Behind The Numbers With Chad Byers

Sam. Hi, everyone, and welcome to behind the Numbers, the show where we dig a little bit deeper to understand what's really important in business. I'm your host, Dave Bookbinder. I think it's not hyperbole to say that every privately held company is going to transact at some point in time. The key is will those transactions be good ones? Will they be successful? And how do you define success? Today we're going to talk about those issues and more. Pleased to welcome my special guest, Joe, Chad Byers, who's the managing partner and a certified MA advisor with symmetrical investments. Chad, good morning.

Good morning, Dave. Thanks for having me.

Welcome to the show. Tell the audience a little bit about yourself, your background and Symmetrical well, my

name's Chad Byers and as you say, I'm a certified merger and acquisition advisor. My background is in mergers and acquisitions and I've been doing it for 17 years now. A little over 100 transactions. And that's what we do. My group of, of folks that I've put together, we focus on mergers and acquisitions and really helping business owners convert their equity into liquidity.

Great. That's exactly where we're going to go. But let's take it from the top. So I read almost every day that we've got about 10,000 people a day turning 65. We're coming upon the greatest wealth transfer in history. And I've also read recently that roughly 85% of a baby boomer's wealth is tied up in their personal business. What's a business owner to do to get ready for this?

Well, there's a lot of things a business owner can do. If you are running a business, you should really understand your numbers. So when we're introduced to folks, really, they, they want to understand what their value is. And as you and I know, if, if a business owner is in a group setting, they may tell other people what their value is, but at the end of the day, they may not know really what the value is, who the types of buyers are and really what that process looks like. So a business owner should really try to start understanding their numbers.

Yeah, no question. And we're going to talk about some numbers. We're going to go behind some numbers because that's the name of the show. We'll touch on valuation, too, because that's one of the favorite topics that I love to talk about. But you mentioned about the different types of capital and I know it can be confusing for business owners at times. When you think about private equity, venture capital, family office, there's a whole host talk about the types of capital that might be available and where do you fit into that continuum?

If you're a business owner and you're a small business owner, let's call it the lower middle market, less than $10 million of EBITDA, it can sometimes be confusing. If you're a larger business and really a public company or a billion dollar business, you're really in the capital markets and the capital markets are a really efficient market. So you understand the different types of capital, what it costs, and everything looks the same. We're playing in the private capital markets and that often looks like a flea market and there's different types of capital and you can't understand what their cost is. So really we're efficient in helping people understand everything from a senior debt provider, and they're kind of the lowest cost of capital to a mezzanine provider, and maybe they're a little bit higher cost of capital, but it's an exchange for equity. And then you have everything in between from a private equity group that's an institutional fund and they've got a 10 year window to buy businesses and grow them and to sell those companies and kind of convert those dollars over to anything down to a venture capital firm, which is really early stage and they're looking for the next best thing. We focus on late stage and existing businesses and helping business owners that have been around for 20, 30, 40 years and they're trying to convert that 85% into liquidity that can help them retire.

Yeah. So with all those different options available for capital, stage of development is obviously one consideration to determine who you might reach out to. Does industry play a role in any of that too?

Well, as you guys know, there's a lot of different businesses in a lot of different industries, and at the end of the day, someone owns those companies. So regardless of what the industry is, we focus on helping that owner get to where they want to go. And that often starts with understanding their situation from a private capital market standpoint.

Okay, so understanding somebody's situation as an advisor, and ideally a trusted advisor, you've got to be a truth teller and you've also got to make sure expectations are set appropriately. Talk a little bit about setting appropriate expectations and having that tough conversation.

Well, I think it starts if you're a business owner and you're receiving incoming solicitation. Who do you receive that from? On one hand you have folks that are really looking to bring you to a seminar and to help you potentially understand value. And maybe that's more about the valuation than it is about the process of converting the equity into liquidity. On the other hand, maybe it's a sell side advisor that's soliciting them to sell their company, but they don't know what their company is. And to the same extent, maybe it's an institutional group that's saying we want to buy your business, but they don't know really who that owner is and what that business is, but they're on an SIC code list or something of the sort. So if you look at the owners in most situations, they shut down. So what we try to do is if we're referred to a business owner and it all starts with having a conversation about how they got to where they're at and where they want to go. And then it goes back to understanding the numbers. So I know we're talking about behind the numbers, but we always start with the numbers and we try to understand people's situation and help them get to where they want to and really give them their options.

Yeah, you mentioned something I want to touch on. You said they shut down sometimes. What does that mean and why does that happen?

If you're a business owner, you're getting, it used to be a lot of facts and now you're getting email and you're getting phone calls and whatever it may be for solicitation for people looking to transact with you. And I think that that's often outputting to most business owners because they don't know who it is that's reaching out to them. And some of those solicitations are probably real and some may not be. And as a business owner, you have so much at risk in running your company, you want to really focus on your business, your industry as a whole.

Yeah, no question. So we talked about valuation a little bit and as you know, I'm a valuation advisor and when someone calls me and they say I'm thinking of selling my business, I need a valuation, I go through a series of questions because if they're in a certain spot in their development and in their process, I can add a lot of value in helping them understand what my valuation might mean, how they might be able to use it. But a lot of times during what I call the oh no moment where they have to sell and I try to help them understand that a valuation may not be their best piece of advice, they really want to talk to someone like yourself because the valuation is a great theoretical construct, but the rubber meets the road when they're in the market and A lot of that valuation realization is going to be a function of structuring and negotiating. Why don't you talk a little bit about that and how the impact of structure and negotiations impact value realization?

Well, I talked about essentially sell side investment bankers or M and A advisors reaching out to business owners about selling their companies. And I talked about private equity groups or other type of buyers reaching out to those same owners about selling their company. So oftentimes business owners think that they need to fit within a box of one side or the other. So, you know, we've both been in investment banking and you're essentially taught that this is our process, this is how we do things and this is what the box looks like. Are you ready? And the same thing, if you're looking to buy a company, this is how we buy businesses, this is how we structure them. Are you interested? So we take a little bit different approach by trying to educate folks that there are a lot of different types of deal structures and there's a lot of different types of deals. So if we can help a business owner understand their numbers and understand their options, then they can design a strategy that's right for them and hopefully we can go to the market and find the right person who says, I'm interested in your strategy versus something that's the opposite of that.

Yeah. How important is it for a business owner to remain with the business post transaction? Do buyers require that they find that attractive?

It's really a different strategy per buyer. A lot of buyers that we work with on average want somewhere between two to five years of that owner staying around. So when we talk about planning, if someone says, hey, I want to be out at 60 or 65 or 70 or whatever their number is, they really need to start thinking about it five, if not ten years in advance. Because by way of valuation, your valuation background, you're often looking at the last three years plus the current year to date, P and L and balance sheet, and you're understanding net working capital and that bundle of things. Well, if you're looking back three years and then you're taking, let's say six to 12 months to transact, and then you need another three to five years in the future. You can back into the math there of what it really takes to start building up the value of your business and really building it to sell.

Yeah, and that's a great point because what I always tell people is that the sale or exit of a business is a process. It's not really an event. So when you think about a Lot of buyers I know from my experience want to just maximize valuation. Is that a realistic goal?

Well, from a sell side perspective, if you're not running your business to maximize value, my question is, what are you doing? I feel that owning a business and running a business is the riskiest proposition you can have. So if you don't have a strategy in mind with, with regards to understanding your total enterprise value and ultimately you back into that by understanding your earnings and the multiple that your company could transact at, what are you doing in your quarterly board meetings or strategy meetings and what is the strategy? And that's almost another aside. I mean, for what we see, we think 80% plus of lower middle market companies are really lifestyle run businesses so they're not trying to add value. So you either are running your business to take out the money until the very end, or you're not taking out the money and you're running your business to sell and you get the money at the end. So it's really one or the other and it's usually not both. If you want to maximize either side of the fence.

Yeah, no question. And you made a really good point about running a business to maximize one's valuation. A lot of times what I see is business owners running a business to avoid the payment of taxes. And like you said, it's pay now, pay later, get it now, get it later. But if you're running your business and you're showing zero profit, five times zero is still zero. So maybe that's a good opportunity for us to talk about the process because it isn't just an event. What can business owners do to get themselves really prepared so that they can not only get ready for the exit event, but when they're in that process, maximize that valuation to the extent possible.

I think that you're ahead of 50% of your peers if you understand how to get to ebitda. If we're in the business, we think that's very common and we understand that. And we start the process by kind of backing into what normalizing is and recasting is. And we try to help people understand that. So if you understand EBITDA and how the outside world will look at it, and even more so I tell people, how would a lending institution look at this if they were looking to finance your company? They would really want to understand what EBITDA is. They would want to understand how much Capex you have on a regular basis, either maintenance capex or growth capex. And if you understand networking capital, you're probably ahead of 80% of business owners in that class or that size of company. So it's really about understanding what the outside world looks at your business as versus what you look at your business as.

Yeah, so you mentioned ebitda. So it's a technical term. Earnings before interest, taxes, depreciation, amortization. It's a great way to kind of level the playing field. It kind of ignores the financing decision and the investment decision. So you can do apples to apples comparisons. What about companies that maybe aren't tracking towards profitability but they're in a position where they need to sell? Do they transact on any other multiples besides ebitda?

There's a lot of ways to look at valuation. You, you know, some folks will look at it as a percentage of revenue or multiple of revenue and Maybe it's a SaaS based business that has customers running a lot of revenue through their software and they didn't completely monetize that yet. So maybe there's an alternative value to that. Maybe there's an alternative value to something with a lot of heavy assets or collateralized value. Oftentimes I always use the example of a crane business or, or crane rental. Think about things with large expensive assets and those assets create earnings and gross profit and ultimately net profit and ebitda. But when we see businesses that look like that in a lot of circumstances, there's such capex required to continue operating that business. If you look at it as a multiple, the asset value almost always supersedes the value of any kind of multiple that you could get to sell the company.

Yeah. So CapEx capital expenditures, and when you think about those, we'll call them more asset intensive type businesses, book value doesn't tell the story. A lot of those assets can be fully depreciated. So a $10 million piece of heavy equipment, for example, could have a book value of $100. Just to set an extreme example, are your sellers sophisticated enough to really understand that distinct distinction between book value and fair market value?

I think the sellers often understand what their book value is if they're looking at their balance sheet, but they don't take into account what the true fair market value is. And most lending institutions are going to want some sort of evaluation on those assets. And if you value those assets and there is a fair market value for the assets, the buyer is going to want the fair market value of those assets because that's what the lender has. And they're going to want to be able to depreciate those assets over a certain period of time and moving forward and the seller has probably fully depreciated those assets if they're trying to save tax dollars and they're not going to want to essentially recapture that depreciation and pay an ordinary income versus a long term tax or a lower percentage. So it's often a debate.

We're going to have to take a quick break. Break. We're going to pause right here. We'll be back with behind the Numbers after this brief commercial message.

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Chad, run your business as if you're going to sell your company, understand your numbers and really look at acquiring your real estate if you're going to be in business for another five to ten years or longer.

Good stuff. So I think in the first segment we touched on numbers. We may go back there again. We talked a little bit about running your business with an intention that there's an exit at some point down the road. Talk about the real estate piece. That's interesting.

Well, most people in business, specifically private equity groups, family offices and the like, are often involved in purchasing companies, growing companies and creating return on investment. Oftentimes it doesn't make sense to go out and acquire real estate. Although if you're going to run your company for 5, 10, 20 years or longer, I've seen a lot of business owners who have been renting for 30 years and they're paying triple net leases. So they're paying the, they're essentially paying the mortgage, the piti.

Right.

The principal, the interest, the tax, the insurance, they're paying everything. So if you're paying everything and you're running a business and you're maintaining the property and you're basically paying for it, why would you not purchase the property? I've seen a lot of business owners and you know, we're in the business of helping business owners again turn their equity into liquidity. But this is really a business of representing companies, but ultimately the individuals that run those companies. So you're helping people increase their net worth or monetize their net worth. So that's one more asset that indirectly they're paying for that potentially they should own. And there's a lot of programs out there to amortize that real estate over a long period of time and to put little amounts of capital down to actually acquire it.

Are buyers happy to take on real estate investment in the sale of business?

I guess it depends. And that's one thing. If you go back to EBITDA and you normalize the line item for a business owner selling their company, they should look at are they paying above market rent for the real estate or are they paying below market rent? And they should normalize that rent line item to what it really should be. So if they want to sell the business and they want to keep their real estate, maybe they either have already paid off their real estate or they can take some of those proceeds and pay off their real estate. And that's a good way for them to have recurring revenue on a long term basis. Or if it's a buyer that wants to purchase the real estate, they're essentially going to pursue that same strategy by growing the business. They own the real estate. It's a byproduct of what they're already doing. And if they sell the company down the road, let's say it's 10, 10 years down the road and they have a buyer who signs a 10 year lease and they've amortized the property over 15 or 20 years. Essentially they're coming out with an asset at the end of that that's going to help them increase their net worth and ultimately give them more investable dollars to help them retire.

That's a great tip. So I hope you've all paid attention to that one. Chad, I get a sense that there's a lot of folks that are out there watching who could probably benefit from a conversation with you. And how can people contact you?

Go to our website, it's symmetricalinvestments.com or you can email me directly@cbyersym-inv.com thank you.

So the name of the program is behind the Numbers and I want to go behind the numbers just a little bit. I've found a quote on your website which has a lot of resonance with me and you say that there's a lot more to value than what is reported by the numbers. What does that mean?

It's always about the people. The last show that you had, you had on the CFO of Marcus Lemonis and we've all seen the profit or we've seen Shark Tank and we've seen a lot of these other shows where these celebrity investors are investing in people and they think that the value that they bring to the table is going to help them ultimately grow. So really what I'm talking about there and what we're saying on our website is that businesses are all about people. It doesn't matter how much capital we can put together and how many assets we go acquire. If we don't have people and we don't have a process in place to be able to run those companies, we really don't have anything. So if we're selling a company and there's people that have been there for a long period of time and they're critical to the success of the company, it's always our hope that the owner has been running the business to sell the company and ultimately incentivizing these folks in the right manner and probably they should have them under some sort of agreement, which is what's going to add more value to a buyer. To know that that system and that infrastructure and essentially ecosystem will stay in place and it will be there and moving forward so that they can add whatever capex dollars or processes they can to increase the value of that business.

Yeah, so that's another area that has a high degree of resonance with me about the value that people bring to the enterprise value. We think about it in terms of individual performers, we think about it in terms of institutional knowledge. There's oftentimes a corporate culture that's instilled with businesses. Sometimes good, sometimes not so good. How do you think about corporate culture when you're thinking about representing a client and what might buyers look for?

That's a difficult conversation because if you're in the business of acquiring companies, you're typically going to buy a platform company and you're going to bolt on other businesses around that. And then that becomes the question of what's the culture look like and will these people be able to get along together? Look at a culture where there's more of a free spirited group of people and a fun atmosphere versus specifically I'll pick on you right now as more of an accounting atmosphere, an evaluation atmosphere or we work with a lot of engineering firms and engineers are different than this kind of free spirited type of business. So I think that's one thing acquirers of companies should really diligence. It's tough because business owners don't want any buyer or acquirer to talk to their people in advance. So it's a difficult challenge in having those conversations to understand really what you're getting at the end of the day other than what the numbers are.

Yeah. And there's been a lot published on M and A successes and I think in a merger and acquisition transaction, success is often defined as the realization of the synergies. The one plus one equals three, if you will. Statistics I've read and have quoted indicate that it could be as much as 85% of MA deals don't realize and manifest those synergies. And the data suggest that it's really because of the integration of the people. Do you work with any groups that help to integrate buyer seller culture?

We do, we do. And I think the key there between the groups is okay, so now you're a buyer of a company and you're going out to buy this business and they've had great longevity of the people that are in the company and there's not a lot of turnover and that's a great selling point. And the buyer says, okay, we're going to come in here and we're going to integrate this business into something we already own or we're going to have this as a platform company and we're going to add other businesses to in to this platform. Think about it in reverse so these people have been with that company for five, 10, 20 years. The owner started it 20, 30, 40 years ago. You're not going to go in and change the culture of the way those people operate very easily. So it's a difficult proposition to look at what that long term existing business is and the way that you would want to change it to be able to institutionalize that business versus what someone thinks that it could be.

So I'm going to add another wrinkle or element into this notion of the people that come with the business and the culture. Talk a little bit about when you have family members involved in the business, what's the dynamic of family relationships there? And I know that could take up the entire segment. So let's just hit some of the

high points that could easily take the entire segment because every situation is different and there could be brothers and sisters or cousins or children and parents. And it's really difficult because everyone has their own idea of what the business is and where the business is going. And if you sit down, whether it's a family business or a group of five owners or however many more than one owner, they all have their own agenda. They're all a different age. They all have their own family situation. Their families are always going in a different direction. And everyone has their own motivation. So if there is a transaction again, if we back up and we kind of package what it looks like from a total enterprise value and then we back into each individual situation, that's where a lot of recapitalizations have kind of come up. Maybe it's some owners buying out other owners and it's a management buyout or ownership buyout or maybe it's management teaming up with some of the existing owners. And there's a lot of ways you can kind of put a transaction together versus, hey, fit in my box. Either we're going to buy all of your company or I want to come and sell your company. I guess a takeaway on that is you own the business and it's your option to put a deal together. That makes sense for you as long as it fits within the valuation parameters of what the. What fits in the market.

Yep. And as we said, that could take up the rest of this segment. Unfortunately, we are out of time that did take up the rest of the segment. Great conversation, went very, very quickly. Thank you, Chad, for joining us today. My guest on behind the Numbers was Chad Byers, managing partner of Symmetrical Investments. We'll see you next time on behind the Numbers. I'm Dave Bookbinder. Business deal. A memorable family celebration.