Show host Gene Tunny is joined by Arthur Petropoulos, founder and managing partner of Hill View Partners, a company specializing in mergers and acquisitions, business sales, and capital advisory services for middle market companies. They discuss how Arthur finds, values, and sells businesses, as well as the wider economic impacts of his work and the role of private equity. They also explore whether we should be concerned about modern-day Gordon Gekkos and how the business landscape has changed since the 1980s.
Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored.
You can listen to the episode via the embedded player below or via podcasting apps including Google Podcasts, Apple Podcasts and Spotify.
YouTube clips
What’s covered in EP211
- Business sales and capital raising with Hillview Partners. (1:22)
- Business brokering process and outreach strategies. (5:18)
- Business valuation and acquisition strategies. (8:10)
- Buyers and sellers in mergers and acquisitions. (14:47)
- Business sale process and foreign investment constraints. (17:34)
- Selling a business, focusing on narrative and information sharing. (24:18)
- Private company sales and legal risks. (28:00)
- The role of capital markets in the economy. (38:05)
- Private equity’s role in the economy, including pros and cons. (44:10)
Links relevant to the conversation
About this episode’s guest Arthur Petropoulos:
https://hillviewps.com/leadership/
Arthur’s YouTube channel:
https://www.youtube.com/channel/UCZu4Nl6i5IseEJBqp1IPd3g
Hill View Partners social media:
https://www.linkedin.com/company/hillviewpartners/
Transcript: Uncovering the Secrets of Valuing and Selling Businesses w/ Arthur Petropoulos, Hill View Partners – EP211
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It was then looked over by a human, Tim Hughes from Adept Economics, just in case the otters missed anything whilst they were munching on fish. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:01
Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory, evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show.
Hello, thanks for tuning in to the show. I’m delighted to be joined this episode by Arthur Petropoulos, Founder and Managing Partner of Hill View Partners, which specialises in mergers and acquisitions, business sales and capital advisory services for middle market companies. We talk about how Arthur finds businesses to sell, how he values them and how he sells them. We also talk about the wider economic impacts of the work he does and the role of private equity. Should we be concerned about modern day Gordon Gekkos or were the 1980s different from today? Okay, let’s get into the episode. I hope you enjoy my conversation with Arthur Petropoulos.
Arthur Petropoulos from Hill View Partners, thanks for coming onto the show.
Arthur Petropoulos 01:22
Good to be here. Gene. I appreciate it. I like, contents great, listened to a bunch of it and happy to add to the archives.
Gene Tunny 01:30
Excellent Arthur, what I’m looking forward to is learning a bit more about what you do and in Hill View Partners and the broader community that you’re part of the broader industry. One of one of my favourite podcasts is David Bahnsen’s Capital Record. And David’s someone who’s always talking about the strength of American capital markets, and just what that contributes to the economy. So yeah, I’d be keen to explore that with you. To start off with, could you tell us a bit about what you do at Hill View Partners please?
Arthur Petropoulos 02:06
Sure. So fundamentally, our company helps companies do two things. We advise and assist companies in the sale of their business and we do the same for companies that are seeking to secure capital. So you can think of it investment banking business brokerage intermediary, but the simplest way to explain it is when you think of a real estate broker, or help people sell real estate, we do the same thing, but with businesses, and we’re helping people find capital for those businesses. And it’s a real area of specialisation and focus, privately held companies generating one to 10 million in pre tax profit, typically owned by families, entrepreneurs, small groups of investors. So in the broad scale of the economy, it’s kind of that line between the lower middle market and middle market, that’s our area of specialisation. And really where we focus.
Gene Tunny 02:53
Right and what sort of businesses would they be? I’m just trying to think I mean you’d have some professional services businesses, do you have bakeries or…
Arthur Petropoulos 03:02
So if you think of kind of the, and the reason why we started the business and folks in this space is I spent about 10 years in New York, doing this both on the investment banking side of helping companies as well as the private equity side of buying companies. And what we found is there’s this doughnut hole of sorts, where very large companies kind of work with the Wall Street investment banks, and then very small companies work with the local business brokers. But there’s a huge swath of stuff in between. So you might have a software company that it’s kind of it has a very specialised niche that generates a million or $2 million in profit a year. I think everybody thinks of software’s giant companies are just growth growth. There’s plenty of kind of very niche software’s dashboard, task force management, pricing tools for particular industries, whether it’s construction or satellite dish installation, it could be anything, right. And those companies are a lot of what we do a b2b and b2c services. So you could think of window cleaning companies we’ve sold or gutter cleaning or roofing companies or, you know, irrigation, those are broad Real Estate Services, then there’s just general kind of like specialty manufacturing or distribution companies. So we sold a company that sold cleanroom supplies into pharmaceutical companies. There’s another company that manufactured component parts that went into aeroplanes. And so what I will say the consistent theme for companies we represent so we really, we’re agnostic of industry, so so long as it fits the profitability criteria as well as kind of the complexion of ownership. But what you find after iterations and iterations is that companies in the size that we represent, are not competing on the cost of capital. They do not provide commodity products, and so whatever it’s b2b or b2c services products offering, where we’ll be is there will be something specialised about it, there’ll be something niche something proprietary, there’ll be something they do better than anybody whether they have just better economics, whether they have access to certain markets or customers, or whether they just have a capability or an aptitude that’s unique. There’s usually something so that’s, you know, that’s part of the fun. And part of the exercise is as we’re talking to new people, figuring out what kind of that secret element is to their, to their respective business.
Gene Tunny 05:18
Right? Can I ask you, how does it, how does it work? I mean, so say you’re in business broking. And you’re selling some of these businesses, you’re trying to get the best price for the the seller, and then you get obviously commission, I don’t need to know, you know, that’s probably proprietary and confidential, but I’m interested in, like, do they pick up the phone? Or do you go actively looking for these businesses? You’re in Rhode Island, are you driving around Providence, and you go up to New York City? I mean, how do you how do you do it?
Arthur Petropoulos 05:51
No, so I mean, look, we endeavoured to make this business a national and international business from the get go, because I think historically, it has been a hyper regional business where you have, you know, three guys sitting at the back of a bar, you know, drinking with the guy who owns a local lumberyard, right, or whatever the business may be. And I think as things have evolved, where middle market businesses have, now they’re doing much more national and international work, we find that there, it’s really about just having the dialogue with people and really understanding the objectives and facilitating the process. And so we work with companies all over the states, as well as international to a lesser degree, but Western, Eastern Europe, Southern Asia, then a small amount of Middle East, but it’s really about finding the business that meets kind of the size, ownership complexion, I think season and in the business lifecycle where they’re looking to accomplish one of these goals. But it’s a because it’s not, it’s not a hyperlocal business. Because there’s you can’t just drive up and down a main street or high street and find a lot of these things. They’re kind of, there’s more of them than you think in some places. And there’s less than you think in other places, right? It’s a it’s a quirky business, because you might not realise but there’s a large like, you know, pillow manufacturer down the street from you, or a software company that’s in just this nondescript building that does this thing. And so, our outreach, we do some direct outreach, whether it’s email, whether we’re chatting on LinkedIn, with people, we put out content that on LinkedIn, as well as YouTube, we have two videos going out every week, kind of just explaining different categories, we get a lot of inbound conversations from that. And then I think some of the best relationships and conversations you have are from other happy customers. And so every time a deal closes, and our client’s very happy, they do tell their friends and say, Hey, we know a firm that did a real good job for us and that and engenders some goodwill. So, you know, I think there’s this kind of direct outreach inbounds there’s some warm outreach from kind of relationships and referrals. And then there’s just kind of goodwill generated by I think, good results.
Gene Tunny 08:04
Good one, and in that process of the sale, like getting it ready for sale, are you, are you involved? Are you providing advice on business operations, governance, that sort of thing to try and improve the value of it at the sale?
Arthur Petropoulos 08:20
Yeah, I think there’s certain things that, that are malleable at that stage of the game. There’s other things where it’s a matter of characterization and kind of just understanding it and documenting because a lot of times the processes are there, the people are there. And it’s just a matter of kind of memorialising precisely what the different people do, how are they cross trained? What are their capabilities? What are the processes of the business relative to origination and sourcing of new business operations and the administration of the company as well as kind of the execution and fulfilment of the actual work? And so, most of these things are there. They just need to be crystallised as part of the narrative. And but look, there are time to time where as we’re having those dialogues, where there are things that, hey, you know, it would if this, we don’t want, we call kind of like single source reasons for failure, right? And so if there’s one employee that does this one very important thing, who else could do that if they couldn’t, right? Or if you’re getting certain raw goods from one particular source, what happens if you can’t get it from them? And so I do think it’s kind of parsing through each part of the business and trying to poke holes in it, that has a lot of good dialogue, because the more we can try to poke holes, the more we either get the answers as to why there’s a safeguard or, you know, it allows for the implementation and incorporation of a safeguard and mitigation means at that juncture.
Gene Tunny 09:46
And how would you know, if you’re getting a fair price, I mean, how do you know what sort of sort of price to to aim for there? Is it multiples of earnings or the how do you actually work that out? And also how do you do it across all these different industries you mentioned you’re industry agnostic. I mean, yeah, that you mean, you must have to get across a lot of new industries really quickly. How do you do that, Arthur?
Arthur Petropoulos 10:10
Sure. So by virtue of focusing, I think on the size of the profitability of the company, and by virtue of that it must be profitable. Capital tends to kind of work in different ecosystems. And what we find is that the delineation of ecosystems is much more predicated on the size of the company than necessarily the industry in terms of capital and in terms of acquirers, right. So you have, if it’s a not profitable business, but it’s growing fast, and it’s that venture capital world, or growth equity, right, that’s its own ecosystem, whereas private equity for the profitable companies that we work with, strategic acquirers in the middle market, that’s its own ecosystem. So it’s fascinating, but you’d be surprised at how many of the counterparties on the other side are looking kind of agnostic of industry as well. And more specific to size and complexion. And then kind of large private equity, and publicly traded companies have their own ecosystems as well. So we focus on our one ecosystem, which is important to do. And then but there is always kind of a specialised research that’s necessary for a particular industry, because there are quirks and idiosyncrasies with any industry as we’ve done, you know, 100 plus transactions as Hill View Partners, and I’ve done 100 plus transactions in my life before starting the company, you do learn kind of which, where to look and how to research different industries. And so it’s not so much that you need to know every industry, but you have to know what to look for in every particular industry. So as we kind of get into any particular new ones, and there’s not many that we have not been involved with, but we still take a fresh look towards it. You know, it’s a matter of finding who are the active parties, we have our own internal database, as well as some, we subscribe to external databases and Cap IQ, PitchBook Data, there’s a handful of them out there. And we do a lot of our own kind of proprietary research. I think the difference in largely what we do is, many intermediaries will just kind of gather all the information, puke it to the universe to 20,000 people and just wait for the phone ring. We are proactive, not reactive, we do a lot of research upfront. That way we’re pinpointing who to reach out to. And what that ultimately does, is A) it mitigates a lot of the kind of typical pain points. So shrinks the duration limits, distraction keeps the discretion generates better results. But also, it really fine tunes the conversation. So getting back to your question about multiples, that’s usually a good place to start, right? The fundamentals are the driver. So if we look at it, you’ll see like different stratas of size will usually have different multiple ranges. So a company that does a million dollars in EBITDA will generally trade at four to seven times EBITDA, a company that does 2 million will trade at five to seven, five to eight, maybe 3 million you probably see six to a four, 5 million, maybe you start getting towards nine, 5 million plus, can you get to 10 at 10 million, can you get to 12 times but there’s this multiples expansion. And candidly, I mean, that’s a lot of the private equity thesis, right is if you buy 10 $1 million companies for $6,000,000. Six times multiple for a million dollars of EBITDA for each acquisition, once you have 10 of those together, it’s worth 10 to 12 times EBITDA right? So that’s how you spend 60 and it’s worth 120. But our logic, our research is finding what the comps are, looking where it kind of falls in the strata. But then also, by doing research about finding where our client is the missing puzzle piece for someone’s bought a puzzle, right? So yes, well, you know, if we sold a company that made a certain type of widget, that mega widget company just doesn’t have this one thing to sell, right? We want to talk about that as a buy versus build opportunity for them. So yes, you have the fundamentals but the two other reasons why companies are bought are A) access to certain end markets, but B) proprietary capabilities. And so if it’s something special about what the company does, or if it has very unique access, then we can pivot the conversation to say, Well look, yes, you may think that there’s $1 million EBITDA company’s worth $6 million. However, it would cost you $15 million to start this company from scratch, to build, to take time the resources to allocate to try to build this. So maybe you can buy it for split the difference, right? And so what we say is we wanted to the fundamentals are the starting point. And then the access to capabilities and pivoting the dialogue to buy versus build. Those are the enhancing factors that hopefully we can get even better but to answer your question more simply a lot of research and a lot of conversations. That’s how we know we’re getting the best results.
Gene Tunny 14:46
Yeah, good one. Okay. And can I just clarify some things so you’re on the the sell side, you’re a business broker or an investment bank, or you’re similar, are you similar to an investment bank?
Arthur Petropoulos 15:00
Yeah, I mean, the key differentiator is investment banks deal with security. So they’re dealing with publicly traded companies for the most part, and we deal almost entirely with privately held companies. So that’s why we’re an M & A advisory firm would be the phrasing because we don’t deal with securities.
Gene Tunny 15:15
Yep. Gotcha. Okay. And private equity so they’re on the buy side. And is that companies like Carlyle Group, is it Carlyle is it?
Arthur Petropoulos 15:26
Yeah, so Carlyle, KKR, Blackstone are the really big ones. TPG, I mean, there’s a lot of them. And then there’s different stratas of them for size. There’s industry specialists. But yes, that’s generally the buy side are, so it used to be you’d have kind of two big buckets, you’d have private equity that were funded just to buy companies and sell them. And then you had strategic acquirers that were basically just large companies that would occasionally acquire smaller businesses or different capabilities. But now you have lots of strategic companies have have created corporate development and strategic acquisition groups. There’s private equity that buys strategic companies. And so it’s a bit more of a continuum. But yes, generally speaking, that is the buy side is companies and financial buyers and strategic buyers that are looking to make acquisitions. And we represent solely the sell side. So the companies that are looking to either sell or receive that capital.
Gene Tunny 16:22
Okay, so you mentioned your private equity, strategic acquirers. Could that include individuals or is it generally corporations at this or companies?
Arthur Petropoulos 16:34
So what’s interesting about the companies we work with, I was just telling someone, I believe we have the broadest swath of prospective acquirers for a company, right, like, if you were selling that bakery, you probably wouldn’t be selling it to a person or a few different people. Now, if you were selling a billion dollar company, you’re probably only selling it to private equity or a very large strategic company. But in our businesses say you’re selling a $2 million EBITDA company for $12 million, or $15 million, right? The buyers for that are going to be incredibly broad, it could be a publicly traded company, it could be a private equity firm, it could be a family office, it could be an independent sponsor, a search fund, a high net worth individual, right. So yes, it runs that whole spectrum. From of, of both size, and I wouldn’t, sophistication is not correlated entirely with size, right. So like sometimes the best buyer that knows something inside and out is just a person who’s obsessed with one particular field who really wants a company. And sometimes it’s the largest corporation. So the important part of our job is to just, you know, we say kiss a lot of frogs to find the prince, right or turn over, a lot of rocks to find gold, but it’s having all those dialogues, both within each category, and then across categories to make sure we’re finding the right the right home for a business.
Gene Tunny 17:54
Right and how long does it typically take to sell a business? Like once you get in touch, or once they get in touch or you find the business? You get the the contract to, to, you know, you’ve got the agreement to, I mean, I imagine you’re going to be an exclusive seller is that correct? You’re that…
Arthur Petropoulos 18:14
Yes.Yeah.
Gene Tunny 18:16
Gotcha. Okay, what what’s, how long would it typically take?
Arthur Petropoulos 18:19
This is not a shameless self promotion. But if you weren’t using Hill View Partners right, these processes can take, you know, 18 to 24 months. We want in the part of why that proactive versus reactive process is important is we want six month processes we want offers within 100 days. And then after the 100 day mark, it’s really the confirmatory diligence from an acquirer, but we have the process broken down and crystallised into different component parts. That way, the day we sign an engagement with a client, we are getting the information that we need, putting our materials together and doing the research about the acquirer so that we’re out there in the market within two to three weeks talking to people. We’ve pushed the dialogues through a process of asking people for follow up questions, having conversations, Zoom meetings, indications of interest, letters of intent, there’s, we have a lot of steps along the way to keep shaking the tree, if you will, right. And so that way, every time you shake the tree, things fall away, and things fall away, right. And that’s the fastest way to get to the conclusion, while not losing any of the substance cohesion or comprehensive approach to it. And so we find our processes we can run in a six month process, if sometimes it’ll slip a month or two, depending on if the diligence has taken too long, depending on negotiations, but largely speaking, six months start to finish. That’s the goal, and we stick to it.
Gene Tunny 19:44
Gotcha. And in the US, what are the rules around foreign investment like so if you’ve got a foreign company or or you know, high net worth individual wanting to buy a business in America, how does that is that a constraint is there, are there barriers there?
Arthur Petropoulos 20:01
I mean, not really because it doesn’t tend to be, you know, if you’re getting the foreign investors that will come and acquire businesses in the states are largely part of larger organisations that have a global business that’s doing something, right. Like the probability that someone’s going to want to move from Dubai to Oklahoma to buy a water hauling company is probably low. So, you know, candidly, we’ve had people I mean, look, I mean, it’s more likely, you know, that hey, someone’s moving it from, you know, from London and, and they want to buy a business in New England somewhere. I’ve seen those things. So Oh, no, it’s it hasn’t been an issue on our part. I guess there were a couple businesses that were a little sensitive relative to they sold into the aerospace and defence industry. So there was some prohibition against even then we were just told, like, don’t even bother talking to people in these countries, because couldn’t sell to them anyways. But that’s, that’s where we’ve seen so less about the individual or more if there’s kind of sensitive stuff that’s going into government agencies or something that they don’t want to have the exposure to foreign ownership.
Gene Tunny 21:09
Yeah, yeah. Just back on the sale process. So do you have a Expression of Interest process? And then you have a tender process? So how does that work?
Arthur Petropoulos 21:18
Yeah. So so we don’t we don’t go out there with an asking price on something, right? I mean, we can give some guidance in the sense that if someone says, Well, what are they looking for, this or that we can say well, you know, we’re seeing comps, we’re seeing transactions for companies like this falling in this range. Because we don’t want it to always just focus on the dollar amount too because the structure matters, the transition period for ownership matters, what happens to the stakeholders, the employees, the community, the buildings, that whatever it is, right, there’s a lot of variables. And so we’ll provide a little bit of guidance. But largely speaking, we let the process determine the price because the people we’re talking to are sophisticated parties, they know what these things trade for. And, and I think people know, we’re pretty communicative in the sense that we say, Look, if, if you’re looking to just kind of kick the tires and lob something in here, like don’t waste your time, like don’t waste our time either. And so we’re able to get down to the real bonafide parties quick. And in the process. Typically, there’ll be dialogue questions going back and forth, we have a data room that we populate, but we’re usually asked for an indication of interest, and then a letter of intent. So what that means is, send us an email tell us generally how you valuing this, how are you looking at structure this or that, because then we can have a constructive dialogue with the prospective acquirer so that when they finally put something forward on letterhead, they now have a good sense as to how probable it is that it’s gonna work. And it’s kind of had some dialogue, if you will, or discussion. So we like to have information sharing conversations, indication of interests, and more communication form a letter of intent. And a lot of that happens from day 60 to 90 of a process.
Gene Tunny 23:02
Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 23:37
Now back to the show.
Can I ask you about how you promote or advertise the businesses? I’m just thinking about real estate. And I mean, you look at some of the things that real estate agents are doing now particularly in, in capital cities in Australia, where people are mad about real estate, you know, they’ve got these cinematic type videos, they’ve got the the houses all dressed up, they’ve put a lot of work into it. And they’ve got these really impressive videos. I imagine you have a prospectus of some kind, like, how do you how do you promote it?
Arthur Petropoulos 24:14
Yeah, I would say there’s less style points in this business. Right? The because it’s less of an emotional acquisition for the most part, right? Like it has to make fundamental sense for companies to buy things. They’re buying capabilities. They’re buying access, like you know, it’s slightly a different sale than saying like, you know, imagine drinking you know, hot chocolate on the veranda on a Friday night, right? So, the product or if you will, or the thing that’s actually transacting has a slightly different approach. Now, that being said, must be professional must be crisp, clear, concise, but the substance of the narrative is more valuable than the form if you will. And so we communicate to the to the prospective acquirers. We have materials that we put together, it’s in our space, we found like the 100 page pitch book, you just everything gets drowned out in, in the one page thing is far too brief. So we have a happy medium that provides kind of the high level overviews of all the things that are important. We have data rooms that we support back, but we kind of sequence or phase the sharing of information. So that way we make sure people are focusing on the optimal or the key elements of it first. But yeah, so it’s it’s, it’s clean, it’s crisp, it’s direct. It’s not as not as razzle dazzle as some other things. But the goal being to communicate the narrative clearly, communicate the value proposition clearly to the prospective acquirer, and getting their attention. Because, you know, the trick in this business sometimes is that if we’re representing a small company to a very big company, the hardest part of that dialogue is getting the first part of their attention, right? If we can get their eyeballs on it, and they like it, well, then it just creates traction amongst themselves, right? Because now they’re saying, Well, this is interesting, want to look at it want to learn more, and they have their own momentum. And at a certain point, they don’t really care what I want to tell them, they care what they want to look at, right? And so they say, Well, I want to learn more about this and learn more about that. So you can’t drown them out with your own narrative. But you do have to make sure you’re giving them enough for not too much and get the attention. And then if the attention leads to interest, it kind of becomes self fulfilling at that point.
Gene Tunny 26:24
Gotcha. And what if, say, I’m looking at, I don’t know a plumbing supplies business in Milwaukee or something like that, could I actually, and I’m a prospective buyer, could I line up a visit to the, the company’s premises and talk to the management?
Arthur Petropoulos 26:41
Sure. At a certain point of the conversation. So we try to phase things out, right? Like, you should be able to, if you are the plumbing supply distributor guy, and you know, this business, right, so we have to kind of validate prospective buyers. So what’s your track record? What’s your history? What’s your industry knowledge? What’s your financial capability to do these things? And let’s say you check out on all these things, well, then you really should be able to give an offer, or at least a skeleton of an offer just based on numbers and conversations with ownership, right. And so there is a certain, so only when we get to like a high level structure, that you would, you can at least put the ? on the back of an envelope. And that ownership can get on board with that we then pivot to you know, whether it’s an in person meeting, facility review, I think the problem with a lot of intermediaries is they allow too much access too soon. And it’s like, you know, this isn’t a field trip, right? Like, we’re not looking to have like 25 people come around and kick the tires and things because it creates an environment of instability for the employees. It’s not good, right? And so you really don’t want to do that until, you know you have something and we try to push. And it’s a tug of war sometimes, but we really try to push things as far as we can. Before we’re doing anything, that could be a disruption.
Gene Tunny 28:00
Gotcha. And you mentioned so you’re trying to validate or vet the buyers, is that that’s a risk mitigation measure I it? Are you, I mean, you’re I guess you want to protect the legacy of the business for the person who sells it. Like, what’s the what’s the thinking there?
Arthur Petropoulos 28:19
It’s not so much from a, I guess it’s qualitative in a way, right? Like, we’re not gonna we don’t want to sell businesses to criminals, or people who have bad track records, you know, in terms of like treating employees and stuff. But, you know, we also don’t, you know, it’s not like, oh, I don’t want it to what’s the Aussie word, you know, a bug in some way, right? Like we don’t like so it doesn’t get to that level, where it’s like, I don’t want these kinds of people or those kinds of, it’s really about capability. It’s about, you know, it’s about industry experience knowledge, feeling comfortable, that they would be a good steward of the business from a fundamentals perspective. Because you’d be surprised. I mean, you know, we always joke and say it’s separating the prospects from the suspects. But it’s, you there’s, there’s a lot of people out there that I think are looking at businesses is like, you know, when you sell a house, right, like you ever sell a house and you put the house for sale, and take buyer, the neighbours show up? Yeah. And it’s like they’re not buying the house. And it’s like that same neighbour, it’s like their hobby is to go look at houses every weekend, right? And they just go in and they like, eat the food and kick around and like, take some paper towels. And so in business, you’d be surprised that a lot of the same names show up and so we want real buyers, but we don’t want to waste any time. There’s no value. There’s no style points to fluffing up the numbers of interested parties on the front end. It’s no good for anybody. So it’s more about capability and are they a bonafide prospect. And and you know, qualitatively, are they going to be the right steward. It’s less about, you know, did they go to a proper preparatory boarding school. It’s more about actual capabilities.
Gene Tunny 30:01
Yeah, yeah. And is this regulated Arthur? Like I imagine it’s not SEC, but are there state regulations around this? I mean, what’s the
Arthur Petropoulos 30:10
Yeah, and there are there are SEC regulations pertaining to private company sales, you know, relative to sizing and structure of deals in a way that does not kind of conflate with securities. And then state by state, there’s different considerations depending on on what it is, for the most part, though, this is it’s kind of free market, third party transactions to other people who are owning things. And, you know, not many of these transactions are going to be either, you know, pivotal to national defence, or, you know, under like, Hart Scott Rodino Act for like, antitrust and stuff like that. I mean, these tend to be, you know, if you said, What is kind of the typical situation, it’s a company that does a thing, either for a particular product or geography, there’s a giant company or bigger company that does it everywhere else, and wants to get access to their geography, and they kind of bolt them on. So. And that’s, you know, sometimes it’s merger of equals, sometimes it’s just one person, but a lot of times it’s kind of the aggregation strategy that’s looking to bolt something on. And so it is regulated, and there’s certainly laws and rules to it. But it’s not to the same level of securities, because not dealing with, you know, selling shares, small amounts of shares to large number of kind of passive investors.
Gene Tunny 31:31
Gotcha. Is there much legal risk on the seller side, I’m thinking, I mean, you know, with any sort of tender process or auction, there’s always, you know, there’ll always be a significant number of people where there’s the the winners curse, so to speak. How do you deal with that?
Arthur Petropoulos 31:47
Yeah, so part of the negotiation. And so once we have a deal, basically, under a letter of intent, you enter into the diligence phase, in which case, the buyer puts forward a purchase and sale agreement for the consummation of the transaction. So unlike real estate, where you have a purchase and sale agreement that you sign, and then you enter into diligence, in corporate transactions, you sign a letter of intent, you do the diligence, and then the purchase and sale agreement is signed, kind of coterminous with the closing of the transaction. But within that, within the purchase and sale agreement are representations and warranties both ways, right. There’s disclosure schedules, so that a seller would have to say, Are there any pending litigation? Is there any complaints? Or what are the customers you’ve lost? There’s things that have to be put in there. And from a buyer’s perspective, they have to say, what they are willing to take, you know, at face value. And so the way we an old, an old mentor of mine said, reps and warranties are there for, you know, fraud, willful misrepresentation, things like that, to protect buyers against, but it is not in what he called, he said, It’s not schmuck insurance, right? It’s not, it’s not insurance that you paid, you didn’t pay too much, or you didn’t know this and do that, right. Like, this is a business between sophisticated parties. And so if a seller sells a company, you know, without using a person like us, and they don’t get a good price and don’t get a good structure, they really don’t have any recourse to complain about it, because that’s the deal they agreed to. Buyers similarly if they, you know, if it’s not, if it’s not in the contract, then then it’s, it’s not part of it. So point is, it sounds more adversarial than it is. There’s just kind of customary reps and warranties that very clearly define what the post transaction risk or exposure is from both parties. They are negotiated pretty heavily by the attorneys. And, you know, as it pertains to the business elements, we get involved as well. But our general positioning on it is we want to protect the buyers from fraud from, you know, willful misrepresentation things we don’t know, which don’t happen with the clients that we work with. But what we don’t want is for anybody to just say, like, I bought the company, I mismanaged it. And now I want, you know, some money back because I didn’t do the right thing, right? That’s not That’s what we avoid. And nobody really asked for that. But we don’t want it to be grey.
Gene Tunny 34:15
Right. So do you engage the lawyer or does the seller engage the lawyer?
Arthur Petropoulos 34:21
It depends on the situation. And it depends on what kind of an attorney a seller’s using. And so sometimes, if a seller is using a corporate attorney for a lot of activities that they’re with they’ll say, hey, I really want our attorney in the mix here. And that’s perfectly fine. We work with lots of people’s attorneys and that usually when we get the letter of intent, negotiated but not signed, that’s typically when they come into the process review that and then we work alongside them shepherding diligence. But there are other times where people say like, you know, I you know, my attorney is a great guy. He’s a great friend. You know, he helped me buy my flat in Brisbane, but you you know, I have a $50 million business, maybe he will play a part in the process. But do you have someone that you can bring in that just does corporate transactions all day, in which case, we have a global network of people that we’ve worked with, that we can bring in, depending on the locale of the business. So it’s situational. And we can work with clients either way, depending on their preference, but we always keep a strong roster of, of attorneys. And I, what I’d say is the right types of attorneys, because you can have, you know, anybody can pick up the phone book and call up the most expensive law firm in the world. But it’s where do you find kind of that optimal mix of value and capability? And so whether it’s people that have spun off of the big law firms running smaller boutiques that are slightly off the radar, or are more tactical people, we like those kinds of relationships.
Gene Tunny 35:46
Yeah, very good. I should ask Arthur, how did you get in, how did you get into this? I mean, you mentioned you worked on Wall Street. Could you just tell us a bit about what you studied? And did that help you get into Wall Street and then your path to Hill View? Partners, please?
Arthur Petropoulos 36:03
Yeah, sure. So when I grew up, my father used to read, he had a very broad spectrum of books he was interested in, and ideas. And so I remember, you know, it was gonna be Plato’s Republic or Aesop’s Fables. But he read a lot of history books to us. And so I remember going through like, you know, Amerigo Vespucci, he was travelling the world selling pickles or the Dutch West Indies Company was fine, you know, whether it was silk or spices, but it felt like the history of the world was the history of business and war for other things, but business, right commerce, and, you know, the idea of a finite amount of resources and an infinite amount of want. And so when I studied more and I would get into like the industrialization of America, and, you know, Carnegie Steel turning into US Steel, and all of these aggregations, I found the combination of business transactions of finance of growth and in aggregation of industry to be fascinating. And when I grew up, the only people I knew that who really had their hands in these things were always attorneys, you hear like, oh, this attorney just helped this person sell this company. Because I do think particularly in days past, I think a lot of attorneys kind of served a dual role in these things. And they still are, you know, key advisors to companies. But so I went to law, I studied undergrad business, I actually wanted, I wanted to get a minor in music theory, I played the piano. But I remember my mom said, if you want to play the piano, you can just leave school and stay in the living room. But we, but anyway business was the key focus in undergrad, and I went to law school, and law school doesn’t have majors, but you can effectively create your own focus. And so we created or I focused on corporate transactions, both from a mergers and acquisitions and financing perspective. And it was when I was in law school that I was reading the case law, you’d have to study of your KKR and acquiring Nabisco and Philip Morris, and this and that. And when you started reading all of these cases, you’d say, well, who is that? And how do they work? And how does this work? And so once I figured out, what is an investment bank, what is a private equity firm? How does capital work, who are these lenders, that’s when I think the world kind of opened up and I said, Ah, like, there’s this whole ecosystem of corporate transactions and all these participants in it. And then I realised, you know, although I believe the law degree is phenomenal in terms of understanding the allocation of risk and structuring of things. I found that, you know, the investment banking was a bit more firmly in line with where my interest was. And so it’s not an atypical path in the sense that I think Lloyd Blankfein and Brian Moynihan and Sam Zell like they all actually had law degrees, because I think they went through a similar kind of learning exercise. And so even that’s, that’s how I was in law school. And then did whatever a young guy looking for a job, you know, picked up the phone and found lists of names and called and called and called and got a job helping middle market companies sell themselves and then went to the buying side and had a few jobs in New York and then said, Hey, we should start our own thing, came back to Rhode Island to do that. And here we are today a little wiser, and with a little more grey hair.
Gene Tunny 39:19
And I mean, there’s no disadvantage to being in Rhode Island I imagine is there?
Arthur Petropoulos 39:24
You know what, there was a time but I think it predated me a little bit where if you wanted to be in finance in the States, it was either really LA or New York. And then you saw outposts pop up in Houston for oil and gas businesses or, you know, Florida because of how many New Yorkers moved there. You know Boston for pharmaceutical businesses. But my notion when we started Hill View was it was already felt like no one really cared where anyone was, as long as A) you could get to where you need it to be, and B) you produce results and B was far more important than any other stuff. So, so no, I mean, I think like we sit right between Boston and New York. So it is a nice hub to kind of do stuff locally, but we’re doing things all over the world at this juncture. And, you know, again, so long as we produce the results, then, you know, it doesn’t matter if we’re in San Francisco or Saskatchewan.
Gene Tunny 40:05
Yeah, yeah. Because even if you did take a meeting in New York City, for example, what’s that a couple hours away is it at most?
Arthur Petropoulos 40:19
Yeah three hours.
Gene Tunny 40:21
Three hours. Gotcha. Okay. Righto. So before we wrap up, Arthur, I’d like to ask I mean, like what do you see as the value that you’re adding to the economy or the business brokers, then we might talk about the other side of it, the private equity, because there are a lot of there’s a lot of negativity out there about private equity, a lot of concerns about market concentration, and these leveraged buyouts and all of that. So could you just talk about what you see as the benefits to the economy of you’re, what you’re doing to start with please?
Arthur Petropoulos 41:04
Sure, I believe that, you know, capital and transactions are kind of the the oil that facilitates or greases the skids for the economy in the sense that transactions have always taken place. But if you read about, you know, John Rockefeller going through Standard Oil, I mean, he was just kind of bludgeoning people and buying things for nickels and in like, you know, there was a lot of unfair competitive practices. Whereas I think, as the capital markets, and as the M & A markets have evolved, it’s facilitated things so that they happen faster, so that they happen in fairer terms for the selling party. And ultimately, I think, allow for the evolution of industry on a quicker and more efficient basis. And also, I think bolster, economic, competitive positioning, you know, particularly for domestic companies, versus kind of international, you know, many times like you have US conglomerates, competing against, you know, state run organisations in other countries, right. So the only way you’re going to compete is on scale and is own size and is on innovation. You know, there’s always that joke about politics, they say, the number one rule of economics is the idea of scarcity, that there’s more want than there is stuff. And the number one rule of politics is to ignore the number one rule of economics. And so I forgot what economist said that but so in reality, right, there’s scarcity. And there’s, there’s scarcity of talent, there’s scarcity of stuff of services of goods. And so the further you can evolve any particular industry, it does allow for even as painful as it can be the reallocation of human capital, to things that are less efficient, right. And so it’s almost this, like, it does push things forward, like, you know, irrespective of how much anybody could complain about, you know, life in America in 2023. Like, it’s hard to argue that, like, your life is not just as good as like a mediaeval King, right, like you have. I mean, literally, I’m sitting in a chair right now, I’ve got the Library of Alexandria, in my pocket, I can have more pizzas show up at my door in a half an hour than then I can ever eat. I mean, it’s like, it’s amazing. But the only reason all of these things happened is because, you know, the guy said, Hey, I have one pizza place, I could own 10 pizza places, and we should do delivery. And then so, you know, Little Caesars and Pizza Hut and Domino’s. Right. And so it’s like, I think that there’s, there’s places and ways to kind of rein in just the pure animal spirits that can come out with that. But at the same time, I mean, that is why for all of our black eyes, you know, the, you know, the most capital, capitalist focused countries have been the most economically dominant because they allow for that. And I think that the part that we play as intermediaries in the capital, intermediaries is facilitating the efficiency of that exercise and allowing for innovation and consolidation on a quicker and effective basis and protect while protecting the interests of those who contributed to the evolution right to the sellers of companies.
Gene Tunny 44:10
Gotcha. And what about on the buyer side, the private equity, do you have any thoughts on on that side? There’s this caricature of Gordon Gekko going in and, you know, the concerns about loading companies up with debt and stripping money out of companies and, and sacking lots of workers. Do you have any thoughts on that? Do you think private equity adds value out there in the economy?
Arthur Petropoulos 44:37
Absolutely. Because I mean, I think that they very much are the facilitators of innovation and consolidation. Right? It’s capital. It’s looking for return on capital that’s doing that. But you know, taking a few steps back, you know, if you think of the United States economy, a lot of that kind of Gordon Gekko element was a bit of an idiosyncratic situation. So you had, you know, let’s say, we leave World War Two and all all of these conglomerate companies start to form, right? Because they basically apply like war learned processes and they just say, we’ll buy everything right and putting it together. And so you had, you know, CBS owned the Steinway Piano Company, and you had all these, like things that came together because they figured they could just run the same process. And so you hit the 1970s, you have huge inflation, because of too much money printing and we won’t get into that. And then Nixon takes the dollar off the gold standard, inflation goes through the roof values of companies go down. And so you start to see all of these companies where it’s like, you’ve got five different companies combined, that all do different things, and no one knows how to value any of it. Because it’s like, you know, the same company owns Jello pudding that owns like, you know a concrete company, or whatever it might be. So the initial premise of it was buying under, under, misunderstood assets that were put together incorrectly, and disaggregating them in a way that allowed for a better value of each constituent element. Secondly, there was a lot of, you remember the Gordon Gekko speech about, you know, tell their paper company when he’s saying like, all of the executives own 1% of the company, and they’re just pillaging it from cash. There was a certain glut of industry in that time period of inefficiency, that was losing kind of our competitive positioning on a global basis. So you can make the argument that and this is where it gets tricky it because, yes, there were a lot of layoffs. But truly it created efficiencies and companies that allowed them to be globally competitive reallocating the human capital to industries, you know, that made that were more ripe for innovation. Now, there’s pain that goes along with that. And then it’s not to be ignorant of the fact that there were a lot of greedy people involved, right, like all of that leverage was not necessary to accomplish these things, it was just a way of choosing the, you know, choosing the return. So the pendulum goes back and forth. And anytime it goes too far, it will pull back, what I would say is that the modern incarnation of private equity has largely been one of innovation and scale, right. And so buying up a lot of small companies and aggregating them, I think, the biggest myth in private equity in today’s environment. Now, I’m not saying if private equity goes out and buys a bloated software company and fires a bunch of people. But you know, that wasn’t making any profit. But I’m saying when private equity goes out there and buys an aggregation of distribution or manufacturing companies, they want to keep the people, the people are the valuable part. That’s where there’s scarcity. So in today’s environment, that notion of over levered like financial engineering and layoffs is really, I think, a relic in private equity in today’s environment does a lot more, I think, good than harm, and a lot of those excesses have been had been pulled in. That’s not to say, you know, there’s not exceptions to that. But in today’s environment, they are a accelerant of aggregation and innovation, I think in in industry as they consolidate different businesses.
Gene Tunny 47:59
Okay, very good. Arthur that’s been terrific, I’ve learned a lot I learned, I hope you don’t mind, I grilled you over the process and what you do exactly. And I mean I learned a lot about how this, these transactions occur. So thanks, heaps for that. That was great. Tell us about your, your outreach, or your YouTube and newsletter or whatever, please. That’d be great.
Arthur Petropoulos 48:23
Yeah, so I’d say check us out on YouTube at Hill View Partners, if you just typed in Arthur Petropoulos, you’d come up on and on LinkedIn our company page Hil View Partners both on YouTube and LinkedIn, we put out two videos a week, talking about just different topics in the mergers and acquisitions and capital world kind of recurring themes, almost like an FAQ of the things we’re always talking about. And then reach out to us, either on LinkedIn, myself, or the company page, or on our homepage, hillviewps.com. So hillview, P as in Peter, S as in sam .com, where you can reach out and set some time up as well. But that’s where to where to find us. And on a, you know, on a closing thought, not to get too philosophical, but I think I think anytime you kind of take a position, that something is just entirely wrong or entirely right, or you’re you’re missing a lot of the nuance, right? And so a lot of the economy has excess in both ways. Right? And so, there are, you know, have there been situations where, you know, companies have been too greedy? Yes. Have there been situations where, you know, look at the industrialization of what America had lots of greed there, right? Look at situations where the unions were too greedy and look at how the steel disappeared in the 1970s. Right, so like, so I think the key to being good at our job, and I won’t extrapolate it enough to say good at anything is like you must understand nuance, you must understand subtlety. There’s four sides to every story and the truth sits somewhere in between and so it’s our job to kind of see reality for what it is not necessarily what we wish it would be. And by virtue of taking that kind of sober yet realistic look on things you know, we’re not, we’re not people that are always cynical and say it’s bad. We’re not people that are always optimistic and it’s always good. But we say, life is hard. The world can be a nasty place. But there are glimpses of good and nice things along the way. And we, we, we like those. And so any event for what it’s worth, that’s our that’s our view of the universe that you didn’t ask for. But this is a this has been good Gene, I appreciate it.
Gene Tunny 50:22
Very good, Arthur. I’ve really enjoyed it. And yep, I like having rounding it out with that philosophical thought. So I think that’s terrific. So yep. Very good. Arthur Petropoulos from Hill View Partners. Thanks so much for the conversation. I really enjoyed it.
Arthur Petropoulos 50:37
Likewise Gene. Appreciate it.
Gene Tunny 50:41
Righto, thanks for listening to this episode of Economics Explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.
51:28
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Credits
Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.
