Lynx Equity – 60 business acquisitions and counting

Lynx Equity Limited is a private equity firm that specialises in the acquisition of small and medium-sized businesses in a diverse array of “old world” industries – sectors such as signage, lumber, flooring, transportation and groceries.

The firm was established by Brad Nathan, who briefly practised as a certified public accountant (CPA) before going to work for venture capital firm Rothschild Canada Limited (a subsidiary of the Rothschild family) during the dotcom boom.

Dissatisfied with what he described as a “crazy” world in which companies “were all zero revenue and $100 million valuation”, Nathan turned to his true interest in small business and entrepreneurialism.

Nathan founded Lynx Equity in 2007 and, since then, the company has completed more than 60 deals and comprises – according to recent figures – 57 subsidiaries. Based in Toronto, Canada, the group has numerous businesses in the US, as well as a growing presence in Europe.

The group first expanded into the UK with the 2017 takeover of London-based Signalhome, a provider of warehousing and distribution to kitchen and bathroom products retailers. This was followed later that year by the acquisition of express labelling services firm Label Express and the next year by its takeover of office furniture dealer and commercial furniture scheme consultant Day 2 Interiors Limited.

While this remains its most recent acquisition in the UK, last year the company announced that it is continuing to target acquisitions in the UK and Europe, having also expanded into Denmark and the Netherlands over the past few years.

Generally speaking, the company focuses on acquisitions of businesses in sectors it knows well (with some exceptions), with revenue from around $15 million to $50 million and EBITDA ranging from $1 million to $3 million. Nathan says that, for the right deal, it would also consider firms with EBITDA as high as $4-$5 million and as low as $250,000.

The journey has been fraught with difficulties. Speaking in 2022, Nathan said that the company’s first deal was with a partner who turned out to be a “fraud” and that he didn’t make a salary for the first 10 years.

However, persistence and a thoughtful, well-defined, scaled-up acquisition strategy have helped the company to thrive. In 2023, the company completed a further four acquisitions and passed $750 million in sales. Speaking earlier this year, Nathan said the company was “climbing towards $1 billion in revenue.”

Hard lessons early on
After leaving the world of venture capital to pursue his passion for small businesses and entrepreneurialism, Nathan founded Lynx Equity, spotting that there was “kind of a hole in the market” for an acquirer focusing on what he called “old school businesses”.

Amid the relentless dotcom era pursuit of massive growth and widespread interest in tech and the latest fashionable trends, there was a gap in the Canadian market for an investor focused on smaller businesses. Nathan characterises Lynx Equity’s approach as “Berkshire Hathaway with three fewer zeroes”.

This has led the company to target businesses with stable track records in industries that are resilient and will continue to thrive in most economic conditions - what Nathan calls “Mom and Pop” businesses. Today, while it has a highly-diversified portfolio, the company’s key verticals are flooring, signage and lumber, with a number of businesses in all three sectors.

However, the company’s early deals taught it some harsh lessons, which helped shape it into a buyer with a clearly defined acquisition strategy and some key non-negotiables that shape both its approach to M&A and its success so far.

Speaking on the Buy & Build podcast, Nathan is frank – even brutal – about Lynx Equity’s first acquisition. This deal saw the firm acquire 70 per cent of the business in question and enter into a partnership with a figure that Nathan condemns in no uncertain terms as “a fraud”.

According to Nathan, the 70/30 partnership meant that he was not only dealing with this person “as an employee, but I was also dealing with him as a partner.” The experience, he says, was “devastating” and “stressful”, resulting in litigation that lasted a year before Lynx was ultimately able to acquire the remaining shares in the business.

This was a harrowing experience for a first time buyer and, for many others, it may have put them off proceeding with a venture that was clearly a passion project. At this point, it may have been easy for Nathan to return to the familiar, more secure world of venture capital, but, instead it taught him a valuable lesson about how Lynx needed to operate as an acquirer.

He offers clear advice to listeners: “it’s [a] very different model if you own 100 per cent or if you don’t own 100 per cent.” The lesson learned from this first acquisition has been crucial in Lynx Equity’s subsequent success, with Nathan saying that the experience “changed our model [so] that we only do 100 per cent.”

The company now does not bend on this approach. If an owner wants to retain 15, or even 10, per cent equity, the answer is a firm no. While it does offer some incentives to outgoing owners, in the form of bonus programs, compensation plans and earnouts, the company’s ownership and investment into a business it acquires must be total.

Furthermore, the scale of Lynx Equity’s M&A operation (Nathan says the company looks at “thousands” of deals each year) means that, if an owner is stubborn about wanting to retain a stake in their business, the firm has plenty of other deals in the pipeline in which the owner is willing to sell 100 per cent.

Nathan modestly says that Lynx have “done quite well with that [...] It works with our model.” Perhaps an understatement for a business that has built itself up to around $600 million in revenue and has completed more than 60 deals in 17 years of operation.

Lynx’s M&A strategy
Beyond the company’s insistence on acquiring 100 per cent of the businesses it takes over, Lynx Equity’s M&A strategy has several distinct features, but few other unbendable terms that it will insist upon during deals.

Fundamentally, the company was founded upon Nathan’s observation that, in contrast to the high-profile dotcom industry – in which businesses with little revenue were commanding huge valuations – there was also a largely ignored ecosystem of smaller companies with strong, reliable revenue and ageing owners seeking to exit.

As mentioned before, the bulk of the company’s acquisitions involve small and medium-sized businesses in “old world” sectors in which the owner is seeking to retire, with Lynx’s main holdings being in flooring, signage and lumber.

While the company has made, and continues to make, numerous acquisitions in these areas, Nathan says that these are not necessarily the sectors on which Lynx “focuses” - rather they make more acquisitions in these industries as a result of having amassed significant expertise and presence within them.

Nathan said that, with reference to these core sectors, “success bred the success.” Lynx’s extensive activity in these sectors mean that they are often approached by owners seeking to exit, while their years of experience means they are comfortable making acquisitions in these industries and are able to conduct highly effective due diligence.

According to Nathan, this is a natural result of being able to “understand the business as much as the seller does”, adding that when Lynx analyses potential new acquisitions, it “can call on seven different presidents to look at a business and know it as well as the guy selling it, which helps a lot.”

However, while he acknowledges that this makes acquisitions of familiar companies easier than “going into a new industry and learning it”, Nathan insists that Lynx “would never have a focus where we’re just buying those businesses”.

Furthermore, once an acquisition has been made in a new industry, Nathan says, the next deal is going to be easier. Ultimately, while there are these core sectors, Nathan estimates that the group has holdings in around 45 different industries.

In terms of the size of companies that Lynx looks at, Nathan says that acquisitions are typically in the $1-$3 million EBITDA range, with its subsidiaries averaging out to around $1 million EBITDA.

However, again, these are not rigid parameters, with the company also considering deals that are both smaller and larger – depending upon if they are the right fit. Nathan gives the example of an unnamed subsidiary “three hours north of Seattle”.

While Lynx owns this business, Nathan says “we want to get more” in the area. As a result, he says that the company would consider the acquisition of a $250,000-EBITDA business with a strong employee base in the same location. However, if it were looking at a first acquisition in a new region, it normally wouldn’t consider a business of such a small scale.

Despite the fact that its parameters for target businesses are quite specific, this flexibility – combined with the size of the market in which it operates and its scale and reputation as a buyer – means that Lynx Equity is never short of acquisition targets.

Nathan says that the number of businesses Lynx looks at runs into the thousands each year, enabling it to be highly selective and giving it absolute confidence in abandoning any deal that doesn’t meet its requirements.

While the company is highly acquisitive, its success is underpinned by this selectivity and, like any successful consolidator, it looks at far more deals than it completes. As Nathan says, while the firm may make five acquisitions in a year, it will also say no to about 3,000 potential deals.

He characterises the approach as “like Tinder for business.” For Nathan, acquisitions are “a numbers game", he continues: “it’s not about [...] looking at one deal and being able to do that one deal. You have to set your parameters of what is acceptable to you and go with that. Don’t change your mantra because something doesn’t fit.”

Offering to owners
As we’ve mentioned earlier, the scale of Lynx Equity’s deal flow means that it is able to insist on acquiring 100 per cent of any business it is looking at and will walk away if an owner is not interested in giving up their whole business.

Given that the company’s M&A strategy largely targets retiring owners, the vendors they are speaking with are probably more inclined to sell 100 per cent of their company. However, the fact that Lynx typically seeks to implement an earnout structure in its deals can be a hurdle for some outgoing owners, with retirees especially likely to prefer getting their full consideration as soon as possible.

While there may be exceptions, including an earnout in a deal is as close as Lynx Equity gets to having a second non-negotiable when striking a deal, with Nathan freely admitting that the company would typically walk away from a deal in which the owner was not willing to accept an earnout.

However, Lynx is also a buyer that is sensitive to the needs of sellers (another aspect that has been a key part of its success) and focuses strongly on making a sale attractive to an owner.

For an owner that is leaving the business after it is acquired by Lynx, accepting an earnout may mean they are offered a higher purchase price. For owners that are continuing to work at the company post-acquisition, they are incentivised to continue performing well by being offered a 25 per cent share of earnings above the purchase price EBITDA.

For example, Nathan says, if a company is acquired with EBITDA of $1 million, then achieves $1.4 million EBITDA the following year, the former owner (or president that has been installed at the company by Lynx post-acquisition) would receive $100,000.

While he acknowledges that there are flaws to this, Nathan says that this method, on the whole, works. Owners at these companies may not have experienced the situation of directly receiving such a large share of their company’s earnings on top of their basic salary, meaning that, as Nathan says, the new structure “is a little bit of a dreamland for them”.

Finally, all owners are also offered the option to invest in Lynx Equity itself and take a share in the wider group’s success. All in all, while the company may be a tough negotiator, this is all done on the basis of the deal working for both buyer and vendor, with Lynx committed to ensuring that selling to them is an attractive prospect for an owner. Clearly, they are succeeding in doing so.

A range of financing
Of course, completing acquisitions at the kind of scale Lynx Equity operates requires that there is always funding available for M&A. In order to facilitate this, the company has what Nathan calls “a very good mixed bag of various providers of capital”.

This includes, pure debt, some equity financing, royalty financing, vendor financing and bank financing. Ultimately, the company is already making significant amounts on its deals, so capital is always available and Nathan says this enables the company to have the general rule of “if someone offers you money, take it”.

Simply put, the more capital the business has, the more it can invest in acquisitions and generate higher profits. Some of Lynx’s capital will be invested as cash for deals, bolstered by financing from the range of sources mentioned above.

This approach appears to be paying dividends for the company’s investors too, with Nathan saying that the company generally generates returns of between 8 and 12 per cent.

Of the various financing options the company uses, royalty financing is perhaps the least traditional. In brief, royalty financing is an alternative to debt or equity financing, in which a business is loaned a specific amount of money from investors, with the investor then receiving a percentage of future revenues over a pre-agreed period up to a specified amount.

While Nathan concedes that royalty financing is “a little bit more expensive” than other forms of funding, he adds that it is “super flexible”. He continues: “It’s long-term capital. It’s basically indefinite capital, you just pay a yield on it. And that’s important to us to have that quasi-permanent capital base without having to be public.”

For would-be acquirers, Nathan says that being able to ask for money is key. He adds that some people, including people he has worked with, cannot see that there is a difference between asking for money as an investment in an opportunity and charity, meaning they are hesitant to chase financing and are ultimately unable to grow.

Nathan concludes: “You just have to be able to be prepared that if you want to grow your business, capital is a big factor” and defines raising capital as “the biggest piece of the puzzle” for consolidators.

For companies seeking to grow through M&A in the current economic climate, where traditional financing options are less readily available and competition to access funding is intense, Lynx Equity’s use of a wide range of sources provides a valuable example of how buyers can attract financing from an array of alternative providers.

Identifying and overcoming succession challenges
In a more recent interview, conducted this year with CanadianSME Small Business Magazine, Brad Nathan expanded on some of the key succession challenges that Lynx Equity faces in its M&A activity and how it has worked to overcome these.

Nathan identifies three common hurdles that the firm faces when acquiring a business: Seller readiness; valuation gaps; and deal terms confidence.

Regarding seller readiness, Nathan comments that, while it can be difficult for sellers to relinquish control of their business (arguably particularly relevant with regards to Lynx Equity’s insistence on 100 per cent acquisition), “having a clear transition plan is critical in their readiness to sell”.

As we outlined in a recent insight, over-reliance on an owner is something that poses a major obstacle for a business seeking a buyer and Nathan says that Lynx has “typically shied away from businesses where there’s no clear succession plan or if the owner is fundamentally too important to the day-to-day of the business.”

Nathan emphasises that, if a business’ success “is rooted in the involvement of the owner”, then the owner exiting will not be possible without putting the business at serious risk post-sale. However, Nathan adds, there have been “rare instances” where Lynx has structured “much longer transition times”, enabling it to work alongside the outgoing owner to find a suitable replacement.

Regarding valuation gaps, something that has been a significant barrier to M&A in recent years, Nathan says that without “minimisation” of the gap between what a buyer and seller think a company is worth, “there is no way a transaction can take place.”

According to Nathan, this problem can go both ways: “Without that gap minimization, there is no way a transaction can take place. I’ve seen buyers hold out and miss an excellent opportunity and I’ve seen sellers hold out for an unreasonable sale price only to have the business go downhill after a failed sale.”

Again, Nathan says that Lynx has walked away from several "good opportunities” due to an inability to bridge a valuation gap. However, he adds that the company often operates by the mantra “you name the price and we’ll name the terms” and has been able to close gaps with favourable purchase terms in lieu of a lower price.

Finally, discussing how a lack of confidence in deal terms can affect a sale, Nathan says that sellers often have difficulty “grasping that they won’t get the entire amount of money for their business upon closing.”

This is one area in which Lynx Equity’s extensive M&A experience can help smooth the waters, with Nathan saying: “As a result of our track record and being in the position for potential sellers to talk with past sellers about their experiences working with us to past sellers, it makes having confidence and trust in us, and the transaction, much easier.”

Ensuring a successful transition
Discussing the importance of post-deal transition in the 2024 interview, Nathan identified one key factor as being vital to creating a smooth, successful transition: people. As he states: “At the end of the day, the people who are in the business will have the most influence, as well as will have the most impact from the transition of sale. So, as specialised buyers, we are thinking about how the people will be impacted and how we incorporate them into our process.”

For Nathan and Lynx Equity, finding the right people to manage a transition is fundamental to ensuring its success and he reveals that the company has a dedicated HR group focused on finding the right people to manage the transition period.

Lynx Equity’s sales and marketing team is key to its post-acquisition process, assisting acquired businesses by implementing professional sales. However, Nathan emphasises, if a business is confident in managing its own success post-deal, Lynx has a hands-off approach.

This demonstrates the confidence Lynx has in the companies it ultimately decides to acquire - a key benefit of an acquisition approach that has selectivity at its core.

After years of successful acquisition and integration, Nathan says Lynx has “a really good ‘plug-and-play’” template for onboarding companies and a team with a diverse range of experience and capabilities to ensure that all new acquisitions get “the Lynx family treatment.”

Find out more about how buyers can ensure successful post-deal integration

Maintaining structure
Obviously, with more than 50 subsidiaries, the structure and management of the group is a key concern. Nathan describes Lynx Equity’s structure as “similar to a bank”, with individual managers overseeing a certain number of accounts.

However, he adds that the specific structure of how this is managed is an ongoing internal debate. Nathan says: “Part of it is, should you focus on each business as a segment or an industry-specific focus where one guy just looks after signs, one guy looks after floors. They have their monthly budget call and assuming everything's okay, they go on with their day."

He adds that the company also incorporates a structure based around identifying areas of the group that need the most help. He mentions what he refers to as Lynx’s “special loans department”, run by Judith Benatar, which focuses on fixing problematic businesses without layoffs and through painstaking financial management.

In some of the company’s most active areas, there will be a specific figure who is tasked with overseeing operations due to their expertise in that sector. For example, Nathan names Lynx’s Head of M&A for North America Eric Percy, who manages the group’s flooring businesses in addition to overseeing its North American M&A activity.

Percy, Nathan says, understands the flooring business “intimately and better than I’ll ever know”. Nathan adds that one of his strengths is being “very good at hiring people smarter than I am.”

The future
Regarding Lynx Equity’s plans for the future, Nathan said back in 2022 that there had been some discussions over a public listing, with “a couple of investors” wanting the firm to take that step.

However, he says that the company is in the fortunate position of being able to continue growing by just carrying on “doing the same thing”. He adds that the firm has “a really good management team, really good capital, really good deal opportunities [and] great investors”, meaning that there is really no need for it to change course.

Ultimately, the company looks set to continue growing through acquisitions, with Nathan mentioning Lynx’s aims of growing further in areas such as Europe. He emphasises the firm’s desire to remain committed to what has been successful so far.

Nathan cites the cautionary example of BlackBerry and the reported impact of former co-CEO Jim Balsillie’s infamous efforts to acquire an NHL team on the company’s status as a genuine competitor to Apple. As Nathan says, “you can’t be 50 per cent focused.”

Ultimately, Lynx’s strategy is founded on incremental growth through acquisitions. This is true both in terms of the size of business it acquires (with Nathan saying in 2024 that the company is increasingly focusing on acquisitions in the $2.5-$5 million EBITDA range, compared to its previous $1-$5 million focus), as well as the sectors it buys into and its geographic expansion.

This was demonstrated with the company’s most recent acquisition - the October 2023 takeover of Creative Surfaces Inc. Founded in 1988 and based in Sioux Falls, South Dakota, Creative Surfaces is a major provider of signage and casework to the automotive, hospitality, fitness and gaming industries.

Of course, signage is one of Lynx’s core offerings. However, when announcing the deal, the firm highlighted that the acquisition didn’t just strengthen its existing signage portfolio, but also represented its first foray into the gaming industry and its first entry into South Dakota.

While a public listing may not be out of the question in the future, it seems there is little reason for Lynx Equity to change its approach. The company has an incredibly high success rate with its buy-and-hold strategy, with Nathan saying that the company has only ever sold a business in “special circumstances”.

This typifies an acquisition strategy that, while highly scaled-up, wide-ranging and geographically diverse, is also well thought-out, extremely selective, patient and based around a handful of vital core principles.

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