The Exit Engine Podcast Episode 31: A Field Guide to Identifying Buyers

Welcome to the Exit Engine Podcast, Episode 31. Good morning, John.

Joe, how are you today?

I'm doing great, man. How are you doing?

I'm doing great. Good, good, good, good.

Hey, you know, we've been— we had our first webinar this week and a couple of questions that we didn't get to answer on the webinar, but it popped up that I think we're gonna talk about today. And one of them is, one big one was, how do you know if you're selling to the right buyer?

Oh, good question.

And, and that's a really good question because we, you know, we, we spend a lot of time, John, telling our, our sellers that they have options. Okay. And a lot of what we're bringing to the table is experience and, and, and, you know, and, and, uh, understanding of things that obviously that a lot of business owners don't have because they are doing their business and we're doing ours, and this is how it works. Um, but what we have become kind of experts in, right, is identifying— when you, when you're identifying the kind of exit you want to have, the buyer, even the kind of buyer that you're going to entertain, right, or want to be in front of, identifying that kind of buyer kind of happens at the beginning, right?

Yeah, exactly. And to your point, you alluded to this a little bit, but making sure that what you want is what the buyer is going to deliver, right? So your goals need to be down on paper and you need to be aligned because the scary thing is if you choose a buyer because they're paying the highest price, that's a mistake. And it's a mistake that you will pay for Almost immediately after the closing. Because when, when you go for the one that's the highest price and you don't look beyond the details, or just beyond the headline, I should say, to the details, it can get to be a mess. And an example of that is someone we were talking to recently of, hey, he wants to sell his company, but he wants to stay along for the ride, right? He doesn't want to go anywhere. He just doesn't want to deal with all the management and all the other things that come along with running a company. He wants to run the product. So he wants to stay at the company. That's a very different buyer than someone, than the buyer who's gonna pay the maximum amount for the company.

No question. And again, so, and within the kind of larger categories of buyers, right? And we're talking about things like, you know, are, that are, you know, strategic buyers versus financial buyers, et cetera, et cetera, right? There are then archetypes within those buyer kind of silos, right? And so what you're talking about is, Hey, this is the kind of buyer that would entertain this, right? It's not just about whether it's a strategic buyer versus a financial buyer or whatever. We'll know going in, okay? After your initial assessment and when you're building your roadmap, you will have a pretty good idea of the kind of person that you should be looking at, right?

Right.

Who is likely to be the kind of— and the first determination you'll make is whether it's gonna be a strategic buyer, or a financial buyer. Okay, and this is assuming, guys, that you're not going to go the way of selling it to your employees, right, or succession through, you know, in terms of your— the next generation of your family and things like that. We are talking about the kind of the 2 biggest ways that are the lucrative kind of financial ways of being able to get a big kind of payday.

Right.

Okay, so there's a lot of information about that we've talked about around ESOPs and ways that, you know, employee, you know, selling it to your employees and, uh, trusts and all kinds of things that you can do with it. But let's today just concentrate on these 2 big things. Sharks, right? We're talking about the sharks. The sharks are the— the sharks are the private equity guys, okay? The sharks are the guys out there that are like, I need to make a deal, I've got all this institutional money behind me, I've got a giant pot, I've got to go out and spend it. They call it dry powder, John, right?

And they have to, right? And the point about what Joe's saying is not only, like, not only do they have the money, but they have to spend it, right? Because when you think of a private equity firm or even a venture capital firm or any fund that, that has been created, they are all created in sort of the same legal structure, and they all have a shelf life, right? They, they are created from X date to X date, and those dates can vary But a lot of times they have a timeframe where they need to invest money and they need to return money to their investors. So they have this dry powder, they have this idea or this thesis about what types of companies they want to buy, and they could be whatever it happens to be. They could be manufacturing companies that need something, or tech firms or SaaS firms. They have a particular spin on how they can uniquely help the companies, um, that they invest in through either management or introductions or whatever it happens to be, and they focus on those companies to invest in.

That's exactly right. And so we call those sharks, right? There's an easy way to put them. They're sharks. These are the guys that are swimming around. They're all about the money. They're all about making the money on the, on the, you know, on the business. They are very— they are frugal. They have a very specific thing that they are hunting for. Okay, then we've got the, the strategic buyers, the whales. Okay, and the reason we call these whales is because these are the guys you're actually really— in my mind, this is the kind of guy that you're really hoping for. Okay, the buyer is the buyer that's in your industry or is close adjacent to your industry, understands and appreciates what it is that you do and what you've built because of his, right, understanding and relationship with the industry, and wants you because, uh, specifically because you are going to be a good fit with them, okay? In terms of what you do, the way you're, you know, your attitude, what you want is a good fit, all that stuff, okay? And so the strategic buyer is always something that we are aiming for if possible, right? And it's only because that most of the time they are the kinds of things that fit better work out better in the end and things like that.

And there's an understanding, right? As Joe mentioned, it's either in your industry or in an adjacent industry. Think mortgage and real estate. Think, you know, a similar customer base, right? If you have a— if you're selling different things to the same customer base, well, that can be an easy— that's a strategic buyer to say, oh, like, I can— that's an easy way to gain more revenue from the existing customer base as well as, you know, diversify to a degree on different products and services that they're— that Each, each of your companies is selling to the same customer base.

Exactly. And I think that, and then in addition, normally these people tend to be like bigger. Okay. So in other words, most of the time it's a larger strategic buyer buying a smaller, right, you know, entity. Okay. Normally, sometimes they're mergers. Okay. So we talk about M&A and we're talking about acquisition all over the place, but we rarely actually mention the word merger. Okay. And, and understand that in the concept that you were talking about earlier with the client that we were talking about this week, that person, what that person's really interested in is a merger, right? He's looking to be technically acquired, but the reality is, is that what that is, is you're gonna take my company wholly as it is and you're going to insert it into it, into your company kind of as a product silo, right? That's kind of what he's looking to do. And and then you're gonna pay me for the right, you know, to to have this thing and buy me out of of owning the rights to the IP and all that stuff. But then you're gonna pay me a salary. I'm gonna work here, and I'm gonna be the product manager, right? And that's a really cool thing for somebody who is in that way of like downsizing their life that way, right? He's going from a I have to be worried about everything to do with this company and the financials and blah blah blah and it. and I'm actually just, I'm really just like a computer guy and I'm an engineer and really what I want to focus on is the product, right?

Yeah.

So anyway, so we've got sharks and we've got whales, okay? And so today's episode is Sharks versus Whales: Are You Selling to the Right Buyer? Okay, and so the, the thing we're going to talk about today is about the different kinds of buyers, the different archetypes within those kind of buyer silos, what motivates buyers in certain ways to do certain things. When is a good time to make sure, you know, what are the red flags when you come up against certain buyers and things like that, and it's time maybe for you to walk away? Um, and then we're going to talk also about maximizing your leverage with buyers. Okay, yeah, we can get the right buyer, but the question is, how do we position it? What do you need to do to your company to make sure you attract those guys?

Yeah, because, you know, you— when you When you go to market or when you start selling your business, you're going to attract all sorts of people, right? You're going to attract the companies that want a deal, right? The people that want a deal that, oh, they're going to think that because you're for sale, that there's a desperation there before you're for sale or the reason you're for sale. And we are here to help you. Specifically us, Jo and I, are here to prepare you so that you're never desperate when you sell. It's one of those things where you are completely prepared to sell, but you're completely prepared to stay in the business for a couple of years, and you're using the exit plan that we're working with you on as a growth plan, right? That you're just improving your business. But you'll get all sorts of people, and it's your job and your advisor's job, frankly, to weed through what do these buyers want, right? Like the ideal situation. And I always say, You know, imagine we were talking in 12 months and the deal closed 6 months ago. Are you happy and why are you happy? And that's a good question to ask these buyers because then they'll— they often will say like, well, I'm happy because we've grown revenue or we've cut costs or we've expanded markets or we've done those types of things. And if those answers don't jive with what you want, that's like a red flag that Joe just talked about.

No question about it. And I think that, that there are so many— remember that every buyer, strategic, financial, otherwise, whatever, has an agenda, okay? And their agenda is, is, you know, goes from the very general, of course I want to buy this thing so I can make more money, right? That's, that's everybody's agenda. That's the first thing, right? But the, the next thing, as you start to move down the stuff, there are certain requirements that every, every buyer, every investor Okay, has a specific set of what we call an investor profile. Here are the kinds of companies that I want to invest in, right? These are the things about these companies that are important to me. This is the stuff, this is how I measure success, etc., etc., right? And so everybody has a, you know, has a mission that they're on, okay? The strategic buyer wants Mostly, most of the time, the strategic buyer is looking for integration. They're looking to take the thing that you're doing or the way you're doing it, whether that's because you have a client base, a process, a product, right, a supply chain, any of those things, a service that could be valuable, you know, in its entirety, okay, to integration with the strategic buyer. Okay, they want it— the strategic buyer is looking to integrate and to scale their already existing business, right? And so if you, as the— as a company owner, decided, hey, I want to grow my business, one of the things that you would look into would be acquisition of another company. Okay, you would be the strategic buyer in that case. Okay. So again, it could work both ways, but you understand that in general, the strategic buyer is a company similar, adjacent, or whatever that looks at your product, service, Et cetera, and decides I need to have this as part of my thing for scale purposes. Okay. The financial buyer, right, is these are private equity firms, family offices, things like that. People with giant pots of money that make several investments in things a year. Okay. They, they are focused on ROI, right, John?

Yeah, they're focused on ROI. They're, they're focused on, you know, and think of their math, right? So they're, they're taking a big pot of money and they're spreading their bets around, right? They're spreading their bets around and their goal is to get a 10-bagger, as Peter Lynch used to say, a 10 times return on their investment. So they're looking for companies that they can inject money in for growth purposes and take the plans that exist at the company, right? The marketing, the marketable inefficiencies that Joe talks about and brought up in our webinar and say, you have these marketing efficiencies, or there's marketable inefficiencies that you can't do because you don't have resources. Well, here's the money for those. Here's the money for those things. Go forth and prosper. And they're looking to— again, based on their investment thing, they're looking at their investment thesis and profile. They're looking for very specific criteria. If you meet that criteria, you can get money from them. They take— they come in and take a, you know, 30% stake or a 35% stake. You run the business. They're there for advisors, and oftentimes they provide, you know, consulting services. They provide people that can help you introductions to various other customers, and they're there as a resource for you. They come on your board, and they can be very— it can be very lucrative for you. You get more money. You can take money off the table. You know, you get more money from them. You can take some money off the table and sell a little bit of your company. And you still own a big piece when a strategic buyer comes along and buys the company that the private equity firm has invested in.

Right. And that's it. And so you can find private equity firms that are going to be able to buy pieces of your equity and whatever, and then potentially give you management services or things like that. And they're going to find most private equity companies aren't going to be in the thing where they want to take the whole thing and control it because they believe that they've got operating staff on their staff, or they'll bring it in here. And so they can actually take this and move the needle, and they want you out of the way over time or whatever. Then you've got— but that's the finance. So you've got strategic buyer, financial buyer. There are a couple of others that we have to mention because I think they are very common and they, they could still technically fall in the other 2 categories, but we want to call them out as separate aggregators.

Okay.

This is a, this is a very specific kind of buyer that basically is looking to basically just to hold, to, to roll up wholly, wholly individual companies into a single holding company.

Yeah. And I was, I was almost part of this back in— long, long time ago. Um, and, and what they— what, what this company wanted to do is they wanted to create like almost like a publishing slash, um, uh, financial empire, sort of. If you think of Bloomberg and before Thomson Reuters got together, they wanted to create something like that. where they were selling professional services through legal and selling consulting services through the stuff I was doing with investor relations consulting and roll all those things up. So they're individually managed companies that were part of a larger conglomerate, and they had a management layer at the top that provided resources. And you can think of this almost like Berkshire Hathaway.

Yeah.

Berkshire Hathaway functions like conglomerate, very, very light on top. All the operational businesses operate at that level. They're CEOs at those companies, and they throw all their money up to Warren. He invests some of it, gives it back to some of them in an operating budget. But they're aggregating businesses, and they're sort of bolting on businesses to their existing business, not without regard to industry, but they don't really care what the industry is. as long as it fits their criteria. So they're similar to financial buyers in one way, but they're also similar to the sharks in one way, but they're also similar to whales in the sense of, hey, if you meet our criteria, we'll buy an energy business, we'll buy a candy business, we'll buy a real estate brokerage. It doesn't really matter as long as they meet that criteria.

Right, exactly. And so those are good people to know about, right, John? I mean, when you were starting to think about selling your company, who am I going to sell it to? Is the kind of, as we talked about, is one of the first questions. And so thinking about these kinds of companies that buy, again, things that might be disparate or might be bolt-ons. Everything about Berkshire Hathaway that's interesting, again, is that they are really looked at as investments. And so what Warren Buffett does is kind of like you said, he's part strategic buyer, part private equity firm. What he really does is to be able to look at individual areas where owning a business can be a lucrative play, right? And that's something that can grow over time and is sustainable, right? And then also things that are complementary.

Yeah, things are complementary. And things like this private equity firm, and I'm not going to name them because I haven't talked to them in a long time, but the way that they got in touch with us was through the person that was helping our companies, you know, um, like a business broker basically. And it's one of the reasons why you need to have an advisor. You don't need to have a business broker, you need to have an advisor who's going to expose your company to as many different entities as possible. Because a lot of times these investment firms have a creative way of bundling companies together that not— you might not necessarily think about, right?

Right.

Like, you might not necessarily think that your particular consulting firm would fit with a legal and technology consulting firm. But like, if you have an overlap of 80% in your customer base, well, that from their perspective on either a strategic buyer or an aggregator strategy can be very lucrative because they can integrate back office systems. They can integrate all these things and save all this money by integrating these 2 companies, by having one IT department, one sales department, you know, one human resource department. And yes, that means loss of jobs, but from your perspective as the owner, it's incumbent upon you and necessary for you to listen to those people. Because while you might initially think, oh, I don't want to be part of that, in reality, these aggregators can be very positive for entrepreneurs because A, you get paid out, and B, you can have a job. Like, you have a job running your business. You just don't have to worry about a lot of the back office things you may not want to have to deal with.

That's exactly right. And to be able to be in a position where you, you've sold the company and then you still get to have to make a $200,000 a year paycheck or something like that, right? I mean, on top of that, for as long as you can, and then potentially an equity and equity in that company.

Yeah, you go, you go from 80 hours a week to 40 hours a week, right?

Right, exactly right. Yeah. And, and potentially have make, make more money, have that big windfall that you can invest in, whatever. So again, lots of ways to be able to play that. Now, some aggregators will just take it. Yeah, you'll just take the whole thing. Great. And then you'll get out of the way. That'll happen too. There's all kinds of levels. There are aggregators that are just working in the advertising space. There are aggregators that just work in the IT space. We had a client for a long time that was on the buy side that was basically building an IT conglomerate, one company and complementary service at a time. Right.

That's a great company.

Yeah, yeah, absolutely. And so there are the— and so then it's the aggregator. So the, the, the— there's one other group though that we have to be aware of, because these are the ones that we have to be a little bit wary of, okay? These are, these are not yet— not really even sharks or whales. These are kinds of like— we call these bottom feeders, okay? So essentially what we've got are there are lots of people out there, okay, who are— who believe in themselves enough In terms of what they do in a very specific way, meaning they're very good at sales or they're very good at some kind of business thing that they can repeat. And what they're looking for is distress. Distress. They're looking for companies that are underperforming. These bottom feeders in some ways can often be people's saving graces. Okay, this is the kind of thing that sometimes can be the only way out for people who are like upside down in their business. Okay, at the same time, I think that they— we have to be careful about these people because some of these people will try— will come in with an LOI that's what we expect or want from a valuation And, you know, and a kind of deal structure standpoint. But they were the— they are the ones that will try to get every single thing down, down, down, down, down, down, down. And they will stop at nothing to make— to point out what is wrong with the company so that they can buy it for less money.

Yeah. And they do this again. Everyone wants a deal, right? No one wants to pay retail price. I get— we get that. But like what they often do and what we've seen in this scenario is they get an LOI, they issue an LOI, and Joe's exactly right. They have a top-line number that sounds great, but the reality is, is they're going to drag this out for long periods of time. They want a holding, they want an exclusive holding period for, you know, over 90 days. That's sort of the red flag. When it's like upwards of 120 days, it's like, well, gosh, that you're going to need that long to vet the company, a third of a year to vet the company. That sounds like a a long time. They are, they have a, you know, sometimes it's a square peg in a round hole, right? They, just like everybody else, they have their criteria, and oftentimes they try to fit your company into their criteria as opposed to the other way around. Or they, you know, because they make these offers on a lot of companies and they try to get them at the price that they want to pay, and they'll take that number down from during due diligence, okay, we're going to discount that 20% because of your customer base is too concentrated. We're going to discount it 20 more percent because of X, Y, and Z. And all of a sudden you're looking at something that's reduced by, you know, 50, 55% from the top line number, and you don't want to be— you don't want to deal with these people in most cases, as Joe said.

Yeah, that's right. I think there are 2 cases in which you do want to entertain this, and this is one of them, is that if you want really are in a situation where you see that you are, that you have some kind of trend of negative growth. Okay? So if you are starting to see that you're in a situation where, uh-oh, you know, I can't get, I'm starting to have a downturn, I can't get out. Maybe something happened with the economy, something happened in regulation situation or whatever. You're in a situation where it becomes just like an asset sale where you're like, let me just get rid of everything I can and just do whatever I can do to be able to move on. Right. Yeah. And so we don't want that to be that. Obviously that's a thing and, and, and, and it's something that, but it is something that happens and just know that that is an option. And by the way, in that situation, the bottom feeder and your biggest competitor may actually overlap, right? So understand that one of the ways in which, if you are distressed, if you are in a situation, we know that distress, John, one of the 5 Ds, right? This is how This is one of the ways, again, 40% of the, of the 80% of businesses that don't sell, 40% of them go this direction, right? Which is that they just close. Um, and the reality is, is that your competitor, your biggest competitor might be your saving grace if you are in a distressed way, right?

Yep, exactly.

And because that, that might be the color with, because they're, they are aligned with what you do. It's an easy integration, you know, whatever. And again, it might be pennies on the dollar, right? Because they know you're distressed. So again, being careful about that, the way that you, the way that you handle that situation, you know, carefully and quietly and all that stuff obviously matters there too. But so, so we've got the strategic buyers, we've got the financial buyers, we've got the aggregators, and we've got the bottom feeders, okay? In this kind of like sharks versus whales, you know, kind of contest. But motive matters, John. And I think that one of the things that we have to understand is, Every buyer, right, has some kind of motive.

Correct. Yeah, whether it's, whether it's, um, you know, growing and, and expanding into adjacent, um, industries by this acquisition. Are they, um, are they looking for synergies? Are they looking to, again, to, to make their— take their human resources department or take their IT department and use it for you? And, you know, they can keep the revenue and, you know, lose the expenses? That's another thing. Are they looking for a sapphire sale like the bottom feeders we just mentioned? Or do they, you know, maybe they truly value your brand, your talent, and/or just your cash flow. It really depends on the investor profile that they're looking for. Are they looking to exploit the resources that your company has? Are they looking for opportunities for your employees? That can be a big motivation when you're selling your business. Is it, do you have a great brand name in the space and in your industry and they wanna capitalize on that? They wanna keep your brand name for them. That happens. Bigger companies buy smaller companies and keep the brand. It's rare, but it does happen if that company has a great name. I think of Amazon and Zappos. They had the Zappos name for a bit on that product when they sold that. So there's all sorts of motive about these buyers. And what you need to do early on is ask them that question. You know, you can assume a lot from their website and maybe what you heard about them, but you really need to ask them, what are you planning to do with my company?

Yeah, this is actually a great point. Time to bring up this that we haven't really talked about before. But, you know, what happens in this, you know, in the process of this, okay, let's assume that We're at a point with, uh, that you are a company and that you are— you have gone through the preparation phase, okay? The, the what we call the exit roadmap. You, you have— you've figured out what you need to do to, to, to, to make your— to grow your business or to evaluate or just make it more sellable. You have, you have executed a plan now that has, that has increased your, you know, your revenue, your top line, and increased your profitability, and your EBITDA is as high as you can get it. Right? And now you're at a point where you're like, okay, I'm ready to sell. I'm going to market. Okay? And so when you go to market, you're going to put together your, you know, what in the business they call the SIM. We call it a prospectus. There's lots of ways and names for it. But the idea is that this is your general— this is the company. This is what's great about it. It's the marketing stuff. It's here's all the financials. Everything's in a deal room. You can look at everything, whatever. And when you come and you and a buyer inquires, acquires and where you're on listing sites, we and your broker should be out there obviously talking directly to potential buyers in the industry and things like that, trying to bring them and show them this great company that you have for sale, right? In that situation, you're going to now start getting meetings, okay? And what's going to happen is hopefully your broker is the gatekeeper, and when there is a real— what, what the broker, or what we consider to be actual real interest, right, that we can verify things like the, the cash exists and they actually have the money and who they, they are, who they say they are, and things like that. Now, what we can do is we can have an initial conversation. That initial conversation, John, comes after a very important document called an NDA. Nobody gets to see anything about your company. Nobody even really gets to know the name of your company or where it's located. Okay, without signing an NDA. Okay, and the reason is, is because there's a lot of people out there who would take meetings with people and just take information, use it for their own advantage, right? You can never tell.

What you need is you need to use it for their own book, their own investments. I mean, there, there's people that, that do this, and it's, it's obviously unethical, um, but they, they own a company, they sign an NDA about they're gonna buy this company, and they look at the financials, they get all sorts of records, and then they have no one intention of buying the company. They just use that for competitive intelligence. Obviously, again, that's unethical, that borders on illegal. And a lot of the NDA language that people are signing prevent that, but it still does happen.

That's exactly right. And so it's just a protection for you and for everybody else in case something goes wrong. And of course, if you've got— there are— once the Once the NDA is signed by the potential buyer, right, it's also covering everybody who works for them and all that stuff too. So it's just a protection for everybody. The point is, so now you've got the NDA, now you can have a phone call, okay? And in this initial phone call, this initial meeting, okay, what's going to happen is that the— that you're— the buyer is going to come in and the buyer normally is going to say, hey, uh, wow, we've been looking at your stuff Right? Because what we've done is before the meetings happen, they have seen the, the, the confidential information memorandum. They've seen the prospectus. They've seen the financials. You've given them access to that. Okay? And so now they say, I'm interested enough that I want to talk more about this. Great. Now we're having a meeting. And, and now what we're— now, now what you're— what you're— this is your chance. Okay? It's— this is— everybody's feeling each other out on this call. Okay? And, and what's happening from the buyer's side is that they are starting— they are trying to— they're trying— they're going to dig around and try to get out of you what they can get out of you in terms of information that's going to see to make sure first whether this aligns with what they do, whether you're full of it or not, okay? And generally talk about the state of the business and where you are. And they're going to ask you things like, why are you selling, right? They're going to ask you things like, what do you hope to get out of this, right? They're going to ask you things like, um, they're going to talk about the specifics, the management team, the things in there. They're going to look at red flags that have jumped out at them or whatever. They're going to ask you to think, who else are you talking to? Who else are you talking to?

Yeah. You know what, you know, if it depends on when they get the information, they're going to ask you specifics about the finances. They're going to ask you about your customer base. They're going to ask you about your employees. They're, you know, this is due diligence before due diligence. And a lot of times when they ask you these questions live online or live on a phone call, they're asking you, A, to get the information, but also, B, to see the body language and the reaction of how, when they ask the question about your financials, a very sort of can be a very personal and difficult question of Well, why, what happened in 2023 when you, your revenue went down 13%? Or what happened in 2021? Be like, well, I ran a restaurant and, uh, the pandemic happened. Like, perfect legitimate reason, right? So they're asking these questions for informational purposes, but also to gauge what you are like as a business owner and a person, and do they want to get into business with you?

Exactly. And of course, what, what that, that, and that is, is from the, often from the seller's point of view, right? What they think the call is. Okay, in other words, it is about I'm going to be on a call where people are going to ask me a bunch of questions about my business, and I'm going to answer them to the best of my ability or say that I'm going to get the information. That's how we train you to do it, right? However, what's what's often not thought about here is that this is your chance as the seller to ask questions of the buyer. Okay, what are your intentions with my company? What are your intentions with my daughter? Right.

What do you want to do? What do you, you know, what do you want to do?

What is— what are you trying to achieve, right? What is it that you hope this will be at the end, right? What is your— what's your— right, what's your team like, right? Because all the people that are in there, this is a human situation, okay?

What's your time horizon, right? That, that's a really good question for PE guys especially, because like their time horizon could be 3 years, could be 18 months. It could— it's not often at 18 months, but, but it could be, oh, we want to, we want to see an investment return in 4 and a half years. Like, okay, that's a different discussion than 2 years, right?

Are they investing in growth, right? Or are they gonna plan on cuts and squeezing profits out of stuff? Are they gonna fire everybody? Are they gonna— are they gonna chop me up and sell me for parts? Right? Like, those are the things that you need, that you get to ask, right? And then you also get to float ideas about what it is you want from a package or from a deal standpoint.

And so, yeah, and, and there's good things to hear, right? There's things you want to hear about growth, and, and, and there's also things— and you can gauge, you know, someone, is he, is, is she or he telling the truth, right? You gauge whether these things, like, okay, And if, if, if you're different and you've heard and you looked at stories and they've, um, you've, you've known somebody maybe that has been bought by this company, or you read a story about how they said one thing and did another thing, well, you need to, need to understand that, right? There's always these red flags that come up in these buyer meetings too, with, with they, they promise the world, right? Or they're, or they say that they're going to do something different with you than they did with their last 4 investments. Does that make sense? Right?

Right.

They slashed and burned in their last 3 investments, but all of a sudden they're going to invest in your tool and die kit product and buy a bunch of machines to make your company go gangbusters. Does that— I mean, does that pass the smell test?

Does that make sense to you if that was the kind of— considering you understand the business and the industry and everything else, right? So that's exactly right. So you want to know is that that's what you're checking. for, right? Is this person know what they're talking about? Is this the kind of person that I want to be hanging around with for the next 3 years while I earn out?

Yeah. Because you're gonna be, you're gonna be, you're gonna be hand in glove with them, hip to hip doing this business.

That's exactly right. You, at least for a short period of time. But again, so, so what'll happen is that you will get red flags, right, John?

So, yeah. And one, one of the big ones that we have here that we've seen is overcomplicated terms and overcomplicated, like, letters of intent. And we're shaking— I'm, I'm sort of using that voice because we've seen these where it's, you know, again, mergers and acquisitions is not— I'm letting you in on a secret— it's not really complex. It's, as Joe mentioned earlier, it's people. It's people talking on the phone and people coming to an agreement. But these, when they have an overly complicated set of deal structures, like Going as an example, going down to the product level and saying this product must achieve this amount of growth in this amount of time period and da da da da da da. And those like that's a little different, right? Or or overly aggressive goals. And if you don't meet those overly aggressive goals, then your earnout as an example what you get after the initial payment for month year year year one year two. goes down. If you don't have control over the company anymore and they're expecting you to exert control, right? Like, if what's gonna happen in the future is they're taking a majority stake in the company and then they're requiring you to make sort of majority stake decisions, but they're not giving you that authority, and yet you're held to that accountability, that's a red flag, right?

Yeah.

So as long as you have the accountability, and the ability to affect those changes, great. You can make those decisions, investing in these products as an example. If you don't have that authority, you don't want to be bound by their crazy earnouts or growth potential.

No question. And I think there are 2 other things that happen that are really, really common, okay, and that are obvious ones. But again, when you're in a situation as a seller and you really want to sell this business, right, because you can smell the $7 million or whatever that might be on the table, right? Like, let's face it, we're all human, okay? And that thing, you want that to happen, okay? And when you want something to happen, all right, you're gonna get— it's there. There are things that you'll let slide, but there are— here are 2 that you may— will not let slide. One, anybody who doesn't respond to you after they submit an LOI, okay? This happens so much, I can't even tell you. And I'm not exactly sure why, except for the fact that people just have second thoughts, or they get busy with other better deals, or whatever, and they just kind of like go away. They just kind of disappear. All right, they've given you an LOI. They actually come in and said, here's what— here's my offer, let's go to due diligence. And then now, now they're gone. The other thing that happens is, again, when people come in and they are suddenly— and they right off the bat, John, what happened this week? Right? We had it happen this week to a client. I'll give you this much money for this much of the business in an email before they even go through due diligence or do any kind of like actual thing. Buyers that are, you know, valuations and things that are way too good to be true.

Yeah. And again, it's— is it always wrong? Is it always bad?

No.

But as Jo mentioned, it is certainly— it gets the you know, gets the hairs in your back, back of your neck up to say, hmm, why would they, why would they do that when at this stage?

Right. Yes, definitely. It raises an eyebrow. It doesn't mean that— there are, there are crazy investors out there that are great crazy people who are incredibly brilliant and will do things like this. Okay, so you can't, you can't make a flat like no, but what you can do is, is have your, you know, obviously be— have your antenna Right? Yeah, treat it with kid gloves. Go— our advice is always to follow everything to its natural conclusion, right? And sometimes that natural conclusion is just— it just disappears. Finally, okay, here's the thing. Obviously, John, there is one thing that you can do, right, that will make it— that will— that is— that will help you kind of automatically figure out who the right buyer is And all that stuff. And that is to position your business in the best possible way you can to the broadest amount of people.

Yeah. And if you go back and listen to other podcasts and even our webinar that we did this week, I mean, we don't really— we don't mean to sound repetitive, but when we say that exit planning is improving your business, even if you're not going to sell your business, exit planning is a great exercise to go through because what you're doing is just what Jo said. You're positioning your business. You're thinking around, you know, you're looking at things and thinking around the corner, right? Seeing around the corner, seeing the future. And you have to have a detached view to a degree, a view above the company to say, okay, we all know about the problems with our operational processes, or our sales have been down, or our sales are too dependent on Kenny or Sarah. or marry. What you, what you do during exit planning is you look to those things and really look at them with a, with a sharp eye and an honest eye and say, how can I improve my business? Because the last thing you want to do is sell your business to somebody who doesn't understand what they're buying, right? That's going to cut— that's going to result in a lawsuit. But also, you want to, you want to have pre-due diligence. You want to have— you want to conduct the due diligence yourself So the due diligence conducted by a buyer goes smoothly. And anytime they say, oh, we're going to discount the price by X— no, no, no, no, you can't discount the price by X. I addressed that. Kenny was, Kenny was 80% of our sales in 2023. He was only 40% in 2024, and it'll be 15% in 2025 because I did X, Y, and Z.

And at the very least, John, it's giving you the confidence to walk away from the deal. Right? You don't feel— when you don't feel like you are— like you are the— one of the things that we try to tell people all the time, and because this is so hard for human beings, especially when they feel like there's someone out there greater than them, meaning that, well, that's other company or this buyer has all this money, and I want— since I want that money, I'm gonna— I'm like the inferior person in the deal, right? And what we're trying to get you to do is to think about it a different way. We want you to put a different mindset on We want you to go, no, no, no. If you do the— if you go through the process of doing the work to get yourself to a place where you're— you have maximized your value and your saleability to the best of your ability, then you should feel very confident in having— talking to buyers and being able to say no, right? That's what we're trying to get you to do. And when you go through the process of exit planning, of doing the exit roadmap, okay, and you're using the Total Exit Value System to do it, which we think is the best one— when you do that, you are not only just doing the due diligence, you are actually making your company a better company that more people will want to buy. And when you do that, what you'll do is when you get to the stage where you're talking with people, you will recognize, my company is actually worth this. I know that the right seller is out there Or right buyer is out there for this thing. And so I don't need your, you know, I don't need you, right? That's what we're trying to get you to be. That's the catbird seat, right? Having a premium company that someone else wants to buy, right? Making sure positioning yourself for that premium kind of buyer, right? Creating competition because you want other people.

Yeah. And while these processes can be onerous, right? The reason that due diligence and all these processes for when you're selling your company can be onerous is most companies don't do this type of planning. Most companies deal like this with a one-off, right? They get a random text or a random phone call from somebody that seeks to buy their companies, and it turns into a fire sale of, let's get the documents together, let's get these things together, let's do the And they're focused on the deal, and that's important. Don't get me wrong, focusing on the deal is important, but oftentimes that you neglect your core business. And you know, you don't have extra people running around doing all these types of businesses, so you're pulling people off of their normal jobs to gather information and to talk to these buyers. But when you do exit planning, what we have is everything's in a room, all the, all the materials are updated. It becomes a part of your of your annual process of, oh yes, we closed the quarter. Have we updated the documents in our, in our internal data room?

So that you are ready at any point, right? Because that's the thing, it's what, what people seem to be neglecting here too. You hit something that was— that's been bothering me for a while. The, the, the fact is that, that when you do this work, uh, you are also prepared to sell at any time. When you, especially when you have to. Yeah.

Right. And what, yeah. And what's gonna happen is, is you get that phone call. If you've prepared, you get that phone call and it's like, great. Like, sure, we can have the meeting on Friday afternoon. Like you, you wanna meet at 3 o'clock Friday? Everyone will be available. Again, when the buyer, when, and when, when the buyer comes back and says, oh, we need more time to get our stuff together. Right. Because they're used to, let's talk on Wednesday afternoon. Let's, let's call it, it's Thursday now. Let's call, let's, let's talk next Thursday or next Friday because they need time to gather their stuff internally. What that triggers you to do is there's one person interested in my company. I got to get a second. I got to get a third. Because the last thing you want to be is they've initiated the call, right? Think of this. They've— the sellers initiated— the buyers initiated the call. They think that you're just dealing with them because they initiated the call. What you are— what's incumbent upon you to do is get 2 or 3 other people. So by the time you have that meeting, be like, Oh yeah, thanks for the call. You know, we, we, we deal with these calls all the time. We had a meeting last month about it. And you don't want to lie, but, but truly, you'll probably get these calls when you have a superior company. And you want to be talking to a couple of buyers at any one time, especially if one seems aggressive.

No question. And I can tell you that from— it happened to, to me kind of by accident because at the time I had no idea what I was doing. But when we sold the digital marketing company that was what was happening. We had 3 different suitors, all kind of happened at the same time.

Yeah.

And, and it's what drove them, you know, and it did drive the deal, um, to one particular company who felt like they were like, uh-oh, we better make a play here, we're gonna lose this. Um, you know, and it turned out that they— what they didn't know was the other, other company actually just— it just didn't materialize anyway. And so for us, it was just like, oh, thank God this company still wants to buy us because these other 2 have dropped out. So But the bottom line is that it's a matter of, like you said, what you're trying to do is if you do the job of exit planning now and you get to a point where you understand what your valuation is, what are the things I need to fix to make sure that I have a sellable company, that I can maximize the value. And even if I can't get to everything in a timeframe, at least I can get to a place where I am more sellable. I am more valuable, right? And I may not be able to get the full monty, whatever, of what I really, really love to have. But again, but at least I'll know what that is. And when you get to the end, when someone actually— when you're sitting in a room with someone who's actually looking to buy your company, you can be in the strong position. You— we want you to be the one sitting there going, these are my terms. Yes, it will be this much money over this much time. With this much stuff, and I know that you'll do that because I know that this is a great company. Right? That's what we're trying to do at the end of the day. There's no reason not to do this.

Yes.

Right? There's just it's just it's all about being able to move yourself and understand what these buyers want, and making it and giving it to them, and then giving it to them in a way in which you can be the one who gets to make the final decision. You control your own destiny. That's our tagline: control your business destiny. That's what you can do when you're doing this exit planning stuff. And again, as John said earlier, you do the exit planning stuff even if you're not yet ready to sell. In fact, do the exit planning now before you're ready to sell mentally, because you will have the time to prepare. You can spend time on it. You can make it right. You can grow that value, but you need some time to do it. Right.

And yeah, and, and if, if, you know, again, shameless plug alert here, but we help companies prepare themselves for sale. We have a system which we use to do it. It's called the TEV system, the Total Exit Value system. You get a score when you take our assessment. You can go to assessment.myexitengine.com, take the assessment. You'll hear from one of us shortly after. Um, you can engage with us at info@myexitengine.com. You can reach Joe by jo@myexitengine.com. You can reach me at john@myexitengine.com because we deal with these things all the time. You, you run your business, we run our business. Our business is helping you sell your business.

No question about it. Guys, a great way to, to, uh, you know, to, to, to get engaged with us is to check out one of our webinars. So every, every Wednesday, okay, there is a webinar available. Sometimes it's live, sometimes it's not, but for right now, there is a lot of information there to begin to get you started, and it will actually give you some things that you can start to do right now. Right now, 12 things that you can start today that will start to immediately increase your value and salability. All right, so check, look for that where you can go to LinkedIn, look at Exit Engine on LinkedIn, and you'll find our webinar schedule there. You can take a look at that. And of course, thank you so much for subscribing to this. Would you guys, if every one of you guys who listens to this podcast would please take this podcast and share it with another business owner that you know, that would be awesome. That you would be doing us a great service, but really you'd be doing your friend a great service by giving them this information and letting them know what you've learned and what's possible. Okay, what we are all about here is about understanding what is possible and that there are options out there for everybody. All right, it's just a matter of taking the time to explore those things and understanding yourself. John, thanks so much for today. Love another, another great discussion, and, and have an awesome day. Thanks, Joey.

Appreciate the time.