Acquire.com Seller Office Hour - Q&A For Sellers - August 26, 2022

All right, well, it looks like we got a pretty good turnout here. We're going to go ahead and get started and I have some questions that I thought would be helpful for all founders to know. So we're going to go through that today. So we're kind of taking a little bit of a detour from our normal office hours where we take on the audience's questions. And I thought it might be helpful to go through some of the most common questions I personally have been seeing this week. And just maybe going around to you, Paul, James. Does that sound good, you guys?

Perfect.

Yeah, let's do it.

All right, so let's say so I was having a conversation with a founder and they were asking if they were going to take their business to market, what would you recommend in terms of ways to help increase the valuation of their business within a three month period?

You want me to start, James?

Yeah, go ahead, take it. I'll follow up.

I mean, so the first thing is really, you know, take taking a look at the business and understanding where business can use some cleanups. Right. So that's in the financial reporting. If it's, you know, I've done simple things like sometimes depending on the type of business, sometimes having a process manual put together is very valuable to a hire because then it's like the roadmap or the playbook, if you will. So it's really dependent on the business. I think the most important though is just really tightening up your financials and getting your business business on the back end in order so it looks very clean to a buyer. And really, you know, our job as advisors is to take off of you most of the heavy lifting so you can continue to operate your business. What's, what's, what would be the worst thing is that if you're going through a process and you're taking your eye off the ball and sales start to diminish, it's not good for that final closing number. So yeah. James, what do you have?

Yeah, I think that there's two angles you can look at this at. It's actually like the nuts and bolts of the business and its performance, how it looks on paper and from a marketing perspective. And Paul, you just touched on that and I think a pretty easy way to do that is answer the questions that would go out in your sim, the confidential information memorandum. So if you look at your business, you answer all these questions, you sort of self audit, you're going to find two things, like maybe you have some big glaring gaps in your business, like maybe you're not diversified enough on your contracts, you have a big customer that's about the churn. Stuff like that, stuff that you could pretty easily improve. But you need to identify the issue too. And then Paul just mentioned this as well. By answering those questions and getting your things in order, you'll, you'll have a business that looks tuned up, you know, like I just went through the car wash and ready to sell rather than one that's kind of in disarray. And you know, the sale price is often, often more of perception than anything else. So if you get that in order, it's going to look far more attractive. Potential buyers.

Yeah. And I'll, and I'll say one kind of funny anecdote back in the my business brokerage days. Um, the, the bottom line number that they're using to calculate value is ste, which is sellers discretionary earnings. And we, we started calling that suddenly discovered earnings because the reality is, is that the numbers don't lie. So you really can't do much to, to fib there or to, you know, it's the numbers are the numbers. I always said the financials tell a story, the founders tell a story. So I think the most valuable and three months is a short amount of time certainly. But I think we've kind of covered the main topics as far as, you know, getting everything in order because it is, it is a value add. And if you look unorganized, right or wrong, and I've said this before, it devalues the business in the eyes of the buyer.

I like both those answers. Do you guys care if I just keep answering, asking you guys some common questions. All right, so in terms of, you know, when you go through an acquisition, not all of them reach the finish line. Even if you find the perfect buyer. What would you say some of the most common mistakes founders going through their first acquisition make when approaching a buyer? Conversing with buyers, negotiating with buyers.

Paul, can I go first? Then you can follow up with something that's more substantial, I'm sure. I think the most obvious one is keeping a pretty strict timeline. Deal fatigue is definitely a real thing. Um, most, most buyer or first time sellers rather they kind of keep a loose timeline. They don't like really force the buyer to kind of move their hand and make sure things are going in an appropriate clip. And by that time, you know, three months in every, both parties have lost interest. So make sure you're doing it in a vacuum, make sure you're keeping things moving. You know, there's always a million reasons why someone could back out and time kills all deals. So that's my, that's my tidbit on it.

That's, that's the, that's the, the line. Right. Time kills deals. Time and surprises. Surprises often kill deals as well. So you know I'd say that the over the one thing I hear the most often is when founders choose to go on their own and which is will support that and will help you prepare your docs and get you, you know, give you the roadmap and if you choose to go that route. Many founders have been very successful on platform we see closed deals daily but it's really notice is on you to make sure that that buyer has the funding that they're representing. They have so there are you know certainly once you get into a due diligence period so you know, you've met the buyer, you've shared your information about the business, you've had a meeting, they've prepared an offer for you and at that time, you know, following is due diligence and they're going to give you a list of everything they'll want to see on the business. Your financial records, etc. Etc. That's a time for you also to due diligence on them to verify that they have the funds in order to close the transaction and that they are who they say they are and they have the experience that they thing to have. I you know it's very painful to go down a path many months and then end up having the buyers not be able to secure financing or funding and your deal falls apart. It's deflating and it's hard to kind of dust yourself off and start over again. So I'd say that's kind of the number one thing is to make sure that that there's funds available to close the transaction.

I like both those answers and I would wholeheartedly agree even just being, you know, honest about and I'd love your take on in terms of, you know, bringing your. Your business, you know, it doesn't have to be perfect. I think a lot of founders make the mistake of and tell me if you agree with me on this. James and Paul were founder brings their business Everything is perfect but no business is perfect. I think it's always better to bring your business forward with wards and what I mean by that is potential growth opportunities outlining things they haven't done yet because that signals to a buyer that there's potential upside growth in the business. How would you handle that situation? Like would you recommend founders Present their business as it's the most perfect thing, or would you recommend that they are transparent with the things that have worked and even more transparent with the things that maybe haven't worked that could be potential growth opportunities for a new buyer.

James, you want me to go first?

I'll go first. Yeah, I can go first again. I mean, that's, I think, just as a negotiation tactic, diffuse the elephants in the room. Right? Like, if you have a crazy churn rate, they're not going to not see it. You know, I think they'd rather be told about it first. And then you can frame that as like, hey, you're probably. I think the turn rate's horrible, but here's some things we can, we haven't done yet. We can fix it. That you can do. And that's why the price point is such. So I'm all about diffusing the elephant in the room. There's different negotiation tactics, but that's one of my favorites. Making sure you're being candid, but also have like, you know, some sort of a backup frame in mind after you sort of deliver what could be potentially bad news.

Right. And, you know, the dressing up a business for sale. But like James said, I mean, it's going to come out in the wash in diligence. It's all going to get discovered. So you really put yourself at a disadvantage if you try to. What's the attitude? You know, put lipstick. Well, that's not a good example. But if you try to bluff something or hide something, it's. And it comes out. It just think about how that would, how that looks. I mean, it's not a very good. It's not a good look. And then what happens there is that, okay, maybe they still want to move forward the transaction, but they're going to dig deep and they're going to see if there's anything else that wasn't disclosed. So the reality is, is that presented as is, I, I always say stick away, stay away from the. This business has great opportunity, great potential. No, just say it like it is. What would you do if you had. I always ask the question, if I handed you a check for $3 million, you had to spend it on the business, where would you deploy those, those funds? And that, that's telling. Rather than saying this business has great growth opportunity. And so setting it up for perhaps something it's not. Yeah. So I'm on board with your, your both of your opinions. Nice.

Again, love your answers, guys, as always, I'm gonna, I'm Gonna stick to, you know, a few, few basic questions that I get answered pretty frequently. James, do you want to walk founders maybe through just the legal aspect and steps from start to finish an acquisition?

Yeah, so I mean there's certain sort of form documents and they vary, I guess, inform. But you'll start talking to a buyer, they'll want to see your sensitive information. You'll get into, you know, it's more or less these days a boilerplate NDA. Get that in place before you start shoveling stuff over. You know, obviously don't give them anything that's super sensitive. At any point you'll start talking, they'll get interested, they'll kind of come to some deal points and price for the acquisition. You guys will enter into what's called a LOI letter of intent, almost always non binding, except for no shop, which just means that you have to cease all other negotiations with their buyers that pre exist the execution of the document. And then you can't speak to any other buyers for 60 days. They want you to do this just so it protects them from wasting a bunch of time and resources and you kind of hang them out to dry if they, if you find another buyer that you prefer over them once they'll continue the due diligence after that document is executed. Once you've gone through all the major due diligence points, by the way, due diligence sort of goes until closing, so it doesn't really ever stop. Once you get done with all the major diligence points, you'll get down to the definitive documents which are buying even that's usually an asset purchase agreement, a bill of sale, a IP assignment, depending on what you're transferring over. And then various other documents that you know, come into play too. Maybe employment agreements sometimes, you know, maybe some sort of like debt instrument, like a note or you know, maybe a secured note, something like that. Anyway, you get to the end, you know, assets go in the escrow, money goes in the escrow, you close, documents get signed and then you're done. Well with you know, infinite definitions and sort of complexities involved depending on the transaction, but that's the gist.

Yeah.

Sorry to interrupt there, Andrew. Just I want to tuck one other thing in there with the, with the docs as you're leading up to closing, there is a document that's associated with the closing docs called the allocation of purchase price. And that's something that you want to get an early run on and connect with your accountant or cpa. And typically the seller would have the first draft of that. And there are different, it's, you know, the allocation has various buckets that you can, if it's a million dollar transaction, there's you know, some that's going to go to Goodwill, some it's going to go to customer list, some it's going to go to ip, non compete perhaps there's some F and E, all of those different buckets and there's infinite buckets, but all of those different buckets have different tax consequences for both buyer and seller at the end of the year. So you do want to kind of get ahead of that and understand what those tax taxing implicit implications are to you. So you really understand what that looks like.

Nice. And then now I have a question specific to you Paul and James, thanks for that. Because there's so many terms like apa, you know, there's lots of Ackerman acronyms, excuse me, when it comes to acquisitions. But if you have any questions about the legal process of an acquisition, go to resources.microcore.com and we have tons of articles that each step that James just outlined in terms of what is the letter of intent, how to negotiate it, what is an asset purchase agreement. So definitely check that out. But Paul, I'd love to know. So let's say I'm, I'm a founder. I, I just signed an loi. I've never gone into due diligence. What, what can I expect and what should I start preparing for and what are some things that maybe I should watch out for too to protect myself?

Well, as James previously suggest or you know, recommended is make sure that your, your whatever you're sharing is protected. So you want to have a non disclosure agreement, a confidentiality agreement in place where you start sharing private company information. I would also want to do a pretty fair job vetting the buyers to make sure that they're the right buyers. And you know, all things being equal money aside, you think that they could come in and operate the business successfully. You know, most deals will have some seller partition participation component to it. Whether that's some sort of contingent payments or maybe a seller note associated, meaning that you're going to be funding part of the transaction depending on the deal, not all of them. I mean sometimes they're 100% cash. But if you are going to be participating in that, you know, you want to make sure that it's the right buyer. The other thing is kind of stuff that's come up during diligence that's slow down a transaction. And as we previously Said time kills deals, contracts. You want to make sure that your contracts, you really read the fine print. We just went through this with another deal we're closing next week. You know, there's 40 different agreements in place of everything from their CRM to their, you know, all the different contracts. You want to make sure that those contracts are assignable. If there's any, you know, obligations under that contract or that agreement that you need to satisfy before the transaction can happen, sometimes it says they need to be notified before you sell. So I would look at the fine print on your agreements, and it's always good to make sure that. Another one that came up on this deal that we're closing next week is there was a lien that showed up, and the seller's like, but wait, I don't have any debt. I don't have any loans. But he did get a line of credit. Never tapped it. But because there was a line of credit established, there was a lien put on the business that you had to get removed that could have really slowed things down. So it's always good just to make sure that you get your house in order, as we previously alluded to. Got it.

Nice. Loving these answers. I'm learning so much about acquisitions from you too, today. Thanks. I'm selling microcry. I need your help. No, just kidding. Next question. Next question. In terms of. This is my first time thinking about selling my business.

What would you.

What sort of advice would you give me as I kind of think through whether now is a good time to sell my business? And what are some reasons? Maybe it's. It's not a good time to sell your business?

I first want to understand why we're having the conversation. Why are we. Why are we talking about the sale? Is it driven by some life event, some health event? Are you topped out? Are you burnt out? Are you seeing things in the market that are changing that make you concerned about your ability to continue? Are you working on the next thing that's got you super pumped and excited? So it really depends on, you know, understanding the motivation, and then you really plot the course moving forward from there. You know, if. If it's, gosh, if I have to go in another day and work with that partner of mine, I'm gonna, you know, I'm gonna. I'm gonna jump into the ocean or something. That's different than if you're thinking about retirement and, you know, you want to kind of get a sense that's. That's actually. If you have some Runway that's A really good position to be in because it allows you to have the initial consultation with us, understand what the business looks like presently and then you have a, you know, you have some time to fix some of those things, perhaps clean up the financials, do some of those, that housekeeping. In order to prepare your business for a sale, often you'll find out that there's, you know, the owner is doing everything. There's no, there's no infrastructure built into the business and you know, you want to think about, okay, well that, that's actually good and bad. I mean, good in the sense that you've been successful in doing it to this date. But when a buy, when I'm looking at it as a buyer, it gives me concern. Oh gosh, is this person really have, you know, so much relationships with the clients that once they leave, it's going to affect the business that's going to change your deal structure, perhaps more on a contingent. So allowing yourself to, it's. What's the adage, work on the business opposed to working in the business, I think is a, is a good way to start preparing yourself for a sale. But just talk to people in advance of, you know, once you first start thinking of it is the best time to start having those conversations. The more time to clean out, you know, to do your housekeeping to that.

Nice. James, you want to add anything to that?

I, yeah, I know that adds some good texture. I mean like, I hate to do this to you, but I'm a lice attorney, so I'll say it anyway. It, it depends. I think maybe, yeah, Paul pretty much covered everything. I think that maybe a bad time is out of desperation, but I think there's a lot of good times too. I think, you know, if you're burnt out, that's as good of a time as any life events. Maybe you're moving on, just want to do something else. It's, it's so subjective that it's hard to really give a hard and fast rule. But yeah, I think, I think, Paul, you covered it well.

Nice. So if you had to give a founder just, you know, three pieces of advice when they're, you know, looking to work with a broker or. No, let me rephrase this question. What in your opinion are the, the main benefits of working with a broker or an M and a advisor to assist you with the sale of your startup.

Paul, can I take this first, please? There's a bunch of points. Institutional knowledge. They know what they're doing, they know who to talk to about whom to their, their contacts within like their own advisor network. Like if you need, it's hard to find like a good CPA or a good attorney or something like that. And it also takes time. They're going to link you up with every need for the deal immediately. They have a, you know, a person they're going to go to that's going to be on call 247 for them to help you out the deal with any component that you would ever need. So they'll idea in that way. Three, they'll introduce you to not only the micro buyer buyer network, but their own buyer network as well. So you'll have vast distribution over every channel they have available. For some that Paul Hart's on all the time, just sort of like psychological backboard, you know, it's a stressful time and you'll need someone to like coach you through the process and talk to get their insight on, get their advice or maybe even like a shoulder to cry on during the time. And then five and I just kind of touched on this speed of your acquisition. They're gonna like double, even triple the speed it would take if you tried to do it on your own. They can get you linked up, they can get you to LOI within probably, you know, within a month of engagement and put you on the fast track of getting it done. So in my mind that's the biggest benefit there is. You know, it's, that's certainly a subjective thing for each person to decide. But yeah, I think those are sort of the high points of why I think it's really advantageous to that engage with the broker.

Nice. And Paul, you next. But James, I really like your point about the emotional support. I remember going through one acquisition, I just had a friend who is an investment banker and I would just call him with questions that didn't even matter. Just like, hey, like is this a normal DD request or is this and every time should I send this email? And he'd be like, no, go to sleep. Or you know, if it's a life changing acquisition, I think just, just having that person in your corner, you know, if they're someone of good standing, good character can really just make the whole process easier for both parties. But Paul, I'd love to hear your take on this.

I mean it's, it's when you guys were saying like the emotional support, I mean it's, it is true. I actually, I really like that part of the work because it is a, it's a stressful thing. It's like the three big Events, you know, you know, having a baby, buying your first house, selling your business. And, and in the best of circumstances, it's still a stressful emotional. Sometimes catching you without you even knowing it, you'll get kind of overwhelmed with emotions. Add on top of that, there's going to be bumps along the road. And if you don't have the filter, which is really a lot of what we do, we're the filter between the two parties to soften the hurdles, to soften the emotional responses and just stick to the game plan. And, and also I think an advisor and I've been around for a while doing this, you could forecast some of those hurdles and prepare best for them. And so if you're removing the surprises as much as possible, it increases your probability of close. But I'm thinking about a recent transaction that we got about two weeks into diligence and the buyers came back with, we still want to move forward. We still totally pumped about this transaction. Although instead of it being it was a huge reduction in price. And if it wasn't for me being able to be there, hearing the founder out, responding to the founder, spending some time as the unlicensed therapist at that time, that deal would have just flopped out. But had to remind him of why he initially was thinking about selling is because he wanted to spend more time with his family. And so resetting that, we restructured the deal. Everyone's happy at the end of the day, but it's the goodwill part is important with your advisor as well as with the party binding. And I agree with everything James says.

Loving it. All right, guys, we're gonna end this one a little early today, but I hope everyone enjoyed those questions. But if you want more information on how we can help you get microacquired, go to our website, sign up, fill out the lead form on the Managed by Microglire page and we can connect you with Paul, we can connect you with other members of our team, like James Rabid. Help any sort of startup founder, regardless of your situation, and we're here to help. So thanks everybody for joining this webinar today. I hope the shortened version based on feedback was good and we'll see you next week.