Want him to buy your business? Treat your waiter well

December 21, 2012

Brad Nathan’s company, Lynx Equity Ltd., is a private equity firm specializing in buyouts of small– to medium-sized businesses.

But don’t confuse him with that guy from Pretty Woman. He doesn’t do hostile takeovers like Richard Gere’s greedy financier character. Instead, Lynx Equity focuses on transactions from retiring business owners, usually with a transition management plan if the owners want to stay on board.

The 44-year-old president and CEO sees it as more of a Warren Buffett approach – but with a lot fewer zeros.

“We’re a buy-and-hold type business that likes to do friendly transactions when someone is looking to retire,” says Mr. Nathan, an experienced merchant banker who founded the firm in 2007 and oversees all operations and finances. “It’s not like a typical private equity firm, where they buy the business, financially restructure it and take it public. We’re very hands on with the management and organization.”

Lynx Equity is the parent company of 20 different companies, mainly in Ontario, ranging fromTopcuts Inc., a no-appointment-needed chain of hair salons, to Maverick Express Inc., a logistics and transportation company, to Of Things Past Inc. a Toronto furniture and antiques consignment store.

Typically, the firm invests an average of $2-million to $5-million per deal. The company has 620 employees spread throughout the 20 businesses, and a team of 10 at its  Toronto corporate office.

A subsidiary of Succession Capital Corp., a merchant bank also founded by Mr. Nathan, Lynx Equity’s current annual revenue is more than  $100-million and guarantees its investors risk-adjusted yearly returns of between 8 per cent and 14 per cent.

Q: How do you decide what companies to buy?

A: First, it has to be a 100-per-cent sale. We’re not remotely like The CBC’sDragons’ Den. It’s not about selling 10 per cent to a venture capital firm. We also want a transition that’s not overly complex and where we can have a transition of management. Then the purchase price has to be reasonable. We don’t expect that these companies are going to go public. We really understand the market and give a very fair price to the vendors.

What do you look for in the business itself?

There has to be stable profitability. We are not turnaround experts at all. We look for historical profitability and sustainable repeat revenue. For example, the Topcuts chain is extremely stable.

We wouldn’t buy a business that made money one year, lost money the next, made it the next, lost it and so on. We don’t want a yoyo. We’re really thrilled if we maintain the performance of the business. We base our acquisition on maintenance.

What’s the most critical element on a company’s financial statement?

Cash flow. You need to make sure there’s a sustainable earning stream. You have to see those earnings exist and that they’re going to continue. Cash flow is like oxygen is to the body. The only thing that kills a company is lack of cash.

When was the biggest challenge when Lynx started?

Financing. Capital. The same problems other businesses face. We’re well capitalized now and have a great name in the market with brokers, accountants and banks. Businesses and investors are coming to us. We have a number of deals in the hopper.

How did you get people to invest in Lynx at the start?

Friends and family. No one will look at you at the start.

You founded the company in 2007, right before the financial crisis of 2008 to 2009. How did you get through?

It almost killed me. I couldn’t raise money. It was brutal. I knew things would turn around eventually and I just had to get there. When we did the deal for Topcuts, I was short $50,000. I borrowed it at 24 per cent annual interest on a VISA credit card belonging to one of my investors. I paid it off in a month – so it cost me $1,000. It was the best move I did because Topcuts has been a fantastic business for us. But when I told the story to a business class, they all said they wouldn’t have done it because of the 24 per cent interest rate. But then they would have missed the deal. I knew enough about the business that I thought if we could get through the hurdles, we’d be fine. It worked.

You lost everything in a fraudulent business deal 13 years ago. How did you deal with that?

I’ve had two frauds that almost destroyed me. In the first bad transaction, I lost everything overnight – all my money, RSPs and about $3-million worth of friends’ and family’s money. I remortgaged my house and vowed to deliver pizza if I had to until I paid all of it back.

We still own that company – a fire sprinkler business – but we’ve turned it around and it’s doing well now. Last year, we finally recouped our investment. The second fraud was three years ago and we’re still dealing with that.

I used to have a lot of stuff but when I lost all that money on the first bad deal, it just stopped being important. I found I could live on next to nothing. I still don’t have a lot of stuff or even furniture. I do jiujitsu training, go to the gym every day and box. I love boxing. I spend my money on restaurants and fitness.

How did you rebuild after the first loss?

Sheer unadulterated tenacity. I worked through it. I’d wake up at four in the morning thinking about how to fix it. I couldn’t stop. We raised money at ridiculously high interest rates. I didn’t want to miss an obligation. I didn’t want to be that guy that people point at and say, there the guy who lost all my money. I don’t know how Conrad Black does it. The tenacity paid off. It took about two years. It still pains me to remember it but maybe that’s good because it makes me a little more humble.

What lessons did you learn from that experience?

Buy 100 per cent of the business. Don’t have a partner whom you don’t know. Don’t get caught up in the deal. It’s better not be as emotional as I was. I was very, very focused on closing the deal. I didn’t like the person I was doing the deal with, but I didn’t listen to my gut. The top lesson: if I don’t like the people, I don’t do business with them.

Every time I meet with a new investor, I tell them about the failures. The honest approach is the best. I think it’s dangerous, when we’re looking to buy a business, if all they do is tell you how good it is. There’s a problem in every single business. So I tell them about our problems and challenges. I don’t want to sell someone.

So do you have any partners?

I have partners at the top level who are investors but not in the individual operating companies. Effectively, we own them 100 per cent.

How do you judge people’s characters?

We do our background checks and spend time with people during the due diligence. You learn a lot by breaking bread with people over a glass of wine or two. You can tell character just by how they treat the servers when we’re at a restaurant. I’ve been with people who are rude to them and I then don’t really want to deal with them again. I think people often overlook those things. A good president should be able to speak to the lowest paid employee in the same way they’d speak to the chairman of the board.

Lynx guarantees annual returns of 8 per cent to 14 per cent. How do you do that?

It depends on how you define guarantee. We can fix a return so there’s no volatility. We basically say we’ll give you a minimum return of 10 per cent but you have to hold it for a period of time. So there’s no volatility but is it a guaranteed government secured return? No, but we’ve been able to deliver.

We’re very careful about what we spend. We’re not spending $100,000 a year on a billboard to say, ‘come invest with us’. We’ll do word-of-mouth and I’ll give that $100,000 to my investors. We’re also a little less greedy with our investors because I want to make sure those investors are there for us. Capital access is more important to me than saving of one or two per cent. If an investor is making a little bit more than he or she would make elsewhere, they’re not going away.

What advice so you have for entrepreneurs?

Don’t live beyond your means. The Canadian banking system is very challenging. If you live beyond your means, the banks will see that. If the company lives beyond its means, the banks will see that – fancy cars on the business, big bonuses, big travel expenses. It’s okay to be a little low key. Have a good relationship with a bank and don’t live at the end of your line of credit.

Also, you have to be a little creative in business to differentiate yourself. Do things differently as long as it’s intelligently thought out.

What’s your issue with Canadian banks?

They’re very slow. I don’t think they understand exactly what we do but they’re very risk adverse and conservative. They like to tick a lot of boxes and we fall outside a lot of boxes. That’s been a top challenge but I’m not going to change that.

What’s the best thing about being successful?

It gives you the ability to only deal with people you want to deal with. I’m not going to have dinner with someone I don’t like. Maybe have a breakfast…. but dinner is sacred.

Originally published in the Globe and Mail December 21, 2012, by Diane Jermyn