Sam Smith is a mergers and acquisitions industry veteran with an affinity for roll-ups. We talk about the journey into the M&A world, some common pitfalls, and advice for others wanting to follow into the industry. Towards the end we discuss items like valuation, pride and ego, and ways deals can be made and how companies go to the stock exchange.

Shout out to episode sponsor R.D. Adair PLLC (https://adair.law)

#68: Mergers, acquisitions, roll-ups with Sam Smith

January 25, 2021 • 56:33


Aaron Spatz, Host, America’s Entrepreneur
Sam Smith, Managing Director, Seven P Capital

Aaron  00:09
Good morning, DFW, you were listening and watching to The Dallas-Fort Worth Business Podcast. I’m Aaron Spatz. Thank you so much for being here. I hope that you had a terrific weekend. This is the business podcast for DFW. I’m excited as the show features business executives, leaders across the metroplex, and it’s all designed to bring you stories to help fuel your drive, your passion, all the things that you’re working on in a way hopefully that we’re doing and is entertaining, educating, inspiring you. Any one of those is a win. All three of them is amazing. But I would love for you to join in on the conversation. So if there are episodes, if there are guests that you’re just absolutely love to hear from, if there are guests that you would love to hear from in the future, drop me a line at podcast@boldmedia.us. I would love, love, love your feedback. It’s always been a true delight.

And today is a true delight. So we have Sam Smith joining us this morning. Sam has been a really, really busy guy covering wide variety of industry, but specifically as it relates to venture capital, investment banking, and all things in between. I will ask a ton of questions and let him do what he does. So, Sam, I just want to welcome you to the show. Thank you so much for being here.

Sam  01:17
Absolutely. Thanks for having me.

Aaron  01:19
For sure, for sure. So I love to lead off with the obvious question as are you a DFW native? And if not, where are you from?

Sam  01:28
No, actually, I’m not. I moved down here, I guess in about 1995. So you know, with 25 years under my belt, I like to consider myself a native, but I guess –

Aaron  01:39
Naturalized citizen.

Sam  01:41
I’m sorry, go ahead.

Aaron  01:42
You’re a naturalized citizen.

Sam  01:44
Yeah. Well, you know, I’ve heard that if you stop at the airport DFW, you become a Texan. And so, I conceded that by far.

Aaron  01:52
That’s awesome. That’s awesome. Well, so, where are you from originally then?

Sam  01:58
I grew up in the quad cities right on the Mississippi River, Iowa and Illinois.

Aaron  02:03
Okay, nice. Okay. And then just as the saying goes, got here as fast as you could.

Sam  02:10
Yeah, yeah. And I was playing a little bit of a ball in college and North Texas were getting pretty aggressive with their programs. So I came down here to join them but got derailed. There’s a lot of good things happening in Texas beyond football. So that was part of the reason for the move but found interest in a lot of other things while I was here.

Aaron  02:31
Football got derailed. What’s that all about?

Sam  02:35
Oh, it’s just that’s me coming down here and seeing the Dallas and Texas and everything it had to offer.

Aaron  02:42
I got you.

Sam  02:42
And I had to take a back seat.

Aaron  02:43
Oh, okay. No, I got you. I got you. So then you jumped right into the world of venture capital, venture banking. So for those of us that are not nearly as astute in this subject, give us a quick 30,000-foot overview of some of the first things that you did and what the industry revolves around.

Sam  03:04
Well, I’ll tell you it is a complex industry and I think that’s why it keeps my interest. Over about 20 years, every day I still learn new things or new problems and new issues to resolve. But like most folks who enter this industry, you get a foothold somewhere. And I started off on the phone, just smiling and dialing and calling folks to generate interest in projects for another firm. And we started off with oil and gas of all things. It was about 2001.

Aaron  03:35
Wow. Yeah. Well, you know, the oil and gas industry has always has its ups and downs. I lived in Houston for a number of years and got to see a little bit of that firsthand, the crazy mad rush that can be. And then all of a sudden, things drying up. And shoot, I mean, things have slowed down dramatically down there. So when you came in – because I wasn’t in the industry at that time, but, you know, were things just on fire, really busy, or things kind of slow?

Sam  04:07
Well, yeah, it was all about natural gas at that time. I think we were sitting about $9 or $10 and I think we were working a project in the Austin Chalk at that point. And it was all about chasing that gas. It was hot.

Aaron  04:20
Wow. Wow, that’s crazy. Well, then, let’s take a quick walk through with your career. So you’ve done a number of things from being a venture analyst to senior investment banker. You’ve dealt a lot with the M&A side of things. So help those of us understand that aren’t as versed in this space. So what’s going on behind the scenes during something such as a merger or an acquisition? What are people like you doing?

Sam  04:51
Oh, goodness. Well, it really depends. There’s so many chaotic factors that come into play. It’s about the market. It’s about the industry. It’s about policy and legislation coming down the pipe. There’s so many variables. I mean, something as simple as one of the executives or board members for the company involved in an M&A transaction getting up on the wrong side of the bed. There’s a lot of managing attitudes, managing expectations. And there’s a lot that goes into it just to bring it to the table for presentation to a venture group or an ibanker or even just a  private equity. So a lot of moving pieces. To some extent, some herding cats. But you really have to be clear on the objectives and the stepping stones to get there because it is a complex industry.

Aaron  05:40
Well, it is one of those things that starts off where you’ve got a company that is wanting to buy another company, or you got another company that is wanting to maybe sell itself off to someone else. Like how does that normally get kicked off?

Sam  05:53
Yeah, that’s kind of what makes it all exciting. It’ll come the pipe 20 different ways. A lot of what we’ve been doing recently is with spec madness going on right now is identifying companies that are maybe not reaching their potential just because they’re more of an organic operating type company and they built it from scratch and they’ve moved it forward. But for them to really accelerate, they need to see those capital infusions or repositioning or restructuring. So we’ve actually been going out, looking more proactively for companies to engage.

Aaron  06:28
Wow. So, I mean, can you give the floor over a quick sales pitch here, but what’s the ideal company that you guys are chasing right now?

Sam  06:40
Well, because as much as you try to cookie cutter investment banking, every deal is just so incredibly different. So there are two keys that we consider. One, is the business scalable? Can this really take a bite of market share? Can it open a new market? Is it something that could actually function on the public market is what we look at. And number two is the management. How qualified is the management? Because we can have a great plan, we can identify all the metrics necessary to evaluate it properly and know that it’s going to be successful in the market, but without the appropriate management team, it won’t get there.

Aaron  07:18
Yeah, no, sorry. You’ve brought up a great point and I’ve read this in countless other statements I’ve seen this time and time again, which is you’re having to evaluate the management team. And so, how has that most effectively done? Because there’s a lot of the tangible, there’s a lot of their hard track record stuff that’s easy, right? That’s the easy part of it, but all the intangible stuff. Like, man, this guy is an absolute jerk or this person is a freaking rock star. They treat their people so well. So how do you go about understanding that piece of it?

Sam  07:55
Well, the easiest is what you just identified. The more tangible component we can look at a resume and say, “Okay, the action exists. Okay, the industry experience exists.” And you know, oftentimes we uncover – well, this is an important feature to running a public company that maybe is just left by the wayside because it is pertinent to the operations. But those intangibles are more difficult. And this is where experience in investment banking, venture capital really comes into play because a resume can look great. But about time you get the board on the phone and the CEO, the CFO, typically tell right away if they’re out of their depths or not. And if they are, it’s not necessarily a killer, but then it goes back to the pre-conversation we just had with football, is, are they coachable? I mean, will they listen to direction? Can they comprehend these steps? But if that resume is solid, they can comprehend it. They just have to have the right attitude getting forward and what it takes to really build a large-scale endeavor.

Aaron  09:02
Got you. Yeah. Calling references and calling people that they work with or people that they’ve previously had any type of affiliation with can oftentimes like really, really paint a much clearer picture to help fill in all those missing pieces, which is is always fun, right?

Sam  09:20
Oh, yeah. That network makes a big difference too. Social media and just the data and information that’s available on people, it’s totally different than it was 20 years ago, but just same. With all that supporting information, you’ve really got to spend some time with them and get a feel for who they are. And is it going to be a fit? Because it’s a different engagement when you’re talking about public markets or introducing investors than it is just a running operations and growing organically.

Aaron  09:51
So the companies that you’re working with, are you putting them on a path where they are going to become a public company or is it all private to public or is it private and they’re going to remain private companies? Again, I’m not looking for a cookie cutter answer because I know this is the answer I’m expecting to get right now is: it depends. And I totally get that. But is there a trend that you prefer, I guess?

Sam  10:18
This is why you have to love America because it’s nothing but opportunity. Every day, there’s something new. Every single day, something new. But for us, we’re kind of kids in a candy store because we can find a solution for just about everything. It’s got the management. If it’s scalable, we can figure out how to best position it and calendar all the efforts so they’re executed, so the company is properly positioned. At the same time, having that expertise can be dangerous because you’re going to burn a lot of time and maybe step outside of your box, so to speak, because you’re so interested in a deal or a company that time isn’t best spent. So what we try to do is focus on those companies that are private, that do have something that is scalable, and that could function as a public company. So for us, yeah, we were looking for companies to move to the market more than anything else.

Aaron  11:17
I see. That makes sense. So you’ve currently got your hands in a few different things. I’m looking at your LinkedIn. So you’re managing director at Various and then you’re CEO at United Energy Corporation and managing director of Seven P Capital. So take us on a quick tour of those things.

Sam  11:36
Well, the lengthiest explanation would be I’m a manager at Various because I do have my hands in a few different companies, different support roles or even just back office. Others where I’m advising on their growth plans or capital raise. Some of them are just going concerns that have taken a life of their own and I’m fortunate enough to participate. What was the second one you had there?

Aaron  12:04
I was just curious about – so what’s the story with the United Energy Corporation?

Sam  12:10
Oh, United Energy, that’s been a fun one because clearly, we’re focused on oil and gas in that. And I guess we’ve had a good number of assets that have been sitting on the private side. And in 2019, there’s some pretty serious flooding in Oklahoma that took out a lot of our production. I got done with that. Yeah, that was a good time. I got done with that and did some cleanups and repair work and said, “You know what, let’s go ahead and reposition this to bring in some capital. We’ll bill out the assets and take a look at some other direction.” And we went ahead and picked up United Energy off the public market and we merged assets into that.

And about time we were taking some shape, we had a COVID hit 2020 and we saw a negative $38 oil so we’ve just been really just biding time. We’ve got a great shareholder base. They’ve been just kind of sitting still, waiting for something. And we’ll see what’s going to come down the pipe here in the next month or two. These prices look like they’re starting to stabilize. They’re on the rise. But yeah, we thought that for the last few years they were stabilizing, and lo and behold, you hit negative 38.

So that’s as UNRG. And the other one, Seven P is where I spend the vast majority of my time. I have two partners that are very well versed in different aspects of investment banking and we worked as a trio on some of the target companies to capitalize them and move them toward the public market. And being an industry agnostic, I’ll tell you, we let me see everything from technology to oil and gas to real estate to even just purely financial businesses. In fact, we had one that was pretty interesting. What do they call it? It’s a virtual bank.

Aaron  13:57
Virtual bank. Perfect.

Sam  13:58
Virtual bank. Yeah. I guess everybody’s fed up with walking into the brick and mortars and have to schedule an appointment. So I think there might be an opportunity there, but that one’s early.

Aaron  14:07
Wow. Wow. So, well, I mean, there’s so many different directions that I want to go with this real quick, but we have time. So when it comes to this market specifically or a lot of the work that you’re doing, is a lot of it focused in specifically on the DFW metroplex or this is a nationwide focus?

Sam  14:29
You know, we actually get a lot of inquiries internationally. And there are some that we would like to engage and we have had conversations with several of them about making home base the US for a number of reasons, but primarily because we’re most familiar with the US markets in all honesty. Globally, this is the capital market, the US. There are others that are significant, but the US is where you go to raise capital. In the US, though, we get a good number of inquiries from coast to coast, various industries and such. And you know, I’d like to do more in Dallas. In fact, I’ve been working more recently here on developing the network because there’s so many great people, professionals. We share the same culture and we’ll talk about business for 20 minutes and football for an hour. It’s a peer group that I’d like to develop further, but we’d like to do more Dallas. We focused primarily US though.

Aaron  15:32
Oh, okay, okay. Well, then, so when it comes to putting a deal together and you’re evaluating – I’m fascinated by the discussion or the point that you made a few minutes ago. So you’re taking a company that has had organic growth and they’re just kind of chugging along and they’re doing fine, but you’ve mentioned your capital infusion and helping really hypercharge their growth. So, I mean, it’s a very obvious outcome. So if you’ve got enough capital, you got enough resource behind a company, you can help rapidly scale that company versus just the organic year over year growth and they can eventually get there. So what have you found to be the marks of a successful company in terms of being able to go from the year in year out, slow organic growth, to properly executing a plan that helps you when it comes to capital?

Sam  16:26
Well, if you have my partners on the line, you’d probably end up with a bit of an argument.

Aaron  16:32

Sam  16:33
Yeah. That’d be great. We approach things a little bit different. I’m an M&A guy. I’m more traditional real estate, oil and gas, manufacturing, and some entertainment, things like this. So for me, the counterpart to organic growth is growth by acquisition or roll-ups. We look for a like-kind or similar businesses that can be integrated and see if we can improve the efficiencies. That’s my strategy. Well, a couple of my peers, they’re going to dive deep on the inside of the company to try and find additional revenues or additional burn to operate that business more efficiently, to see if they can improve the organic growth, and make that move a little bit faster. So I’m a roll-ups guy. I think you find a business and acquire.

Aaron  17:20
So if you are a small business, let’s say you run, I don’t know, a steel fabrication company in North Texas and you’re wanting to grow this. I mean, there’s a ton of industrial companies out there, but if, let’s say, you’re trying to grow and scale that. So you’re saying your strategy for growth would then be go identify other steel manufacturers or fabricators rather either in our market or where the target happens to be. But you’re trying to realize some efficiency gains by bringing more assets under management. Is that right?

Sam  17:56
Yeah. And off the cuff, that argument that I mentioned is I might have one of my peers who say, “There’s no way we can effectively produce or manufacturer steel in the US,” and of course it depends on the specific niche that the company operates within. But that’s where the argument would come on that side. For me, you know, I’m going to view it just as I stated. Okay, well, it’s a roll-up. So can we find the like-kinds and introduce them. But then again, as you dive a little bit deeper into the deal, well, it’s not a terribly portable business, now we’re considering operations of the same type in two geographically different locations. How do we integrate these? What kind of equipment do we have to move if we want to integrate? We’re going to lose some of our trade routes. I mean, there are all kinds of things that are going to be evaluated. But yeah, I still stand by the roll-up.

Aaron  18:48
Nice. Well, what’s been one of the most interesting roll-ups that you’ve worked on?

Sam  18:53
We’ve got one right now that we’re trying to push through. And in fact, later this morning, I’ll have complete the deal sheet to share with one of our partners here in Dallas, but they’re working on broadband roll-up for underserved markets, which has a social capital aspect to it. But quite honestly, it’s good business just because there aren’t any competitors at the moment. And there’s a lot of market out there that’s underserved, but what what’s funny is how little I know about broadband but how much I understand the roll-up method and how those metrics should look.

Aaron  19:28
So, what are you looking for then? And I’d love to understand more of the roll-up process because I’ve heard of it. I’ve seen it happen previously. But from your perspective, what are the things that you’re taking into consideration during a roll-up?

Sam  19:44
Well, with this deal in particular, the cornerstone is while the market is underserved, it is served. And it’s a matter of how efficiently they’re served. The majority of the operators in this space are small mom and pop businesses. They’ve done pretty well. Some of them have aged in the last 20 years as broadband and telecommunications became more of a necessity of life. So these mom and pops are sitting there, and quite honestly, if they were following the traditional business model, then they’re going to look for a local buyer. Well, in smaller, underserved markets, buyers are further in between. So a larger group to come in and take that over and operate in that space and realize some of the efficiencies and having mass holdings would certainly be a benefit.

Aaron  20:33
Nice. Well, when it comes to putting one of these deals together and you’re working – and we’ll just stay parked on the roll-up side of this. So if you’re a company that is looking to acquire other companies, you’re trying to get those growth going, how does that journey start for them? So are they focused in on their own operations? Are they literally reaching out to your firm just cold and have that conversation?

Sam  21:02
Yeah, sometimes they are. And sometimes it’s just a cold text. Sometimes it’s a friend of a friend or a network or any variety these days. It’s not receiving a letter in the mail anymore. So we’ll receive communication 20 different ways. But when we take a look at or consider this company, it goes back to the same two things. Are they scalable? Do they have the management? We start our assessment from there. And obviously, we go into industry and market and timing and competition and all these other factors. But you know, the bottom line for us is those two items: management and scalability.

Aaron  21:39
And then from there, you are taking then a pool of funds from an investor base or from some other outside source and using that to help inject capital into the business?

Sam  21:51
Yeah. It depends. You can get tired of hearing that from me. It depends. Because we have a deal right now that they’re really under the gun. They’re short on time and they’re a little scattered, but they have a debt obligation that’s coming due and we’re taking a look at it. We’re making considerations for a capital raise or bringing in a VC or some form of equity. And they just don’t have the time for their story to get out there. So we said, “Well, let’s go ahead and consider this another way.” Because of the position they’re in, where they only have that debt and that debt is collateralized, it’s backed by actual profitable operations. “So, guys, now let’s step away from equity for the moment. Let’s solve the problem with the debt position and then we’ll handle the restructure from there.”

Aaron  22:43
Nice. No, it’s fascinating. There’s so much here. And what I want to do is take a step back. So when we come back from break, what I would like to do is understand it for those that are curious more about getting into this business. So if they’re wanting to apprentice in some type of M&A company, how they go about doing it? So we’ll cover that here just one second.

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So, Sam, one, I’m trying to understand more. I mean, I have a cursory level understanding of what is you do, but, I mean, we’re talking surface scratch level and your knowledge base goes miles and miles deep. So forgive my incredibly stupid questions, but I’m just genuinely, genuinely curious though. If they were willing to kind of shadow your career, if someone was wanting to try to follow in your footsteps, one, where do they start? And then b) what advice do you have for people that are just getting into the game?

Sam  24:35
So this might be helpful here. We’ve actually been going through the interview process and look to hire a couple of potentially associated investment bankers. But you know, you’re not wrong in any of the savings you just made because it’s a complex industry. And there many facets features and components and areas of practice that it’s a very generic term, but we’ve been working to hire an associate. And we posted for an associate investment banker and we got some fantastic resumes from some of the top firms and had some great conversations with very experienced people.

But for us, investment banking, you’ve got to be able to cover two – what should I say? You have to have two characteristics that are absolute key to doing this. One is the academic acumen. You have to have some level of training in the analytics so you can review financial statements, so you can take a look at the market, so you can understand kind of what’s going on around you. Now, you don’t have to have all the answers because I’ve got 20 years in and I still rely on two other peers who have another 20 years in the industry. No one person is going to have all the answers, but you have to be able to evaluate information and data.

The other piece is you have to be able to sell a deal. And for me, personally, I’m not a pushy guy. I don’t slap people around to get them to do anything. What I do is I illustrate to a ridiculous degree exactly what we’re doing, how the pieces fit together. And really, I guess it’s called no place to hide. Because if it makes sense and there aren’t any objections and then we typically consummate the transaction. But with that being said, as I’m going through these resumes and such, I’m finding that I’ve got one or the other.

Aaron  26:29
I see.

Sam  26:29
I’ve got either the analytic ability or I have a sales professional. So for us, when we think of investment bank and I put this out to several of the applicants, I said, “In our eyes, an investment banker who’s the street and destitute, what he’s going to do is he’s going to find a deal. He’s going to find something that makes sense that could be profitable because he’s got that analytic ability and he’s going to contract, he’s getting to negotiate, he’s going to create understanding for that client company. And with that, he is then going to go sell the deal.” So those are the two components that are absolute key. You have to be able to understand what you’re talking about and you have to be able to sell what you’re talking about. That’s investment banking in our eyes.

Aaron  27:12
No, that’s perfect. And so I think, for me, I’ll just speak to my own preconceived ideas of how this works, is realizing that there is a sales component to it. So my perception of the space, it’s been complete 100% analytics, right? The analytics drive all of this stuff. And you’ve got people that are wanting to make something happen. And what I picked up in what you just said was either a) you’re having to go sell it to a group of investors or maybe b) you’re having to sell it to another company or c) you’re having to sell the own company on its own idea because maybe they’re getting cold feet. Is all of that true?

Sam  27:56
All of it. Yeah. Every call is a sale. And even the chief executives we work with, they’re fantastic salesmen. They may not be selling the product, but they have to sell the idea. They have to sell somebody on why they should join their company. They have to sell a vendor on why they should do business with them. There’s always a sale taking place.

Aaron  28:15
Wow. So, then, what you’re doing is you’ve identified that gap that you’ve had, you’ve identified the opportunity, you’ve done all the homework on it. So then, as you said just a few minutes ago, you’re going to go into painstaking detail to show them exactly every step of the process of what’s going to happen and be like, okay, what are we waiting on? What are we going to do? And it’s kind of leading them into that.

Sam  28:40
Yeah. And it’s funny because it’s a bit of a double-edged sword because transparency has been one of our cornerstones. It’s absolute understanding and clarity. Because what we don’t want to do is end up on the phone discussing anxiety. Let everybody have a clear picture of the steps we’re taking, the movements we’re making. The double-edged sword of it, though, is this: it’s complex. It isn’t simple. It isn’t something where you just make a list and there’s clear understanding. So we’ve had to scale back and we’ve kind of identified the key topics, key points and things that require a little bit more understanding. And because every client company and every investor is completely different, we give them enough information to process. And then let them start asking questions more in particular in areas that they’re curious or have better understanding to better grasp some of the movements we would like to make.

Aaron  29:36
What do you find to be the most frequent threats to a deal going through?

Sam  29:42
Oh, gosh. Well, getting up in the morning is one. It varies. Truthfully, I go back to the same item I said, that management. Because, you know, management, they’ll have a concept for what needs to happen or how it needs to happen. And most of the time, we don’t question the operating side because they know their business. A lot of times, we can be more like consultants and point out some of the inefficiencies or some of the excess burn they’ve got so they can be a better operating company. But in general, we leave that part alone. Where a lot of the disconnect comes in is when that board of directors or that executive officer is trying to understand how they fit into the market because they’re master of their own universe, but they’re a blip on the screen in the global economy. So a lot of times, when they were introduced to facts and the matter where they are and what steps they need to take to get where they want to go, a lot of times, there’s a lot of hand-holding that has to take place, but that’s probably about the greatest risk.

Aaron  30:52
Okay. Well, because there’s a lot – I’ll just go there. So there’s probably a lot of ego that you’re dealing with too, right? So you kind of hit it on the head where these people, they’ve been very successful. That’s probably why there’s a conversation taking place. They’ve done very well at what they do. They’re used to being the subject matter expert for exactly what it is that they’re doing on their own little universe. And then you’re bringing them into a place where they’re used to being a big fish in a smaller pond and now they’re just another fish in a giant ocean in that reality. And so when that starts to set in and now they’re kind of dependent on understanding more information, I can see where there may be a hold up or there may be – I mean, are there times when just the emotions are just running like sky high and you’re dealing with just a plethora of people’s feelings, whether it’s good or bad?

Sam  31:53
So I’ll say you’re correct in your assessment. If you recall early in the conversation, it was the tangible and intangible review of those executive officers. And that ego does tend to get in the way, which is why that personal interaction is so important. Whether it’s over the phone or in person, being able to read, is this someone who’s done it? And when I say, ‘done it’, the most successful people I know or have worked with are very humble people because they appreciate while they may be titans in their own right, they’re very small. I was going somewhere with that, I promise.

Aaron  32:39
It’s all good.

Sam  32:40
What was your…?

Aaron  32:41
We’re talking about ego. We’re talking about what does that like for just the emotional roller coaster for some of these people as they’re kind of going through some of these discussions. That’s kind of where we were.

Sam  32:55
Yeah, yeah. So we like those humble people because they’d been burned, they’ve stubbed their toe a few times, so they’re on the lookout. They’re very aware of what’s going on. And when they’re aware, they’ve got those heightened senses. So they listen a little bit closer. They look a little bit closer. And when we’re introducing information to them, they’re processing it with a higher level of detail. And those are the people who we’re going to have less of an emotional rollercoaster with. We had a deal last year where, quite honestly, every time the wind blew, this guy was upset and that’s almost no joke. It took absolutely nothing for him to be bent out of shape and worried. And you know, all of a sudden, he’s looking to blow things up. I don’t know. We come across those once in a while. But cornerstone to the answer I’m providing your question is humble. If we’ve got humble people then we can feed them information pretty easily, they’ll process it and they stay pretty in tune with what we’re doing.

Aaron  34:06
Yeah. Well, what’s one of the big stereotypes of your industry that you’d like to put down? So I’m sure there’s all sorts of different preconceived notions or you probably get the same typical questions from people who don’t really know what you’re doing. So what are some of the more common misconceptions or myths?

Sam  34:28
Well, I think one of the things about this industry that’s overlooked is how vast the industry actually is. There were a lot of small firms or a lot of independent investment banks or a lot of folks out there who were grinding every day to put deals together and help companies move forward or improve or even regenerate. So what would say is you can’t rely completely on the headlines for the industry. Everything that’s happening – because for every billion-dollar deal, there are ten hundred-million dollars that took place as well. They’re just not getting the headlines. So a lot of hardworking people, a lot of complexities. And like I said, a lot of different areas of the industry that really aren’t reported on. So I would say just don’t buy all the headlines. There’s a lot of activity behind the scenes that’s happening.

Aaron  35:23
And then, are there things that people can do to better prepare themselves for a deal? So let’s say, your company – because I’m sure you’ve run into this, where there’s people that are either – we’ll stick to kind of our lane when it comes to roll-ups. So you’ve got people that are interested in exploring that as an option. Are there other things that people can do to better position themselves for that? Are there things that you find yourself consistently telling people like, “Hey, you know what, let’s hold off another year or three” or are there other some common things that people can do to better get ready for those kinds of things?

Sam  35:56
I’ll give you the three items that are absolutely key: financials, financials, financials. You got to have your books in order. Because if we identify an opportunity, it’s a small company but they really have their hands on something special and we know it’s going to take significant capital to move it forward, then in all likelihood, we’re going to have to go through an audit. Like you said, we chase more of the public listing, the access to capital. If it’s a significant number, they’re going to have to go through an audit. And if all their financials are done on napkins, they’ve got piles of receipts and things like this, then they’re not going to survive an audit. And those audits can get really pricey. So financials is absolutely 110% the cornerstone.

Aaron  36:43
Wow. And when you’re talking financials, you’re talking specifically just like accurate record keeping. Is that primarily what you’re referring to?

Sam  36:51
Well, it is accurate record keeping.

Aaron  36:56
The strong financial position as well.

Sam  36:58
That’s ideal. We work with a lot of companies who don’t have it just because they were positioned and structured wrong, but those are all things can be remedied. But those financials are really the history of the business. So P&Ls, balance sheets, all of those items, which are part of basic financials is step one. Step two is more into the record keeping. Because you may see in the financials where they’ve been paying on a contract for three years. We need the contract as well. We need to see that because there’ll be part of the audit.

Aaron  37:28
I see.

Sam  37:28
So record keeping and good old fashioned, traditional, complete financials.

Aaron  37:34
Complete. I like how you emphasize complete. That implies there is often incomplete financials.

Sam  37:42
We’ve had people send us bank statements and say, “These are our financials.” Well, not quite.

Aaron  37:48
Oh, my god.

Sam  37:48
Yeah. It can be something.

Aaron  37:51
I mean, if you want, I could get a banker box around her somewhere and I could just make a whole bunch of stuff on napkins for you and just ship it to you as a nice gag gift. Like, hey, man, here’s my financials.

Sam  38:02
I’ve heard that joke too many times.

Aaron  38:05
Nice, nice. So going through the valuation process, I imagine your financials answer is going to continue to ring. I mean, it’s still right through this one as well. But when it comes to valuation, what are some common – again, I’ll ask the same question, but I expect maybe slightly different outcome here. But what are some common misconceptions that people have about the valuation process that you’d like to speak to?

Sam  38:36
Oh, goodness. Valuation actually is fairly complex. And I’m less about building the valuation personally. So I rely on my partners. I’m more about a review of the valuation. Can it be justified? Is it reasonable? Equipment, cashflows and industry and the multiple and things like this all come into play. And we can come up with valuation but one thing we found is oftentimes it doesn’t match with the proprietor or CEO’s perception of the company’s value, which gets to be a someone blob. But there are several methods that are used. We deploy a few of them and it’s really about a meeting of the minds what’s reasonable. And quite honestly, we’re going to know what’s reasonable about the time we go to market – the deal or the project. Because investors are going to take a look at it and a lot of them that we work with are savvy in particular industries. And if it has to be an industry they know, they’re going to point it out right away. They’re going to say, “No way. This isn’t worth near what’s being asked here.”

Aaron  39:40

Sam  39:40
There are a lot of checks and balances that just inherently take place in the process to arrive at the appropriate valuation. Now, also one of the reasons why we’re big fans of the public market is because the same valuation we just discussed, now we can apply to a book value. So we know per share what the company is worth. But the market tells us more in particular what the company’s worth. And there isn’t a whole lot of arguing there. It was trading at a bucket share. It was trading at ten bucks a share in the share account. We know what the company’s worth.

Aaron  40:14
I see. Yeah. I mean, because I was going to ask another obvious question. I mean, are there times where you have a valuation kind of sketched out as far as what you think it should be, but then, you go to present that or you go to do a little bit more research and you realize, man, we are way under here. There’s actually crazy demand for this and our assumptions based on multiples and all these other factors that come into play really aren’t as relevant. And maybe in this particular instance, maybe it holds true 95 times out of a 100, but you’ve got a couple of these cases that are outliers, relatively speaking, and it’s like, man, you know, the valuation is what people are willing to pay for it. And that could be good or bad.

Sam  41:02
Well, the outliers, they’re pretty common these days. Over the last 25 years, tech’s really taking the lead on what’s considered to be the attractive deal flow speculated on how a new app or a new fiber line or medical device may perform is largely speculation. What’s it going to do a year from now, five years from now? And there’s so many other chaotic factors like competition and legislation that enter into that equation, that a lot of it’s a best guess and that’s why you’ll see a lot of these deals where they’re raising a half billion dollars for a startup.

Aaron  41:58
That’s crazy.

Sam  41:48
Yeah, it is. The school of thought I’m from, more on the manufacturing, the oil and gas, real estate, more traditional items. And we’re talking about tangible assets. We’re talking about cash flows. We’re talking about operating history. We’re talking about some level of forecast. So those valuations are just so much easier, but IP and technology, yeah, it can get a little wild.

Aaron  42:10
Yeah. Well, I mean, but going back to what you just said, you know, real estate and oil, they have such a track record. There’s so much data, there’s so much available to you that you can pull from there to really refine and probably gets a pretty dang close number in terms of what a company could be worth. But then, yeah, it baffles me. Because it baffles me when you see these companies come out of nowhere. I mean, it could be me, man. I could show up, have this bright, shiny new idea. “Yeah, I’m pitching you today. My company is worth $12 million.” And some people would say, “Wow, that’s way too aggressive. You’re worth about five cents.” And then you have other people like, “Oh, my gosh, that’s a deal. I think this companies were $50 million.”

And where does all that come from? Because to me, it doesn’t seem like in those spaces, things that you just talked about, like technology and intellectual property, some of these other items, tech, that there is not as much emphasis placed on – I mean, especially when it’s just launching. So, I mean, how do you invest in something like that where it literally becomes this, okay, this is a super high risk investment, but it’s also potentially a very high return investment. Is that kind of how you balance that level of craziness?

Sam  43:35
Yeah. We’re back to that analytics. I mean, you have to be able to break down and define data. Because valuation, in my opinion, is an imperfect science. It’s really about the marketplace and the meeting of the minds. Is this reasonable to both parties? And if it is, then there’s a transaction. Now at the same time, if you’re consistently approaching venture capitalists, VC firms or of the like, you’re always going to be overvalued. Probably, no, this is too rich. This is too rich. It’ll happen consistently. But if you’ve got the analytics that work for you and you have a reasonable or plausible argument for that valuation, then they’re going to be some transactions that just don’t take place and others that will. So you’re not completely at the whim of a market participant. But if you’ve made 500 communications and all 500 of them say, “Are you crazy? This is ridiculously overvalued.” Well, then, your metrics were probably off. But you’ve got the human components here coming into play and it adds to those chaotic factors.

Aaron  44:47
Well, speaking of the human components, what have you seen or what level of involvement do you have when a company’s getting rolled-up, the actual integral of those two companies? So you’ve got employees that were wearing the logo of – or I mean maybe they just continue to operate under a different brand. Maybe that brand name lives on and they operate under the same hardhats and vests that they were operating on yesterday. Or, hey, we’re all one big family. And you know, management’s changing, we’re changing some key leadership roles out here. But what level of involvement do you have on that end of things?

Sam  45:25
Well, historically, I’ve had quite a bit. More recently, I take more of that consulting position, where I’ll share my opinion and if there’s really something to argue about, then I’ll argue it. But in general, these are corporate actions. These are corporate strategies. And what is their intention? And just off the cuff or a simple answer to it, if you’re talking about, for example, your steel company, well, the steel company is more about B2B interactions. It’s more about delivering products to those business clients. So the marketing of the company is less significant than it is for a retail or consumer products. So retail or consumer side, if we’re going to integrate operations, that we probably want to have some commonality in the branding. And whenever we do a press release, that press release doesn’t represent only the core business or the acquirer, but it represents all of the acquired as well. So we’ve got more breadth, more spread, and that marketing dollar can go a lot further, just for a simple answer.

Aaron  46:31
No, I mean, that makes sense. Especially if you’re dealing with B2C type companies, you need more likely than not to have a more unified front versus some of these other independent businesses where it’s all B2B transactions. It could just be one of those things where like, you know, ‘a division of’ or ‘a company owned by’. Because you’ve got potentially tons of money tied up into logos and very unusual places, very expensive projects, right?

Sam  47:05
So I’ve got people around me were very detail oriented and one of the reason why I can make things work is because I’m smart enough to recognize I need people smarter than me. But if you want to get down to the nitty gritty of it, you’ve gotten ten acquired companies and nine of them had different names, then something as simple as ordering those companies shirts, you’re going to be better off ordering the same shirt for all ten organizations. So you get down to the detail of it and it does make sense to create common branding, especially in that B2C space.

Aaron  47:40
The last thing I want to cover before we cutaway is the process of taking a company to public listing. And so that’s something I don’t think I’ve ever spoken with anybody about this before. So if we can, I’d like to spend a few minutes talking about this. Literally zero level of understanding of the actual process of what – I mean, I understand the outcome of, like, now we could theoretically purchase shares on for a publicly traded company. But what does that process look like when someone’s wanting to become a public traded company? What all do you got to do? And I realize, I know I just cracked a can open of a six-hour long answer here, so help me start to understand that.

Sam  48:30
So it can be a lengthy process. It can be. It’s very lengthy when you worked with the wrong people and oftentimes it doesn’t happen when you worked with the wrong people. And you know, I’m not special. Years ago, I made the mistakes and I learned from them and we rebuilt Rome a couple of times. I’m not talking about a bad deal. I’m talking about just an experience and it’s pretty costly. You got to have the stomach to stay in it. And same with the CEOs. They have to have the stomach to stay in it because it’s a process.

Now, for us, over the last several years, we’ve just learned that public equity is cheaper and private equity can be very time-consuming. Even with a venture firm that’s running the fund, sometimes their due diligence and they’re checking the boxes, it can just take forever. But if your position is a public company, the access to the capital is much easier, primarily because of that valuation question, because you can see on the market what the company’s worth. This is what the company is doing.

But for those reasons, we focus on utilizing the public company as a conduit. It is a tool in the box. It is not an exit event. Something that’s always baffled us is, well, now you’re at that point in your development where you can access real capital very quickly to build this company. And really, the daydream, we’ve heard it from CEOs. Their daydream is to ring the bell on NASDAQ and that’s our exit. Like, wait a second, you just got to the show and you’re leaving.

So for us, we’d be with the public company as a conduit and it’s a tool for a company to accelerate their growth. We focus the vast majority of our attention on the reverse merge. We look for dormant companies that are trading on the market and we’ll look across all exchanges. We’ll even look international. There are some advantages going that way. But we locate that company and we execute a takeover of that company. With that company in hand, usually it’s a mess, it’s got some expenses on it and such, but we do our own diligence to make sure they’ve had the proper filings and make sure that this company can actually be utilized. Otherwise not only would the company lose, but we would lose too.

So we go through excruciating steps to make sure we have a company. We bring it current. We file necessary paperwork with whichever market it’s traded on. File with the SEC or FINRA, the state. And from there, we have a company that is really nothing more than a ticker symbol on the market. What we’re looking for is that private company is going to be a good match for that public company. And we can execute that merger from that point in about a week. So we can have the company on the public market in a week.

Aaron  51:22

Sam  51:22
The next few steps are actually, all right, what kind of capital do we need? How much do we need? How fast do we need it? Do we need a lockout period? So people don’t sell shares as soon as they get them. And these are all strategic questions depending on the position of the company and where it plans on being in three, six, 12, 24 months. But with an existing public company, the merger process is simple and it’s fast. Alternatively, we will go through the filing process. We’ll go through DTC, we’ll go through the application for a ticker symbol, but you know, now you’re talking about a much longer process. In our scenario, we can take over a public company, we can merge a private company. We can register up to 75 million in public shares. As long as those financials are put together – don’t have to be profitable. As long as they’re put together. And raised $75 million and we can have that done ballpark 130, 150 days.

Aaron  52:21
Wow. Man, that’s crazy. Especially the taking the dormant company and breathing life back into it. Because you see the excruciating detail where I think your words – and I can only imagine the level of detail because there’s potentially an insane amount of risk because you don’t know what landmine are you about to step on, And so you’re trying to understand what does this company have. What do we need to do? And so you’re thinking of strategies of how to best use that company as more or less a shell that you can use as a container for other companies that you may want to bring in, whether it’s a portfolio or it’s just a single company. But, I mean, I’m making sure I’m understanding your logic there, right?

Sam  53:09
Yeah. And I’ll give you an idea here. We’ve got 51 jurisdictions where we can acquire public companies. We focus on three of them. The reason we focus on three is because of the state law that’s in place that expunges corporate debts after a period of time.

Aaron  53:28
Oh, okay. Nice.

Sam  53:29
So that’s one of the ways we save ourselves from of those landmines. We go through noble lists and shareholder lists. We look at who’s holding what positions. And sometimes we make phone calls to see about taking their position before anything happens. I mean, it’s all part of the construct before we even have conversation with the private company about this movement.

Aaron  53:50
Well, but in my opinion, that’s where the victory is done right there. Again, I am way over simplifying this, but it’s like if you’re to buy a distressed home, the actual, it hasn’t been realized yet, obviously, but you’re winning on at the beginning of the deal, because you know what you’ve got is something that could be something valuable and you’re already starting off on, yes, it may be potentially negative territory, but you have the vision for the company in terms of where you want to take it. And so for you, it’s like, man, this is just a matter of dot some I’s and cross some T’s and linking up a few things here, but this could really, really, really go somewhere. And what you’re doing is you’re finding something that’s undervalued or underpriced right now and getting a great deal on it. Am I am I saying that right?

Sam  54:47
Yeah, yeah. I guess you could view it as there’s upside. You could view it that way. Because clearly, these public companies have shareholders and they’re not real happy with what management’s done and they’re sitting there trading at 20 cents. They’re going to be ecstatic when there’s a new introduction and there’s some momentum behind a new technology, or, you know, an oil and gas. But whatever the play is, they’re going to be excited that there’s something happening. And oftentimes we’ve seen the stock triple on day two.

Aaron  55:16
That’s crazy. That’s crazy. Well, Sam, we could keep going. I’ve thoroughly enjoyed getting to pick your brain a bit. Thank you for your incredible patience dealing with my novice level questions. But yeah, how can people get in touch with you? How can people follow more about what you’re doing?

Sam  55:36
Probably the easiest way is to visit us at sevenpcapital.com. That’s SEVEN, the letter P, capital, CAPITAL.com, sevenpcapital.com. And you can drop us a line or you can take a look at a couple of things we’re doing. I think we have a couple of companies listed up there that we’re working with and I think we’ve got about 20 in the works right now.

Aaron  56:01
Is that it right there? sevenpcapital.com.

Sam  56:07
sevenpcapital.com. That is it. Yes, sir.

Aaron  56:10
All right. Cool, cool. Well, Sam, again, I just want to thank you. It’s been a lot of fun. Thanks for spending some time with me this morning. And yeah, this has been great.

Sam  56:21
Absolutely. Thanks for having me. Look forward to doing it again.

Aaron  56:23

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