In this session you will learn about:

  • Strategies for building a billion dollar company through serial acquisition;
  • Common things that business owners do wrong from a buyer's perspective;
  • Reasons why acquirers say "no" to buying a business;
  • Executing on a multi-stage liquidity event; and
  • Determining the perfect time to sell your business.

About the Guest

Terry Freeman is a long-time energy services, construction and maintenance executive, investor and board director. He was with Flint Energy Services Ltd. as CFO and Board Director for 20 years, helping oversee its growth from $20 million in revenue to $2 billion and its eventual sale to URS. During a five-year stint as a Managing Director for Northern Plains Capital, a niche private equity firm specializing in oil field services and energy industrial companies, Terry assisted in the deployment of $140 million over three funds in 19 different businesses.


More recently, Terry started Corrosion and Abrasion Solutions Ltd., a service company providing industrial sand blasting and coating services to energy producers and transporters, pipe and steel fabricators and others. He remains on the Board of Directors for a number of other energy services companies.

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Noah Rosenfarb: Hi. It’s Noah Rosenfarb here with another episode of our Divestopedia Exit Strategy Podcast. Today’s guest is Terry Freeman. Terry is a long-time energy services, construction and maintenance executive, investor, and board director. He has a depth of experience in mergers and acquisitions of companies from $20 million to $2 billion. Terry’s a great guest for all of you, listeners, who are thinking about what your eventual exit might look like. For those advisers to owners of companies, Terry’s got great experience and great stories so we’re happy he’s here to share them with us today. Thanks so much, Terry, for getting on the call.


Terry Freeman: Thanks for having me, Noah.



Noah Rosenfarb: Great. Let’s jump right into it, Terry, and maybe talk to our listeners about a story that you think would be valuable to them. Maybe you could start with kind of the biggest deal you’ve done and what happened in that course of events, what you did right and what you would have done different if you’re able to go back in time.

Terry Freeman: Sure. The biggest company I’ve involved in building was Flint Energy Services. We started that really in 1992 when I joined a private company that was doing roughly $20 million a year in revenue and built it into a $2 billion public business through a series of acquisitions and private equity backing from a US based private equity firm that specializes in energy services. What was intriguing about that - and probably the biggest mistake we made at times - was just the pace we went at it. At times, we probably moved too quickly, at times too slowly, and it’s really kind of finding your pace to which you’re comfortable with and having an organization that can perhaps leap ahead of where you’re going to be rather than trying to catch up constantly through that process.

We probably did almost 35 acquisitions over a ten-year period so we were constantly busy and often trying to catch up on our infrastructure to accommodate what we were buying next. It was a lot of fun but a lot of challenge.

Noah Rosenfarb: One of the things I’ve noticed about people who are in the serial acquisition business, you know, growing their companies, is that they tend to notice a lot of common mistakes that the owners have made of their acquiring firms, either their failure to prepare a variety of ways that the owners didn’t capture more value and that the acquirer probably would have paid more had the owner done a few things. What would you say out of those 35 acquisitions? Were there any common themes of things that the owners had done poorly where they could have probably got more money out of you had they spent some time?

Terry Freeman: You’re exactly right, Noah. I think the biggest fault we all have when we’re selling businesses is recognizing that the buyer’s buying it for what it is tomorrow, not what it was yesterday. Quite often we end up with advisers or others who are solely focused on an EBITDA history track, probably don’t spend enough time on normalizations and really understanding maybe what was anomaly in operations and also where that business is headed - what is the growth profile, why is that really achievable, and why should the buyer pay a higher multiple based on an EBITDA projection that is substantially better than what history has been. Those are the things I would focus on.

The other piece of it would be the lack of identification of addressable market. One thing smaller businesses tend to either don’t have knowledge on is just the size of their market and where they participate, so are they a 5% market share with a great fairway growth or are they an 80% market share where probably they’re going to get eroded over time? A buyer wants to know those kinds of things and typically that’s hard information to get, particularly in construction and maintenance type sectors, so people tend to just ignore it or carry on without that level of detail.

Noah Rosenfarb: Do you feel as an acquirer you are often getting great value because the sellers weren’t prepared?

Terry Freeman: I don’t know if often would be the right word but I’d say yes, you definitely do get better value when the seller is not fully prepared and hasn’t had a professional approach to preparing information. It’s an advantage for the buyer.

Noah Rosenfarb: As an acquirer, what were some of the things that you did and ways that you looked at potential acquisition targets, and maybe combined with that, what were some of the deals that you said no to? Was there a common theme among the owners were you had to say no and took a pass?

Terry Freeman: The biggest no really came down to organizational fit and the strength of the second tier of management. Quite often, an entrepreneur will find it difficult to fit into a bigger organization where they’re not calling all the shots, and the piece that lots of our guys didn’t like was they couldn’t make capex decisions any longer, because there was a consolidated capex budget and they couldn’t go out and buy every piece of equipment that they wanted. I always referred to as yellow iron fever in a lot of the construction businesses that we were involved in.

Where we saw guys that couldn’t adapt to a change in their level of control, we would pass. Also, if they didn’t have any kind of training in succession where if the owner got hit by a bus the business would collapse, then we’re probably less interested. Not quite as relevant as you get bigger in size and you have organizational depth as an acquirer that you can inject into a business, but then you’re not going to pay up for that either. If you have to be supportive and drive change and growth and the organization can’t support that on its own then you’ll probably pay less.

Noah Rosenfarb: Tell me about your eventual sale of Flint. What prompted that? Did the money need to get back to the investors or was there another reason, and how was that process?

Terry Freeman: It actually was a multiple stage process. We went public in 2001 through a reverse takeover process. There wasn’t a lot of liquidity at that time. The company we bought was thinly traded and it took some time to build up into a real sound public business. It was several years later in 2005 where we went to the market and raised capital to do further acquisitions, and a secondary offering for some of the long-term shareholders that we created that liquidity event at that stage. We became more of a real full trading public entity so liquidity was at the option of the holder after that time period.

Eventually, a much larger public construction business, URS, bought Flint lock, stock and barrel in 2012 primarily for access to the energy services construction market as well as the oil sands in Alberta. That was the ultimate liquidity event.

Noah Rosenfarb: Did you still maintain an active role with URS or were you liquidated in that also?

Terry Freeman: No. At that point I was a board member and the board was liquidated and that was that. It was over.

Noah Rosenfarb: Was it a fun ride?

Terry Freeman: It was a very fun ride. For me, it was almost 20 years from investing in the original private company in 1992 through fruition. It was great to see a lot of people mature and grow and. I think about one of my colleagues that started cleaning equipment in the back at our original shop and now runs a business that’s almost a billion dollars. The M&A strategy, while it often gets criticized as being unsuccessful in destroying shareholder values can actually be pretty accretive if you do it well.

Noah Rosenfarb: So what would you say were some of those keys to doing it well for the listeners on the call that are thinking about their eventual exit but like this concept of, "I’ll buy people at a 3x multiple and I’ll sell it as a 6x multiple.

Terry Freeman: The arbitrage is awesome if you can get it. That does come with scale so you can get a larger turn if you actually create something that’s either into somebody’s way or has a more meaningful market position than where you start. That’s part of the equation.

The other thing is to really stick to your macro thesis through thick and thin. Understand what your business is. Don’t get distracted by adding on a whole bunch of different pieces that don’t really fit with your core and become hard to manage, and just really focus on being excellent at what your primary thesis is.

Noah Rosenfarb: That’s good advice. Maybe you could share some more stories. I know you and I had kind of exchanged some information about the Elite camp. Maybe you could tell our listeners what happened there and what some lessons learned were.

Terry Freeman: Sure. Elite, we invested in through a private equity firm I was a partner in and it had really two business lines at the start, very small entities, management that was quite entrepreneurial but really had a difficult time growing. It was a theme we saw in many of the small investments we made through Northern Plains. Well, people might have had a good business idea and believed that they could support growth. They really didn’t have the skills set to manage additional people and double and triple and quadruple the size of the business. In that case, we had to change out management.

We sold one of the divisions, which was what I refer to as a dumb iron equipment business, and focus solely on the business we’re good at which was remote accommodations. We brought in some management from competitors that took it to another level. I think the lesson learned there is that sometimes you have to be prepared to pay up and make people whole when they can leap-frog your company ahead of level. That’s what we did in that case and it really paid off well because we had strong operational leadership and grew the business from roughly a nine million dollar top line to almost 40 at the point of sale and we were able to really pack that up with an additional growth profile because we understood specifically what that business was. So all the things about staying disciplined, staying focused on the thesis and really understanding where you were in the market and where you could capture growth paid off for us in the long run.

Noah Rosenfarb: One of the unique things I heard there is investing money that some people might consider high-risk as a sole business owner or a founder of a company, in talent. I think private equity firms, for the most part - at least those that are successful - have recognized what you described, and that is you have to pay the play and have the team that you need for the three years and not the team that you needed for the last three years. Do you find that owners that might be struggling with their existing management team and the investment that they need to put into the company to hire the right talent to help them get to that next stage, that they’re great private equity candidates?

Terry Freeman: They are, as long as they’re willing to accept advice and recognize that they have to augment their team. Loyalty is a great thing but you also have to accept that maybe your long-term players that got you to a certain level can’t take you beyond that level and that they have to perhaps find a different role or be, you know, ring-fenced in some duties. That’s sometimes hard for an entrepreneur so as long as you have that very frank discussion, upfront, about talent and about perhaps the necessity of augmenting talent, I think that works.

The other thing that’s important as a private equity sponsor is that you have at least some representation within your firm that’s had operational experience. The things I’ve seen that go sideways are where you’re a pure financial buyer and you don’t really have an appreciation for what it takes to make a business work and you get so focused on EBITDA, return on capital or all the things that eventually turn into value that you forget about the fact that there’s a thousand people out there trying to drive that number everyday. The number doesn’t happen without the people performing.

Noah Rosenfarb: Yeah. Did you have a similar experience at McCoy? What happened there? Why don’t you tell our listeners a little bit about that story?

Terry Freeman: Sure. McCoy is a public company, which I sit on the board of. In that particular instance - and this part of the story is all public - we really helped to narrow the focus. It was kind of a - the one board member, I like his reference. He calls McCoy now a complex pure play relative to historical conglomerate that it was. We got rid of a lot of extraneous businesses that were low margin and not contributing much to earnings, so the market and analyst now really understand the story. It’s become a real pure play drilling products business in manufacturing that has gone up substantially in value through subtraction. We got rid of a big part at top line that didn’t contribute and we actually saw an increase in the share price.

McCoy continues to be a public company. We brought on a number of US-based people in Houston that have really taken it to another level as well, so both the investment and talent and the focus on pure play have really helped that business.

Noah Rosenfarb: Was there a founder involved in the company as you did these divestitures?

Terry Freeman: Not in the McCoy situation. McCoy has been around for a hundred years and it’s been public since 95, so the founders were long gone.

Noah Rosenfarb: I don’t know if you’ve seen the track of divesting out of low margin or unprofitable business lines. I think it’s something that outsiders often can visualize and articulate to ownership but if the owners were integral in their creation of those business lines, you know, they often have a bit of, "I don’t want to get rid of my baby." Did you have that at McCoy at all even though no one was particularly the birth father of any of those business lines?

Terry Freeman: Maybe a little bit, because the CEO had actually run several of the businesses so he had an appreciation for them, but fundamentally really believed in the strategy of getting to a pure play situation so we didn’t have a lot of pushback. As a buyer of businesses I really look for those kinds of opportunities where you see something non-core to a conglomerate or a public company that maybe isn’t getting an 11 isn’t going to get any future capital to grow. Those things can be great buys too.

Noah Rosenfarb: Yeah. Walk me through your iron story, Iron Derrickman.

Terry Freeman: Iron Derrickman was interesting because it was an illustration of when’s the right time to sell and when’s the right time to try and drive value. The people that started Iron Derrickman were great innovative people who developed a really cool technology to handle pipe, you know, drilling operation that was far safer and more productive than what was done historically but they were not manufacturers. They had a number of prototypes working in the field.

Their next step would have been to actually run their own manufacturing business or a third-party and try to manage it that way but they recognized they didn’t have that skill set internally. Great engineers but knew nothing about how to do that part of the business so the decision was made to sell it at that stage by demonstrating the potential in the market and putting it in the hands of a business that had manufacturing, knew how to do that well and can take it to that next level and recognized the value they would create through that process, partially in an earnout and partially in an upfront payment. In that case, we really minimized the risk of failure in a part of a business the management wasn’t strong at, and got off at perhaps earlier than it ultimately became truly profitable.

Noah Rosenfarb: When you look at that kind of situation in owners that are listening to our call, they may be thinking, "Oh, I don’t want to sell yet. I’ve got to implement this, I’ve got to implement that. I don’t want to sell too soon," what advice do you have for them about timing and how to find that right timing?

Terry Freeman: I think if you try and sell right at the top of the market, you will often fail because that buyer still wants to know that there’s a fairway for growth. If that’s your objective to get to the absolute peak of earnings, that’s going to be a very hard thing to drive the value you think you’re worth.

In our business, energy services, it’s very cyclical, so when you think about timing and creating value if you can eliminate as much technicalities you can through constant revenues and relationships with customers that allow you to say, "Okay, I’m not going to go completely in the ditch like my competitors or other entities in this space." You can drive more value that way too. Maybe your timing revolves around having signed a master service agreement with a customer that gives you a longer term perspective on revenues and you have a five-year window that you can demonstrate, as opposed to saying, "Okay, I’m on the last six months of my relationship with that customer and I haven’t resigned yet." Those are the kinds of things I’d pay attention to in trying to drive value in the particular sector that we operate in.

Noah Rosenfarb: I want to pick up on one of your comments. We created an ebook for those of our listeners that are interested you can go on my corporate website which www.freedomexit.com and download 53 value factors. You mentioned these service agreements, which is one of the 53 value factors that we described to owners, different ways that they could create value in their company and somehow it’s through, you know, things that could be simpler to implement if you just knew that they were important, like a service agreement with one of your suppliers or your customers. Terry, maybe you could continue the conversation around talking to your employees and one of the ways that owners during these 35 acquisitions that you did or when you deployed private equity money into 19 different companies. How did you counsel owners to talk to their management team and to talk to their employees around their exit and their involvement of you and their company?

Terry Freeman: That’s a very intriguing question. Typically, the owner of a private business won’t want his employees getting distracted because quite often it’ll have a big impact on performance. You either have to go completely tight hole or you’re not disclosing anything and doing due diligence off-site if you can, or you have to open up and kind of embrace the situation. I’m involved in one business right now that’s going through an exit process and they’ve been very upfront with the employee base and what they’ve told them is, "For the long-term success of this business, we need a different shareholder base." That might be private equity. It might be being involved in a larger public company, but really the shareholder base we have now needs to exit. They’re not prepared to support the business with the kind of growth profile we think we can take it to. Therefore, we’re going to make a change in ownership.

It won’t affect your day-to-day job, it won’t affect your compensation, it won’t affect many of the things that impact your wellbeing, but that’s what we’re going to do, so we’re in that process. Being upfront about that takes away a lot of the rumormongering and the difficult conversations that people have, and they usually project the worst. That quite often lets the air out of the balloon around some of those issues.

I would say in probably 90% of the businesses we acquired, we did see a degradation in results in the quarter after the deal closed because when you’re buying smaller businesses typically you’re using a lot of the management resources that typically are focused on execution through due diligence, through negotiation, through all of those time-consuming processes that you have to look after when a deal’s being done, so quite often you will have an issue around execution, maybe in a couple of months prior to close and then the quarter afterwards. Everybody’s tired.

The other sensitive situation is around customers. In the end, most of the feedback we got doing customer diligence where we go out and visit the key customers for anything they’re requiring, was as long as I still see, you know, Joe or Jill across the table after the deal closes and you’re not changing my pricing, I don’t care who owns it. I just want my service delivered. I think that’s quite often the case with employees too. If they have the same leader, the same direct report that they had prior to the deal, their life doesn’t really change that much. So if you can give them that level of comfort, comp doesn’t change. My boss doesn’t change. A lot of the noise goes away. I would tend to do that sooner rather than later once you’re, you know, to be certain that a deal’s going to close.

Noah Rosenfarb: Do you think the upfront disclosure of, "We need a new owner," is better or it’s case by case to being totally silent until after the deal is closed?

Terry Freeman: Absolutely case-by-case. Quite often, if let’s say it’s a competitor situation. You wouldn’t want that getting out because they’ll start to poach your people. If they’re a prospective buyers why would they pay up when they can just hire them? Also, if you’ve been in a growth mode where, let’s say you’ve hired people in a progressive smaller entrepreneurial organization, away from big staid slow pubcos on the premise that they’re going to have some freedom and the chance to create something. If you enter a sale process and you’ve got that kind of management mix, they may be very unhappy about having left a big situation and then having to roll back into one almost immediately, so case by case for sure.

Noah Rosenfarb: Great advice. What other advice do you have for owners that are contemplating their exit? Maybe some best practices or some things you’ve seen that have really helped owners in the short term and the long term.

Terry Freeman: I think the things that would spring to mind there would be really focusing on normalizations and building your historical EBITDA to a level that proformas any acquisitions you’ve done, any business lines that you’ve added and really working back through that history so you understand your business. People get too fixated on, "Well, I got 4 times my EBITDA or 6 times my EBITDA," and less on the big number which is the actual EBITDA itself. If you can work hard on that, I think that’s step one.

Step two is really focusing hard on what the year ahead represents. If you’re not doing some budgeting process or a three-year, five-year model, you should start doing one. I recall, you know, the board chairman of Flint used to tell me my job as chief financial officer or CFO didn’t stand for Chief Financial Officer. It stood for Chief Forecasting Officer. Knowing where you’re going tomorrow will create value for you because that’s really what the buyer’s going to be focused on. They’ll send in their third-party accounting guys to vet history and tick and bop what happened yesterday, but the decision makers are going to look at what’s going to happen tomorrow.

I think the third thing would be really spending time on the customer base in the addressable market so that you have a clear path to what’s going to support the growth you put into your forecast. If I’m going to broaden my customer base by adding three key master service agreements, here are the particular companies I’m going after. Maybe it’s 3 out of 10 so I don’t have to hit on the 100% to reach that growth profile and really having concrete steps that you can demonstrate. You have the people and the equipment and support to execute on, it will really give that buyer confidence. Those would be the three things I’d focus on.

Noah Rosenfarb: How about your experience in private equity and deploying capital. What would you say to owners that are contemplating, "Should I go with private equity deal or should I just sell 100%?" Where would you tend to advise those owners on how private equity firms could either be a good fit or maybe not a good fit?

Terry Freeman: I think you want to recognize firstly that there are many fish in that sea of private equity players and they all have different strengths, so you want to find someone that’s going to be a true partner to you. if you’re going to roll over your equity position on the premise that their capital and expertise and connections are going to support growth, you’re taking a bet on them just like they’re taking a bet on you, so you need to do as much due diligence on the private equity firm as they’re doing on your businesses. So get some references from previous investments they’ve done, talk to entrepreneurs that they exited with as well as people that didn’t make it to the final cut and exited from an employment perspective before the exit was engineered.

So I would go through all those steps and then I would think, the real question is, "Can I make more selling 100% today or can I make more by taking somebody else’s capital, owning a smaller chunk of what ends up being a bigger pie and realize more value that way as well as making my own life better, so maybe it’s a question of taking a little bit of risk capital off the table now, deal with some personal financial things you want to deal with, and then you’ve got a ton of freedom and a balance sheet that allows you to pursue those growth options you really want to pursue, because that’s where the fun begins. If you have a vision for growth and private equity capital can get you to that vision, then there’s nothing better.

Noah Rosenfarb: Yeah. Anything else you’d like to share with our listeners about either, you know, the role of the CFO and the importance of the CFO, the role of private equity or the importance of a board? Any advice that you have?

Terry Freeman: I think the most important advice I give anybody in business whether they’re looking at doing transactions, being a CFO and dealing with the board or anything is really you want one version of the truth in your numbers so if you’re building a forecast and you’re working historicals into it, it’s the same numbers that you have in your external financials and internal financial reporting. You’re not trying to monkey around with different versions of history. You may have different versions of the future based on levels of investment or different businesses you enter into. Really, everybody understands the numbers the same way, whether it’s ops or the private equity guys you want to bring to the table or the board, because you spend too much time working through, "Well, I adjust to this," or, "I adjust to that," or, "I’ve taken this out of cost of sales and moved it into SG&A." Just don’t do it. Just have one version for everybody.

I think the other thing I would say is, if you plan properly, there’s no reason to be scared of M&A. Lots of people buy into this and 80% of M&A deals fail, but if you use due diligence to really develop an execution plan rather than just using it as a vetting process on history, your chances of success go way up.

Finally, as a CFO, spend as much time as you can in operations. One of the reasons I left being a CFO for a public company is the job became more about SOX and IFRS and technical accounting detail, unless about building the business and helping operations people succeed. I think that’s really the joy of being a CFO, was being fully conversant in what’s happening in the operations and doing the things at the finance level of support what goes on in whatever your field is.

Noah Rosenfarb: Yeah. So what led you to start Corrosion and Abrasion Solutions? How did that come about?

Terry Freeman: In our private equity world, we looked at a number of different sectors that would have gone into our next fund, had we done another fund, but rules change relative to private equity in Canada so we elected not to pursue a fourth fund from Northern Plains and I hate to see a good idea go to waste so I started Corrosion and Abrasion Solutions myself with some partners in the theory that it’s a sector that has a lot of mom and pops that are not meeting market requirements for investment and technology capacity and providing a full professional service to the industrial customer. Much like Flint provided that for the construction sector, we see it at a different level in a subcontract service like codings and blasting, and the inability of industrial owners to manage their corrosion problems that we can consolidate that sector in the same way and provide a more fulsome comprehensive corrosion management service to the customers we want to provide it to.

So it’s got the macro features in terms of industry spend. It has the ownership features within a mom and pop oriented market and it’s got the profitability and market share gain that you can get by performing consolidation that would lead us to any kind of private equity investment.

Noah Rosenfarb: And in your role there in doing acquisitions, do you look for them independently? Do you work with outside advisers? How’s that working for you now that you have all of this experience yourself?

Terry Freeman: Right now, the contacts have come primarily through our operations people, so they’re word of mouth, which typically works best for us. There have been a few who you’ve seen from advisers, but we haven’t closed on any that have been presented to us by outside advisers. Nothing against that process but when you’re in a biddign situation, typically you don’t have the same level of bargain when you’re sole sourcing. At this stage, in our formative track over the first year of operation, it’s been more financially beneficial for us to go out and sole soucre them where we’re really the only game in town.

Noah Rosenfarb: That’s all ways the best way. If you could do it, right? Terry, I really appreciate you sharing your expertise and your experience with our audience. If any of our listeners have an interest in contacting you, what’s the best way for them to get a hold of you?

Terry Freeman: Email is the best way to contact me. My email is terry.freeman@casltd.ca.

Noah Rosenfarb: Great. That’s also going to be on the Divestopedia website along with Terry’s bio and a transcript of this podcast. Thanks so much to all of our listeners for tuning in to us, the Divestopedia Exit Strategy podcast. My name is Noah Rosenfarb. I’m the author of Exit: Healthy, Wealthy and Wise, and I’m a longtime counselor to business owners seeking advice on how to get the best exit. Thanks so much again for listening and we’ll speak with you again soon. All of our listeners, don’t forget to rate us on iTunes and leave your feedback there. Thanks.