Selling Your Business: How to Maximize Value Before You Exit

Speaker 1 – 00:00
We’re going to be talking about the Fun side. If you’re monetizing your life’s work or deciding whether you sell to an
outside buyer, private EP, or if you sell internally, what’s some general advice you’re giving clientele on how the
process works and how to maximize it?
Speaker 2 – 00:15
The more time you have the plan, it’s always in most cases the better. Depending on your circumstance, there’s a
lot of different options. There’s also a lot of business owners that they don’t even understand. The process of how
you drop trade the business, let alone how much it’s worth, doesn’t typically make a lot of sense for a variety of
reasons. But you need to talk through all that and strategize.
Speaker 1 – 00:34
What are the three or four biggest.
Speaker 2 – 00:36
Drivers that you’ve seen? Cash flow and profitability is always super important human capital and then just de
risking as much as possible.
Speaker 1 – 00:45
How does AI now affect those three areas?
Speaker 2 – 00:48
Any business that is impacted by it, if you’re not in exploring it, examining it and starting to implement it, you’re
going to have a real problem.
Speaker 1 – 01:01
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All right, perfect. Welcome back, Tom. I’m excited for today’s episode. We’re going to be talking about the Fun side.
If you’re, you know, monetizing your life’s work or deciding whether you sell to an outside buyer, private EP, or if you
sell internally. There’s a lot of, you know, psychology that goes on behind that. But I first want to talk about, you
know, what is the advice you’re giving someone and really two scenarios, they come to you and they’re selling like
this year. And then the second scenario would be they come to you and say, hey, I’m planning to sell in the next
three years. What are those two things look like and what’s some general advice you’re giving, you know, clientele
on how the process works and how to maximize it?
Speaker 2 – 01:43
No, it’s the most important question, I think, for any business owner because it’s going to happen at some point. So
the more time you have the plan, it’s always in most cases the better because for one thing is you have a chance to
correct things that are dilutive to value, plan for it and all those things. The other thing is that depending on your
circumstance, there’s a lot of different options like you laid out. And so anytime with a new client that we have,
even if they say I’m dead set against X, you know, we want to go through and explore all the potential, you know,
liquidity events for them like you referenced different times with clients where the offer is, you know, cash up front.
That is, basically, if they just run the business for two years or something.
Speaker 1 – 02:35
Like that, they can save that themselves. Yeah, right.
Speaker 2 – 02:39
So we’ve had scenarios where we go through and do analysis and we’ll help someone do a dividend recap. So the
high level of that is, you know, for a business that doesn’t have a lot of leverage, you. You go through and you
analyze and let’s say they’ve worked with you and they need $10 million to be set financially forever, but they don’t
really want to sell the business. Well, and they don’t have a lot of leverage in the business. We’ll go out and shop
the debt for them. Borrow $10 million from a commercial bank, you know, maybe even some of the alternative
lender. Yeah, from time to time. And a lot of times you can take that, borrow that money and then take that out a lot
of times tax free.
Speaker 2 – 03:24
Now you’ve taken, you know, value out of one side of your balance sheet that’s illiquid, put it into the liquidity side,
given it to you to work your magic, not promising any returns or anything. Yeah, like that. But now you have more
flexibility with that, and you haven’t traded the business at all. You got to repay the debt, of course, and you go
through and you know, do a cash flow analysis to make sure you’re comfortable with it. But there’s some business
owners that are just dead set against debt, so maybe we don’t do that. Well, maybe another alternative is to
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manage a buyout. Or maybe they should do a strategic acquisition before selling. For whatever reason, maybe they
need to change certain attributes, you know, about something within the business that will make it more valuable.
Speaker 2 – 04:12
So if you don’t have time to do that, you know, you’re stuck. I mean, I’ve had people approach me before and say, I
want to sell. And they take a look and it’s like, there’s nothing to sell here. And I don’t mean that in a. That there isn’t
a business.
Speaker 1 – 04:26
You are the business and there’s no asset. So if you leave, is that there’s still gonna be a business? Is that what you
mean?
Speaker 2 – 04:32
Or just that, like you referenced private EP? In some industries, private EP is consolidating, you know, businesses,
and then in other ones, you. You really don’t have a lot of places to sell to. Either there aren’t large enough
competitors or competitors aren’t being acquisitive or whatever. And so, you know, your only exit may be to private
EP. And sometimes in certain industries, private EP. Like I’ll give you an example. In the behavioral health space
where I’ve done a lot of transactions, most of the acquirers there don’t want to acquire practices that have 1099
people working for them. They want to acquire salary W2 employees for a variety of reasons. And so if you only
have 1099s, no one will want to buy you.
Speaker 1 – 05:29
Like it’s.
Speaker 2 – 05:29
Period, full stop.
Speaker 1 – 05:30
Let. Let me ask you this. Is that because, like, what I’ve seen with 1099, it’s kind of like people operating
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businesses within a business. Then you kind of have this band of pirates. Everyone’s doing it. But if you have a W2,
it kind of represents. It is a business. Everyone’s rowing one ship, one direction, and it’s. It’s a repeatable, you know,
call. It represents a lot of things structurally that are probably set versus 10. Everyone being 1099 probably means,
from my experience, a little bit of internal chaos or a lot of chaos. Is there anything else that you would say
differently?
Speaker 2 – 06:03
I’ve seen, I’ve seen both. I’ve seen really organized groups that.
Speaker 1 – 06:07
With 1099.
Speaker 2 – 06:07
Yeah. And it. And. And that’s an, you know, that’s a nuanced industry. Yeah. You know, just as an example. But
they’re, you know, there’s other ones, you know, there’s lots of other situations like that where you might have one
specific way you do business or attribute about the business that just makes either it unsalable or the value comes
way down. And so, you know, if you don’t have time to correct that’s a big, you know, you’re missing out on a lot of
value there. So, you know, planning. And there’s also a lot of business owners that they don’t even understand the
process of how you trade the business, you know, let alone how much it’s worth or anything like that. They think
you can just. You just go out and talk like, oh, my. My biggest competitor for years.
Speaker 2 – 07:01
And then like, you’re sure they want to buy you and that’s the only person you want to talk to. Yeah, like, it doesn’t
typically make a lot of sense for a variety of reasons, but you need to talk through all that and strategize. You know,
the other thing that is important is timing. You know, if you’re in a, let’s say a commodity business, like, of late that
was impacted by tariffs. And you just have no clarity of what’s going to happen that can. It doesn’t ne. It might not
change the value of your business per se. It could, but it may make acquirers just, they’re just not making
acquisitions because they don’t have clarity of what’s going to happen. Or right now there’s a war and it’s impacting
oil and energy prices and things like that.
Speaker 2 – 07:52
How much of that is speculative versus real market things? A lot of times the M and A space and the credit
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markets, they just seize up when there’s uncertainty. And so timing becomes really important. And if, you know, you
wait until the last minute, I have to do it this year. It might be a really. If you’re in the year where your business is
worth the least for reasons you can’t control, I mean you could win the other way too. But the point is that planning
and timing is always better and you can.
Speaker 1 – 08:29
Divert, you can plan and diversify against those situations. Not always perfectly. There’s always the black swan
event. But I wanted to ask you Tom, after all the valuations you’ve done, and I know this is going to be a tough
question because of how detailed you are, but if you were to say, you know, I come to you three years in advance of
selling, but relatively, let’s say eight out of ten well run business, there’s some, you know, bad habits, we’ll say, or
you know, bad deals. Client diversification isn’t the best. I have a couple clients that make up a lot of the revenue.
Let’s just say there are some basic problems. What in general, if you were just to have to say like the 8020 analysis,
this.
Speaker 1 – 09:10
What are the three or four biggest drivers that you’ve seen that someone can change course or prepare to
maximize the value in that three year period, what would you say those are.
Speaker 2 – 09:26
Number one? I mean cash flow is always king, you know, so cash flow and there’s a lot of rabbit trails involved in
cash flow. But I, I can’t, you know, if I didn’t have cash flow as part of that list, that would be.
Speaker 1 – 09:39
I think you mean available cash flow. So revenue. I’m just simplifying this way too much revenue minus expenses.
Like what could an acquirer able immediately extract from the business if they purchase it tomorrow? What’s the
available cash flow they can after expenses, you know, what’s the profits? Is that what you mean?
Speaker 2 – 09:58
Yeah, ebitda. And, and so EBITDA is an acronym that is basically akin to free cash Flow. And you know that’s the
basis in most transactions from which a multiple is applied. So when you talk about EBITDA multiples, you know
that’s the one factor. So it’s eight times X. The higher X is, the higher the value. So you know, so over those three.
Speaker 1 – 10:26
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Years you’re encouraging me, you’re coaching me. Hey, because there’s so many levers in a business that you can
pull to improve that. You can lower expenses, you could increase fees depending on the, and then, you know,
renegotiate deals. There’s, what are, you know, what’s the consultator educational process you’re typically seeing?
Like, hey, I’ve looked at every part of your business. Here’s some low hanging fruit that we think we can, that we
think you should accomplish in the next three years to maximize that.
Speaker 2 – 11:01
Yeah.
Speaker 1 – 11:02
Free cash flow.
Speaker 2 – 11:03
It’s funny because usually when we start talking about that stuff, they already know the answers.
Speaker 1 – 11:07
Yeah.
Speaker 2 – 11:08
They know where the soft spots on that.
Speaker 1 – 11:10
Yeah.
Speaker 2 – 11:10
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And, and they just haven’t had the gumption or incentive or whatever to go fix that. So sometimes it’s those things,
other times it’s just focusing on a certain part of the business or selling a certain part of the business. Recurring
revenue is a big thing that can increase valuation.
Speaker 1 – 11:35
Do you say recurring revenue is number two then? Are we still on number one?
Speaker 2 – 11:39
Yes, inside of number one. I would say that’s inside number one. You know, the other two things, you know, that I
would say are people, you know, human capital is hugely important, you know, within a business. And so who’s
going to run it? If you’re selling it, what does that mean? Are you staying? Who else is involved? If you know, if
something happens to you, I like to use the you win the Powerball instead of you get hit by a bus analogy. But you
know, if who’s running the business, what’s the management team, what’s the depth and breadth of that? Because
a lot of acquirers, unless it’s a strategic buyer, someone in the industry that can, knows how to run it, if it’s private
EP, they don’t want to have to hire a new person to run it.
Speaker 2 – 12:34
They don’t want to have you dive.
Speaker 1 – 12:35
Into details or demonstrate that business is able to operate without you.
Speaker 2 – 12:39
Correct. Like, so that, you know, having that plan increases value and being able to show how it’s going to run.
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Speaker 1 – 12:45
Let me ask you this. If I come to you and let’s just say like I Can’t pronounce it the way you do. Ebitda, Free cash
flow. EBITDA is how I always say free cash works too. Second guessing myself here. But the, that’s why I always
say the most valuable businesses are the ones that the owners are relevant. Right. It’s for that exact reason.
Because if I’m relevant, that private EP company has to, you know, pay the multiple and still pay me, negotiate a
salary with me to stay on, which will probably be the next two to five years. One of the most miserable years of my
life. Because now I have a boss.
Speaker 2 – 13:19
Right.
Speaker 1 – 13:20
But if I prepared over this three years where I’m irrelevant, they don’t have to hire me. I think what you’re saying is
my salary could be immediately become part of that eida. Yeah. And now we have a multiple on. Let’s just say it’s
an extra three or five or whatever it is, 100,000 that could really, depending on the multiple would drive the value
up. If I as a business owner have made my management team so strong and the business can operate without me,
there’s immediate, you know, be millions of dollars of value.
Speaker 2 – 13:53
There’s one that the buyer is going to want to likely meet the management team and then get them to sign
employment agreements sometimes even before closing. But then also a lot of times they want to give them
financial incentives. So I’ve been involved in plenty of transactions where the management team is excited
because one, they’re getting more responsibility, more financial incentives, sometimes even some EP incentives
and things like that. Some real significant upside because the acquirer is saying, look, we want to have everybody
aligned here. Yeah. You know, we want to have everybody rowing in the same direction in the worst possible thing
that could happen after you acquire a business. I mean, if you just think about it, even if you’re buying a gas station,
the person that does the overnight.
Speaker 1 – 14:44
Shift, some of them make sure people aren’t stealing candy bars.
Speaker 2 – 14:46
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Yeah. If the person doing the overnight shift leaves as soon as you buy that, how long does it take you to find that?
What if you can’t find it? So human capital these days is terrifically important and that’s actually part of our process
for sell side clients, is that we’ll do management meetings. I always encourage as much as possible owners to get
their management team involved in this process and meeting the potential buyers prior to closing. 1 It gives the
buyer, you know, some warm fuzzies. One that there’s a close knit relationship where they can feel things. Yeah,
yeah. They can feel the culture they, and then having them part of those meetings where you’re talking about,
you’re talking shop, you’re talking about the numbers in the future, they’re actually participative in that. And, and
they’re showing their competence to, you know, the buyer.
Speaker 2 – 15:44
So, you know, if you’re selling your business and you’re the only one that ever talks and you’ve got three guys and
you’re like, trust, they can run it.
Speaker 1 – 15:50
Red flag.
Speaker 2 – 15:51
You’re the only one that ever speaks. And they’re just, you know, they’re just sitting there. That’s very different than
if they’re doing most of the talking about everything and you chime in every once in a while. That’s a different, you
know, dynamic. So, you know, human capital is really important.
Speaker 1 – 16:10
Real quick, I’m gonna say the reason we started this podcast initially two, three years ago, four years, whatever it
was I wanted, you know, obviously taking on more of the responsibility of CEO and running the firm. The less client
involvement I could have. And so I just, in my head I was like, I think the more I give the team the voice and the
channel and believe it or not, you know, people started listening that, you know, Ben, Jameson, Chris and those
relationships in my industry typically take two years. We’re able to do them in like six months, which was an ego
check for me. I’m like, I thought it was super important and this was never going to happen. Like six months.
Speaker 1 – 16:45
Clients were like happier than could because like they know they’re all over their stuff and where I’m like emailing
them back at midnight, they’re like, what’s.
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Speaker 2 – 16:51
Going on with March?
Speaker 1 – 16:52
He’s probably too stressed to be like, you know, so it worked out. But I could not agree more with the acquirer,
seeing that it’s not just a one man show that’s so important to have that team in place, the culture in place and for
everyone to have a voice. Yeah, yeah, no question.
Speaker 2 – 17:06
Yeah. And I would say that the third thing is, you know, just de risking as much as possible. And that could be
customer concentration, that could be vendor concentration, that could be, you know, pension liabilities or union or
something like that. Like. And you know, there’s certain things that in every transaction, you know, buyers are
always looking for. And some will just say, we’re out. Yeah. Immediately. If you have a revenue con like there.
Speaker 1 – 17:40
So some industries I’ve, I have a business, let’s say the revenue is 50 million, it’s a 10 margin. So profits are 5 really
simple. And so that means I have, you know, 40 million of overhead. And some of that’s variable based upon the
customers or the business I do. But a lot of that’s fixed. If I have one client that makes up half of that and you do a
stress test, if that client leaves, I go from being 5 million EBITDA to maybe negative 1 million EBITDA. So as an
acquirer, I would say you don’t have a contract with that person. It’s just a go as you go. Yeah, I’m not buying that
business. So that’s just a really probably too simplified example of what you’re talking about. Right.
Speaker 1 – 18:20
Is that diversified base of clients or looking at the contracts in place of how sticky is the business is a huge thing.
Right?
Speaker 2 – 18:28
Yeah. And sometimes you can’t help that. Right. Like, yeah, if you have a great relationship with a client and they’re
80% of your revenue, it’s not like you’re going to go fire them because they’re 80%, you know, so then it becomes
strategizing, okay, how are we going to sell this to a buyer to show them that this is airtight, this is going to
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continue and all those things. And sometimes it’s through contractual agreements, sometimes it’s through some
softer things, sometimes it’s just getting everybody in a room. It, it all depends. But strategizing on that is the
important part. You know, if you don’t have time to change it or massage it or anything, then you’re just, it is what it
is. Yeah.
Speaker 2 – 19:07
And you know, you might be either looking at not having a transaction or a significantly reduced purchase price,
you know, because of that, because of the risk to the buyer, like you said. Or, or, and sometimes instead of you
getting more cash up front, the buyer saying, if this customer leaves, we’re in trouble, so we’re going to do an earn
out. Which is never ideal. Yeah. So it’s, you know, sometimes you just can’t de. Risk it. But you know, it’s important
for the business owner to understand them and then try to massage as much as possible. Like I said, the other
thing is that a lot of times they’ve lived with these risks their whole lives. Like they have a union, for example. And
I’m not against unions or anything like that. Yeah.
Speaker 2 – 19:51
But a lot of buyers see that as a risk and something that they don’t want to have to deal with. And so the business
owner might be like, well, what do you mean? Like, I love the union. They’re Great. I’ve never had any problems with
them. Well, you know, he’s looking at that risk. He’s lived with it for 30 years and it’s no problem. But to someone
else, it’s a different perspective. And so there’s some of those things that, you know, outside eyes, like we would,
you know, show them and explain to them why this is a thing that we need to try to, you know, massage. Or they’ve
got the plant manager. That’s great. But he’s 70. Yeah. And a buyer is going to be like, this is a problem. Like, who’s
the net? Like, what do you mean? He’s.
Speaker 2 – 20:37
He’s not going to retire? And it’s like, well, yeah, right. Someday he will. Yeah. So, you know, that’s. Those are the
things that, you know, are really important. So, you know, I guess to summarize, you know, cash flow and
profitability is always super important. Human capital and then just de risking as much as possible.
Speaker 1 – 20:59
All right, so we could do a podcast on this in general, but how is just a quick opinion because it’s evolving so much.
How does AI now affect those three areas? Where do you think? You know, I think we’re. If you lean into it, I think
we’re in a golden area of, you know, it’s going to be some fortunate things and some very unfortunate things. I do
think it’s going to a big problem in America. There’s a wealth gap, there’s an income gap.
Speaker 2 – 21:22
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Right.
Speaker 1 – 21:23
And I think AI is unfortunately going to magnify that. And it’s going to be one of those things where the rich get
richer. Now, the good news of it is that I think it is going to provide a platform for a lot of people in the workplace to
become more efficient and become more present with their families to save time to create efficiencies. So I just
want to hear your opinion on. And I’m advising like younger generation, like coming out of college. If you’re AI
proficient, you’re just so much more attractive to the workplace, you know, because it’s those starting jobs I’m.
We’re starting to figure out, like, we don’t need. Because AI can do a lot of the maintenance, but you need someone
there to prompt it. Right. To do it and to have so much knowledge to prompt along.
Speaker 1 – 22:05
So I just want to get your opinion. If you’re advising someone that is using AI, what are the risks? What do you
think? What’s the potential and what are the. Yeah, just general thoughts, I guess. Would Be my question as it
relates to business valuations and operating a business.
Speaker 2 – 22:19
Yeah, I mean, and you’re right, we could probably do a whole thing on this and talk at length. But, you know, what
I’m seeing even in my own industry is that it’s changing so quickly that it’s like, even when you feel like you’ve got a
good understanding of a new tool and how it works and how to use it’s like the next week something else, the new
Claude gets released or something, or you hear someone else is using. And so, you know, it’s just going to continue
to evolve.
Speaker 2 – 22:50
And so I think any business that is impacted by it, you know, if you’re not, you know, exploring it, examining it and
starting to implement it, you’re going to have a real problem, maybe even just in your operations, let alone selling,
because most of the people that you’re going to be selling to are almost for sure going to be using it up on it. So,
like, if you’re just the, you know, the person that’s like, I don’t want to learn this new thing. I’ve done it this way for
30 years. I don’t need a computer to tell me what to do.
Speaker 1 – 23:29
You’re going to be a more attractive buyer if you’ve adopted or have a general education level in your company to a
buyer. Because most buyers that if you want to get a good value, are going to be utilizing in some fashion.
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Speaker 2 – 23:43
Most, most. This is a very general statement, but most businesses that are acquiring others, typically the acquirer
is more sophisticated and has more resources than who they’re acquiring. That’s not always the case, obviously,
especially technology and stuff.
Speaker 1 – 24:04
You know, you just look at the Paramount. Yeah.
Speaker 2 – 24:06
But if you take, you know, the, the larger. So. And they just have more resources, so they’re going to be looking at all
these tools and they have more capital to invest in technology and things like that. So if you’re way behind versus
ready to implement that, it’s just a different, you know, different conversation. You know, conversely, you know,
what’s interesting is that, you know, there’s a lot of businesses that in the past. I’ll use H Vac as a example. You
can’t AI H Vac, at least not the installation and that part.
Speaker 1 – 24:43
Right. Yeah. Maybe one of the best businesses out.
Speaker 2 – 24:45
There, because that’s right.
Speaker 1 – 24:47
You need it.
Speaker 2 – 24:48
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And you know, I would say in 10 years ago, maybe even less, it wasn’t like there was this hot M and a market for H
Vac companies. But right now there’s a huge consolidation recession.
Speaker 1 – 25:01
Ish proof.
Speaker 2 – 25:02
Right.
Speaker 1 – 25:02
Very high cash flows, very attractive.
Speaker 2 – 25:05
Right, right. We talked about recurring revenue and things like that. You sell maintenance contracts to
homeowners. You’re not going to just say you’re not going to opt out of heat in the winter or AC in the, in the
summer. And so, you know, those are services that you’re going to need. Mechanics, auto body shop, like so there’s
certain industries that as AI comes into play, it’s changing things so fast. It’s also making other industries more
attractive because they’re the same as they’ve always been. It’s necessary, it’s recurring. And you know, we may
have more human capital available in those spaces because, you know, you have more people going into trades
and other things because as many office jobs aren’t as needed anymore.
Speaker 2 – 26:00
So it’s just that it, I think it’s, to me, I’m excited about it frankly, for our business, you know, But I think that’s also
because I have the perspective of early adoption and usage and. Yeah. And things like that. And I have a good
friend who described it as, you know, I’m like Iron man now. Yeah. You know, I, I have all these.
Speaker 1 – 26:24
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Tools I can get done in one week now, in one day. That’s how I describe it. I mean it’s, it’s crazy, but super if you’re
utilizing it for, you know, serving clients the right way, helping team members have a growth path, helping your
company stay rock solid, it’s great thing. Totally.
Speaker 2 – 26:42
Yeah, absolutely.
Speaker 1 – 26:43
The only downside I see is I envision this big company and bigger into providing opportunities. And now probably
30 or 40% of those physical aren’t going to be needed in the future just because of the efficiencies you build with
technology.
Speaker 2 – 27:00
Which is crazy, I think.
Speaker 1 – 27:03
Let’s talk about ebitda.
Speaker 2 – 27:04
Right? Yeah.
Speaker 1 – 27:05
I mean there’s, we can drive EBITDA up or we can keep client fees down or a mix of both. So it’s, you know, from a
business purely capitalistic standpoint, it’s great. Obviously, you know, recognizing that there are other problems in
the world that, you know, we hope get better as well, such as the wage gap and the wealth gap. But yeah, that’s
another podcast conversation for another day.
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Speaker 2 – 27:26
Oh, yeah. There’s a, there’s a lot there that we could unpack. But I think that, you know, from my experience in just
business and life is that the world evolves whether we like it or not. And so whether you think AI is great or not, to
ignore it is probably to your peril from a business perspective.
Speaker 1 – 27:49
Well, let’s shift for time’s sake, Tom. We’re going to have you on for a couple more episodes. I can tell these are
going to be good, great conversations for audience education. But the. Let’s say, and I, I want to go into a couple
stories and obviously confidentiality is key, but sometimes, you know, someone will get a business valuation for
thinking they’re going to sell. And then there’s an education level of, hey, have you thought about it this way? And
so one specific example is, you know, EBITDA around 3 million and the offer on the table was 30 million. It was a, it
was at tech slash service. And the best offer, you know, was 30 million was only like 7 million guaranteed. And
then the other 23 million, I was like, hey, dude, like, you operate this business for two and a half years?
Speaker 1 – 28:41
Yeah, we construction this pension plan mega back to Roth, you know, your brokerage account, 500, all this stuff.
We couldn’t get your family on track. You needed about like 10 to 12 million to be forever set. I was like, the
guaranteed part of this we can take care of in like two to three years. Because you’re also. EBITDA’s growing by
15% a year and you’ll still own your business and the next two to five years won’t be the worst years of life because
you won’t be operating with this company that you already think is a little sketchy and you don’t really agree with
their philosophy. And so there’s those kind of conversations where it’s like, oh, 30 million sounds great, but the
structure of it is so crucial.
Speaker 1 – 29:15
So I’m finding with like small business owners that are young, it are really, the valuation is so crucial because it
opens up these philosophical or psychological conversations of do I sell or do I not sell? Yeah, do I sell and do I
stay? Do I sell and maximize the value? Do I sell and maximize the partnership? Because I want to be part of this
company forever. So just speak to like your experience and how you help navigate clients through those paradoxes
that exist when they’re going through thinking about a transaction like this.
Speaker 2 – 29:51
Well, it’s funny because I have said many times I couldn’t be a financial advisor because there’s too much
psychology involved. It’s crazy and it would drive me crazy. But talking people out of buying gold and putting it
under their bed and all the different things that I’m sure real or not or perceived, you know, people think about. But
it’s very similar in terms of this, you know, industry. And so when you’re helping someone, you know, transition their
business, there’s tons of emotions involved and things for them to think about. Sometimes a business owner, you
know, they literally started it from scratch 30 or 40 years ago and they’ve gone through hell and back building it,
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growing it. Their family has taken lumps along the way, they might be working in it. And so now to transition it to
someone else, like it’s their baby.
Speaker 2 – 30:55
And it’s not a matter of if there’s going to be disputes afterwards. Like there’s absolutely. Because the new owner is
going to treat the baby differently than they would and they’re not going to maybe have the as long of ownership
horizon in mind. So they’re making more short term decisions as opposed to like what’s like, I’m not buying this
truck right now, even though we can use it for the next 10 years, because the one we have now breaks down every
once in a while. But it’ll get us through the next five or whatever the situation. Like so, you know, there’s all kinds of
emotions and situations to unpack.
Speaker 2 – 31:37
And what I find, like I said in, you know, our first session was that, or is that they’ve, you know, people learn so
much and a lot of times don’t understand structure and other things that a buyer is going to either require or
necessitate or what have you. And sometimes the highest, you know, the highest offer isn’t the one that you want
for a lot of qualitative reasons. But you need to be thinking about that and unpacking that ahead of time. Not when
you go to sell, not when it’s a Friday and you got in four, Lois. And you got to make a, you know, somewhat time
sensitive decision on which, who you’re going to get engaged to.
Speaker 1 – 32:24
Isn’t that a paradox in itself though? Because a lot of like business owners can get the best returns, typically if they
put all their cash back in the business. But then it becomes this huge astronomical part of like 90% of their balance
sheet. And so when you look back on that and you say, okay, I’ve grown this astronomical business, it’s hard to
really leverage between peace of mind and getting a transaction done when your whole life’s dependent on that.
Because now you have this lifestyle depending on a million or $2 million a year and if you don’t monetize it the
right way. Now there’s pressure.
Speaker 2 – 32:59
Yeah.
Speaker 1 – 33:00
Versus a business. I found a business owner that comes into a sale with like even if the business doesn’t sell, like
I’m set now. This is like the legacy for like the kids and like the, you know, to really increase the net worth. But I find
it’s interesting to have a good plan that just like you said, a three way Runway or a five year Runway, even a ten year
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can be astronomically helpful. Having a good financial plan to back that up can be crucial for someone not having
to sell or having to choose the wrong partner or having to maximize. And you can really negotiate your own terms
of like, no, I need more than 50% guaranteed or I walk. Because I can still, I’m good no matter what.
Speaker 2 – 33:37
Right.
Speaker 1 – 33:38
I’m still good running my business. I don’t have to sell. So that. Do you have any experience? Like you have tons of
experience but anything like perspective in generality. So I know every situation is so different so it’s tough to talk
in generalities. But like for what you’ve seen, for someone that goes in having to sell versus someone that doesn’t
have to sell, like what do you see? Do you see any major shifts between the two?
Speaker 2 – 34:02
I mean I think that, you know, each situation’s different. But you know, the first question I always ask is who’s your
financial advisor and do you have a plan and do you know what your number is? Sometimes people don’t want to
tell me their number because they think that means that’s what I’m going to.
Speaker 1 – 34:21
You’ll settle for.
Speaker 2 – 34:21
Yeah. Gravitate.
Speaker 1 – 34:22
And you get 100 with only a 10. Yeah.
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Speaker 2 – 34:24
Right. And I always explain I’m not asking for your number because I’m going to try to settle. And in fact our
engagements are structured so that if you win, we win. They’re contingent percentage of higher the better. Right.
So I never have an incentive to sell short. But that being said, if I think the business is going to trade for 45, 50
million dollars and you need 50 million after tax to take care of your kids and manage your lifestyle and whatever,
well, that is probably not going to happen. And so I need to know because going out and marketing a business one
takes a lot of time and effort. And I’m not talking about us, I’m talking about on the business.
Speaker 2 – 35:19
And you’re putting yourself out there to the market within who you choose, but you’re still putting yourself out there
that you’re for sale. And so if you’re just kind of exploring. It’s never a good use of time and energy. And now you’ve
got the market talking about that you are out there trying to sell. And so you need to know that the transaction is
going to achieve, you know, your personal and family goals, because you only get one shot, you know, and if you go
through that whole process and you get to the end and you have an offer and you’re like, yeah, this doesn’t do it for
me. I mean, maybe you didn’t. Maybe, maybe you got an offer less than what you thought you would. But, like,
that’s my job to know that’s not going to happen. Yeah.
Speaker 2 – 36:09
But, you know, if you get to that point and you hadn’t really thought about how much cash you need, you just
wasted a whole lot of time and energy. So it’s all about having all the people in concert talking about that, looking
at it, you know, in thinking through, you know, all those things from a personal perspective. And if, and if you have a
short Runway, like you said, that’s all, you know, you might have to settle for something less than your number. And
that’s never good. If you have a longer horizon, then you have more time to plan that. Yeah. And things like that.
And the other thing, like you said, is that I’ve had clients before that are like, I definitely want to sell for whatever,
like myriad reasons.
Speaker 1 – 36:58
Yeah.
Speaker 2 – 36:59
Then we go through and we do analysis and talk through the qualitative and look at some cash flow things and
whatnot, and they actually come to the conclusion they’re like, wait, I don’t actually need to sell.
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Speaker 1 – 37:10
Yeah.
Speaker 2 – 37:10
I just need to do that. Yeah. Yes, exactly. Like hire someone to start mentoring to take your role. And yeah, you’re
not going to make as much money every year, but you still own the business, you’re still going to get cash flow out
of it and you’re not working as much. Not bad.
Speaker 1 – 37:29
Literally two clients that we’ve worked with together that had that exact shift and turned out for both, luckily to be
no brainers. Right. They got the cash that they were going to get, plus they still in their business or they passed it
to their kids, you know. Yeah.
Speaker 2 – 37:43
So pretty cool.
Speaker 1 – 37:45
What would you. So from the flip side of that, let’s say in that example, you gave the fit, they need 50 million. Let’s
say that same client only needs 20 million, but they do want to maximize. So part of your negotiating and the buyer
may be, we need 20 up front. The other 30, it can be an you Know, we’ll share the risk, but we also want upside of
60 if there’s an earn out. So how do you go about like the negotiating the deals of what’s guaranteed up front, what
risk is shared during the process and then ultimately how much of a. I’m sure it’s huge bit by industry, but how
much of a valuation lever is that when you’re sharing risk versus getting cash up front?
Speaker 1 – 38:27
If you get cash up front, all the risks on the buyer, no risk to the seller.
Speaker 2 – 38:31
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Right.
Speaker 1 – 38:31
If you’re getting half and half, I don’t want to say it’s shared, but just for conceptually purposes, the risk is shared in
some percentage, not 50. 50.
Speaker 2 – 38:38
Right.
Speaker 1 – 38:38
And then if it’s like all in earn out, it’s basically at that point it’s like, well, might as well just run your business
yourself because that is guaranteed. But yeah, how do you approach that?
Speaker 2 – 38:48
So the first thing is I, I would never go into a, you know, marketing a business and going into that so selling process
unless were very confident that cash at close was going to be at or in excess of their number. You know, if there’s
going to be something other than cash at close, in my opinion, it’s too risky. Hold on to the business and keep
running it. That’s sort of a period, full stop, you know, kind of a thing. There could be a scenario where someone’s
health or other reasons that’s just like, hey, we just need to go do this. But in most scenarios where you don’t have
a, you know, some pressure, forcing the action, you know, we want to be really confident that we’re going to be
above that because like I said, you don’t get a redo at this.
Speaker 2 – 39:36
So, you know, your question gets into, you know, how do you basically maximize, you know, your selling price? And
that gets into, you know, the process that an investment bank, you know, good investment bank, you know, should
run, that could be a whole podcast, you know, but we’ll bring it back to talk about the broad brush strokes are, you
know, we do the modeling and the forecasting and the recasting and all those things and we come up with
evaluation model, we come up with a forecast, you know, and go through all that with management and they sign
off. Then, you know, you go through and you put together marketing materials. So here’s a booklet, you know, we
refer to it as a SIM confidential information memorandum.
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Speaker 2 – 40:26
It’s usually 40 to 50 pages, financials, all kinds of information, you know, everything you need to know about the
business, of how you would value it more or less, or give a buyer opportunity to come up with a, you know, a rough
value. Then you do, you know, research and come up with your buyer pool. You know, some, you know, business
owners, they want to say, I don’t care who you talk to, I just want the most money. Some are like, I only want to talk
to 10 or 12 because I don’t want this noise out there in.
Speaker 1 – 40:59
The market thinking something’s off or wrong. Yeah, competitors swooping in.
Speaker 2 – 41:03
Right. So we have tools. I mean, we have a Rolodex. You know, that term is definitely obsolete, but you know, we
have our buyer list, but then we also go out and research the whole market and have tools for that. And you know,
you go through and you curate that list of who you’re going to go approach and then the client agrees on that. And
then, you know, you go out to those buyers and you create a, basically an auction process. You go out to them with
what we call a teaser. It’s basically a one page generic overview of the business. Call them up and say, hey, would
you be interested in this business? If you would be interested in acquiring it, sign in it an NDA. And then that gives
you the sim.
Speaker 1 – 41:51
Gotcha.
Speaker 2 – 41:52
Now with the sim, you know who it is.
Speaker 1 – 41:54
Gotcha.
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Speaker 2 – 41:54
If you don’t sign that NDA, you don’t know who it is. So then they get the SIM and typically have a month or two
months or so time where they, you know, depending on circumstance can ask questions and different things and,
but we set up those parameters. They are not talking to owners or management, you know, they’re not having
conversations with them. Like we’re keeping that tight. And then ask, solicit offers, you know, from them what we
would call an I.O.I. Indication of interest. And then typically, you know, we’ll set a deadline for that. Like if you want
a chance at this, submit by this date. They submit those.
Speaker 2 – 42:39
We go through those with their client and we usually pick, you know, a handful of those, you know, depending on
circumstance, you know, how many there are to then come in and meet with them in person, meet the
management team if they’re under the tent and ask more questions. Typically at that point we might open a data
room, limited data room that they, all the potential buyers would have access to. You’re still holding back your
closest, you know, the formula of Coke and your customer names and like all those sort of things. But you know,
you’re giving them more information and Then you give them a deadline to submit an loi. And so the reason that
we go through that whole process is one that you’re creating time urgency so that this doesn’t take three years.
You’re making it known to all the participants.
Speaker 2 – 43:29
You’ve got competition here. And this is serious. We’re professionals. This is what the seller wants to do. And if
you want to participate, here’s what you gotta fall in line. And then if they make it through these different gates
where we’re making sure they’re serious, they have the financing to do it, they come in and meet the humans and
start developing that rapport. And that meeting is just as important for our client as it is for the buyer. Because our
client is going to very much care about who are these people that I’m going to get in bed with? How are they going
to treat my employees? What’s their view of the future? A lot of times if it’s a private EP owned group, you’re going
to have a reinvestment of purchase price, you know, proceeds into the acquiring business.
Speaker 2 – 44:21
So you’re Gonna, if that’s 10% of your deal, you know, you’re going to care about what they’re going to success, how
successful. They’re these, do these guys know what they’re doing? So you go through that process and you get to
that, you know, you solicit those allies and then you go through and you know, pick the best one based upon your
criteria. A lot of times I develop like a decision making matrix of all the attributes that, you know, my clients have
said they care about. Purchase price is always on there. Usually I count that double points. And then it’s, you know,
what’s happening to employees, what’s the timeframe, cash upfront or whatever the things are. And that just helps
to, you know, we’ll like score them out. And sometimes you only have one.
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Speaker 2 – 45:12
Yeah, sometimes you go through all that and you only have one person interested.
Speaker 1 – 45:15
Interesting.
Speaker 2 – 45:17
The great part about the process is if you go through that, you don’t change the process and you don’t tell that
buyer that they’re the only one. I’m not lying to them. Yeah, but they still go through that same process. Just like if
there’s 50 buyers. So they still have the concept of urgency, competition and a professional process. And again, it’s
not like, you know, we’re not, you know, making this big show of it and like bringing in fake other buyers, like pass
them in.
Speaker 1 – 45:56
The hallway and this is like trying to sell A million dollar house and you can look up on Zillow how many saves it
has. And the real estate agent saying, there’s three offers that are on the table.
Speaker 2 – 46:04
Right.
Speaker 1 – 46:04
It’s a lot more private and due diligence and NDAs involved.
Speaker 2 – 46:08
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And I’m, and I’m sure that there’s, you know, I’m sure there’s. I bankers out there that do those sort of things. And
like, we’re just. That isn’t. That’s not how I want to do business.
Speaker 1 – 46:17
Yes.
Speaker 2 – 46:18
I don’t want to do smoke and mirrors, but at the same time, we will set up a process that absolutely maximizes
value to protect the client.
Speaker 1 – 46:28
It does maximize value. It’s still business as usual, right? It doesn’t.
Speaker 2 – 46:32
Yeah. So if I have a, if someone says, look, I want to sell my business, this is the buyer. Negotiate with them. I’m
like, well, what leverage do you have that’s going to force them to pay the maximum that they’re going to pay?
Because if I just call them and say, hey, make an offer, they’re never going to come with their highest number. The
only leverage you have is saying no. And by default, I’m calling them to ask them this so they know you’re
interested. Yeah. So this process creates that competition that in the private company world, public companies, it’s
all public and it’s out there. Private companies, you have to create the market. And so that fundamentally, that’s the
job of an investment banker that’s representing a business.
Speaker 2 – 47:21
To sell is to create that market and to do it in a professional, concise way that maximizes value and minimizes the
risk to the client of one no sale, confidential information getting out there and then just time. Like if this takes a
year, like if you’re out at market for a year, you’re in limbo. Yeah, right. Like that isn’t a Fun way to live. Like, am I
selling? Am I not? Like. And so, you know, we want to create that urgency, even if it’s sort of manufactured, just
because we gotta know, living in that, you know, in between isn’t Fun.
Speaker 1 – 48:02
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Well, that’s super important perspective. I, I do think we need to come back and do a couple of these subjects in
great detail on the AI, on the, you know, going to market specifically, et cetera.
Speaker 2 – 48:15
But there’s tons of rabbit trails throughout.
Speaker 1 – 48:17
All that, which is all, you know, you and I could talk about this all day. But yeah, for the sake of this podcast and the
length. Any closing thoughts? On or advice if you were to say a business owner thinking about selling their
business or in the process, just some general closing advice that you’ve seen just from experience of dealing in
this marketplace for so long.
Speaker 2 – 48:38
I, I think, you know, and it just sounds, you know, almost trite, but planning and having good trusted advisors that
have experience and know what they’re doing. You know, if you’re with a financial advisor or an accountant that
hasn’t done transactions and hasn’t had a business owner through these types of things, I’m not saying they can’t
do it, but you need someone that can help you look around corners that you’ve never been around before. And if,
and same thing with attorneys. If, if those are the people in your life, it doesn’t mean you get rid of them, but you
really need to talk to other folks that can help you see around those corners and explain things. And even just the
concept of how does networking capital impact the value of a business?
Speaker 2 – 49:33
I need Excel stuff and modeling to show you and walk you through specific examples and stuff. You know, if you
haven’t been through a transaction and understand that it’s really hard, you know, to just know that like you could
look up, yeah, you could look up on AI to like give them the answer, but like the experience still matters. So it’s
worth your weight in gold to have, you know, a mat on your team that’s a trusted advisor that knows this is going to
think through not just okay, what are we planning for today, but what are we going to plan for, like your whole
estate plan, you know, what are we going to do for all these different things?
Speaker 2 – 50:13
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Because you know, one of the things that we always say is like, we want to maximize value and then help you keep
as much as possible. And that isn’t always, that’s not just us, that’s a partnership with a wealth advisor. So you
really need to have, and like I said, you might have a 30 year relationship with a CPA. That doesn’t mean you fire
them. You just bring other people around the table that have the experience.
Speaker 1 – 50:41
Biggest transaction of your life, right?
Speaker 2 – 50:43
You only get one shot at this. And so, you know, and if that 30 year relationship is offended by you doing that,
probably wasn’t the best relationship. Whose interests are they really, you know, looking out for? And you know, we
collaborate all the time with other CPAs and you know, professionals and stuff like that. And at the end of the day
it’s just all about, you know, doing what’s best. Like you said for the client, maximizing value and meeting their
goals. And you know, if you don’t have people that can see around those corners that, you know, you can’t AI That.
Speaker 1 – 51:20
Yeah. Blind spots.
Speaker 2 – 51:21
Right.
Speaker 1 – 51:21
Help you navigate your blind spots and in the industry in general.
Speaker 2 – 51:24
Right. And, and like we’ve talked about, like there’s a lot of qualitative, emotional things here. So sometimes the
things around those corners aren’t quantitative. It’s. Didn’t you realize this was gonna happen? Like it was
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psychological. Yeah. Like I’ve, I can’t tell you how many clients I’ve had where like we want the buyer to promise
they’re not gonna get rid of this person. I’m like, that isn’t even legally plausible. And they’re like, what do you
mean? I’m like, no one is gonna agree to that. If that person stops showing up to work, they’re going to fire them or
if the economy changes and the business is going to like, they’re going to like. So that’s sometimes right there
stops a transaction because they’re like, well if they won’t agree to that, I’m not doing it. Yeah. And so, you know, it’s
just a unique thing.
Speaker 2 – 52:19
It’s only one time and you have to almost work backwards from the end all the way back through all that stuff.
Yeah. And if you don’t know. So if you’re not working with people that have been at that end point before or often
enough, how are they going to walk you through that? Yeah. So true. So I’m biased in saying that, of course, but you
know, along the lines of the AI stuff like experience is still going to carry the day. Yeah.
Speaker 1 – 52:53
No question. Well, I mean the fact that like you’ve never had IRS audit you and obviously we having you represents,
you know, you’re a trusted partner of ewa clients for these purposes and we really appreciate the work you’ve done
for existing clients and I’m sure many future to come.
Speaker 2 – 53:09
So. Absolutely. Yeah.
Speaker 1 – 53:10
We’ll make sure to put your contact info in the description of this video if someone wants to. That’s not. Our client
still wants to do the business valuation. Love the access to do so, but can’t thank you enough for joining us and
you’ll be a welcome back soon on going deeper on some of these other subjects, these rabbit trails. Yeah. So
would love for joining.
Speaker 2 – 53:26
Absolutely.