Ep. 201 — Dave Diehl: How Uncertainty Reprices Your Business

6 min read

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Episode Summary

You sat with your CPA in February and felt good about where the business was tracking. Then March hit, and now you have no idea what your company is worth or what the next twelve months actually look like. Demand is fuzzy. Your supply chain is exposed. Your bank just quietly moved from 3.5x to 2.5x EBITDA. Buyers are pulling deals, repricing, or pushing earn-outs. The question you can’t shake: what’s the future cash flow story I can actually defend? I brought Dave Diehl back, CEO of Prairie Capital Advisors, because his team runs over 300 ESOP valuations a year plus an active M&A practice, which means they see the full spread (financial buyers, strategics, ESOPs) and how each one prices risk differently. We got into why valuations are really a confidence-in-future-cash-flow problem, how the lending markets quietly set the ceiling on what financial buyers can pay, why strategics can still get deals done while private equity sits on $1.5T of dry powder, and the playbook Dave saw work in 2008-09 (lean teams, seller-financed ESOPs, growing through the downturn) that’s working again right now.

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## Top 10 Takeaways
  1. When you buy equity, you’re buying future cash flow. Uncertainty about that future widens company-specific risk and crushes price.
  2. Financial buyers price off cash flow and what banks will lend. Strategics layer synergy on top of that floor.
  3. When banks pull from 3.5x to 2.5x EBITDA, your sale price drops with the leverage available to buyers.
  4. EBITDAC is a meme. The real question is which COVID hits are true add-backs and which are just lower demand.
  5. Wall Street is disconnected from Main Street. Don’t read S&P highs as a signal about your private-company multiple.
  6. If you can’t tell a clean future cash flow story, expect price cuts, earn-outs, or no deal at all.
  7. ESOPs with seller financing keep the transaction moving when the debt markets are frozen. Refi later when they thaw.
  8. The biggest valuation killer is an entrepreneur who never built a management team that can run the business without them.
  9. Companies that came out of 2008-09 strongest got leaner, automated more, and shrunk their supply chain to higher-quality partners.
  10. Build a healthy business and you get options: strategic sale, private equity, ESOP, or just keep running it.

Sound Bites

“When you’re buying equity, you’re buying the future. And so what we’re needing to do is take a look at what the future prospects of the business are.” (@TBD) — Dave Diehl

“Wall Street is without question disconnected from Main Street in what we’re seeing pretty broadly. When the S&P has 20% of its valuation tied to the five largest tech companies, the S&P really is disconnected in large part from the rest of general valuations.” (@TBD) — Dave Diehl

“It’s the equivalent of losing 10 pounds prior to going out in the dating world.” (@TBD) — Dave Diehl

“The people that do the hard work are gonna get rewarded for it because there’s a lot of people that have been caught off guard and kind of sleepy.” (@TBD) — Ryan Tansom

“You may feel like you’re getting close to the finish line, but if you take your eye off the ball, we’ve seen it time and time again, people all of a sudden think, okay, well, I’m in the mode of selling, and they see their performance start to dip when they’re in the middle of being priced for their ultimate exit.” (@TBD) — Dave Diehl

About This Episode

Dave Diehl is the CEO of Prairie Capital Advisors, an investment banking firm focused on helping privately held business owners execute on ownership transition strategies (M&A advisory, family transfers, management buyouts, and ESOPs). Prairie performs over 300 ESOP valuations annually across eight locations and is a major voice in the ESOP community. Dave is a returning guest. His team helped Ryan’s business partner Pat convert his company to an ESOP, and then three years later helped them sell that same company to a private equity firm, resulting in over $20 million of checks distributed to the employees. This conversation was recorded mid-pandemic when M&A activity was down 80-95% in April and May, which made it an unusually clear case study in how unknown future cash flows directly reprice a business.

Resources Mentioned

  • Prairie Capital Advisors — Dave’s firm. ESOP, M&A, and valuation advisory across eight offices. — prairiecap.com
  • Dave Diehl email — ddiehl@prairiecap.com
  • The Economist — “The 90% Economy” edition — Referenced by Ryan as a useful resource on consumer spending and the partial reopening dynamic
  • Paycheck Protection Program (PPP) — Referenced throughout as a temporary buffer hiding deeper demand problems
  • Arcona — Intentional Growth Digital Course — Ryan and Pat Hobby’s course on shifting from annual income to long-term value creation. — arcona.io

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