How to Sell Your Business for Maximum Value

I recently did did a summary of 10 different ways of maximizing value in selling your business. And if you divide up what the advisor does, what STS would do to help an entrepreneur or a family business increase their value in the eyes of a strategic it relies on the client continuing to do the work of strengthening the leadership team of understanding where the products are going to be strategic for the strategic buyers of of understanding how their weaknesses can be shored up of preparing the business to to be assessed and to be audited by strategic buyers. And that's where the client should be focused in driving that value up and not in the process.

Our guest today is Rob Follows, the chairman and founder of STS Capital. Rob is a deal maker, a visionary and an extreme adventurer who's on a mission to help entrepreneurial business owners turn their success into significance. As the founder and chairman of STS, he's led or been involved in over a thousand M&A transactions driving over $100 billion in deal value. His passion is helping founders maximize their exits, creating life changing wealth and billions in new philanthropic capital along the way. Beyond business, Rob's a leader in strategic philanthropy and a lifelong adventurer. He's one of the few to have climbed all seven summits including Everest. He's also the founding chairman of Ultravest Charitable Services which empowers charities to scale their impact. With decades of experience and a global YPO network and a track record of creating extraordinary exits, Rob is the guy that entrepreneurs trust. When it's time to sell and move on to their next big purpose. Rob follows. Nice to see you again, Cameron.

It's always awesome to be with you and your team.

You and I have been friends now for crazy 16 years. We met at the YPO Global Leadership Conference in Barcelona back I think it was 2009, maybe a little later, maybe 2010ish. But you've been a great friend. You helped me move to Barbados at one point or spent time at your homes in Canada, up in Whistler and in Barbados and spent time with your family and your kids. You're an amazing human being, but you also run an incredible business. I mean STS Capital has been a partner of ours for years and I've referred deals to you over the last 1112 years. Can you tell us what STS is?

First of all, I want to say what an honor it is to be with you here and what inspiration you are, Cameron Harold. And so thank you. And STS Capital Partners is a firm that I started, Cameron, when I sold my business for 27 times EBITDA way back When I was selling my marketing services business, I'd grown and developed. At that point in time, free trade was coming along and it was made really clear to me that if we didn't sell the business by the person leading the negotiations. He said, rob, if you don't sell your business, you're going to get. You're going to get absolutely creamed by the people that are financing billions of inventory in your industry. So I tried to find somebody to represent us. I tried to find somebody, Cameron, that really understood what we did, which was a sophisticated fulfillment operation. And I couldn't find somebody that really was on the side of the entrepreneur. I couldn't find somebody that would really work to leverage what we had to maximize value. And so we did our best. We got, you know, a fabulous outcome. It was 27 times EBITDA. But two years later, when I was sitting in the headquarters of Merits in St. Louis, Missouri, who'd bought us, and someone asked if I'd seen my file. I asked for the file and, Cameron, they would have paid a hundred times EBITDA for my business. A hundred times. And that is just an outrageous multiple. But that's because it has nothing to do with the multiples. If you are an entrepreneur and you have a business that a strategic buyer could integrate, we learned the hard way, and make many, many times what you're making, hundreds of times what you're making, then the elasticity of the price on the exit becomes extreme. That is to say, it can be a huge multiple. And that's really one of the motives. That was what caused me to launch what we call STS Capital Partners, which helps entrepreneurs and helps families maximize value. Cameron. When they decide to sell their business or decide it's time to sell their business.

And kind of, in layman's terms, part of what you talked about in maximizing that strategic value is the buyers often have some reasons for acquiring your company that the entrepreneur may not see. And that's what gives you the additional leverage on multiples versus selling as a percentage of, or, you know, a multiple of revenue or multiple of profit. They see some other value. Can you speak to that?

Yeah, exactly, Cameron. So I will compliment the private equity industry. They've done a fabulous job of convincing entrepreneurs and families that their businesses are a multiple of ebitda. And you hear it now in different industries, you know, my industry is 5, 7 times EBITDA or 10 or 12 times. And in fact, Cameron, that's not the value itself. The value is, is if you're the. If you're the strategic buyer here and you're the seller here, the value is really when you integrate your business into that strategic buyer's world, what will they make with your business integrated into theirs? How much profit will they make? How much sales will it drive? How much, bottom line will it drive? How much is that worth to them integrated into their business? Now, that's not an easy thing to understand, but when you've been a strategic buyer, which all of our senior partners have been strategic buyers, and when you understand what they have to go through to really socialize it and sell it internally and then put their own career on the line as a risk because it's very, very public. When you buy a company, when you understand how all of that works and you help them with all of that, as the advisor, they will share Cameron with you what they're looking to make. And that becomes the negotiation point. And that's how instead of taking it to private equity and local financial buyers, which is easy, taking it to global strategic buyers, the strategics being the ones that will integrate will drive very significant value. There's more to that, but that's the summary.

There's, I guess, two parts to that. One is you guys at STS are really good at identifying strategic buyers who already know the value in these potential companies that are up for sale. And then second, I know that you work really hard with these entrepreneurial companies to actually package them up for sale so that they. It's kind of like the. I always talk about Tiffany's jewelry. You know, Tiffany's jewelry is nice, it's fine, but it's not that great. There's, there's much better jewelry elsewhere, but they put it in the blue box with the white ribbon and it's packaged up so nicely and people go, oh my gosh, look how great it is. So there's a little bit on both sides of this equation, isn't there? Finding the strategic buyer, but also packaging up the selling company. Can you talk about that a lot?

Absolutely. So we love the analogy, Cameron, of Rembrandts in the attic. And so the, the old analogy, if, if, if your listeners aren't familiar with it is your, your spouse comes home and says, you know the house I've been talking to you about on Main Street, I really decided I want to buy that. And you're like, well, wait a minute, it's $5 million more than all the others. It's listed at 10 million. All the others are at 5 million on the street. Can we please look at one that's you know, 5 million. And, and so you're convinced to go and look at the house. And when you do, the real estate agent says, I know this is priced higher than all the other houses on the street, but I think there's some. It comes with everything in the house. And one thing that we're not sure what the value is, a lot of stuff. The full attic in the top of the house is full of all kinds of fabulous, interesting antiques. And so you go up to look at it, you throw a canvas back and you see a big painting with an R that looks like, with a T at the end, looks like a Rembrandt. You're thinking, this couldn't be. So you call a Christie sky. And the guy comes in, he goes, this, these are Rembrandts. These are actual Rembrandts. And so as the buyer there, you realize that you will pay double what anybody else is paying because you've got more value than the seller sees in that house. You see the Rembrandts in the attic that it comes with. And that analogy really applies to strategic buyers. So if a buyer, a buyer is strategic, just to put it really simply, when they can make a lot more money than you currently do owning your business. So let's say you have intellectual property and you're saying, this is just how I operate my business and I'm using this system and it's a really unique system. And let's say a buyer could, could, could Cameron, extend that across their whole organization globally. And let's say there might be a thousand implementations for that times, all of their customers and all of those thousand implementations. You can start to imagine how valuable buying that business with that intellectual property would be for the buyer. The job when you're selling your business is to understand what are those Rembrandts in your attic? And it's hard to see your own. You need a professional, usually. And what will that be worth to a strategic buyer? And there's a whole other conversation I can extend on and getting on the radar of the strategics well in advance so that they can help inform that for you.

And I think this kind of level of understanding and expertise that you and your team have globally, and you've got a pretty good global team, is why you found a good niche for your client types. Right? You don't work with the $5 million company who's looking to exit. What's your sweet spot? What's kind of the, the, the zone that you look for.

Yeah. Thank you, Cameron. We're mid market so our entire range is 50 million to 5 billion. We'd love to be in the hundred million to billion dollar range, which is kind of the core. And the reason we're not we can't do 20 million or $10 million deals or $5 million deals is because of our promise, our brand promise is to sell to strategics. And if you're a strategic buyer, usually unless it's a SaaS business or an intellectual property driven business that could plug in and leverage significantly, normally a business that size will not move the needle for a strategic buyer. And so we only act for the sellers. But the way we get the maximum value is by getting them to move the needle for the strategic buyers. And that's why we need some substance and size. But I'd like to say something if I could about the billion dollar and up businesses.

And it's 100 billion DOL is because I'd written down 50 to 500. So it's good to know it's 50 to 5 billion.

Yeah.

Is that 100 is 100 million to 1 billion? Is that revenue or is that what an exit is?

It's, it's enterprise value. And so revenue is a nice guideline. But if it's in SaaS, of course SaaS is much more valuable if it's in, if it has intellectual property that could be leveraged, if it has a really unique, a really unique circumstance like someone in your hometown had an inland port and to the person that made a $5 billion bid on the port they were going to build out, having that inland port was worth uniquely to them many, many, many times. One of the strategic buyers they ended up paying 20 times, so 20 times more on the purchase price than one of the other strategic buyers because they had that leverage. And so that's the unique value driver you want to find with a strategic buyer. And, and not, and not. And which will not be offered by private equity or financial buyers.

Why do so many companies when they're looking to sell focus on the wrong thing? I feel like when companies are looking to sell, all they care about is what percentage is the M and a firm going to take. And that's kind of, kind of almost irrelevant if you get the right. It's kind of like if you can sell the company for 100 million versus 50 million, who cares if they're paying five and a half percent versus three. The Delta is like do they just not understand the math? Are they too myopic?

I, I think, I think that the industry has done a really poor job of sharing with. So let me do this in the interest of the benefit of your listeners here, Cameron. So first of all, the industry has done a poor job of aligning interests. The old Lehman formula was a reduced percentage as the, and that's what a lot of people might remember if you had a hundred million dollar deal, it would be a lower percentage in selling that deal if you got to 300 million. And so it was a distance incentive for the hard work that goes into leveraging that value up. And so that's reversed in the last 20 years. And so now there are more and more advisors that are building a hockey stick curve of value where you're starting here with the agreed value that say private equity will pay and then moving that up as you both in percentages as the value goes up. So it's a win win. And if that's explained clearly to entrepreneurs and families and it's not about the investment bank or in our case the sell side advisor making more money, it's about them creating more value in the work that they're driving, staying up all night working to drive, leveraging their personal relationships, their focus to drive those competitors up and up and up and up in price. And it gets uncomfortable and it gets really stressful. But you can double the price in a circumstance where you're really leveraging and so incenting the team. It's an incentive, Cameron, the way I see it and so, and the way I know many do, but many haven't had a chance to have that explained to them that if you're at a baseline, you know, you leave it at x percent, say it's, it's 3% at the baseline but if you can double that or triple that then then you want to double or triple perhaps the percentages and so that everybody's aligned in maximization of value. And as you say, looking at it as, as the net proceeds is the really the best way to consider it as a seller.

I wish, I wish that real estate agents that worked on behalf of the sellers operated the same way because they really don't. They just want to get the house sold and take their commission and they don't really care. So you've, you've got a seller and they're, they're going to start working with sts. What are the biggest things that the seller does that gets in their own way? Like where do they end up hurting or sabotaging a deal?

Well, sellers who, and we had one today, sellers who stop the work they're doing in driving their business value up and driving their EBITDA up and driving their, you know, their new product design and their research up that, that take their foot off of that pedal and, and come and get very, very, very involved in the process are doing themselves a SkipService. There are 10 or 15 or probably 20 ways I recently did, did a, a summary of 10 different ways of maximizing value in selling your business. All of those are really the advisor's work. And if you divide up what the advisor does, what sts would do or another advisor would do to help an entrepreneur or a family business increase their value in the eyes of a strategic, it relies on the client continuing to do the work of strengthening the leadership team of understanding where the products are going to be strategic for the strategic buyers, of understanding how their weaknesses can be shored up, of preparing the business to be assessed and to be audited by strategic buyers and to practice the management presentations to ensure that incentives are in place for all of their leaders. I mean the list goes on and on. That's where the client should be focused in driving that value up and not in the process. If they get involved in the process then which they have the prerogative of doing, I mean they're the client, but they don't do themselves the best service. The other thing that entrepreneurs often do is buy into the Wall street education. The Wall street education is to service Wall street leaders. All the analysts sit there, look up to the private equity leaders, you know, the owners of large private equity firms and hedge fund owners, and they say, look, those guys, I'm in restaurants with them, they're looking across, saying, look, there's Kravitz, he's worth X billions of dollars. And it's all about how do I pay less and get more for something? It's all about, it's driven by ingratiating themselves. And when these large I banks are working in family and entrepreneurial businesses, they're looking out for themselves first. And that's a really big problem. And so if families and entrepreneurs would recognize that independent, fully independent sell side advisors or advisors that can help them are really the ones that they want to be working with, I think that would be helpful. There's a misunderstanding that going with private equity and going with traditional I banks like, you know, I mean, we can name them all, right? Goldman Sachs and JP Morgan and Morgan Stanley. And I just spoke to somebody last night who had 10 of them in working with him and I said to him, Raj was his name. Who did you choose ultimately? He said, bank of America, you know, I said, well, why would that be? He said, rob, in my opinion, I'm quoting somebody now in Singapore last night, these are all the same. And you know, I let the private equity guy drive the process because he'd invested a little bit. And I now learned that my interests were not being looked after. I'm not putting down private equity and I banks work that they do for themselves. I'm just calling out that. It's a big conflict, Cameron, against interests of entrepreneurs and families. And so recognizing that and finding somebody that will really work for you as the entrepreneur, the family business owner is critical. And you only have one large transaction or two or three in your lives. These firms are doing many every day and so they have a large lever with advisors and I banks.

I want you to speak to kind of what happens at the 11th hour. You know, I've talked to a couple of CEOs that I've coached and one in particular, Ben Kirschner, who had a deal for, I'm not going to disclose it but, but a mid eight level deal that he walked away from it literally the night before signing and then ended up getting a much better deal about nine months later. And then I've heard of other people that have walked away from significant money. One walked away from a nine figure deal and he's never ever seen a $7 million offer or seven figure offer since. Can you speak to that kind of moving target that entrepreneurs have? And how do you know when it is right to walk away and how do you know when it's right just to get the deal done?

So the answer to that question, and I would encourage all entrepreneurs do this because it's a very dangerous area to equivocate in. And so you want to be clear on the outcome that will satisfy your goals. And so as an entrepreneur being, and I'll use this example of this case with two of our clients, as an entrepreneur, as a family business owner, a private business owner, you want to go into the process with your required versus your preferred outcomes. So what are your required outcomes? And list them down, what are those required outcomes? And there's a required outcome of X amount, whether it's $500 million or 50 million or a billion or a hundred million, whatever that number is, that's a required outcome and a preferred outcome is much higher than that. But when push comes to shove and you know that that number will meet all of your requirements and you thought about it in the calm present state of mind before you get into the negotiations and that number is exceeded Then our strongest advice is to accept the deal. And because things can fall apart brutally. And I'll use this example. We had a heating and air conditioning group that's rolled up and rolled up and rolled to a multi billion dollar group now. But it started, and I won't use their name, but it started, it was in, let's say, close to Philadelphia. And when the buyer, who is from Detroit, they wanted $50 million for the business, they said $50 million is, is inaccessible. But the stretch goal was a hundred million dollars. We went through a process and we got them an offer for $256 million. 256.

Okay, take it and run.

Well, wait till they hear what happens. So the buyer is trying to be nice and because it's a hard airport to get to, are in Michigan. And so they send the corporate jet down to pick up the two entrepreneurs and the deal's done. The deal's all agreed to, the due diligence has started. We're all agreeing, we're headed for the closing date. The closing date was in 40 days. It was all. And they sent the private jet down to pick the guys up, to bring them in to meet everyone. And we'd done our work, so, and I was out of, out of the country at that point. And they said, look, the private jets coming down, we're going to jump on it and go up there and visit. And we coached them on, you know, what not to say and just to, to, to let them fall more in love with it. They had never been on a private jet before. And when that private jet landed and picked them up and brought them up, by the time they got to Detroit, they'd convinced themselves if a company could afford a private jet and a $256 million valuation, they wanted 300 million before they were going to accept the deal. And the buyer, the buyer said no. And, and, and because they'd already. I can explain the reasons why once you've socialized it all internally, if it's earlier on, you can get a higher price potentially. But once it's all socialized and cemented, everybody's agreed and they've got the capital and they're ready to close, you can't adjust the price like that. Now, they saw it as a retrade and rejected it wholesomely. They came back to a letter on their desks the next day rejecting the deal. And they were in the heating and air conditioning business. It was the hottest Christmas. People were playing golf at Christmas out in New York that year on the Golf courses. There was no snow, and so they didn't sell any furnaces. Their business tanked, and it took us four years to get a $250 million offer at a 30% higher valuation. In four years of their lives.

I. I saw one in Vancouver where he had $117 million offer, and six months later, he was out of business because he said, no, I've got to ask you two more questions before we wrap up. And they're.

They're.

They're related, but they're not related. I think you set a world 67 times revenue, some crazy valuation you got for a company, but that's not the hardest thing you've ever done. You've been to the. You, You've been to the top of Mount Everest, and you've been to the top of the tallest mountain on every single continent. Is that true?

That is true, yes. And in fact, we became one of the first amateur couples to climb the seven Summits, and so I'm writing a book about that now. What is your Everest? And encouraging people to set really big stretch goals. If an ordinary guy like me from the suburbs can become one of the first amateur couples to climb the seven Summits, you know, what is your Everest? What's your next big stretch goal?

You also do speaking. I think there's groups of entrepreneurs. Yprs, other groups of entrepreneurs hire you to speak, Is that right?

Yes, I do. I do two speeches together. The keynote on what is your Everest? Setting big life planning goals and living your life to the fullest. I do the seven summits that we. If I have the hour, I do the seven summits and then the seven life planning processes and then a breakout in the afternoon. And the breakout in the afternoon is on 10 Ways of Maximizing value in the sale of your business.

Awesome. Well, Rob follows the chairman and founder of STS Capital Partners. Thanks so much for sharing with us. Really appreciate the time today.