Sell-Side Behind the Scenes: Preparing a Company For Acquisition Part 1

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I'm doing great, thank you. How was your weekend?

It was good, thanks for asking. I'm glad you came to hang out with me. I'm excited to learn from you. Can we kick things off with a little bit about your background?

I did a business school in Europe called HEC Paris and like most often when you do that, you start working consulting. That's what I did for a couple of years in Paris. And then completely out of the blue came a job offer to move to Martinique to the French West Indies and to work as a CFO of a food manufacturing company. So here I was, a young guy, hasn't traveled much. You get an offer to go live under the sun after spending all of your life in Paris under the rain. So I picked it up and that's how I started in the food industry. What happened is that company had some, let's say, leadership issues. So very rapidly, even though I joined as a cfo, I was named the CEO of the company. I was very young at the time. I don't remember if I was 27 or 28.

How big of a company was it, how many people?

We had 125 employees. There is a lot to say about that because you're coming of a prestigious business school. Sometimes people think you know it all, but you don't. If I was in that seat, would I give a company I own to a 28 year old even though he's coming from Harvard or whatnot? I probably would not because you don't learn it all. Paper is one thing, life is another thing, books are one thing and experience is another thing. But anyway, I was lucky enough for it to happen to me. That's how I got in the food industry and I've never left it. And that was in 1986. I'm old. Since then I've been in the food industry in different sectors ranging from wholesale baking to dairy to snack manufacturing. And more recently with that new endeavor, I'm leading oil edible oil manufacturer for cooking oils. Yeah, that's the way the supermarket are calling it. I hate that. There is so much more you can do besides cooking with cooking oil. A great oil, sure you can use it for cooking, but it's a bit of a waste and you have to enjoy it, taste it, experience it as a dressing, as a dipping oil. And that's what we do. We're making a very unique product that actually tastes like something and that has great nutritional qualities and that's what consumes your time and effort.

Interesting. That's a great way to think about it. M and A. You've done some M and A deals?

Yeah, I have been on both sides of the aisle. On the acquisition side, sometimes on the selling side. Happened to me five times in my life under sometimes very different circumstances. It started in Martinique where one of our partners was trying to acquire a company in a sister island from Martinique called Guadeloupe. And I helped him doing that. That person was, by the way, a fantastic entrepreneur. A gentleman called Mr. Neuhauser. The guy started with A small bakery in a small town in the eastern part of France, after 25 years was actually the largest industrial baker in Europe. So that's telling you about growth. And that was his life. He was living for his company. And that's all that was interesting with him. I had my first exposure to acquiring a company. Actually that same person is the one who took me to the U.S. at some point he acquired a company in the U.S. and told me, would you like to move to the US and that sounded like a very interesting opportunity. And that's what I did. And that was in 1990, I relocated from the French West Indies to Boston, Massachusetts. A little change of scenery, much colder weather for sure. And that was again, a baking company. During that time I was exposed to both buying and selling. We acquired a company located in San Francisco and that company became plant for the West Coast. And that was one of the circumstances where probably you don't actually want to be on the seller side. That was a distressed company. They were in dire financial trouble, had no negotiating leverage whatsoever, had nothing to sell but trouble. We scooped them for a sum, literally buying out a few tax debt that they had and we purchased the assets, we did the leases of the building they occupied, and here you go. That's how we had a manufacturing plant in California. But definitely, since we're going to talk, talk about being on the selling side, that's certainly not a situation you want to be in and having to sell your company because you're short on money.

I wanted to talk to you more about the sell side because I don't get that story too much. It's hard for me to find people that really want to talk through. And I don't know if it's mainly because they didn't have a great experience and their memories they'd rather not revisit. But that's where when you were open to speaking about it, I said, let's, let's talk about it because that would be fun. Maybe you can give me a little bit of an idea of what those scenarios were when you were on the sell side of the business.

The first opportunity I had to sell a company was that company in Boston. It was a CEO of it. That company experienced a fantastic growth during a few years, meaning when I joined that business it was doing at the time. And remember it's in 1994. So that company, when I joined them in 1990, was doing just little over $2 million of sales. And in 1994 we are doing over 45 million. We went from one manufacturing plant in Boston to five manufacturing plants all over the country. We had one in Phoenix, one in Miami, two in Boston and one in San Francisco. That's the first time. And what happened actually, it wasn't in the plan to sell that company. That's not what I was hoping for. But my parent company, the guy who sent me to the US at some point was finding himself in a predicament at that time in Europe, a small company called Unilever had decided that they would become the king of industrial baking in Europe. And they started acquiring left and right. My boss at the time saw himself in a situation where he would be engaged in a price war with a company that was of course, infinitely larger than it was. So he wanted to have cash, a treasure chest that would enable him to go into a price war or to face whatever situation he would face. So at that time he told me, frederik, I think we could sell that business because I need money. And certainly we had a very nice high going from 2 to 45 million in four years. So that sounded like a business that could be attractive to a buyer. At the time, we were the leader for segment for market segment. In the bakery business. It was making partially baked bread. And that was at the time, the new thing, very convenient for food service operators. You have a restaurant, you want to have great bread, serve great bread, but you don't want to have a bakery on your barrel. So you're basically buying a frozen partially baked product that you're going to finish off in your oven at the restaurant, and you're serving a warm loaf of bread to your customer exactly as if you had made it yourself. And that's what we were doing. And the concept really worked well. And it worked well for cruise lines. If you think of it on a cruise ship, you cannot have an army. There is an army, but you want to limit the number of staff and augment the number of paying passengers. And to do that, you disembark stuff and you load on more paying passengers. So to do that, you basically get rid of your begging staff and replace it with partially baked bread. That's what made the success of this product essentially going back to what we are talking about, selling the company. How do you sell a company that's coming out of the blue? We are experiencing a great. Right. We are looking at 60, 70 million dollars of sales down the road a couple of years after we were the leaders on your market segment. So what do you do? And either you go to an investment banker or something like that, and you tell them, I want to sell the company. Here are the books. What can you do?

Well, but even before that, where do you start determining the right time to sell? What even leads to the decision for.

The sale in that case? Again, that wasn't my decision. That was a decision of the ownership of the company. They didn't need money and they saw something were successful and they told themselves, well, it's not an essential part of our business. They were mostly European. The American division was just a small asset.

So it's a strategic decision. Was there other sales that you were involved?

Another one, and it's down the road. But after that company was sold and after I left that group, I worked for a company called Promise Landeri in Texas. Basically my job was a turnaround job and preparing the company for sec.

Okay.

Transform it from a money losing business to something that was attractive and that could be scaled up because that's at the end of the day, what an investor wants to buy. Something that can be scaled up. Most large company or investor don't want to buy something for what it is today, they want to buy it for what it can be tomorrow. My job was basically, I mean to make it more palatable to an outside company. And ultimately that business was sold to Borden and on board a couple years after or a year after found himself sold to Grupo Lala from Mexico. So that was a second time in between. Still on behalf of that Mr. Neuhauser, after we had sold that company in Boston, he left me a little bit of money in the States and told me make another company. So he left me a few millions to build up a new company and we build up again a new company that was manufacturing bagels. Bagels at the time were all the rage. Everybody wanted to bagel. So we did a company called Uptown Bagels and that was a wholesale manufacturer mostly for the food service industry and same thing. After a while that company had to be sold for the same good reason. We want money.

But you built that one up from scratch and then sold it. You built a business line up within a company and then sold that business line.

Yep. We started from absolutely zero. I remember fondly seeking out space to build a plant. And literally we started from a cow pasture in the southern part of New Jersey to a plant and to letter the provider of all baked goods for a chain of convenience store on a gas station called Wawa. I don't know if you're familiar, but very successful company, incredible company by the way. Very smart people leading it in a very Difficult environment. But anyway, we are manufacturing all the baked goods that we are buying at Wawa. It was back breaking. You are doing a fresh product every day. You are doing 50 different SKUs every day. And every day they have to leave on time in 50 different trucks that are going to run from New Jersey all the way down to at the time, S.C. and that's every day because they don't even close for Christmas. So anyway, that was a very interesting business. But that company ultimately was sold to a neighboring company, also publicly traded, called G and J Snack Food. G and J Snack Food. They are the king of pretzels. All the frozen pretzels you see in sports arena or in supermarket in boxes are coming from those guys. J and J Snack Foods also family owned company, remarkable business.

Sounds like there's a clear strategic driver when it's time to make that decision to sell.

Yes or no. Most of the time it's driven by circumstances. The ownership of the business is going to have a specific need and at that time they will say it's a good time to sell. And this is basically it. Most of the time. Or a larger company decides that specific company they want to sell no longer fits in their portfolio is a distraction. Promised Land Dairy and the guy who owns Promised Land Dairy is a guy who owns KCI Medical Supplies. So he's a doctor. He made a dairy because he's a very devastated out person. And one day he had a vision that he should make a dairy and he decided to build a dairy. And the money to do it after 10 years decided that maybe it wasn't all that. And that wasn't really fitting so well with his portfolio and he wanted to unload it, to sell it. So no, all my experience, most of the time it hasn't been a conscious decision where you have a bunch of people gathering around the table and saying this is the best time to do it. No, it's been driven, honestly, mostly by circumstances, eager people, richer people, deciding that no longer fits their needs or wants and they decide to move on.

So it sounds like there's a few different scenarios. You can have the conclusion, hey, this is the right time to sell. And then you plan it. You have maybe an offer you can't refuse and then you got to think that through. Then you have the other situation you don't want to be in, which is you have to sell.

Yeah, you have to sell, but you know the offer you can refuse. Let's talk about that for a second. When you have a software company where you are in a pharmaceutical company and you discover something that is a game changer. Sure you're going to have bigger people who want to buy what you have. But where you are in the food industry, how often do you see a product that is truly changing the landscape, Something that is completely changing the way people consume food to the point where a larger company will say, oh my God, how could we miss this? And we absolutely need to do this. We couldn't make it ourselves. And think of it recently, I mean there is of course the plant based movement and there's a couple companies that did wonderful result and Snacks, the company I used to work for within Superfood or people like Impossible Burger and people who basically created something that looked on bled like a burger with plants. That's a game changer. But most of the time this is not the situation you're in. You are just finding a slightly better mousetrap, a slightly better product. And what you have to sell is the opportunity for a larger person to multiply the product in more places or in a different segment that you haven't been able to enter. They're already in that segment. For example, if you're a food service person, well, you haven't been able to penetrate the supermarket industry and you tell yourself, well, that product could work in a supermarket too. But it takes millions to launch a new product in a supermarket trade. We already have the network, the contact, the brokers, the salesforce, everything. So for us it's just going to be an addition. You decide, yeah, that fits for me. So if you are in that situation, what are you really selling? You are selling an indication to a larger company or an investor that you're capable of generating very rapid growth. At that point you rebid down and all of that. Of course it's important, but this is not the most important point. The most important point is your ability to grow. And how will they multiply that and make it even grow faster? And those large companies, they're going to assume that because they integrate that into their system, they are not going to experience a whole lot more cost and it's just going to be additional sales mostly and it's going to drop mostly to the bottom line. That's the reason that I think most of the large companies in the food industry are using. If you are as a food company trying to basically sell profitability, it's rare. Food companies are not known to generate 25% of EBITDA every year. That's just not the reality. You're doing 10, 12%. You're doing great and that's few and far between doing that. If you're approaching a group of investor or a larger company and your valuation is going to be based on EBITDA or multiples of ebitda, you're not in a great place. If you're a profitable company, you're doing, here you are as a mid sized small company, you're doing 8, 10% of EBITDA. Okay. Say you're doing $40 million of sales, 4 million of EBITDA a year and they offer you five or six times EBITDA. $24 million. Sure. Great. If you own the company, it's not the windfall that many people picture. So I think, and I have seen, I have experience and I have seen around me most of the time the best sellers are companies that have been able to grow very fast, are in one sector of the industry and they're basically selling the concept that this could be multiplied in other sector of the food arena. Like I said supermarket to food service or vice versa. And that you are in some instances a regional company, a larger guy is going to take it nationwide. If you are doing on a regional basis a quarter of the USA, if you're doing 25 million, the larger company is going to say we have the network, we're just going to take it to Everywhere in the U.S. and here you are, you have a $100 million division and that does interest them because they have a success story to sell everywhere else. Yeah.

It's interesting how you're shaping this. You're drafting the investment thesis for a potential buyer.

Yeah.

How do you go to market with that? Do you go out and you have some relationships, maybe you don't and you're reaching out to these companies or do you recruit an investment bank to do this for you? What's that look like?

Investment bankers, you're not going to interest them until you reach a certain size. Because the way they're going to look at it is they're going to say, tell you what I mean, if I'm trying to sell a $10 million company or a 50 or $75 million company, this is the same amount of work for me. But my fees, since they're generated mostly on a percentage, not going to be that great. So I'd rather focus my time on selling a 50 to $100 million company than selling a bunch of $10 million companies. It's hard to interest our investment banker until you reach a critical size. And here again, if you're trying to sell your Profitability. If you have been experiencing rapid growth and most of the time that company that has gone from one to $50 million in five years, their bottom line is not going to be that great. Again, we are in food, we are not doing a pharmaceutical product. We are. Margins are incredible. And when you make food, this is the same basis all the time. You're trying to have your cost of goods plus labor to be at or below 50% and if you're doing that, you're doing great. I don't know of any food company that has a cost of goods sold plus labor that's 10% and 90% is profit or, or gross margin that just doesn't exist. Profitability is not as easy to generate and to be attractive for an outside investor.

Depending on the size you dictate how much of the process, you're going to be very hands on versus working with an advisor. This is the real game here. I feel like the real art of doing the M and A deal is what you described of drafting this investment thesis then talking to these companies that would be your potential acquirers.

You're correct. And actually I find it best if you're not talking to them because it's always better to be quoted than to be the person trying to court someone.

How do you structure that? If you have an idea, here's this. Identified a potential buyer, you started drafting that investment thesis for them. But you obviously want them to take lead to ask you out as opposed to you knocking on their door saying, hey, I got to sell this because you want to have the right balance of power.

You're absolutely right. If there is one thing that I certainly have learned is first of all, if you're trying to sell, don't talk to only one company or one person. If you're pursuing only one deal at a time, you have no leverage. You're not ready to go up of your chair and leave the room, which you have to be willing and able to do. So at a minimum, pursue it with two potential acquirers. If you don't have that, it's going to be rough. It's going to be very rough. But let me give you an example. When I started trying to sell that company called Rudy's, the one that was making power baked bread in Boston. When I started selling that, I first went the route of brokers on everything. And one of those guys hooked me up with Sara Lee. At the time, Sara Lee was really big in baking. He approached them, they approached me, they asked me to come to their headquarters in Chicago. They sent me a beautiful car to pick me up at the airport. I had a beautiful room, very impressive and everything. I met a whole lot of people who basically started telling me, your company, not really profitable. It's only. Maybe we could offer you two times mba, maybe three times if you push it. But more likely than more likely two times ebitda, which was absolutely not what we were looking for. No interest in selling the company at that level. So I realized that, and I told myself, that's not going to work. So the other approach I took was to basically use the professional leverage, the power of professional press. And I reached out to a couple of professional magazines and told them, hey, look, we have a wonderful story here. We started from very little. We grew like 5. And the professional press is just seeking these type of stories. That's what makes the magazines interesting. So I had a couple of those magazines reaching out, doing full features. I was lucky because luck is also an important part, always for anything in life. But I was lucky to have, at the time of the NRA show, not the National Railfair association, but the National Restaurant association in Chicago, which is a major show for food service every year. And here you go. The magazine that they were distributing at the door had my company on the front page with a beautiful picture of the bread we were doing. And the whole article was about how great a success we had been and how fast we grew and so forth and so on. So on the heels of that, what happened is I started getting calls. I wasn't the one calling anymore. People were calling. Actually, we had like four different companies in addition to Sara Lee calling us. So we decided after a little while to work more specifically with one of them called Pillsbury. The conversation went on and went on with Pillsbury. And when Sara Lee got wind of it and heard that we were actually in advanced talk with Pillsbury, I don't know what happened at their headquarters, but basically the M and A people probably got a scolding. How could you let this happen? Blah, blah, blah. I get another call from Sarai and tell him, yeah, forget the two or three times ebitda. Now we're talking in multiples of sales. And remember, the company was doing 45 million. So we went from them offering us less than 10 million to over 45 million in the span of two months. And for no good reason. There wasn't any financial reason, but the fact that now all of a sudden there were multiple people interested in the deal. And for the fact that, I guess they had a fear of missing out in the food industry, not very often do you see new and appealing things happening. So all of a sudden when you see a corner of the industry where someone is finding something that's growing from nothing to 50 million in four years, and the big companies are saying, wow, okay, we missed out. And this is a story of the Greek yogurt, how all the people who were king of yogurt in the US missed out and some guy purchased a broken down plant in New Jersey, turned it into a billion dollar business. But if you can generate market interest like that, the big company realize that they missed out and all of a sudden the price is not really the issue anymore. And obviously I even got in a situation where we were on the verge of signing with Pillsbury. Some very higher had already called up, called up and said, whatever they offer you, we offer 5 million more. Where is that coming from? He didn't even know what we were being offered and it was just whatever, 5 million more. Now the owner of the company had some ethics and said, no, I'm not, no, thank you, but no thanks. If I'm in an advanced deal with people, I'm just not going to walk away because I'm getting offered more money. So that did not happen. We sold to Pillsbury ultimately, but it's a very interesting situation. And if I compare that with the same ownership and the situation we were when we tried to solve ton Bagel, where we were not able to generate multiple interests, different ambience, I guarantee you I'm the guy on the other side of the table at all the leverage.

Frederick, in the software world we call that demand generation. What you described, I like that approach a lot. Are there any other approaches where you're either doing something similar or maybe you had to find a way just to get in front of them directly and pitch the story?

Yeah, of course. When you're in a long time in an industry, you end up knowing a lot of people or if you don't, you shouldn't be in that industry anymore. Just you spread out the world. I'm not a big fan at all of knocking on doors. If you send the message that you're in need and you're trying to sell, it's not the best position to be in. Be patient, have the guts to wait and maybe it will take longer than you want, but spread the word out and at some point, if you repeat it enough, maybe even in podcasts like yours, Polari has no interest whatsoever in selling anything here. But that would be the perfect example because your podcast is listened to by people in the M and N arena. So I could sleep right there and there. Hey, and I got the message around and maybe I get a couple of phone calls after that.

But you're not going out with the message that you are for sale. It sounds like you're focused on the growth, the attractive parts, and getting more or less the exposure.

You do both. You indicate that there is a consideration and you're asking yourself. Playing as if you're not knowledgeable, as if you're inexperienced, is a good way of proceeding too. If you send a message, I'm really turned, I don't know what I want to do. Even if you know what you want to do, but I really turn. I don't know what do you think? And your hesitation, or maybe your fake hesitation will be repeated and at some point you're going to land into the right person's ear.

And it's almost where you can explore and even ask for advice or get different opinions.

Exactly. Depending upon who you're talking to, it can take different forms. Can you help me? Explain to me what should I do? All those things and you're going to get the world around. But in the food industry, a list of VCs and just going down the list and sending your paper to 150 VCs and hoping that some of them will bite is hard. Unless you have something that has some spectacular growth and you can sell a dream more than an achievement, which often works. Sometimes selling a potential is easier to sell than a reality. That's life. But yeah, definitely harm yourself with patience. Just be ready for the process. The initial process, the initial contact to last six months, a year, 18 months. That's what you have to be ready for. It's not because on a bright morning, you get out of bed and you decide, okay, now is the time to do it. I want money in my pocket and I'm going to go out and sell and I'm just going to send papers to a hundred people and I'm going to have 50 people banging on my door. Not really seen that very often.

What are the steps you need to take to prepare for an acquisition? On the sell side, you have to.

Realize that you still have a business to lead. Okay. And you still have customers to visit on food, show to attend and problem to deal with and people quitting on you and so forth and so on. The normal life of your company will not start because you decided to sell. So that means that on the preparation side, if you are starting the selling process and you haven't built up everything that will be asked of you in the due diligence process. You're setting yourself up for a very, very hard situation because you're going to be torn between the daily need of the business and it's going to be even more pressure because if you have an accident, the loss of a major customer, all of a sudden it's going to freak out, spook the potential buyers. Oh, I just lost whole food. Oh my God. And I just of whole food because I took my eyes off the ball. I wasn't attentive enough and I let some logistics issue, I let some operational issue create a problem for me. So prepare. Prepare. I mean, meaning everything that you will be asking. Due diligence. Due diligence are infernal. They are so exhausting, so detailed. Every little bit of agreement, paper, lease, buying agreements, selling agreement, whatever you have is going to be examined. So you literally have to start building folders on your computer and making a due diligence folder. And at the end of the process, that thing will be 15 folder long and probably tens of thousands of pages. That's a reality. Your whole company life since inception will have to be in that folder. And it takes time. Because when you're growing a company fast, most of the time you don't have a new structure around. You have to prepare for that. There is nothing worse than if you're being asked for documentation and you don't have it and you just have to say to someone, we don't have that. We get back to you in two weeks after we do it and the other side is going to look at that as unprofessional, unprepared. Oh, does that mean that company doesn't have clean records? You're opening basically Pandora's box for yourself. Because that type of delaying or that type of situation where we are saying I don't have it, I'm not ready, just indicates that you're not great at record keeping, that your books are not in order. If you're being asked for a margin analysis, tell me what is your margin per customer and per segment and you don't have that available immediately. Also, you're driving the business blind. Is that what you do? You're opening a whole bunch of questions that are going to affect your credibility and attractiveness. So most definitely, that's one of the things want to have your due diligence ready. The second thing, if you really want to sell, I would say have multiple new product development and launches in your program available because Again, people will pay more for something that could happen than something that has happened. Because something that could happen, you could present it in a very favorable light. Something that has happened. It's just a hard number. It is or it isn't. So, you know, if you say, sure, we are incredibly successful with those 10 products, but guess what? Because we know so well, we've developed five more products that we are about to launch in the next six months, on eight months. All of a sudden those people are saying, don't lodge them or just now let us do it because we'll do it better than you. Because of course, the acquiring side is always working from the idea that they know more, they will do better than you, or if they wouldn't buy you. So have your new product development for the next 18 months ready, because that's at the end of the day, what will make the difference in your attractiveness if you don't have much or if you have nothing and people will say, what am I really buying here? What am I buying that I do myself? It's great. And you can even engineer that. You can be in the testing phase of a new product, but you restrain it to the channel where you know it's going to shine the best so that you can provide wonderful numbers. In the food industry, if you're selling to the supermarket trade, velocity is everything. How many units of one SKU will you move per week per store? Since shelf space is limited, the only multiplication you can do is how fast you sell. If you know you have a product that can be great, but you don't really know because you haven't sold it yet to 5,000 supermarkets and you don't have actual results. Pick up one or two, the one where it's going to shine the best and you can show to a potential buyer, look at that. I have this new product in testing phase, in testing mode, and we are doing twice the velocity of any competitor in the similar arena. All of a sudden, wow, okay, they really have something going on here and we better jump on it. So definitely have new products ready, ready for launch. Have your team ready. And what I mean by team is not necessarily an investment banker, but if you're going to sell a company, you need to have a really good tax attorney available. Tax are complicated matters. The buyer most of the time is a lot more knowledgeable and a lot more astute than you are on taxes. They will want the deal to work to their advantage. On the most basic level, is it a cash for asset sale or are you selling the actual and what does that mean? The way you get paid and how fast on this and that all those questions that will make your tax bill either negligible or a major part of your proceeds is something you need to contemplate upfront so that you know what you want. If you let the buyer guide you, you're always going to be in a defensive position where you have to push back and push back. If you at the first contact state very clearly, the only thing that doesn't trust me is a cash for asset itself. For example, at least the guy will not try to argue that. Maybe he will, but you made your statement and they know what will and won't work. So have a clear idea of what type of deal structure you want from a tax standpoint and from a future standpoint. Also decide where you want to be. Do you want to be part of the future company? Do you want to have a transition role? Do you want to just take the money run and start something else? You have to decide that from the get go. Or you told to people and there is nothing worse than again lack of clarity or indecision internally. Your people, what is your situation? Are you in a situation where your people have a strong vested interest in you selling the company meaning that there is some sort of windfall for them or are you the sole benefactor of the sell? That's a very different situation because in one situation everyone will be pushing and the other situation you will have a choice between either fighting everyone or even being in situation where you hostage to your senior management. Where they say that happens, I'm going. But then the acquirer said if you have the VP of sales and if you have the VP marketing and if you have the plant manager leaving, what am I buying here? A book of recipes that's not great beforehand know exactly in what situation you are. Also contemplate if you are going to have outside actors having leverage on the deal. And what I have in mind here is for example, if you're leasing property, if you're leasing your plant, if you're leasing a building, there is a very high probability your lease won't be transferable. So if you are in a situation, I have been there, where basically your lessor is telling you no, not going to sign an assignment of the lease, maybe unless you accept a 30% rent increase and the lease goes from three years remaining to seven years remaining, the guy is literally holding you hostage and the whole deal is going to hinge on that. So contemplate all of that and ask yourself the question is there any outside actor that can hold me hostage and basically hold the deal up and ransom me? Do you have any dirty laundry? Meaning, is there anything. Do you have any lawsuit pending threatened? Because they will come out during due diligence. If you're good enough to hide them, they will come back to haunt you because in some form you will have a representation and warranty part of the deal. And if you misrepresented, you're going to end up in court and giving back a lot of what you made. So all of those things, they are hard truths. And when you have that, you created something, it's working well, you're in love with it, you're proud of it. It's very hard to contemplate all the negative aspects. Who can hurt you? We can hold you, we can ransom you, but this is something you have to do. And this is where an outside counsel can be most helpful. Because that guy, he's not going to have the same vision of the business as you do. And he's going to look at the hard factor. He's going to work with an experienced acquisition attorney. And yeah, you're going to spend multiple six figures or possibly more. But this is money that is very well spent. And if you know you can't afford that money, then you probably shouldn't sell in the first place because it means that you're weak. You're not going to be able to sustain the time that the acquisition may take. Some acquisitions go quick, that sales of hoodies and everything happened in the course of three months and that was including due diligence, some acquisition take forever company. I recently worked for 18 months after nothing still had happened. And probably nothing will happen, but it's exhausting. It's exhausting for everyone, for the morale. Be prepared and like most things in life, look at the glass half empty instead of looking at it as half full. And be prepared for the worst. Hope for the best, but be prepared for the worst.

So I got four key areas is what I'm picking up that you need to do to pick up to prepare to sell your business. One, understand and prepare for buyer's diligence. Really getting a sense is what's that process as they go through, Assess the risk, understand where your dirty laundry is and prepare ahead of time. Second one, building that narrative of the future potential of your company. Really think through, like what does that look like? So you can flesh that out and build more on the future potential as opposed to what your current past track record is. The third is the Team. It sounds like there's both internal team and external team. Maybe you don't have this big M and A capability. So think of the tax attorney M and A attorney that you're going to work with externally and then internally. Who are the key people that are going to help you build manage this process as well? Because obviously there's going to be a lot of effort that goes into it and we'll expand on that a little bit. But the fourth one was the vision and goals to really have clarity on are you going to stick around? Are you planning to move out? How would you like to participate? Post flows? Sounds like those are the four key areas.

Yep. No, you got that exactly right. Absolutely. With the internal part.

I mean your own people who are the internal people. Because I can see here, CFO obviously want to keep in the loop about what we're doing here, but how transparent are you about this? And is this something you socialize across all your functional leads or is it very much as an as need to know basis?

I think it really depends on the situation. If you had a management style where all the key employees have a vested interest, because most of the time, most of the people won't lose their job, at least not immediately, at least not for a couple of years. But if they know that at the end of the sale they're going to get a bonus quote, unquote, that equals, let's say, no less than six months of their patch, all of a sudden I see something bright and shiny in your head that's going to make them participants as opposed to enemies of the deal. It's hard to do it in a concealed manner. When we solve that again, that who? This company. And I'm always going back to this one because this one is old and there is no trailing confidentiality agreements and so forth. But we did it in a way where very few people, just like you said, outside of the cfo, no one was knowing. So the due diligence all occurred under the guise of customer audits and different types of audits. It's hard to maintain the fable, to maintain the story, and to make people believe that. Why? Because a food auditor doesn't look like a corporate M and a guy. When you see a guy walking through the door with a suit on a briefcase, chances are he's not a food inspector. If your own people feel that you're misleading them, this is when you start emerging people. This is when people are leaving you. And that's of course very detrimental for the sell. But for the very Future of the business. Because if you've been successful, it's not because of you, it's because of the people you had around you. So very important. I'm a big fan of making sure that all the key people are incentivized in some way. You don't want to give stock, fine. There is other ways to do that. Phantom Star, all kind of different instruments. And most people, 99% of the people are not going to finesse and saying, oh yeah, but if you had given me stocks, my tax bill is going to be lower, blah, blah. No, most people won't go to that level of dissection. They are going to just say, I appreciate what you're doing and at the end of this transaction, I'm going to keep my job and I'm going to get a bonus that's going to be, like I said, six months to a year worth of my pay. That's nice. Thank you. They will be happy with it and all of a sudden they will help you making that sale happen. And because again, if you try to do it just you and your CFO in the frame again of a small to mid sized company, that also means that all the work is hinging on you. You cannot delegate anything, you cannot ask for anything to build or to hunt or to retrieve the simplest document. Because if you keep asking the HR person for the history of workers comp accident and then this and then that, after the third request, that person is going to come to you and say what's going on? If people figure that you're lying to them, you're losing a loyalty, you're losing enthusiasm, you're losing a lot of things. And let's keep in mind that more than often the sale will not go through. There is a lot more unsuccessful sales than there are successful ones. So if you destroy your team in the process, you're not in a great place.

After I'm enjoying this conversation, we're going to have to schedule time to continue this conversation. We'll do that. But before I let you go, what's the craziest thing you've seen in M and A?

Tantrums. Literally. I mean, tantrums and rooms full of people. Corporate attorneys, house counsels and everything. Everyone screaming at one another, throwing paper through the room. Oh yeah, no, I've seen that. I have seen that.

What's like an example of something that would spark a good tantrum?

People who are still in business are involved there.

Oh, so is it definitely something very specific?

But I remember that poor individual is no longer with us. Mr. Neuhauser, the guy who owned that company, really Foods, wanted the transaction to go faster because he wanted to spend the weekend with one of his girlfriends. And the M and A attorneys on the other side of the table were not really up for that. Let's just say the guy had a very crude way of speaking and was using a lot of language that wouldn't work so well in your times. But at the time it wasn't working well already because that was really incredibly crude and offensive. There were ladies in the room and compare started flaring up and basically a whole stack of paper flew through the room and in his face.

Wow. Did the deal get done?

The deal got done because one of the guys the really simple question at the end of the day and he looked at him and told him, you want the money or not? That's basically when he sat down and shut up.

Take it to the bottom line.

Yep, exactly right.

I'm going to look forward to continue this conversation. To give you a heads up, I'm going to ask you about some French M and A terms. I'm curious if there's some different language that you use for an M and A, so we'll have some fun with that, but I'll look forward to having that conversation with you again soon.

Absolutely. I look forward to it.

Till then, here's to the deal. Foreign thank you for taking the time to explore the world of M and A with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M and A function or optimizing one that that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email. Kisan K I S o n a science.com or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's mascience.com here's to the deal. Views and opinions expressed on M and A Science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.