What Business Owners Need to Know Before Selling Their Company

Speaker 1 – 00:00
I think as a business owner we’ve seen so many people have good sales, so many people have regrets. You guys
had so many perspectives on people selling their business, whether they ended up selling it internally, doing a
esop. When is it smart to hire you guys as an investment banking role?
Speaker 2 – 00:14
Our job is to maximize valuation, but then also to de risk the terms. A good investment banker is the first line of
defense to that because they’re dealing with the business terms.
Speaker 3 – 00:24
There might be like a rush to entertain selling your business. Now that didn’t exist before, which obviously lends
itself to a lack of preparation.
Speaker 2 – 00:33
Your first kind of decision process is what investment banker.
Speaker 3 – 00:36
The value of the generalist approach is that you can cross apply knowledge from deals that happen all across the
spectrum. Whereas if you’re isolated in a group, you can start to get tunnel vision.
Speaker 2 – 00:45
Sometimes we have clients like, oh, I’ve known this industry group for 40 years and like, they’re good people. That
is not the way to do a deal.
Speaker 3 – 00:53
We can’t adequately serve a client on the investment banking side of the house unless we understand what their
expectations are. Transactions are emotional, difficult processes. It’s a long process, but it’s a very designed and
specific process. And that’s for a reason. If you follow the steps and entertain the right protocol throughout, you’re
going to be successful in exiting your company.
Speaker 1 – 01:16
All right, welcome everybody. I’m excited today. I’m not going to have to do much talking today because I’m joined
by two of the smartest minds in the investment banking world. So excited to ask you guys some good questions.
So Tom’s been here, this is now your third appearance, right?
Speaker 2 – 01:30
Yeah, thanks for having me back.
Speaker 1 – 01:32
Absolutely. And then Andy, this is our first appearance. Excited to get your expertise as well. So today’s episode. So
Tom and I previously we covered, you know, the importance of getting evaluation even when you’re not selling a
business, primarily from a financial planning, an estate planning tool, family owned businesses. And then we
covered how to maximize the value of your company. Whether you’re going to sell, whether you’re going to stay,
whether you’re, you know, doing an intergenerational family or employee transfer. So today I want to talk about
essentially why is it crucial or why when is it crucial? When is it smart to hire you guys as an investment banking
role and what does that look like?
Speaker 1 – 02:17
And so before we get there, I do want to tell a story recently and this was in the last two weeks, this is not a client
of mine. It’s actually, you know, A friend of mine who shared and I didn’t get any. So he sold his company. And
before the sale he was like, I’m under this NDA. And I was like, do you want me to look at anything? And
underneath he’s like, no, it’s life changing money. I’m just gonna do it right. And so I, I knew it was gonna have an
eight figure check behind it. So I was like, okay, that’s great. Now this guy’s relatively young and his 50. So I was
like, have you thought about what you’re gonna do with your time after? He’s like, well I’m still gonna work there,
you know, they’ve agreed. I was like, okay.
Speaker 1 – 02:58
He’s like, and there’s an earn out. So he was really excited about it. Now that the sale has been made, he’s like 10
months in, he got that first check and there’s another 50% basically in an earn out period. And what he described
and he said.
Speaker 2 – 03:14
Before the 50% of the whole valuation.
Speaker 1 – 03:18
Of like the whole deal, an additional 50% above. So I guess a third of the total lot. A lot.
Speaker 2 – 03:24
Yeah, yeah.
Speaker 1 – 03:25
And so he’s sitting here now. He’s like, I called him, he was working from home and he’s like. I was like, why are you
working from his. He’s like, I’m not allowed my office. I was like, why aren’t you allowed in your office? Well,
apparently they have all of his employees. I think there was like 10 or 15 of them. They got in a pay bump. The
comp model is now kind of e what you kill. So he’s like, what used to be this family environment. I’ve known these
people like my ride or dies for 30 years. Like no one talks to each other. They talked to the corporate like the
mothership who bought this firm out. And now there’s HR issues and he believes he’s going to get fired because
the year one is after 12 months. He’s 10 months in.
Speaker 1 – 04:08
So you had to hire an attorney. Lyrics. Am I going to spend the 2/3 check that I got now fighting to get the 1/3 that
I’m still owed. And so it’s TBD. But I think if it worked with you guys probably wouldn’t have these issues. My guess.
So yeah. If we can start with that in mind. I think as a business owner we’ve seen so many people have good sales,
so many people have regrets. I just want to start out with like, what is, what would you guys define as like what is a
horror story? What’s the worst case? And then what’s the best case when you’re dealing with someone selling their
business?
Speaker 2 – 04:45
Well, I’ll start, but I was explaining this to actually our interns this morning. What do we do as investment bankers?
And when you think about it, you’re creating a market where one doesn’t exist. There’s no market for privately held
businesses out there. And so naturally in a market environment, you’re creating competition. So in your friend’s
case, if he just directly negotiated with someone, that buyer, even if they pretend like they’re good friends and they
develop a relationship, they don’t have any competition. And if you’re not looking at other offers, you also don’t
know what other people are willing to do. And that one buyer knows that they don’t have any competition. So it’s
highly unlikely that they’re going to come with their best, strongest valuation possible. Or they may have a really
nice, you know, top line valuation that’s market.
Speaker 2 – 05:39
But then the terms are terrible. Like in this case, if you’re, if like even a third of your total valuation is in an earn out,
you know, so when we, when we go to clients, we always say if you’re not getting cash at close that you’re happy
with for rest of your life to be, you should not even look at this. Right, because don’t count on that happening. And
if market, let’s say, is 10 times EBITDA for a business and you run a competitive process and you get someone to
do an earn out of the 11 12X. So two turns of EBITDA is earn out over and above market value, well then you’re
winning. That earnout is differentiating higher than everybody else.
Speaker 2 – 06:33
But if it’s part of that 10x that is market value, those aren’t terms you should accept because you’re putting that at
risk.
Speaker 1 – 06:42
They’re basically saying we’re going to buy a part of your company risk free.
Speaker 2 – 06:46
Right, exactly right. And so, you know, our job is whether it’s our job is to maximize valuation, but then also to de
risk the terms and you have to have a good attorney and you know all those things. But, but a good investment
banker is the first line of defense to that because they’re dealing with the business terms. Attorneys don’t want to
come in and screw things up. And there’s some business owners I’ve seen where they tell the attorneys, don’t
screw this up out of the gate. They’re like, make sure you don’t mess this up. So that also makes them gun shy to
bring up horror stories and things like that. I tell my clients my job is to think about the worst case, you know, and
my nickname’s the rain cloud around the office because I’m.
Speaker 2 – 07:33
I’m just, you know, wired to kind of think that way. And, you know, that’s helpful. It’s not always helpful, you know,
with my wife and kids, you know, in other circumstances. But, you know, for a business owner, you have to think
through those situations. And sometimes we have clients who are like, oh, I’ve known this industry group for 40
years, and like, they’re good people. That is not the way to do a deal. Like, you still. And if.
Speaker 3 – 08:05
And you.
Speaker 2 – 08:06
And that’s great. And they might be great people, but that’s why you hire someone as an intermediary to negotiate,
to hold their feet to the fire, you know, to ask them the hard questions and negotiate them with them. When you sell
your house, you don’t do it direct because they’re saying negative things about your house. You’re going to get
upset. You know, there’s all this back and forth that’s too personal. And so that’s the same concept. You’ve got to
be a degree of separation. And we say this all the time with different deals. You know, if the buyer is acting in a way
where they’re dragging the seller across the finish line by their hair, that is not a great way to start or relationship.
You’re. You, you’re getting married. And the goal of. In almost every situation that someone is per.
Speaker 2 – 08:55
You know, is going to retire. You know, you’re. You’re starting this new life together where you’re supposed to
create wealth together, right? But if one side is just bullying you through the end and changing terms, retrading and
all those things, just run for the hills. Because that’s what life is going to be like.
Speaker 1 – 09:16
Foreshadows, right?
Speaker 2 – 09:18
And so if that isn’t happy, if that isn’t exciting and you’re not in diligence, starting to talk about integration and how
you’re going to take over the world together, it’s like, who’s going to be excited about that? Like, on day one, you’re
like, oh, great, we finally got here. And now you’re going to keep. Treat me like, yeah. So all that stuff, like,
sometimes that qualitative stuff is just as important as the quantitative stuff.
Speaker 3 – 09:47
That’s what I would say. I mean, well, first off, if you’re the rain cloud, I don’t know what I am. But not the rain, cloud,
sunshine. Yeah. But long story short, the first thing that we do in every single deal in that vein is that we sit down
with those clients and we say, let’s define our expectations, right? We can’t adequately serve a client on the
investment banking side of the house unless we understand what their expectations are. And it’s our job to say
whether or not those are realistic, those are market, those aren’t, right? Can we accomplish the things that you’re
looking to accomplish?
Speaker 3 – 10:19
Because to the extent that somebody doesn’t fully understand what they’re asking for and what the limitations
thereof are, then you’re going to sit back at the end of the day and they’re going to swallowing a pill that they didn’t
intend to swallow and they’re going to be unhappy. And rest assured, right? Transactions are emotional, difficult
processes. So to the extent that you’re going through a transaction that you’re already uneasy about by the time
you get to that end and that close date and you get the cash in your account, that’s fantastic.
Speaker 3 – 10:44
But you’re already worn out, you’re already exhausted, and it’s going to further perpetuate that relationship being
sour immediately after the deal closes, as opposed to just being in a state of equilibrium throughout, recognizing
what you’re getting into, who you’re going to end up working with, and what life’s going to look like thereafter. So a
big part of our conversation with every single one of our clients is what’s it going to be like to be an employee
again, Right? Business owners or business owners for a reason. They’ve been successful in the way that they’ve
done things. They’re not always as adaptable. And I could say this personally about Tom and I, right? And what we
do, right? They’re not always as adaptable as they think they can be.
Speaker 3 – 11:22
When other people are all of a sudden setting new standards, setting new processes, setting new stipulations, or
changing the culture of your business like your buddy, you were talking about. So, you know, giving examples of
these types of situations. We sold a restoration company. The two owners that were brothers, they’re a
phenomenal group. They’ve done well their whole lives, but they knew it was time for them to move on, right. They
had, you know, call it real estate enterprise that they were looking to further. So we sat down with them and they
said, what’s your objective here? Right? Is this to maximize the output value on a sale, or are you guys looking for a
home for your Employees, do you want to continue the name all the things? Right.
Speaker 3 – 12:00
We ended up settling on these guys, were really looking for the highest and best offer, but with an eye towards
preservation of the family legacy that they had built. So we knew that as went in, were going to get offers that were
going to be higher with the overstipulated, higher offers that they could look at and they could potentially entertain.
But it may not meet the qualitative objectives that they had. And then there may be other offers that we could
structure to work the right way that would meet some of their qualitative expectations or all their qualitative
expectations, but then also accomplish the, you know, departure plan that they were looking to enact. At the same
time, they ended up with a big group. Big group came in. They kept the hometown name, hometown presence,
hometown location, all of the things.
Speaker 3 – 12:41
They worked for two years and they departed. Right? They’ve since retired. They couldn’t be happier. They’ve got all
the money they need to continue their real estate enterprise. They’re not restricted in any way. And that’s another
thing we should talk about. So your buddy having his earn out attached to his employment is always a big topic of
conversation to the extent that they exist. But there’s also other stipulations, right? Like, am I allowed to do the
other things that I do if I sell this business?
Speaker 3 – 13:07
The restoration business is so closely interlinked to their real estate development business that we had to go in
and we had to make sure that non solicitations and non competes and things of that nature that resided in the
agreement were, you know, clear and concise and permitted them to continue to, you know, Trek 1 after they were
done with this part of it.
Speaker 1 – 13:26
Well, how many. So how many people come to you in a smart way? Proactive? Hey guys, I want to sell my business
in three to five years versus which then there’s lots of cool stuff you can do. We’re in another podcast on qsbs. You
could convert to a C corp and get tax free, all that kind of stuff. How many people come to you, like in advance? I’m
going to do this the right way with like a proper Runway versus how many people are coming to you because a
divorce, a death, this is something I need to get out. I’m like having a mental breakdown and I want this to be quick.
Speaker 3 – 13:57
That’s a loaded question because Covid made everybody tired. So preparation became, I think, less important to
some of these companies and their owners after Covid happened, because people haven’t Wanted to navigate the
waters of getting back into their businesses in a way that is now fundamentally different than it used to be.
Speaker 1 – 14:16
Add AI on top of that?
Speaker 3 – 14:17
Yes, and I was going to say that’s the next thing. Right. So there’s other businesses now that are just fearful of AI
and technology. And so, you know, there might be like a rush to entertain selling your business now that didn’t exist
before, which obviously lends itself to a lack of preparation. But I can tell you, every person that we talk to is
different. Typically when we’re talking to people that are entertaining sale opportunities, we’ll actually, that’s one of
our starting points is are you ready to do it yet? Right. So we kind of lead them to that answer. Well, we have clients
that we’ll work with that for that two or three year period to get them, you know, as sharp and clean as they can be
so that they’re going to be able to maximize value on the exit.
Speaker 3 – 14:56
If they don’t want to do that, we have to work extra hard to navigate or mitigate the potential deficiencies in the
business, or at least the perceived deficiencies in the business on the sell side so that you’re not dinged royally for
things that you just haven’t had time to adequately change to satisfy what, the larger scale buyer pool.
Speaker 1 – 15:20
And we talked about that on the last podcast over reliance on the owner, one customer making up half of the
revenue.
Speaker 2 – 15:28
Right.
Speaker 1 – 15:28
You know, yeah, all that kind of stuff. So the more time you have, I’m sure the easiest. How quickly do you think you
could. If I, in a reasonable industry, someone comes, you say, I want to sell, what’s the like average time between,
you know, initiation and sale and then what’s the quickest you guys have been able to get that done?
Speaker 2 – 15:50
Probably. I mean, I’d say the quickest realistically is six months. You know, if someone was really desperate and
they were really collaborative, that’s six.
Speaker 3 – 16:00
Months from when they sign up. Right. That’s because there’s usually some poor front work that goes into these.
Just to make sure that we understand.
Speaker 2 – 16:08
Yeah, it, you know, so, you know, I’d say that a typical process is nine months to a year, you know, easily, sometimes
longer than that. But what tends to happen is that people say, I want to sell it. And they think this is like, you know,
you’re putting a for sale sign out. Well, you know, first we have to underwrite, figure out what the, what your
valuation looks like. Is it going to meet your criteria? Because if we don’t do that first, if someone just says sell it,
sell it, you know, it doesn’t make sense for you to go out to the market if they’re not going to absolutely say yes to
something. Yeah, both. It’s a, both a waste of our time.
Speaker 2 – 16:48
It’s also a waste of their time and it gives them a bad name out in the market because now they’re out there and it’s
swirling. And so we’ve got to knock off the qualitative part first. That’s, you know, with the wealth manager is really
important in that, you know, how much cash do you need? You know, all those things, what’s life look like
afterwards? Then we have to underwrite the deal, prepare middle market materials, then go out and do it. And
sometimes those processes, for various reasons, you know, can take twists and turns. You know, and, you know,
we’ve had. I had a situation where were closing on a Monday. On that Friday, it was discovered that they were
victims of a cybercrime where someone had, through a phishing, hundreds of thousands of dollars.
Speaker 2 – 17:40
And they found that out when they called their, one of their main customers with the buyer to make sure that main
customer is actually a vendor. That main vendor was going to continue doing business with the new buyer. And in
that process, like, oh, yeah, this great relationship, everything but like, we haven’t been paid for a while. So imagine
I’m getting ready to light a cigar on a Friday afternoon that, hey, everything went great, the deal’s going to close,
and instead it’s panic. Now, thankfully, that deal got closed, you know, it got delayed a couple weeks, you know, to
get that sorted out and they got that done. But, you know, we have a joke around the office that we’re never, you
know, we’re never 100% sure something’s going to close.
Speaker 2 – 18:29
It’s like, you know, we like the most we’ll ever get to is like 40% sure.
Speaker 3 – 18:34
Anything can happen. I remember when you made that call to me and were talking about what to do. Now that’s.
You talk about value and having the right advisors around the table. Right. The attorneys rallied, we rallied.
Everybody involved rallied to make sure that.
Speaker 2 – 18:47
Called insurance, friends and contacts, like, hey, is this an insurance claim covered?
Speaker 1 – 18:50
Yeah.
Speaker 2 – 18:51
What do we do? Like, so, yeah, I mean, that’s having someone that actually cares and is collaborative and all those
things.
Speaker 3 – 19:00
Nobody threw their hands up and walked away, not even the owners. They didn’t. You know, I mean, as troubling as
it Was it, you know, our. I think your response back to them was, you know, sit tight, let’s collaborate with our, you
know, advisory group. Let’s make sure that we have all our bases covered and let’s rectify this with the buyer. Right.
And that ended up working out well. I mean, it did take an extra couple weeks, but they were very. They might have
been one of our happiest.
Speaker 1 – 19:24
Full transparency, both sides and Yep, you guys recovered. So the deal still went through.
Speaker 3 – 19:29
And I had the same thing. I had another deal that had. We were signing the loi and two lawsuits came in that day
and the owner called and said, well, what do I do? I’m like, well, you can’t bury your head in the sand and hide it.
Right? Let’s present it to the buyer group. And then you never know how they’re going to react until you do that. But
that pulling off the band aid and actually calling and letting them know what’s going on is the hardest thing to
overcome. Well, what ended up happening was, is went back, we said, this is what’s going on. They said, we bought
businesses like yours before. This happens all the time. Our legal team’s familiar. Let’s look at what they’re
claiming and then. And let’s just work through our diligence.
Speaker 3 – 20:05
So we didn’t halt the deal one bit that we got sued by two different, you know, groups, like on the day that we
signed the loi, they instead went full fledged, full charge ad. We prioritized legal matters first and diligence. And
then we structured it with them where if they ever hit a point where they said this is just something that we’re not
going to be able to overcome, that they would tell us right away. And they have, since we’re closing that deal on
July, I think it’s July 5, right after the holiday. And they, you know, they work through all of it with our legal team,
with their legal team, and everybody will help a way to get comfortable with it. But yeah, Addison, that collaboration
that would have, you know, that they would have just walked away from the transaction.
Speaker 2 – 20:47
Well, that’s the example we talked about last week, that one of the values that investment banker brings is it helps
you look around corners you’ve never been around before. And so. Right. And so in a situation like this, like, you
know, if you don’t have an advisor that’s, you know, just like I’m saying, the buyer can’t be pulling the seller across
the finish line by their hair. The seller also can’t be hiding stuff like lawsuits are going to get whether it’s in diligence
or after closing. So they’re going to come to light. If you didn’t disclose that. Think about now how the buyer feels
after closing. That’s not a way to start relationship either. So you have to be transparent. You have to be above
board. And I mean, we’ve had clients before that they say, well, potential clients.
Speaker 2 – 21:29
They say, this is how I want it. We’re like, no, like we’re just not going to go out in the market and say these things.
Not even that they’re untrue. They’re just like, you know, not totally ac. You know, you know, totally there in terms of
truth and above board. Like, we’re just not going to do that. Our reputation is too important. And that isn’t. That that
deal is just faded to not work out. And so, you know, we just don’t want to be a part of that. So you have to do all
the planning. Like I said, you’re getting married, you know, so if it’s not going to be happily ever after, you really got
to pump the brakes.
Speaker 1 – 22:09
All right, so let’s like go through from A through Z so people understand what your process is and like how to
prepare. I can act as the business owner here. You guys choose the industry. What do you think?
Speaker 2 – 22:22
Financial advisors.
Speaker 3 – 22:23
Financial advisors. Let’s do that. Good.
Speaker 1 – 22:25
All right, cool.
Speaker 2 – 22:26
Or golf simulator operator.
Speaker 1 – 22:28
I’ll probably never. Oh, that’s a good one. I’ll never. I don’t think. Yeah, just full transparency that my goal is not sell
or to. To. You know, we’ve already started internally structuring profit interest in the company to keep it and keep it
private forever, but who knows, you know? But okay, so I’m a financial advisor. I have an rea. I’m coming to you
guys. Let’s say I’m, you know, 65 years old. The average financial advisor is like 61 at this point. So probably a lot of
transactions are happening in this field. Step one, I come to you guys. You’re asking me, I’ve heard, what’s your
goal? So first is like, what’s my number? I need. The second is, do you want to work? What are. What’s all the info?
What are the questions? I need to come prepared to answer in that first.
Speaker 1 – 23:17
Engage in that first.
Speaker 2 – 23:19
So I’ll even go before that. So your first kind of decision process is what? Investment banker? Because there’s
people out there that will be. All I do is financial advisory deals. Okay, right. We’re generalists. So we go across all,
you know, any industry, basically, unless there’s certain niche things that don’t make sense for us to get into.
Speaker 1 – 23:41
But you’ve done tech companies, restoration companies, advisors, the whole gamut.
Speaker 2 – 23:47
Manufacturing SaaS. Yeah, healthcare. So I mean, like, you know, it’s a broad base. So you as a business owner
have to decide, okay, what is the best. Is it someone that I’ve known for a long time and trust or that I can get
personal referrals to, or is it this person who’s an industry maven or whatever and knows everybody? And our pitch
on this is that person that’s out there that just deals in your industry. Yeah, they know everything about it and they
know the buyers and all those things. But is that actually of. Is that value one? They know all those buyers. So
those buyers are constantly trying to get into their pocket in different ways. And.
Speaker 1 – 24:29
And there might be a little. Not pay to play, I want to say. But you know, I want to purify a word this. When you do
deals with a lot, you develop a relationship. And so the question I had, I’ve seen is that person be capable of having
my best interest in mind when they’re playing golf with conflicts of interest,.
Speaker 3 – 24:49
They may be inclined to push it one way or another based on personal relationships. And that’s where we say being
generalist benefits the client because we’re looking at the broader market without any, you know, bias or guys or
bias to anybody.
Speaker 1 – 25:01
And Tom does even golf, so.
Speaker 3 – 25:03
No. Well, I know he can’t be biased. We’ll get him over there.
Speaker 2 – 25:07
Not on the golf course, at least.
Speaker 1 – 25:09
Fair enough.
Speaker 3 – 25:10
But that’s a real thing. And you know, I think that the value of the generalist approach is that you can cross apply
knowledge from deals that happen all across the spectrum. Whereas if you’re isolated in a group, you can start to
get tunnel vision. Vision. Right. If you want to say I’m a specialist in tech, I’m a specialist in financial advisory, that’s
perfectly fine. But you may not be as privy to new market entrants or groups that are surfacing. They’re looking to
roll up certain industries because you’re just dealing in the same redundant fact patterns and groups that you’ve
been dealing with over the course of forever. Whereas we’re starting over every single time we’re working with you.
Every single product that we put out to market is completely different. Nothing is standardized. There’s no
templates.
Speaker 3 – 25:54
We are learning your business and what’s in your best interest and then who the best people to go to every single
time. Right. We spend that time up front. So that’s a differentiator.
Speaker 2 – 26:03
And it used to be that you know, an investment banker’s value came from the Rolodex. But you go on Claude and
say who’s the buyers? You know, who are the likely buyers? You go on just old fashioned Google. We subscribe to
other tools. We have Rolodexes obviously. But you know, if there’s a, if there’s someone that specializes in just an
industry, we can reach those buyers just the same as they can. There’s absolutely. Those buyers want to be found.
They’re, they’re out there pushing. We get emails every day from buyers saying hey, do you have any businesses in
this industry? So, so I think that you know your decision as a business owner of who to work with one is it.
Speaker 2 – 26:48
And I don’t want to sound corny with this, but there has to be on some level a personal and almost emotional
connection that you’re going to feel.
Speaker 1 – 26:56
Comfortable talking at the biggest financial decision of your life.
Speaker 2 – 27:00
Yeah. Hopefully you’re going to have conversations at 11 o’ clock at night on weekends you’re going to have hard
conversations about what’s going to happen to employees. You’re going to have hardcore money about what you
want to do. Something might change, go wrong. Oh, my spouse is saying this, whatever. Like it is not like 10% of it
is the numbers. The numbers are easy. Everything else is the hard part getting through it. So you know, if it’s some
broker from New York City that knows everybody in the industry, you know, is he gonna, how much, how often is he
gonna come see you in person? Do you gonna feel comfortable? Can you really connect with him? Does he really
understand your hometown cult? Like all those things?
Speaker 2 – 27:42
So I think that’s actually really important and obviously trust and is this person really going to scrap for me? Are
they going to call me at midnight on a Saturday or take a call on Sunday morning at 9 o’? Clock? Like that has to be
part of that because that’s how deals go. It’s, I say I’m on call 24 7, like when we’re in deal time, like absolutely.
Speaker 1 – 28:07
All right, so I’ve chosen you guys. I feel comfortable. Industry’s too tight. I’m a little bit scared. So I’ve chosen you
guys. So we meet. I’m, I’m now 65. What’s the, what’s the crucial information like 80, 20 analysis.
Speaker 2 – 28:22
We don’t need to go through everything.
Speaker 1 – 28:23
But what are like three or four important things that you guys need to know about my goals to. To get to work.
Speaker 2 – 28:30
So goal. The goals are quantitative and qualitative. Work with your other advisors to talk through that. You know,
we’ll just talk through that from our experiences and stuff, get those on the table and make sure we understand
those. In terms of the quantitative. We look backwards at your historical numbers, recast those, take out, you know,
normalize the results. And then also we. We’ve got to build a forecast with you for the future because that’s what
we’re marketing and then put together marketing materials on your.
Speaker 1 – 29:03
So essentially you’re going to. You’re going to do evaluation to start based upon history. You’re going to do what
you know sounds like a future evaluation of like, here’s the potential and then use that at the. At the meantime,
you’re probably talking to my. If I was an advisor, I think advisors should have their own advisors. You’re talking to
the wealth advisor, the CPAs, the attorneys. As far as like the personal situation, hey, what does this person need to
walk away with and actually be financially secure? I’m sure.
Yeah. And you don’t want to do that in a vacuum. Right. So we do want everybody involved with this individual who
they trust. Right. Or individuals to pine on this. But if you talk about what are the most important things, you know, I
think I always lead with what do you want to do? Right. So number one, you’re looking for a walkaway deal, which
we would then in turn explain that doesn’t happen often. Right. There’s usually at least a transition period to. Right.
Are you comfortable going. You know, some people have qualms about going private equity versus strategic and
how the process works is that encapsulates or encompasses both if you’re going to approach people. But, you
know, are you comfortable with that and for what reasons aren’t you will try to advise you as to whether or not
those are logical.
Speaker 3 – 30:11
You know, call it considerations on that. I do or don’t want to go to certain people’s side of the fence.
Speaker 1 – 30:17
Yeah.
Speaker 3 – 30:18
You know what inherently in the business is important to you 99% of the time that’s. I want preservation of the
employee base. They got me here. I think it’s a noble thing to acknowledge that your employees are a huge part of
your organization and you want them taken care of.
Speaker 1 – 30:32
So most of your clients are not necessarily trying to get the top Dollar amount. They’re. They have these other
factors, loyalty factors that are kind of non negotiables of I want my employees to be set.
Speaker 2 – 30:45
Depends.
Speaker 3 – 30:46
Yeah. I mean, some people just want the highest dollars and they want to depart. Right.
Speaker 2 – 30:50
Or it’s like if it’s a difference between $5 million, it could persuade you. Yeah. So it all depends. But we’ve absolutely
seen people that leave money on the table, significant dollars for the benefit of the, for the home.
Speaker 1 – 31:06
Feeling of the employees being an environment. Okay.
Speaker 3 – 31:10
Then on the back end of that, it’s going to be, you know, once you understand the. Called the logistics of the
qualitative expectations. Right. It’s marrying that to the numbers and then saying, what is the implication on value
if you choose to focus on these qualitative factors throughout the sale process.
Speaker 1 – 31:28
Got you.
Speaker 3 – 31:29
So this is probably one of the most time consuming parts of us working directly with the owners and their team to
make sure that’s all nailed down and that will change. Like, don’t get me wrong, as we go through the process and
we start to figure out who we’re talking to, you know, those expectations change. The willingness to accept things
that you were otherwise uncomfortable with before will change. Right. So we have to be readily able to adapt. They
have to be as transparent as they can be with us throughout the process. They being the, you know, prospective
seller. Because what we want to do is we want to say that we’re, you know, we’re leading with your desired
outcome. Right. We’re not figuring the desired outcome out as we go. We’re leading with what that is.
Speaker 3 – 32:09
And if that changes, then that evolution needs to be communicated to the broader group that we’re eventually
going to pitch this transaction.
Speaker 1 – 32:15
I’m sure there’s some calibration. If they said it’s 10 out of 10 importance for the dollar amount, 10 out of 10 for the
employees. And it’s like, well, I get this, but I’m sure there’s lots of levers that are getting pulled as you present
different options on the table.
Speaker 3 – 32:27
Right? That’s correct. Yeah.
Speaker 1 – 32:30
Tom, were you gonna say something?
Speaker 2 – 32:31
I. I was. I had a client who we basically built a matrix of the things that he cared about. And I just made this up on
the fly and developed a scoring system, you know, what valuation, you know, was counted 2x times everything else.
And then everything. And then when we got our offers in from buyers, we sat in a comfort with his management
team.
Speaker 1 – 32:59
Yeah.
Speaker 2 – 33:00
And went through and scored each offer and just. And it. And it wasn’t any magic to it. Like, I don’t, you know, I’m
not going to get the Nobel Peace Prize for this. But it was just a way to quantify the qualitative. And it just
facilitated discussion amongst him and his manager team who he’d brought into that process. And it just helped
them kind of suss out the different things. And it just made it obvious which thing was the best. It just so
happened to be the highest value and it was in it, candidly, was the best, you know, for the people as well. That
transaction happened. The owner has, since, you know, retired from it.
Speaker 2 – 33:41
There’s, you know, almost all the employees are still like, it’s, it worked out great for everybody and so that, you
know, there’s different ways to skin that cat. But that’s, you know, those qualitative things are really important to a
lot of buyers, no doubt.
Speaker 1 – 33:57
Anything else to add in the, as far as like the processes, and I know every process that you go through, it sounds
like is extremely customizable based upon industry. It could look at, you know, you can have 10 buyers, two buyers
if it’s a certain niche industry. But anything else that you think it would be helpful for the listeners to know about
the process part of it. I have some more lasered in questions coming up. That’ll be fun.
Speaker 3 – 34:19
But the only thing I would say is it’s a long process, right? But it’s a long process. But it’s a very designed and
specific process. And that’s for a reason. If you follow the steps and entertain the right protocol throughout, you’re
going to be successful in exiting your company. What a lot of people will tell you is that 50% of companies that try
to sell fail. Our realization on that is more like 95%. But we attribute that to the fact that we have a sound process
that procedurally has proven to work Right. And defining and setting expectations up front, which we just talked
about. Right. Once we’re all holding hands and agreeing on what those things are and what we’re going to target.
And we determine on our end that we can accomplish that. Right. If we just follow the steps.
Speaker 3 – 35:02
And yeah, you’re right, their processes are tailored, but the fundamentals of the sell side process in particular are
always the same. Right. How you approach groups, how many you approach. Right. We’d call what we do a
controlled auction. Right. And the reason we do that is we don’t want your information out to everybody in the
world. There are brokers that’ll publicly post like A real estate listing your business with a one page teaser and say,
you know, if you want to talk about,.
Speaker 1 – 35:28
You might not have told your clients that you’re selling it. You might not have told your employee. Yes, that’s a
highly sensitive process.
Speaker 3 – 35:35
So our process, you know, it strives to do a couple things after we all agree on how to move forward. Right. One of
those is to reduce the burden on the owner who’s selling the business during the sale process because they got to
run a business and substantial changes in the business after you decide to do this are just not a good thing. Yeah.
The second thing is confidentiality. Right. So we’re going to go to a controlled group, we’re going to take very
seriously the confidential aspects of this process and who we’re communicating with and how we’re
communicating them and what we’re telling them.
Speaker 2 – 36:05
So client will know all of those.
Speaker 3 – 36:07
Yes.
Speaker 2 – 36:07
We’re never going to talk to someone about the business, even getting them under an NDA or anything like that
without their approval. The business owner approves that all upfront.
Speaker 3 – 36:17
Super important.
Speaker 2 – 36:18
Yeah.
Speaker 3 – 36:18
I would say the last thing is this is our. We like to, you know, organize and facilitate or control if you will. Control is a
bad word. But the financial aspects of, you know, the offers that are being received along and then manage the
emotional aspects alongside that. Because you’re going to get offers that make you mad. You’re going to get
offers that you’re, you know, are unrealistic. And we know that they may not know that but they’re like.
Speaker 1 – 36:46
And you know, it’s normal that people lowball and you know, you can help them with the emotional process of the
whole thing.
Speaker 3 – 36:54
So that’s. Yeah, that’s a big part. So I mean, and this, like I said, this is when it’s as long as it is you end up being like
these ends up being really good friends at the end of the day is what ultimately ends up happening. Because you
get to know everything about these clients. Right. This is different than an accounting firm and some of the clients
you work on in there, you’re intimately involved in lives, you meet their families, you understand family dynamics
and relationships, good and bad. Right. And all of those things then kind of culminate into, you know, it’s. You
become much more than just an investment banker. It’s really a family trusted advisor at this level. Right. This
family on middle market type business.
Speaker 1 – 37:32
Awesome. Every one has a scoreboard in their mind. You know, how much should I have in my 401k when I’m 50
like that kind of stuff. So. All right, well, to close out, I think it’ll be fun because you guys have had so many
perspective, so much perspective on people selling their business, whether they ended up selling it internally, doing
an esop or whatnot. So I’m just curious. And none of these, we’re not saying any of these are going to be accurate.
Just like kind of top of mind. If you were to take a best guesstimate of what would you say an average client deal
structure looks like cash up front versus a, a dependency on results happening on the back end. Is it 50? 50 Is it?
What would you say?
Speaker 1 – 38:14
If you have to say just a number, best guesstimate, I know it’s dependent on industry, but in generality, what would
you say?
Speaker 2 – 38:21
Well, Andy mentioned this up front was that you take the qualitative and that’s what you lead with.
Speaker 1 – 38:26
Yeah.
Speaker 2 – 38:27
So when we put together our marketing materials, we, and we’re sending that out to buyers, we always say we
want an all cash deal.
Speaker 1 – 38:35
Okay.
Speaker 2 – 38:35
So that’s where we start. Now that doesn’t stop them from putting in offers that differ from that. But we’re putting
it up front. One, they know that there’s competition from all of the other people that want to buy this company.
Speaker 1 – 38:47
If it’s an all cash.
Speaker 3 – 38:47
Yeah.
Speaker 2 – 38:48
And we’re saying that we want all cash. Now there might be reasons that we stray from that like we talked about
before, but we’re putting that front and center and saying like, hey, these are sort of table stakes here. So, you
know, that doesn’t mean that it might not be different, but that’s always our goal is to push that. And you know, so I
would say that we’re never, you know, as part of the core valuation relying on an earn out, definitely not seller note.
You know, if those are, you are.
Speaker 1 – 39:22
Guaranteeing a hefty chunk of the valuation.
Speaker 2 – 39:25
Well, that’s part of the reason we do that qualitative upfront is that we go study the market, understand the real
value of the business.
Speaker 1 – 39:32
Could someone get this up front?
Speaker 3 – 39:33
Right.
Speaker 2 – 39:33
What are their needs? So if the company’s worth $50 million and they need 50 million in cash to live their lifestyle,
it’s not going to work.
Speaker 1 – 39:43
You gotta roll the dice. If it’s only, you gotta pay tax up front. Half.
Speaker 2 – 39:46
Yeah, yeah. So if the value, if we think the value is 50 million and they only need 5 more million to live their lifestyle
forever, we’re still going to ask for 50 million cash at close because it takes the risk off the table. Now if somebody
comes in and says we’ll give you 50 million at close and we’ll do a 10 million earn out to differentiate us from the
market.
Speaker 1 – 40:14
Great. Yeah.
Speaker 2 – 40:15
God bless America. Now let’s work on how do we get the earn out to be fair, you know, not set up to be lots of
arguing like don’t make it on ebitda, make it on revenue or gross margin that like the more variables in the earnout.
Speaker 1 – 40:32
It’s very surprising because I, I think I see often the people that are selling their businesses without and they’re
coming to us after they sold it and then they’ve just got it basically the equivalent of a real estate deal. They got a
25% down payment. I’m thinking of a. But like who became a client after the fact was like 4 million cash. And then
it was like another. I think it was another 16 through an earn out and some stuff happened where it didn’t. Not all of
that was achieved. But you guys were saying like you would never let that happen. Essentially we’re very close.
Speaker 3 – 41:02
So it’s funny as buyers because we’ve been on the buy side as well. Right. That’s what we want, right? We want to.
Speaker 1 – 41:09
Yeah, you want that as a buyer. You want that low risk. That low.
Speaker 2 – 41:12
Right.
Speaker 3 – 41:12
When we’re advising clients, we’re at a minimum advising them of the risks associated with that type of structure
in a transaction. But it becomes very industry specific as far as structure of a deal like you know, financial.
Anything retention based is going to have some sort of structure to it, right?
Speaker 2 – 41:28
Yeah.
Speaker 3 – 41:29
Particularly like use accounting firms as an example. You know, there’s a transitionary risk to a buyer that has
historically proven out that attrition will occur because of a change in leadership of an accounting firm. Right?
Speaker 2 – 41:42
Yeah.
That gets factored in. But that’s also structured into the deal to the extent that we can avoid those things. We most
certainly do. Right. We work with our clients to make sure we lay out the fact pattern the right way to call it.
Mitigate any risk of that happening or mitigate most of the risk of that happening. But the overarching objective is
just you want somebody to be comfortable with what’s going to be in their bank account when the deal closes. We
don’t want them to be reliant on a substantial chunk. There are crazy story, but that deal that I was talking about
before, that is a 50 deal. It’s 50% up front and 50% in an earn Out. Right. The owner was comfortable with that for a
zillion reasons. Right.
Speaker 3 – 42:20
But the main reason was, is he’s got a core group of personnel that he wanted to share with, but he wanted that to
be share of appreciation, not a share.
Speaker 1 – 42:29
So they’re aligned. They’re aligned to keep the company going. They’re aligned. If it does and goes, he wins bigger
too. It’s alignment.
Speaker 3 – 42:35
He may have a smaller piece, but it’s going to be of a bigger pie.
Speaker 1 – 42:38
Right.
Speaker 3 – 42:38
And then we have a high degree of confidence that he can hit the Earn out figures. So we spend more time on that
deal, negotiat the parameters of the iron out than we did the headline purchase price. Because there really isn’t a
headline purchase price. Right. But our goal, you know, the main objectives when I talked to him about this was if
you’re going to put this much in the Earn out pool, then we’re going to protect your downside and that’s going to
happen first. Right? Yeah. And if we have to give a little bit on upside to protect your downside, that matters more
to me in a lot of cases than it does to push this number through the roof, but then have no ability to achieve it on
the back end of it.
Speaker 3 – 43:09
And then we figured out how everybody fit into that and all the things. So, you know, I’d say you can’t really put a
percentage on it. But if I would say that typically we see the reinvestment or rollovers happen around, you know,
that 10 to 20% mark. Right. Which is actually not a bad thing. You know, the industry, you know, the space, if you
trust the people, you should be willing to do something like that. As long as there’s an adequate departure
program, you know, inside their program or their acquisition.
Speaker 2 – 43:35
Yeah. Reinvestment shouldn’t. I mean, that’s totally different than an earnout.
Speaker 1 – 43:39
Yeah, yeah.
Speaker 2 – 43:40
Sometimes the buyers will put in taking.
Speaker 1 – 43:41
The risk and putting your money back into it. Right. Yeah, yeah.
Speaker 2 – 43:45
You’re reinvesting. And sometimes buyers will put in vesting provisions in different ways that you can lose that.
And that is not market. That should not be ever part of that. Right.
Speaker 3 – 43:56
And like Andy said, the other hand is a completely different. You know, that is a, you know, again, that should be a
bonus to you in some way shape or form on the back end of a transaction. If you get it, great. If you don’t, you’re
not, you know, foreclosing on your house.
Speaker 1 – 44:10
Yeah, right. We all know the most valuable business is probably the one that the owner could sell it and then step
away the next day.
Speaker 2 – 44:16
Right.
Speaker 1 – 44:16
Because the business can continue to operate. That’s most. Most business owners don’t have the luxury of being
able to do that. So with that in mind, if a business owner comes to you stress out of their mind, they want to get
out, they want to maximize the value, they want to make sure their employees on average. Again, not asking you
for like specifics, I didn’t ask you to prepare for this. How long would you say someone has to stay if it’s a semi
dependent business on the owner? The owner’s still involved but not crucial. Just have you guys seen an average,
Is it one year, is it five years? What would you say in general if you were advising me as your client, what would you
say?
Speaker 3 – 44:51
We target a year most of the time now we’ve had deals that it’s been 60 days. We’ve had deals where it’s been zero
days of transition.
Speaker 2 – 45:01
It’s very industries.
Yeah. But long story short on your. If the owner desires to walk away, they. And again, this is part of our, you know,
working with them through this and whether or not they’re really ready today to do what they want to do. If you
want to walk away from the business and you have to have a really robust management team that operates and
orchestrates a, you know, an autonomous organization. It’s wholly unrealistic for somebody, you know, off the cuff
to come and say, I want to sell my business and I just don’t want to work anymore.
Speaker 2 – 45:30
Everything is penalty.
Speaker 1 – 45:31
You’re making every fire.
Speaker 3 – 45:32
So yeah, if you’re clear and clean,.
Speaker 1 – 45:35
If someone’s really stressed out, they could, you guys could, you know, back to the wall. It could be a six month
process and then if it’s me, it could be a six month process before we have a deal sign. And basically I’m there for a
year and then after that. But after that six months, I’m, you know, you guys are fighting for me. I’m getting a check
that’s. I’m good that year is. I’m just fulfilling the contract of that I signed up for. High level.
Speaker 2 – 45:58
Yeah. I mean anything you do though, that’s under duress like that, like you’re not going to maximize value.
Speaker 1 – 46:03
Yeah.
Speaker 2 – 46:04
You know, so if you’re saying ideally.
Speaker 1 – 46:06
I’m really stressed out, really happy, I’m like, well, yeah.
Speaker 2 – 46:09
I mean we’ve had other.
Speaker 1 – 46:10
You’ve probably had a lot of that recently with COVID though. Right. Some people that want to sell Just because
they don’t know what’s next, but they can’t do this anymore. Or is that becoming less uncommon?
Speaker 2 – 46:19
We sometimes have like one of my longest term clients, you know, the day I met him was a very warm referral. Met
him and he just had a milestone birthday and said, I want you to sell everything. I said, I don’t even know what that
is yet. We haven’t even talked about the business. But he’s like, I want to sell every. Because he was in that.
Speaker 1 – 46:41
So business owners can be crazy quick with decisions.
Speaker 3 – 46:45
For sure.
Speaker 2 – 46:46
Life happens. And Covid was hard, and lots of things are hard. So you know that. That business owner, through
that process, went to market actually twice, two Lois then pan out. Not because of. It was just the buyers getting
cold feet, but having worked with him through that process, giving him counsel and showing him his numbers and
all that stuff, some of the market things that was really stressing him out. Calm down. He decided, well, I don’t
want to sell. And I was like, okay, that’s great. He’s like, but I need a financial person to be my cfo. So I still have
that relationship today. And. And it’s made more money not selling than if we had done that, you know, so that has
worked out great. And in that process, I said, great, you don’t want to sell, but you also.
Speaker 2 – 47:37
These things are stressing you out. So let’s talk about how to solve those problems. Who in your organization can
step up and take these? Do we need to hire someone else? Like, figure out how to replace yourself in the business
and just be like, so.
Speaker 1 – 47:51
Yeah, isn’t that funny? You can get to. If you roll on a cell and you take the right steps, you can get your business to
a point where you’re trying to maximize cash flow, which means you should be taking that money and putting chips
off the table. You’re trying to delegate the whole company to your management team. And then by the time you do
all that, it’s like, what? I don’t need to sell.
Speaker 3 – 48:09
It happens, actually. I mean, people are.
Speaker 1 – 48:11
We have a shared client that happened with.
Speaker 3 – 48:13
Yeah, yeah, it happens. You sit back, you look at the business and you say, man, if I can do this and only work 20
hours a week because I set it up the right way, now why would I sell it? It’s just, this is a help. Just clip a coupon
every year, take my money out, and I’ll let it continue forever like this. Right? Younger guys, I think, that are looking
for doubles or triples on selling their business. They discover this often whenever they’re talking about selling their
business. And that’s something that we are wholly not offended by. Right. I would love it if you discovered during
us working with you that there’s a better way to do things that’s going to make you more comfortable and make
your company more bulletproof because you’re just going to keep more money until you are ready.
Speaker 3 – 48:54
Right?
Speaker 1 – 48:55
Yeah.
Speaker 3 – 48:56
So by all means, that. That’s the, you know, inflection point where you actually figure that out. And we sit back and
say, okay, we’re great. I’m glad that we came to this conclusion. We’ve got a client for life who we’ve advised
adequately, we’ve added value. And then when they are ready, you know, we’re prepared.
Speaker 1 – 49:11
When they are ready this second time around, they don’t have to sell.
Speaker 3 – 49:14
That’s right.
Speaker 1 – 49:14
And so they want to. That’s a totally different picture when they walk into you.
Speaker 2 – 49:18
Yeah, totally.
Speaker 1 – 49:19
Thank you guys for joining. And we’ll provide contact information for your ID services for any listeners that are.
That are interested or thinking about gearing up for evaluation. Thinking about selling internally or selling
externally. These guys are very good at what they do. Absolutely.