There is no better advice than that which comes from someone who has been there and done that.
In the first of a series of Divestopedia interviews with entrepreneurs for entrepreneurs, we have a candid talk with John Altobelli, a serial entrepreneur in the energy services industry.
John and his partner have acquired, built and subsequently sold two energy services companies in the last decade. The first business was a fluid storage and handling company sold to a private equity backed platform company. The second business was a pumpjack installation and service company sold to a public oilfield services conglomerate traded on the New York Stock Exchange (NYSE). He has, therefore, experienced selling his business to both a financial buyer and a strategic buyer in the short span of eight years, so he definitely knows what he's talking about.
In this candid interview, we talk to John about his experience with his first business, which he sold to a private equity backed platform company, and how he felt that was different compared to selling to a strategic buyer. His insight provides all prospective sellers with a good appreciation about what to expect, and what not to expect, for the private equity experience.
Divestopedia: John, first of all, thanks for agreeing to do this on such short notice. We are thrilled that you are doing this. Can you tell us first how you first got involved with the fluid handling business?
JA: No problem, I'm happy to do this. The company was owned by a friend of mine who had owned it for 18 years. His righthand man, Scott, had told him he was going to leave if he didn't bring him as a partner. Scott approached me and along with a third partner, we rounded up one third of the equity each and financed the rest of the purchase price. It was a big risk for me, because I ended up maxing out my line of credit, which was secured against my house. My wife thought I was crazy, but I knew this was my opportunity. Shortly after we bought the business, Scott and I bought out our third partner with free cash flow from the company as he was interested in moving on to other ventures.
Divestopedia: Wow, that must have taken some guts. How did you and Scott build the business and create value from the time you acquired it to the time when you sold it?
JA: The business was originally 80% contractors with very old equipment. So what we did was take all the cash flow the business generated at first, and then started replacing the contractors with our own equipment. We made only about 12 - 14% margin on contractors, and we knew we could make in excess of 30% margin on our own equipment. We flipped the ratio around completely to 80% owned equipment rather than contracted equipment. We also aggressively pursued new accounts and diversified our service offering including fluid handling and storage, rentals, service, etc. We were a one stop shop.
Divestopedia: Why did you decide to sell the business?
JA: Right around 2006, the business was doing close to $40 million in revenue. Our receivables in one of those months got close to $11 million, so we knew this business had grown a lot. We figured the business had gotten too big for us to manage by ourselves, and we needed a partner to help take it to the next level. The markets were very favorable in 2006, so we figured we wanted to look at some private equity firms as potential partners.
Divestopedia: Did you use a business broker to market the business, and if so, did you find the experience useful? Did they create value for you?
JA: Yes, but not right away. We started talking to some people ourselves around 2006, but did not engage a broker until 2007. We used the investment banking group of one of the Big 4 accounting firms. In hindsight, we didn't find the experience as useful because the broker presented us to the same private equity we had talked to in 2006. They approached some other parties including a large public strategic buyer, but I still I felt that they did not create the best competitive bidding. We ended up doing the deal, and becoming part of their platform roll-up. I should have just gone directly to the private equity firm myself again, and maybe just asked the broker to prepare a CIM by the hour. They wanted a success fee of 4% on the total purchase price, but we ended up negotiating it down to 2%.
Divestopedia: Why did you decide to go with a private equity firm?
JA: I felt the private equity firm guys were more personable. The public strategic buyer felt more corporate. I still remember the words from the CEO of the public company. He told me: "I don't care about anything else, just put the ball in the net for me." We cared about our people and wanted them to be treated well. I wasn't sure that they were going to feel safe and just didn't feel good about it, eventhough their offer was about $500,000 higher. The private equity guys introduced me to the rest of the partners that were already participating in the roll-up. It just felt more personal, like a family, so it gave me some assurance that my employees would be taken care of.
Divestopedia: In hindsight, do you feel you made the right decision, or would you have preferred to take the extra $500,000 based on how things played out?
JA: Probably, but hindsight is always 20/20. Ultimately, there was still change and the platform became structured corporately, so maybe going with the public company would have turned out the same. I don't know. The private equity firm was very transparent; it was perhaps me more thinking that nothing would change at all when in effect things need to change in order for the platform company to grow.
Divestopedia: But you had a good experience with the integration. Can you tell us a little bit more about the integration process with private equity?
JA: With the platform company, everyone is growing together. They are looking at your infrastructure such as your computer systems, and then they would suggest and execute. It felt more like a team. In addition, with the platform company things moved much quicker because there weren't that many layers of decision making. I learned later with the the strategic buyer how slow things could be, as there were more layers of approval in place. With the platform company, the personal touch was much higher. That was the big difference. There were three guys basically to call, and things would get done.
Divestopedia: John, we want to thank you for taking the time to chat with us. We're sure our readers have appreciated your experience as they find themselves trying to find the right fit for their company.
JA: No problem. I trust you're buying dinner.