Warren Feder | Navigating Family Business Exits and Legacy

Speaker A: Foreign.

Speaker B: Trusted authority and executive and transactional liability and national practice leader for mergers and acquisitions for Liberty Co. Insurance brokers where we provide peace of mind with great care. Welcome to M and A Masters where I speak with the leading experts in mergers and acquisitions. And we're all about one thing here that's a clean exit for owners, founders and their investors. Today I'm joined by Warren Federer, partner of the newly branded CMA Group, which is formerly known as Karl Marx Advisors. CMA Group is celebrating their 100th anniversary of uh, providing investment banking services with an emphasis on family owned or closely held businesses. Their motto, complexity is our specialty. Warren, it is great to have you. We had the pleasure of meeting in person during my east coast swing a couple weeks ago. Good to see you today.

Speaker A: Thank you, Patrick. It's an absolute pleasure to be here. It was a pleasure chatting with you in our office in New York and it's a delight to be joining you and your listeners.

Speaker B: Well, let's catch up the I, because they weren't sitting in on your newly furnished office there in New York. Uh, before we get into CMA Group, let's start with you. What led you to this point in your career?

Speaker A: Well, I've had an eclectic career, Patrick. I started life off as a merger and acquisition attorney in New York and London doing large complex deal for corporations and investors. Then I joined my own family business which was a manufacturer of hair brushes, hair ornaments, shampoo and conditioner. And I spent 10 years working with my father and brother, growing a business together and dealing with all the bumps and all the challenges that come about by being in a family business. And after that I worked and founded another company, Gordon Brothers Capital, where we provided bridge capital to companies that had opportunities but needed someone who really understood what went on in companies to provide them the capital they need to get to the next stage. Those three things led to my, uh, co founding the investment banking group at the CMA group a little under 25 years ago.

Speaker B: And the CMA group with the ironic original name Karl Marx Advisors, which when they think Karl Marx cma. Karl Marx actually opened up before the Karl with a K came along and uh, guy known for other things. But talk about the CMA group. You know, you've been around for 100 years. Why the rebrand and just the overall background of the organization?

Speaker A: Well, we are a fourth generation family business which gives us great insight and identification with many of the family businesses that we end up representing. And it's often our privilege to represent. We have new leadership after many uh, years and the new leadership, uh, together with the other partners, thought it's a great time to bring a fresh approach. And since we spend our time really with entrepreneurs and family businesses that have built up great businesses and are now looking for the next stage in the business's evolution, we thought a rebranding made a ton of sense.

Speaker B: Carl, CMA Group, you've been focused on the lower middle market, family owned businesses. Talk about that commitment to that section. Because after 100 years you would have figured you guys would have been up, going up market substantially since your founding, right?

Speaker A: For us, working with entrepreneurs and families is really a very special skill set that I think we understand better than most. I was in my own family business with my father and brother for 10 years. Uh, I used to say my brother is 3,000 miles away and it's not quite far enough. Um, so really the intricacies of partnerships in closely held businesses coupled with family in many cases really is where we earn our money and provide value for our clients. And as a fourth generation family business, we really understand that at Karl Marx,

Speaker B: the investment banking space has grown quite a bit. Uh, probably as few as maybe 15 years ago. There were maybe 1,000 investment banking firms out there, other advisory, uh, type companies. That's now ballooned to 5x. Tell me what CMA group is bringing to the table that the other, uh, burgeoning companies aren't bringing. What sets you apart?

Speaker A: Well, first and foremost, we have a in depth appreciation for the great accomplishment it is to actually have created a business and have it profitable and support multiple families. When I was an M and a lawyer, we looked at numbers, we looked at documents. I had no appreciation of that after spending 10 years running a, ah, family business with my father and brother. And this is hard to do. And if you've been able to do that and build a business and provide a service or a product in such a way that your customers are happy, your employees are happy, your partners are happy, uh, and make money. At the end of the day, that's hard. And it's really our privilege to be able to work with a family or an entrepreneur who's built something like this and help them get to the next stage, which is often a very large check for their business. But you know, truthfully, Patrick, it's not always about the money,

Speaker B: which a lot of people don't believe. What is it about?

Speaker A: Well, it's certainly our job to make sure you get a full and fair and the highest price possible for the business that you've built. But for many of our clients, like it was with my father, the business was their first baby. And there's a legacy here. There are employees, there are suppliers, there are customers. There's a reputation that in many cases goes back generations and that's equally important to our clients. So our job is to find not only the highest and best value, but the right partner to continue the legacy and the right structure to make sure everything comes together right.

Speaker B: You know, that, uh, I've heard that echoed over and over again. In a real competitive M and A community, it's not always the uh, highest dollar figure offer that wins is oftentimes, you know, where the owner or founder, particularly if it's an owner or founder, uh, they want to see a fit for transition. Even if they're not going forward with the new company and they're, they're, you know, heading off into the sunset, they still want to see that legacy that they built, you know, sustain itself and go on because it brought so much joy and so much benefit to a lot of people. And I think that's one way where firms like yours can provide uh, that extra little edge. Because you've been entrepreneurs and founders yourselves and so you're speaking the same language, I would say you've got simpatico priorities with them. Wouldn't you agree?

Speaker A: Absolutely. Uh, let me tell you a little story. Last year we closed on the sale of a, uh, 70 year old business, uh, called Royal Products. The owner was second generation and 82 years old and he built a great culture and he had a management team of five key people who had been there on the average 25 years each and they owned some phantom equity in the business and he owned the primary equity and it was up to us to find the best partner to not only pay full value to, um, the 82 year old owner and his partners, but to continue the legacy which was very, very important to them. At the end of the day, we had four companies really interested in um, partnering with them and buying this business. And they were all reasonably close to each other. And our client decided to choose the lowest of the four bids because they felt that the cultural affinity with the bidder and the fact that the bidder was going to allocate more equity to a larger employee base as they grow the business in the future while was more important than that incremental small amount of dollars. And we also then jumped in to make sure that the management team, who would have been taxed at ordinary income, uh, got very favorable structure and taxes so that they were able to get capital um, gains and no taxation for their rolled equity at close. Ah.

Speaker B: And this is the great benefit and the reason why I want to have this podcast and platform. An organization like CMA Group because there are so many owners and founders, they're not used to doing these types of transactions and the danger is they will, if they don't know where to look, they'll default and either look to be acquired by a competitor or a peer in their industry through strategic acquisition or they're going to uh, default to some institution and talk to them. Neither side really has their interests at heart and you know, they, they may end up losing money or overpaying and getting you know, services that were under provided and they don't know where to go. That's why it's wonderful to have organizations like CMA Group out there. And I mentioned before, there are thousands of investment bankers and all these other things. They're, everybody's got a different fit I sense. And when we had our conversation you really connected with the baby boomers because I mean you take their business personally. Talk about that a little bit. And why the baby boomers? Not just because you're part of that group too, but why that's a fit Because I just couldn't see an owner or founder as you mentioned in their 60s 70s meeting, I don't want to put ah them down. But a 30 something year old investment banker who says look, I know where you're coming from. It doesn't connect, right?

Speaker A: No, that's uh, very true. I mean having some gray hair or certainly less hair than I have when I was younger, uh, has proven to be a real asset. It's the personal touch really. And we're not a volume shop. Some of the larger investment banks, even the larger boutiques, um, they have to get a certain number of deal done and they have pressure to close deals and if a deal isn't going the right way, they then move on to some other deal. That's never the case with us. If an owner and a family hires us to help them sell their company and take it to the next stage, this is a privilege. We've been selected in a, as you mentioned, there are thousands of bankers out there and they've chosen up us and I take that very, very seriously. And I'm involved from the first time I meet them until we plan a spectacular closing dinner. And every step of the way, uh, I'm involved with any material decision. And this is where kind of the background I have as an M and a lawyer and as an owner of company and as an investor. All comes in because I could look at 100 issues and say these three issues are the important ones and these are the ones that can make or break the deal. And these are the ones that have value consideration. The other 97, the lawyers can figure out one way or the other, and truthfully, it's not going to make, uh, that much of a difference. But these issues are the ones that we have to really care about.

Speaker B: Those are, uh, the non negotiables. You'll find those three and it's like, let's focus on those, uh, not waste energy and money on the other 97, which those are, give or take. And you're not going to notice those. So, yeah, that's interesting. Now, in addition, we referenced this with the baby boomers, the owner and founder. But give us a profile, uh, Warren, of your ideal client who is CMA Group looking to serve.

Speaker A: I'll give you two examples. Uh, during COVID uh, in the middle of COVID we were working with a second generation family business where there were four siblings, owned a school bus transportation business. And imagine Patrick trying to sell a school bus transportation business when Covid hit and all of a sudden there were no buses going anywhere. Uh, so we put a pause on everything. We went back, um, when there was more stability, about six months afterwards, and we closed a, uh, great sale. But here we were dealing with one of the four siblings, was the CEO who was running the company and did a great job. The other three were not involved with the business. So finding a way to get all four parties on board behind a transaction and get everything done, uh, that's something that we do pretty well. And we were able to do that very successfully with regard to this business.

Speaker B: Well, you're good at herding cats and finding alignment there. That's a real talent.

Speaker A: Yeah. The hard part is really not dealing with the other side. The other side tends to be either a private equity firm who's in the business of buying companies and we know what their requirements are and we could address that. Pretty straightforward. Uh, or it's a strategic buyer who's in the industry and we generally know how to deal with them. Uh, the challenge, as you say, is herding cats and dealing with the personalities. Uh, ultimately it comes back to you took my toy truck when you were three years old, that I still resent you for it, and now I'm not going to sign a $200 million deal. Um, and that's not too far off there. Um, the other company we Dealt with last year and closed successfully was uh, called JDC Power. And they supply critical power systems to data centers. And there they had three entrepreneurs who owned the company equally. And you couldn't get a deal done unless all three agreed. Well, two of them were not talking to the third for the last year. So um, uh, I think we did a lot of good in getting this deal done. But I get most credit from the lawyers and from the clients in getting all three parties to agree to a structure and a deal so that we were able to close the transaction industrial wise.

Speaker B: I'm sure there aren't any school bus transportation verticals out there. Um, so I would say are you agnostic in terms of industry? And then how about geography?

Speaker A: Geography? We're throughout the United States, uh, and we've, we've closed deals pretty much everywhere. Um, we are generalists overall, but we've now been focusing on business services, consumer products and industrial technology. And they're fairly wide categories but we've been very successful in those areas. And we've closed deals uh, for clients in those areas and those are areas that we bring some extra expertise.

Speaker B: Okay, is there a minimum, uh, either ebitda, uh, financial size you deal with, or anywhere?

Speaker A: We generally like transactions that have an enterprise value between 30 and $300 million. So we're under where the Morgan Stanleys and Goldman Sachs are. Um, but we're not doing early stage venture capital deals or small shops either. We don't do much in retail, we don't do much in real estate, um, and not a ton in tech.

Speaker B: Well, from a couple of the scenarios you just gave, because I want to underline this and it's in sync with your motto. Okay. If there are owners, founders, sellers with family dynamics or something that is complex, that's something you specialize in. Because when you talk about complexity is our specialty. I think there's nothing more complex than the human dynamic out there, particularly with families. So I think that's. Any family businesses. And again across the country, uh, over 30 million in enterprise value and up. I'm sure you'll come down a couple, a couple mil if necessary. But you know, in that I think that's a great realm out there. One, um, of the uh, issues that has come up, one of the trends in mergers and acquisitions that's really facilitated an acceleration in deals is the development of reps and warranties, insurance. Because financial transactions have huge financial risks. Particular uh, M and A transactions have huge financial risk, particularly to the seller because this could be a lifetime or generational liquidity event and you don't want to get that wrong, which could force people to pause and freeze in these situations. And uh, having a risk transfer vehicle like wraps and warranties has really expedited processes and made things faster, cheaper and happier in the transition wise. But don't take my word for it Warren. Good, bad or indifferent, what's been your experience with rep and warranty insurance?

Speaker A: I think when you go back 15 years, you really didn't have rep and warranty insurance. A uh, meaningful amount of the purchase price was held back in escrow for sometimes 12, 18, 24 months. And the negotiations of all the reps and warranties was a real slugfest between the buyer's lawyer and the seller's lawyer in the last seven or eight years. I can't recall Patrick, any deal that we've done that didn't have rep and warranty insurance. And when we ask for letters of intent to help us choose the buyer that we want to work with and the partner to take the business forward, we make it a requirement that rep and warranty insurance, um, is a integral part of the transaction. First and foremost it minimizes risk for our client, which is very important and critical. And second, um, they get to keep more money at close, which is needless to say extraordinarily important. Um, and third, it actually makes the negotiation of the documents between the buyer and the seller lawyer much simpler. Um, because they know what is accepted, generally accepted, uh, market in the rapid warranty world and they all gravitate to that. So you're not fighting so much over allocation of risk because the risk is going to be borne primarily by the insurance carrier.

Speaker B: One of the newest developments, if you've been aware of rep and warranty for years, is it has been use in now 95% of middle market M and A deals. These are uh, transactions above $75 million in enterprise value. And I can't think of one deal at that level that doesn't carry it. However, you know, a lot of smaller deals in the 10 to $40 million range may not necessarily be a fit for traditional buy side wrap and warranty. That's why there's a new product out there. It's called TLPE Transaction Liability Private Enterprise. It re engineered form of rep and warranty designed specifically for smaller, less complex, less risky transactions. Again as low as a million dollars enterprise value up to can be as high as 50 million enterprise value. And the cost, there's no underwriting fee which a huge savings and the cost is a fraction of the cost of rep warranty. Because they are smaller deals, they deserve a uh, smaller rate because there's a lot less risk. Again, tlpe Transactional liability Private enterprise. Now Warren, as we're moving in, looking uh, forward to the first half of 2026, what do you see going forward for mergers and acquisitions, either broadly or specifically with regard to cma?

Speaker A: Well, thank you, Patrick. Um, two weeks ago I was at a conference where we had speed dating with 40 different private equity firms. Think of it. Every 20 minutes someone else shows, shows up at your table and you catch up on what the PE firm is investing in and what might be um, in the transactions and companies that we're working with. And uniformly everyone said the first half of 2025 was very slow, slow as it's been in memory. And the prior two months had more activity than all of the first half of the year. So we are optimistic that that is going to continue into 2026. I think what the overhang was, uh, earlier in the year had to do with tariffs and also had to do, uh, which we've seen in now a couple of deals, uh, with immigration workforce. So here you have situations where some of uh, some food service companies, some um, landscaping and other manual labor companies really rely on an immigration workforce. And with some of the ICE crackdowns and what's going on, um, it just adds uncertainty to transactions and institutional investor is not going to invest in a company unless everything is buttoned up. So um, I think people are getting more comfortable with the tariff situation. Uh, I also think that interest rates are coming down a bit so that the cost of debt is less prohibitive than it was earlier in the year. Uh, and the private equity firms have $3 trillion that they have to spend at some point and the longer they wait, uh, the more uh, negative impact it has on their return to their investors.

Speaker B: I have fallen for the instant gratification that I was hoping for. I just looked back at 2024 and thinking that there was a slowdown in activity because the big uncertainty was the election. And once the election was decided, I thought we would be off to the races in 2025. And sometimes you can't turn that ship around on a dime. It takes a little bit longer. And as with you, I think, uh, there are a lot more business friendly, positive forces that it takes some time for them to get ingrained and for people to get immersed in. And I think that they're going to start moving forward as well. I'm an optimist at heart and as you and I are looking at, uh, owner, founder companies, many baby boomers who, despite anything else that's happening in the world, one thing that's not stopping is the clock. And they're all aging, and so they're looking for a transition. So I think the next year or two should be robust. And with organizations like CMA out there helping these owners and founders not only find that exit, but find the right exit, uh, that's why it was all worth it. And so, you know, I think it was important. It was just a real pleasure to Misha Warren and to share the story of CMA with, with, uh, our audience here. Tell us, how can our members find you?

Speaker A: Well, um, my email is wfedercma group.com our website is thecma group.com and I am on LinkedIn as well. Uh, and, uh, so I welcome any inquiries from any of your listeners. Part, um, of the joy I have in the work I do is meeting entrepreneurs and helping them get, uh, the benefits of what they've often worked on for their entire life or sometimes generations. And it's, um, a privilege. And truthfully, it's been a lot of fun for me.

Speaker B: Well, I'll tell you, Warren, as people who are owners and founders, that they're selling, you're only going to do this once you spent all this time. You may as well do it right. And, uh, I think you would be well served by reaching out to the cma. Uh, Warren Federer from cma, Absolute pleasure having you. Thanks for joining us today.

Speaker A: Thank you, Patrick.