We’re back with our “Three Questions” series. Today’s quest is Richard G. Satin, Managing Partner of Satin and Lee.
Richard has extensive experience representing targets and acquirers in mergers and acquisitions; corporate issuers and investors in public and private debt and equity offerings and ongoing securities and regulatory compliance in securities law transactions pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934; financial institutions and businesses in the area of commercial lending including single credit facilities, secured and unsecured transactions and senior and subordinated loan financings. His clients range from early emerging growth/early-stage development companies to complex multi-national diversified manufacturers across a broad range of industries, including insurance distribution, healthcare, and technology. Mr. Satin has completed more than 300 transactions with an aggregate value of more than $3 billion dollars.
Prior to founding Satin and Lee Law P.C. , Richard was a partner at a large regional law firm with offices throughout the United States, including serving as the Managing Partner of its New York office. Prior thereto, Richard spent more than 15 years as the Chief Legal Officer for a NASDAQ listed medical device company with responsibilities for all aspects of the company’s legal affairs around the world. Richard also served as the company’s Chief Financial Officer for many of those years as well.
John Biasiello: We’re pretty excited today because my guest is Richard Satin, one of the premier attorneys in our insurance space.
Richard has formed his own law firm, so I’m going to ask him to introduce himself, ask him to tell us a bit more about his new business.
And so Richard, thank you very much for agreeing to do this.
Richard Satin: It is my absolute pleasure to join you today. As you mentioned we formed our new law firm. We thought it would be a great time to do it in the middle of a pandemic, but it was a long time coming. Elliot and I had talked about it for a number of years.
And the good part of it is we have a very strong philosophy. We wanted to combine the exceptional quality of our legal, together with best-delivered value for our clients in terms of having extremely competitive rates. And I’m pleased to report that after being in business for 18 months, we’ve completed approximately 100 transactions with upfront payments in excess of $1 billion.
JB: Richard, that’s awesome. Richard and I have been working together for years and we recommend Richard pretty much on every one of our transactions. Just full disclosure the reason we do that is that he’s the best in the business.
Let’s touch on your background a little bit, Richard, in the insurance business because I think it’ll be good for our audience to understand a little bit about the amount of time you spent in this space.
RS: We’ve been specifically in the insurance distribution space, and M&A transactions for about 12 years.
So we were there just around the time private equity decided to somewhat get involved. We started representing a private equity back buyer in 2010. So it’s now about 12; we’re approaching 13 years, and over the course of time, we have completed more than 400 transactions.
We’ve done transactions with virtually every buyer in the marketplace. Certainly the buyers of agencies. We also do represent buyers of agencies. We have a tremendous amount of experience with what we see in the marketplace what we see in terms of. Purchase price multiples diligence escrows all the various aspects that go into a transaction when you’ve done as many transactions as we have.
It really gives our clients the ability to understand all aspects of a transaction and be able to explain what issues they might run into in a particular transaction.
JB: Richard, that’s great. It’s really great today to have your experience. These questions are really going to help our potential clients and even some of our current clients.
So we at Sukay & Associates really appreciate your time.
The first question, Is is a general one, and I’d just like to know from your perspective what you think the two or three most important things that an agency owner might want to know before deciding that they’re going to get into the business or give them some perspective of what your thoughts would be if you were selling your insurance agency.
RS: I think that’s a great first question, John. What we like to see, in terms of the decision being made for an agency to go through the process, I think it’s really important that they’re ready for the process and that could be from the balance sheet, financial statement perspective. It could be from an agreement and documentation standpoint.
Have they engaged in various transactions that need to be cleaned up? And that’s what I put in the category of being ready, from the processes that you run, having an agency that is ready to go to market and ready to go through the diligence process is in many cases, an arduous task.
And if you are ready, you can embrace it and it really becomes an advocate for you in being able to be able to translate that into a higher purchase price.
Another thing that we like for agencies to do ahead of time and not on the fly in the middle of a transaction is tax planning and the tax structure of a transaction.
There are multiple ways for sellers to have certain tax planning to reduce their tax bill. Obviously, if they are a C Corp, you want to do everything you can to avoid double taxation. Most transactions are asset purchase agreements. So if you’re a C Corp, you want to make sure you can avoid double taxation if the buyer is not engaging in an equity transaction and of.
I always think it’s an important consideration in any of these transactions, how they can fit in with a prospective buyer. Not all buyers are the same and therefore using the knowledge of someone like yourself and your firm and understanding the various buyers that are out. That one, to pick the one that would be a really good fit, I feel is very important.
And, there are others, but clearly, those are the top two or three that if you work on that at the beginning of the process, that’ll make the end of the process that much.
JB: Richard, I absolutely agree with you that the process is hard. There’s no doubt about it. It’s a hard process to go through.
Many of our clients are at the end of the process really. The first thing I hear at the end of the process is, “Thank God we hired someone to help us do this”. And the reason is that the process is that difficult and hopefully with the services that you provide and the services that we provide we make that process as easy as possible for our clients.
I think the last point that you made about the fit is really our main focus. We really focus on that fit because we believe if both parties really see the fit and the transaction, it also helps smooth that transaction out. Really great points and thank you for that.
The next question is regarding multiples.
I hear a lot of things about this multiple idea, and a lot of my competitors are out there in the marketplace touting, multiples and how they get the best multiples out there and the highest multiples out there and multiples are, they start quoting numbers out there to, to many people and I almost find it disingenuous because what happens is that the clients, all the clients see is that high multiple and it confuses them in a sense because they’re getting a high multiple. They feel like they’re getting the best price. So if you could talk a little bit about multiples and how they reflect dollars when it comes down to what, and I call this the old, it’s the old adage.
It’s not how much you get, it’s how much you keep, right?
So when people talk multiples, sometimes, it makes my blood boil a little bit instead of talking about, your overall transaction value. What is your perspective on what’s happening in the marketplace right now from your experience with these multiples?
RS: Multiples for the most part today are relatively stable. I don’t really project out over the next six months. As interest rates continue to go higher obviously buyers that have large credit facilities will no doubt be impacted. And it’s gonna take a little time to work through.
The transactions that are already been started, and I think you’ll see in the first quarter of 2023 what effect higher interest rates will have in the short term. In the long term, everyone believes at some point in time they will come back down. But what I see in the marketplace, it’s an extremely competitive marketplace and it’s almost like going after a free agent in Major League baseball. The owners bid against each other and raise the prices. So as long as the marketplace and the processes that you run for your clients is done in a competitive fashion, I believe that for the time being, the multiples will remain where they currently.
And time will tell. We’ll monitor that, obviously on a monthly basis especially as we see new transactions, but we have not seen as of yet a decline in multiples being paid, as you mentioned. Again, transactions. The function of total value in a transaction is really what you are looking to measure.
So the upfront payment might be one multiple. The earn-out could be capped. For many buyers and some buyers, it’s uncapped. So again, I agree with you a hundred percent. It’s not necessarily just the multiple for the down payment. There are components in a transaction that can absolutely take that purchase price well above another buyer’s offer where the multiple was higher. That buyer might cap the earn-out at 20% of the purchase price. Another buyer might cap it at a hundred percent of the purchase. And then another buyer might have it uncapped. So if you knock the cover off the ball in the earn-out period or periods, you could make a lot more money in the earn-out than you’d make for the multiple in the down payment.
So again, some buyers because of the way of their own corporate structure, allow you to defer the tax if there’s any rollover equity in the transactions. In many of these transactions, as there, there is a component of the purchase price of equity in the buyer. So depending upon that component, the tax, the ability to tax, defer the equity consideration and transaction could make the final purchase price look very different than the original purchase price and the original multiple.
JB: We see a lot of buyers that present multiples based on different EBITDAs. The multiple is one component of that calculation. You have an even multiple on the other of that calculation, which really matters probably equally. In addition to that, they also these transactions have things like working capital, calculations holdbacks, escrows, and things to that nature, which generally insurance agency owners are not used to seeing this kind of thing and how the multiples work and the true value of a transaction is really important.
So one of the things we try and do is to make sure that our clients understand the whole transaction. And as we’ve seen multiples come in higher with ultimately a lesser transaction value. So these things happen all the time and it’s really important to not just understand one piece of that puzzle, but multiple.
RS: I could not agree more with you, John. So thank you for that.
JB: The last question I have for you, Richard, is
I’ve heard a lot about this and a lot of my competitors have written about the ultimate transaction value and the difference between having an advisor on a transaction and going it alone. They. It’s really self-serving, to sit here as one of those advisors.
But, I think it’s important to hear from someone like you who see both sides. Transactions that are generally where the buyers are represented by an advisor. And you probably see some transactions that were represented by an advisor and it would be really important to know some of my competitors have put the value, the transaction value at 30% higher when there’s an advisor involved versus not having an advisor involved.
Can you give us an idea of what from your perspective in that area?
RS: We do a lot of transactions that have advisors. We do a lot of transactions that don’t have any advisors and advisors bring value to the table. I think that when the buyers price a transaction, especially if there is a process that has been run by a banker like yourself, they know it’s a competitive environment. As I previously mentioned, I think the advantage of having the banker, whether or not the value was 30% I would not be able to validate or not, but there is no doubt having a banker increases the value to the agency looking to sell because you create the environment to get the best possible price.
That without a banker, it’s generally unlikely that the seller can get that value. So there is no doubt, in my opinion, that a banker in terms of the purchase price, in terms of value, in terms of negotiating the initial purchase. The earn-out terms, the amount of equity that’s included in the transaction, the working capital requirements, and all the things that you’ve mentioned are what I believe the advisor brings to the table.
And the buyers are well aware of that. If they’re going to win a process that you are running for your clients, they know they need to make sure they are competitive with the other buyers out there. So I think it brings tremendous value. And again, I also think that the value of having an advisor comes very clear and is important during the due diligence process.
The bank has run the diligence process. They generally put together a confidential information memorandum. They have already done a lot of the homework that we will need during the course of a transaction. Not all, but it’s certainly if they identify issues early on that come up in a transaction all the time, and instead of addressing them in the 11th hour, we address them right up front whether it be with certain indebtedness that a seller has, whether it be a book purchase agreement with a producer that owns a portion of their book, all that generally will come out early in a due diligence process run by a banker like yourself.
JB: And if I were to ask you if you were an agency owner what qualities that you would be looking for if you were hiring someone like Sukay & Associates, what types of qualities would you look for in an advisor or a banker?
RS: There, there are a number of key qualities.
Obviously, it’s understanding the marketplace. It is having relationships with the buyers themselves. It’s being able to do the necessary analytics. That goes into these transactions, understanding and preparing the proforma EBITDA or proforma revenue as the case may be.
Understanding that and being able to work with a client in a fashion that makes it collaborative for you to do your job to get them the best fit at the highest total value, not just looking at necessarily upfront payment, but making sure that the other buckets of the purchase price are the best that they can be so that the totality of purchase price generated for your clients are achieved.
And I, I think that when you combine all of those attributes into a banker like yourself, it makes it such a wonderful relationship that you have with your client in not only just getting them to the marketplace but seeing it through to the closing of that transaction. And you can make the call to say, “Congratulations, we just successfully closed the transaction”. So I think those are the specific attributes that someone like yourself possesses to really do a great job for their client.
JB: And how much do you think the knowledge of the actual insurance business – a lot of times we’ll say, “the reason that we believe we are as competitive or better than most people out in the marketplace is that we’ve actually been in the insurance business ourselves”. So how much do you think plays a part in being a good advisor or a good banker?
RS: I think it’s really important. I can’t underscore that enough, John.
The marketplace is very difficult marketplace depending upon the types of insurance and you’re understanding of whether or not it’s a retail broker. Wholesale broker is it how much life insurance policies are involved and whether or not there’s a captive insurance company involved having an understanding of the different specific items that are in a transaction like cash cutoffs, agency bill, direct, all the things that an agency deals with on a daily basis, having that knowledge is just cannot underscore enough how important it is for your clients.
Having that background allows you to understand the issues that they’re going to face in a marketplace in terms of valuation and understanding the concentration of accounts.
Which come up in a number of transactions and just having that understanding I feel is a tremendous value to your clients.
JB: Richard, I really can’t thank you enough for agreeing to do this. I know your time’s pretty valuable and you’re a busy guy and just want everybody to know that Richard’s been a trusted partner for Sukay & Associates pretty much since we formed the company.
And Richard, we can’t, speak highly enough about you, your firm, Elliot, and everyone else there that, that works at Satin and Lee. We appreciate all your efforts on behalf of our clients, and as you’re a trusted advisor and we really appreciate all your efforts on our behalf and our client’s behalf.
So thank you again for doing this.
RS: Oh, thank you so much for the ability to participate today. It was absolutely our pleasure and we look forward to many more transactions together.