a “note” is like an IOU, a promise to pay back money.
Imagine two kids, Sally and Bob. Sally has a lot of candies, and Bob wants to have some. They decide to strike a deal. Sally gives some candies to Bob today, and Bob promises to give Sally some of his lunch money next week. Here, Bob’s promise is similar to a “note” in M&A.
When one company decides to buy another company, they might not pay all the money upfront. Instead, they might pay part of it later. This promise to pay a certain amount in the future is often written down as a “note.”
This way, the seller gets some money now and more money later, and the buyer doesn’t have to come up with all the money at once. It’s a way for both parties to feel comfortable with moving forward with the deal.
Mezzanine Debt: Mezzanine debt is a kind of borrowing that sits in between regular debt (like a typical bank loan) and ownership stake (like owning shares in a company). It’s not the first debt to get paid back if a company runs into trouble, but it’s ahead of stockholders. So, it’s sort of in the “middle” — hence the term “mezzanine,” which often refers to a middle floor between the ground and main floor in a building.
Why would anyone go for this middle-of-the-road option? Well, mezzanine debt usually comes with some sweeteners, often in the form of “warrants.” These are like bonus tickets that give you the option to buy shares in the company later on. So, besides getting your loan repaid with interest, you might get a piece of the company’s future growth.
Companies often use this type of debt when they want to buy another company or when they want to change who owns the company, such as in a buyout. It can make the deal more attractive for the new owners and help it happen more smoothly. If things go south and the company can’t pay its bills, mezzanine debt gives the new owners a better spot in line to get their money back compared to some other stakeholders, but they’re still behind regular bank loans and other more senior forms of debt.
In short, mezzanine debt is a more flexible and potentially rewarding form of borrowing that’s often used in big business moves like acquisitions and buyouts.
About Our Guest
Mark Zweig
Mark Zweig is an entrepreneur. He is founder and Chairman of Zweig Group, a three-time listed Inc. 500/5000 management consulting/publishing/media firm and Mark Zweig, Inc., an Inc 500/5000 design/construction/development firm as well.
