Mastering Proprietary Deals: Insights from Carlo Santelli's $16M Acquisition

In the world of entrepreneurship through acquisition (ETA), some deals stand out as true masterclasses in deal-making. One such example is Carlo Santelli's recent acquisition of Trium Industries and Stillwater Fasteners, two manufacturing companies he purchased for $16 million without using any of his own capital. This article explores the key strategies and insights from Santelli's deal, offering valuable lessons for aspiring business buyers and searchers.

The Deal at a Glance

Before diving into the details, let's review the key facts of Santelli's acquisition:

• Acquired companies: Trium Industries and Stillwater Fasteners
• Purchase price: $16 million
• Annual revenue: Approximately $13 million
• Annual EBITDA: Approximately $3.5 million
• Employees: 65 across two facilities
• Manufacturing space: 150,000 square feet in Connecticut and Massachusetts
• Closing date: October 29, 2024

The Power of Proprietary Deals

One of the most striking aspects of Santelli's acquisition strategy is his unwavering focus on proprietary deals. He refuses to engage with businesses listed by brokers or investment banks, believing that the best opportunities lie in direct negotiations with business owners.

"I only do proprietary deals," Santelli explains. "If there's a bank on it, there's a broker on it, not interesting to me. In fact, if there's a CIM or a data room or any materials prepared, I don't touch it. It's an instant death kill for me."

This approach allows Santelli to find businesses at more attractive valuations, as he's not competing against other buyers in a formal sales process. It also gives him the opportunity to build a direct relationship with the seller, which can be crucial in negotiating favorable terms.

Creative Financing: The Sale-Leaseback Strategy

Perhaps the most innovative aspect of Santelli's deal was his use of a sale-leaseback arrangement to finance the acquisition. Here's how it worked:

1. The total purchase price was $16 million for both the businesses and their real estate.
2. Santelli negotiated a $2 million seller note, reducing the cash needed at closing to $14 million.
3. He then arranged a sale-leaseback of the real estate for $10.75 million.
4. This left only $3.25 million needed to close the deal.
5. Santelli secured an asset-based loan for the remaining $3.25 million, using the companies' inventory and equipment as collateral.

The result? Santelli acquired a business generating $3.5 million in annual EBITDA without using any of his own capital and retaining 100% ownership.

"The sale-leaseback was a game-changer," Santelli notes. "It allowed me to bid down the purchase price significantly and get a great deal on the transaction."

Focusing on Consequential Matters

Another key insight from Santelli's approach is his focus on what he calls "consequential matters" during due diligence. Rather than getting bogged down in every minor detail, he concentrates on the factors that could materially impact the business's value or operations.

"When you're paying 1.5 times EBITDA for a business, there's such a margin for error," Santelli explains. "I always focus on the consequential stuff. I didn't badger the owner with certain things that I knew were not consequential."

This approach not only saves time and resources but also helps maintain a positive relationship with the seller throughout the process.

Building Trust and Momentum

Santelli emphasizes the importance of building trust with the seller and maintaining momentum throughout the deal process. He achieves this through:

1. Rapid response times to emails and questions
2. Quickly producing letters of intent (LOIs) after initial conversations
3. Offering to handle much of the due diligence work himself
4. Constantly reminding the seller of the end goal (a successful sale)

"If you can get the ball rolling as quickly as possible, I think that helps with owner fatigue and minimizes the risk they're going to walk away because they're tired and don't want to do the deal anymore," Santelli advises.

Leveraging Industry Connections

While Santelli's acquisition of Trium Industries and Stillwater Fasteners came from a cold email, he stresses the value of industry connections for future deals. Once you own a business in an industry, it becomes easier to find and close additional acquisitions.

"I incentivize our service providers and vendors to go find other businesses that are looking to sell," Santelli reveals. "They know all the other owners, they know if they're looking to retire or open to selling."

The Importance of Deal Fees and Risk Tolerance

Santelli is candid about the financial risks involved in his approach. He estimates spending around $450,000 in deal fees for this acquisition, money he would have lost had the deal fallen through. This level of risk may not be suitable for all searchers, but it highlights the potential rewards of Santelli's aggressive strategy.

To mitigate some of this risk, Santelli includes a clause in his LOIs requiring the seller to purchase certain due diligence materials (like quality of earnings reports) if the deal doesn't close. This helps limit his downside exposure while still demonstrating commitment to the process.

Looking to the Future: Roll-up Strategy

With this acquisition complete, Santelli is now focused on a roll-up strategy within the industry. Rather than concentrating solely on organic growth, he plans to acquire additional businesses in the same or related sectors.

"If I can buy a business for three and a half million of EBITDA at one and a half times, and I can buy four of those, now I've got 14 million of EBITDA," Santelli explains. "I paid one and a half times for those businesses, but that probably trades for close to 10 times EBITDA. The amount of equity value I've created there is so much more than if I spent my whole time operating this business and grew revenue and EBITDA by 10% per year."

Key Takeaways for Aspiring Searchers

While Santelli's approach may not be suitable for all searchers, particularly those just starting out, there are several valuable lessons to be learned:

1. Consider proprietary deals as a way to find better valuations and build stronger relationships with sellers.
2. Explore creative financing options, such as sale-leasebacks, to reduce the amount of capital needed to close a deal.
3. Focus on consequential matters during due diligence to maintain momentum and avoid overwhelming the seller.
4. Build and leverage industry connections to source future deals once you've acquired a business.
5. Be prepared for the financial risks associated with deal fees, but look for ways to mitigate your exposure.
6. Consider a roll-up strategy as a way to create significant equity value through multiple acquisitions.

Conclusion

Carlo Santelli's acquisition of Trium Industries and Stillwater Fasteners serves as an inspiring example of what's possible in the world of entrepreneurship through acquisition. By focusing on proprietary deals, employing creative financing strategies, and maintaining a laser focus on value creation, Santelli has positioned himself for significant success in the lower middle market.

While his approach may not be suitable for all searchers, the principles he employs offer valuable insights for anyone looking to acquire and grow businesses. As the ETA landscape continues to evolve, deals like Santelli's demonstrate the exciting opportunities available to those willing to think creatively and take calculated risks in pursuit of their entrepreneurial dreams.

Article created from: https://www.youtube.com/watch?v=myLMZwM-mUc