Business Transition and Investment Banking with James Pugh

Recently, I’ve been taking a new approach to teaching some of the subject matter that I’ve discussed in the past. Although some of the concepts may be familiar, we’re looking at them through real-world application by interviewing some of the experts in each respective field. Each of the interviews in this series deals with a different aspect of your business’s legal department, specifically, as it pertains to your exit. Due to the detail and length of the discussion, today’s article serves as a review. If you’re just joining this series, I encourage you to follow along with the podcast. That’s where you will find my full interview about investment banking and business transition with James Pugh.

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TIME INDEX:

• 00:42 – Investment Banking and Business Transition, with James Pugh
• 03:13 – Who Do Investment Bankers Work With
• 06:08 – Investment Bankers as Facilitators
• 07:00 – The Current Market
• 08:16 – Risk Mitigation and Increasing Value
• 09:11 – Low Hanging Fruit
• 10:31 – Effects of COVID
• 12:22 – Small Market vs. Middle Market
• 13:01 – Tips to Increase Value
• 14:45 – What Should Business Owners Ask
• 16:07 – What is a Capital Stack
• 16:53 – How to Build Your Capital Stack
• 19:52 – Recommended Reading
• 21:21 – The Right Team Members
• 22:54 – A Nugget of Wisdom
• 24:36 – Summary

Getting to Know James Pugh

James Pugh is a Mergers & Acquisitions professional and Managing Director with Pivot Capital Partners, a boutique Investment Bank with offices in Atlanta and Chicago. James and Pivot Capital focus on both the buy-side and sale side of M&A, capital raises for debt and equity, as well as Strategic Advisory Services. Within those Strategic Advisory Services, James and his team focus on growth and value enhancement for lower and middle-mid market companies. Additionally, they work to develop pre and post-merger valuation and integration strategies.

James Bates Pugh Jr., MBA, CEPA, is a Registered Representative of Finalis Securities LLC Member FINRA/SIPC. I’d like to make it clear that the purpose of this interview is for educational purposes only, and should not be considered investment advice. If you would like to contact James, he can be found through his website, pivotcapitalllc.com. You can also reach him at (888)585-9981 or on LinkedIn at www.linkedin.com/in/james-pugh-mba-cepa®.

Who Do Investment Bankers Work With?

Investment bankers can wear many hats. What they do really depends on where they “play.” In James’ and Pivot Capital’s case, they act as advisors for business owners and management teams as they develop their process for going to market. Additionally, they provide feedback for what the mergers and acquisitions process might look like, as well as what options are available to their clients. Likewise, they help buyers identify strategic targets for what best fits them and their ideas for growing a specific organization.

Where a business broker will typically work on the micro side of business (between $1MM and $3MM EBITDA), investment bankers, for the most part, are working with businesses from a minimum threshold of $2-3MM in EBITDA all the way up to the middle-middle market businesses that are earning around $500MM. James noted that his firm typically serves clients within the $2MM to $20MM range. What sets his group apart is that they are heavily focused on Strategic Advisory Services rather than solely focusing on transactions.

How Investment Bankers Prepare You for a Business Transition

Not all investment banking firms focus on Strategic Advisory Services. Some, merely step in as a facilitator when it’s time for the transaction to take place. This is something that you should research before choosing to work with an investment banker. If they don’t offer value acceleration or other forms of strategic advice, you probably want to work with an advisor who can help you ready yourself and your team for the business transition. When the time comes to work with an investment banker, you want to have grown the value as much as possible before the transaction takes place. But how do you do that?

There are many things you can do to grow your organization’s value and prepare it for a transfer. However, you’ll want to remove as much company-specific risk as possible. As you mitigate the risks to your business, the value also increases. An investment banking firm, such as Pivot Capital advises their clients through risk mitigation and value acceleration before the business transition takes place. So, you’ll want to research before choosing a firm to facilitate your business transition. This isn’t to say that firms that are strictly transactional aren’t of use to you. Instead, I am simply pointing out that if you choose one of these, you may want to consider seeking a third party to aid your business through the value growth process to ensure you’re maximizing your business as an asset.

Tips to Increase Value

If you’ve followed me for a while, you’ve heard me discuss the 8 key areas that have the most direct impact on a business’s value. However, I wanted to get another perspective on this matter. James doubled down on the necessity of risk mitigation. If your focus is on value growth, you must deleverage your company from the start. Doing so can mitigate its risk, and ultimately, drive its value.

Similarly, James added that having advisors and a great management team around you is a must. Much as you would allocate budgetary funds toward marketing, you really should be investing in the advisory board that will help you grow your business. Contrary to what many business owners may believe, this is something that should be taking place from day one. I’ve often said that you must begin your business with the end in mind, and that’s exactly what James is referring to.

What Question Should You Ask?

There is little doubt that you will have many questions throughout the business transition. But, if there were one question that you could benefit the most from asking, what would it be? According to James, it’s more about having conversations about the people you’re putting “on the bus with you.” By having these conversations sooner than later, you position yourself to have a better understanding of who should be on the bus and which seats they should fill.

This is especially true when you’re speaking of capital sourcing and allocation. James said that his firm spends a lot of time focusing on the capital stack and where smaller companies can source capital. As you deleverage your company, less expensive debts become available to you. The idea behind the capital stack is to use the banks’ money rather than your own, but only when it makes sense to do so. As business owners, we often cut our lifestyles in order to deploy more money into the growth of the business. But doing this is one of the most expensive ways to grow your business. This is why James places such an emphasis on the need to have these conversations with a trusted advisor. They can guide you on when you should be seeking certain sources of capital and where it should be coming from.

Wrapping Up…

In closing, James offered up one beautiful little nugget of wisdom. Plan early and plan often. Too many times, business owners reach their business transition and think, “Oh, I wish I had done…” By conducting regular SWOT analyses, having frequent meetings with your advisory board, and implementing strategic plans, you’re able to address things before it’s too late.

Friends, preparing your company for a transfer is a long and complicated process. But, if you put some of these tips to use (as they fit into your unique circumstance) you could position yourself for a much easier business transition. I know life is hard. I get that. But life is good. Growing your company’s value so it can be sold for maximum profit can be frustrating. However, it doesn’t have to be. With some careful planning, a great advisor, and a willing attitude, you can make your transfer at least, financially simple.

For more on investment banking and business transfers, listen to the full podcast episode. Then, reach out to us. The Financially Simple team is always ready to help you and your business on the path toward achieving your biggest goals.