The Basics of Sell-Side M&A

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I'm Kisan Patel and you're listening to M and A Science where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals. Foreign.

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Joining me today is Adam Coffey, CEO.

Of 21 years, over three companies and nine sponsors, now running his own advisory practice. CEO Advisory Guru how's it going Adam?

Good. Happy to have you here in my hometown, even if we're not in the same building.

So today we're going to talk about the basics of a sell side M and A.

Sounds like fun.

Can we kick things off with the brief on your background?

Four Things About Me Veteran US army military taught me something about discipline, teamwork, leadership. If I wasn't there 40 years ago, I'm not here today. Great foundation engineering background made me a meticulous planner. I was at General Electric during the golden era, the Camelot era I call it. When Jack Welsh was there. Jack's last 10 years I was at GE, first as an engineer, then crossed over into business GE is who taught me how to run a business. And then 21 years, three different PE backed companies, nine different sponsors, $2 billion businesses built. And I was counting yesterday for somebody last two platforms, I bought 58 companies as a strategic platform owned by private equity doing buy and build. And then I decided late last year it was time to pivot, time to do something new. Want to help multiple companies at a time. And so now I'm in my own consult practice which is doing really well. Happy to be here, happy to be talking to your listeners.

Hey, you've had a lot of roll ups. Probably reached over 100 deals that you touched.

I have. If you include buy, sell, the whole nine yards. Sure. Over 20, 21 years, a lot of deals. More deals to come. I'm sure.

That's how I want to get that perspective. You've done a lot on the buy sides. We want to provide some good insights and tips for those on the sell side today.

Absolutely. Happy to. That's why I wrote the book. The Exit Strategy Playbook was for most entrepreneurs. So selling a business is a one time event. Maybe it's a second time if they're a serial entrepreneur. It takes a lot of time and effort and sweat equity to build a business. And for people doing their first exit, I'm a guy who's bought 58 companies over the last two platforms. There's a lot of lessons learned when I'm talking to sellers, interacting with sellers and ultimately buying their businesses. Because if 58 deals close, there's probably a number of others that we looked at but passed.

Let's get into it. A lot of people think selling a business is easy. What are the common mistakes that you see people make when selling a business?

The number one mistake I see made by entrepreneurs is assuming that the expertise they have in building their business in the industry that they're playing in somehow translates to an expertise in selling a business. These are very successful people. Is that 7% of people who start a business get to a million dollars of revenue. Only about 4% those get to 10 million in revenue. And so these guys are unicorns or these ladies and they're really special people that could be entrepreneurs. Start something and build it. And I think there is a success factor at play that as they've built the business and then think about an exit, they just assume, hey, I'm an expert, I built a business, I'm really good at what I do. I'm a multimillionaire already and I'm going to be a really rich person after I sell that somehow I'm an expert at selling. And they're a novice. They're doing it for the first time. Think of anything you've ever done in life and you did it the first time versus the hundredth time. And lessons learned across all of those different things. And selling a business is complex. It's not like renting a car where you could do it the first time and be successful. It's difficult. It takes a lot of time and effort. There's a lot of bumps in the road along the way. And if you've never done it before, you're in for a rude awakening. And you'll never know if you got the best outcome when you're alone, just doing your own thing. And so that's why I always recommend a team of advisors too.

Don't rush into it. I think you're absolutely right that you can't base other business experience into selling the company.

It's a false sense of security. I don't want to call it arrogance because it's really not arrogance. It's a false sense of security. I'm successful, I built a multimillion dollar business. I'm wealthy. I got this. No, you don't. It's a false sense of security. I think people get into.

Can we talk through the types of objectives that you should have when going through this? Because a lot of times you just focus on the money, what that purchase price is going to be. What are some of the other key.

Areas when you're selling a business? First of all, there's a lot of different people you could potentially be selling to. I call it the universe of buyers. There are financial buyers like private equity firms who offer one set of experiences because they're bringing a checkbook and typically not bringing a leadership team. The expectation is you're going to be a rollover investor in the business and invest alongside of them and continue to run and grow that business alongside side of them. Maybe you want to retire, you're 65 years old and you're ready to hang up your cleats and you want to go fishing or go spend time with the grandkids. And so maybe that's not the right fit for you. There are strategic buyers and in strategic buyers, that means a company buying another company doesn't matter if they're private equity backed or if they're public or private or what their capital structure looks like. It's just essentially a strategic buyer as a company buying a company. When I bought those 58 companies, I was just Talking about in the. In my last two platforms, I was a strategic buyer because I was a company buying a company. However, I was private equity backed, so I had a financial sponsor behind me. A unique benefit there is, there's an ability to do a rollover investment and get second paydays and additional bites at the Apple. And when you think about selling and wanting to do some prep work, it's really comes down to before you have people in your office and people starting to call you on the telephone is what are your goals and objectives? What are you trying to accomplish? Are you seeking to walk away? Are you seeking to stay? Are you willing to make a meaningful rollover investment or are you wanting to just cash out your chips? What about your employees, the people that help you become successful? What do you want to have happen to them? Is it important to you that their lives continue and not be disrupted, or does it not matter? It's not a factor. Is price the only thing? Is legacy important? And certainly then who's the partner that I want to partner with? These are all kinds of things that a person should really be thinking about. I started touching on strategic buyers. There's generally two kinds of those that want to keep the lights on, I call it. Which means you're going to stay. You're going to keep growing your business, but you're now going to be part of a larger organization and you're no longer going to be the boss, meaning that you have a boss for the first time, but could be the first time in your career. You're going to be reporting to someone farther up a food chain who can fire you. And then there's strategic lights off where, hey, I'm going to fully integrate your business. After I buy it, you're going to just retire, get a consulting agreement for a year and walk out the back door. And I'm going to literally turn the lights off on the business that you had. Because I'm really after maybe your people, your process. If you're a manufacturer, your capability, service business, it's your customers, contract, portfolio, things like that. Then there's other things. There's public IPOs, ESOPs, there's SPACs that are out there. Selling your business doesn't just mean high price. There's a lot of different paths that you could take and help you navigate to a desired outcome. Problem is, you have to know what that desired outcome is ahead, ahead of time. So when you face these different forks in the road, you know whether to go left or right. So I like to think that the Strategy behind your exit is very important as a precursor to actually talking to anyone. It's what am I trying to accomplish? What do I want my employees experience to be? Am I staying or going? Am I making a rollover investment or cashing out my chips? All of those things are questions that are better answered ahead of time rather than on the spot as people are calling you. And as you said, people chase dollars, so they don't necessarily even think about that. They get led down a path because one path is offering a slightly higher price than potentially another. So a lot of forethought I think that needs to go into an exit. As an entrepreneur, we want to think.

Through the strategy from the beginning. And there's two big elements I hear. One is goals. Thinking of your professional, where do you want to go? That if you really want to exit time, retire, check out, clean exit, you're done. But you may be alternatives that you're willing to stick around. Maybe you want to get a partial exit, you want to get some chips off the table, take care of some of these things which some of these private equity products can offer. They'll invest, you still retain some ownership and have potential for another exit as the business grows, which could also align with some interest as well and maybe fueled that next level. Bring in some of these sophisticated investors. They help change your strategy, maybe even position the company for an ipo. So there's a lot of that thinking that needs to happen in terms of what you want to do as an operator executive. Then the other component I heard was around the people that you're leading today because it's shaped differently depending on who the buyer is. Are they going to continue growing it with the similar type of strategy that you currently have in place or is it going to be a large strategic that may integrate the company completely in. Now they're part of a totally different organization, may have a different strategy. That kind of the realm of the different things you're thinking about it really is.

And these are thought provoking questions that for a lot of people, they just can't simply answer. You touched on one thing though. You talk about people wanting to potentially diversify. What I've really seen across the universe of companies that I've bought over the years, the typical seller is not at retirement age. They're not 65 to 75 and hanging up their cleats. Majority of them are in their 40s or 50s. And they are really seeking to diversify assets and to not be 100% at risk with all of their net Worth really tied up in a business, need to pull some chips out, aren't necessarily ready to stop going, have got lot of game left in them, want to keep rolling. And if you think of the volatility in the world today as a result of pandemics or political upheaval wars, the world can change on a dime. It can be scary as an entrepreneur to have your entire net worth tied up in a business. I was talking to a person just the other day, and their business is probably worth 125 to 150 million somewhere in that neighborhood. And they were talking about the potential of selling the business. Is it ready? Is it not ready? I'm still a young guy, I want to keep going. And I said, think of it this way. If your business is worth 125 to 150 million, set it aside, extract that value from the conversation, and then talk about your assets outside of that business. Are they also 100 million or 125 or 150 million? Ah, hell no. That's a million or two. Or is three or four? Okay, we got a lopsided equation here. You got $150 million asset that if something happened to it and it became worthless, God forbid, there's not much left outside of the asset that you have and call a company. And so from just a pure diversification of risk and diversification of assets, felt to me like it's a really good time to either sell a piece, do a recap, and pay yourself a dividend, but somehow you need to start monetizing some of that asset because you have to protect your family. I see more of that than I personally see people who are just saying, hey, I did it for 40 years, I'm retiring, time to go. And this is the path I've chosen, frozen. I do see that. I'd say probably at least 90% of the time, it's asset diversification is the driving factor behind someone leaving. Because one of the other problems you have is for the person who says, I'm going to cash out my chips, I'm going to sell a business, don't want to keep going, I'm going to cash out my chips. Okay, you're in your 40s, you're in your 50s, you got a pile of money. What's the first thing you have to do? You have to decide, how am I going to invest this pile of cash and what am I going to do? I often tell people, why not keep investing in the business that you knew, that you grew, that you created, because you know that better than anybody else on the planet. Take the diversification, get the chips off the table, but make a roll forward investment and work with some of the world's most sophisticated financiers and investors and let them help you raise your game, bend your curve, take your business to a new place with a new capital structure and then you get paid again. My goal is always to roll enough to where the second payday is bigger than the first, just to keep life interesting. That's the kind of buyer I see most often in today's world.

Let's build off of that example. Let's say I run a tech company. So we're saying it's a tech company. I feel the market is really hot right now. Valuations are extremely favorable for sellers. With the $150 million value, then yes, we have this asset diversification problem. We got just a million total out and little properties and cash on hand. Now I'm starting to think through this sale process, what are some of the steps? What's next? We sat there, thought about the goals and came to the conclusion, I'm not ready to retire. I want to stick through this, but I do need to balance the capital structure I'm operating off of. Personally. Where do we go? What are some of the things that I need to start preparing?

Before we hang up the proverbial for sale sign and pound it in the ground outside our business and try to find a buyer, there's generally some preparation work that needs to take place. It happens all the time that people just wake up today and say, I want to sell my business and they start launching a process which we'll get into. But if you didn't start your business 10 years ago with the idea that someday you're going to sell it, ideally it's two or three years in advance of actually taking it to market. That's ideal. You can certainly get a company ready to go in six months, no problem. Happens every day, happens way too much. But ideally in my world it would be about three years in advance and you'd start thinking about things. You break it down into different categories. So this is a huge asset. It's the most valuable asset that you probably have. And if you sell it, going to be a liquidity event or a lot of money that's going to be generated. And so you as an individual are going to need tax advice. And how am I going to prepare for that windfall? Am I going to have some type of a trust? Am I going to have a network of trusts? And there's all kinds of strategies. And I'm not an accountant or a lawyer and I don't pretend to be one. There are other people that we're going to bring into this equation here in a second. You know, it's really okay, big win, false comment. How am I going to deal with that? I'm going to need some planning and I'm going to probably need some preparatory time and work to build that structure. But it's even little simple things maybe. I have a business that does conducts operations in California, Nevada. If I live in California and I sell this asset, if I don't have this, a certain trust structure set up or put in place, hey, I'm going to pay 13, 14, maybe 16% state tax on the capital gain that I'm going to generate. But if I live in Nevada, I'm not going to pay any. That's going to be zero. Okay.

Yeah.

How many people have tried to scam the state of California and move the year that they sell their business? And California is looking for that. They're aggressive on that. With so many people leaving, it takes advance planning. If you're going to have a domicile change, you're going to want to do it well in advance of any sales transaction, ideally. And you're going to need tax advice that quickly is going to lead you to a lawyer. You need competent legal advice. You know, this is a specialty area of legal practice. We want to make sure we get top flight M and A attorney on our team. With our tax help, we're going to need an accountant. We're going to need some accounting help for the business we're going to have to go through. And it's common. Hey, look, when you run in a business, your goal and objective is not pay taxes. So you're going to minimize your cash profit. You're going to have a lot of write offs. Uncle Jimmy who died 10 years ago, still on payroll. You're paying for a lake house and once a year a customer goes there and goes fishing. So yeah, it's a business expense. I got an airplane and every time I fly, let me tell you, it's a business trip. You have different kinds of expenses that are running through your business. You might be using a cash method for accounting and you need to get to an accrual method of accounting. A lot of work. Quality of earnings is probably the most important thing. Whenever this house goes up for sale, whenever we're going to sell this business, it's really nice to have three years of clean, normalized financials ready to go. A sell side quality of earnings that say, hey, here is what the business is actually doing today. This is my ebitda. Why ebitda? Because EBITDA is the line, the magic line in the financial statement where most businesses are valued from as a multiple of, of doing prep work in advance. Very important to presenting the right picture. Depending on who you're selling this business, there needs to be a growth story. So is this a business that's been growing like this, meaning nothing? It's a stagnant business that's doing nothing. You can't expect a premium multiple from somebody or a high price if the business isn't a growth company. And so it's really, it's working on your operations, it's understanding the levers of growth, starting to build that team of people who can take the business to the next level. Especially if you're going to leave. If you're going to leave, who's going to run the business? If I'm buying a business from you and you're walking out the door, is there competent leadership underneath you? Or do you micromanage the hell out of everything and what I buy disappears because you walked out the door? There's so many different things that you need to plan in advance if you're making changes to operations. Another common one is real estate. A lot of times entrepreneurs who run small businesses also buy the buildings that they occupy. They have to separate those assets from the business and put it into a different legal, legal entity because the vast majority of buyers don't want your real estate. It's not an investment friendly vehicle for a private equity group who's buying and selling companies. To buy a different asset class and mix it in together with the business, it creates difficulty and hurdles. I may love your business, hate your real estate. I may decide that although I like the business, I'm going to pass because I don't want to own the liability or potential liability that goes with the real estate or I don't like the locations, it's not capital efficient. The money that I get from my limited partners is to buy businesses, not to buy real estate. I'm not a real estate fund. So always tell entrepreneurs, split the real estate off, put in place a fair market rent between the business and the business that you create to hold the real estate part of your empire. There's all of this prep work that needs to happen in order to make your sale process smooth and very efficient from a time perspective, but to also maximize value. And oftentimes when you're preparing a business for sale. What you're actually doing is building a better business, you're running a better business, you're starting to ramp up your revenue and your earnings and as a result you're going to be rewarded with a higher purchase price. So it's what am I going to do from a tax perspective? Let's get an accountant and clean up the sell side quality of earnings, get things ready, let's get competent M and A council, put them together into this equation because ultimately I'm going to be signing and creating legal documents. Those are going to have a huge impact potentially on my trailing liabilities after I sell the business or have a big impact on my life after the sale is closed. And then the last person call it as the realtor, before you pound that for sale sign out front, it's the investment banker. And so they are the person that is ultimately going to take your business, market it to the universe of buyers based partially on your input and the desired outcome that you're looking for in terms of your future involvement in the business. They can help you navigate then that universe of buyer create the competitive tension, market the business and help you get to the ultimate outcome. Lot of prep work to be done and I would tell you that that very rare. So just like I told you, most of the people that I've been buying businesses from tend to be mid career, not end of career or they're mid towards early, later stages of their career but they still have game left. Most of them are not seeking to leave, they're seeking to monetize an asset, diversify risk, but keep going, become rollover investors and get another bite. I can also say how many of the people in the universe of buyers that that I or the companies that I bought took the time two or three years in advance and did all of these things. Very small percentage. Most people just decide time to go, I'm going to take on a partner, phone keeps ringing, I finally said yes, come talk to me. And before they know it they got taken down a path and then they're trying to scramble to do all of the work that is required to get done in a very short period of time. And oftentimes mistakes are made, steps are missed, what really is is opportunities are missed to maximize the potential exit tends to be most people that I'm seeing mid career, later early stages, late career, wanting to diversify, keep going. Most of them not as prepared as they could be. Many of them getting a good outcome because they're dealing with me and I'm a good guy, but there's a lot of sharks out there and there's a lot of people out there who would take advantage of an unprepared seller or that seller who doesn't have a sound team of advisors. That seller that has that false sense of security that I'm an expert at selling my business and they get taken advantage of.

Those are the best deals on sophisticated sellers for buyers. Absolutely.

You could have four or five word differences in indemnification clauses that take a balanced contract and totally tilt it in the buyer's favor and put a lot of risk on a seller. A lot of different things that can take place, and it's caveat emptor, unfortunately, there's probably a lot more that goes on than people know about. And it's just because the seller has a false sense of security that they know what they're doing when they really don't.

So I want to make sure I get the timeline right and the preparation tax. Start off with that kind of think through this stuff early, maybe even worth, like relocating to a different state because that could have a huge impact and not wait till the last minute where that's not going to be a good thing to do. The accounting part comes up thinking through, cleaning up our books, the quality of earnings. Would you want to do a Q of E before retaining a banker or would you want to do that after?

I personally am going to want to make that a part of my sale process and I personally, as a seller would be doing that right before I hire a banker. So before I do the banker bake off where I might invite four or five bankers in to look at the business, I'm going to want to prepare them because I want a good estimate on what my business is going to be worth. I have to know what my true adjusted earnings are. Here's my three years of clean financial. Mr. Investment Banker. Here is my quality of earnings. I'm looking for you to give me your pitch on why I should choose you to represent me, why I should pick you to be my realtor, to use that analogy. And it's very helpful if they understand where the business is truly at. So from my perspective, it's going to happen. Question is, does it happen the month I hire a banker or three months later once the process is launched? I would like to like as early as possible to be populating a data room and putting all of this information up there so that as we get closer to the time of letting potential buyers into a data room to look at my financials, the quality of earnings and all of that. It also takes some workload off of me as a seller potentially. If I don't do this pre work, then in diligence, you know, really scrambling to get information up there. If I can do it leisurely before it gets really intense, I'm well ahead of the curve as a seller. And so I personally think Q of E right before you then invite some bankers in to look at the business and pitch you and tell you why should I use you? I know this industry, I know exactly what these businesses trade for. Based upon your quality of earnings and your adjusted ebitda, you should be able to get X to Y for this business. In today's market, maybe we can get a little bit more. I like what I see, whatever the case may be, but without some of that information upfront, it's sometimes hard to choose the right banker because you're giving.

Them better data essentially. And it'll some ways help you get the right fit for the banker as well. I get the accountant. We're doing the Q of E. Legal representation is obviously very important in all of this. Before or after do we get the legal representation, then start doing the Bake Off.

Pick up the exit strategy playbook and I'll walk you through all of this. But I'm thinking about what's the path that I think is probably going to be right. There may be multiple paths to get me where I want to be, but I can start to frame up who I think is the probable buyer. I then engage the tax person first. As I'm thinking about my business, there's going to be a windfall generated. How do I deal with that? Doesn't matter. Whether it's $50 million or $100 million is still a windfall. So how do I prepare for a windfall? And I start thinking through that because it might include a domicile change, which is a big deal. And then it's engage the accountant, help me start normalizing financials and maybe I'm going to make some business improvements along the way. And then right before the banker, make sure I've got the lawyer. You may want to use a lawyer to help you look at, call it the engagement from the account or the tax people, whatever. But that's not the sale of the business. It's a more minor type of an engagement. Ad hoc legal relationships can help you if you feel like you need that. But I really think you engage the M and A attorney right prior to doing the Bake Off. With different investment banks or brokers. Depending on the size of the business, it may be an investment bank that you're dealing with. If it's a smaller business, it may be a broker or two that you're interviewing and talking to. In either case, legal documents to engage them will start coming soon. Good to have kind of that M and A attorney geared up and ready to go to help you with that step and then to help you subsequently with the associated contracts related to the actual sale itself. So that's how I think of it and some of this advice. It could be peer networks, it could be guys like you and I who earn a living doing things like this and have a lot of experience doing it. Your YPO network, your what, what whatever, your Vistage group of people. But it' to think through the buyers, get the tax help, get the accounting help, making business adjustments, setting up a structure for your real estate, doing all the things that you're doing. It doesn't take three years to do this. The reason why I say three years is because the first thing the buyer universe is going to want to see is three years worth of financials. If you've done this in advance and started to make your adjustments, you're going to have a story that's being told over the three years that you're prepping. You could again do this six months in advance, but you're going to deal with three years worth of actuals that have already happened. And you're going to go back and try to make adjustments and do a lot of forensic accounting work to try to normalize everything that's happened over the last three years. If you're thinking ahead, it's three years of prep time to optimize. If you're thinking it's going to be soon, so I got to go back and create three years worth of smooth things to show that are normalized. Remove Uncle Jimmy and the lake house and the airplane and those kinds of things. So the more time you have to think about it is great. And one of the things I've learned over 21 years of doing this is when you are a seller, when you've decided to be a seller, you need to be a seller. Time is not your friend. World events happen, things really do crush markets, change businesses. Once that process is launched, you want to be on an efficient timeline that gets you to a closing table. Thinking about it well in advance helps you get prepared. So when the inevitable comes that it's time to do something, you're prepared to do something, something quickly can we walk.

Through the steps of the sale process for those who haven't sold anything after that, I'm asking some hard questions when.

I think about a typical middle market kind of sale process. So I built a business. Let's say I've got 30 million worth of revenue and if that's too high, pick a number, it doesn't matter. But 30 million, let's say I've got 15% EBITDA margin. So I'm at four and a half million of EBITDA and that business is going to trade. It's probably going to be, it's going to be a lot of interest from the smaller private equity sponsors at that point. It's going to be be a full process. I'm going to hire an actual investment bank, investment banker. Once I engage them and usually before I engage them, I've talked to multiple of them. We've talked through fee structures, who the probable buyers are, what the prices we think that they're going to pay. I've chosen someone that I like that I think is going to do a great job and I've negotiated that engagement with my attorney and now we're ready to go. The typical first step for the investment bank or the broker, the person representing the sale, is to create a one page teaser. And it literally is just that. It won't say the company name, it probably won't say the anything about the specific address. It may say city and it may say, hey, a commercial H vac company is going to come to market in the next month. Relative size, relative earnings, this customer base, this is what it does. And if you're interested in Project Cool or Project Chill or Iceman, it's got a code name for it and it's a sexy one pager. It's got some verbiage to describe generically and it's got some pretty pictures. And it's a teaser, that's what it is. And they send it out to their connections, who they think are the universe of buyers. Based on some of that early dialogue with the entrepreneur who's this is what my future is going to look like. This is what I'd like it to look like. That may impact who they send the teaser to, but they're going to want multiple classes of buyers at the table because it'll create more competitive tension. They send out that one page teaser. In the old days it might go out to a hundred or two hundred people. Today they're usually small distribution. Maybe it's 30 or 50 who get the teaser. If it's a broker who doesn't have special in an industry, it's a broker because the business is smaller. The teaser then probably goes out over a broader scatter shot canon because they're shooting in the dark a little bit and trying to just rope in some people who are interested. But generally once that teaser comes, people get back to the banker or the broker and they say, hey, I'm interested. I'd like to learn more about Project Iceman. And so then NDAs happen. And once NDAs happen, generally a book that they've been working on while this teaser was being prepared and going out next comes the confidential information memorandum, the SIM or the confidential information presentation, the SIP. One's a Word document, you know, one's a PowerPoint document. Ultimately they may also be a physical book or sent as a PDF, but a book is generated and that book goes into a great amount of detail about the business. Now because we've got a signed NDA, we're disclosing name. Now we're talking about market served, customer served. Customer information may still remain somewhat generic, maybe customer A, customer B. But now talking about specific verticals and the industry itself and how big it is and how we play in it, what differentiates us from our competitors and our history and our leadership team. And here's my org chart and here's pictures and bios of the different people. That book then goes out to the people who have signed an NDA and have said, hey, look, I have an interest and I want to learn more. Some subset of those people who get that book may be afforded a phone call or a zoom with the CEO or a select couple of members of the leadership team, often called a fireside chat. And this is to allow the CEO or the executives to give some type of an elevator pitch about the business and to educate and make Potentially call it. 10 out of 25 people who got the book feel a little bit more special because then the banker's opinion opinion, Those are the 10 who are probably going to stretch the most. And to create some advanced competitive tension, let's start giving them a little bit of access to the leadership team and let them answer and field questions. It's also good intel because now as a banker, I'm actually hearing what are those early questions where people are going to test the company and the management team for the management presentations that come later? Generally as those fireside chats are happening, people are looking at this book and they're formulating questions. Eventually we get to management presentations. Management presentations are often a Four hour meeting that includes a dinner. So you may have a group that flies in in the afternoon, meets you for dinner, next morning, has a four hour meeting, they leave town, then you have a next group coming in and you can have back to back depending on the number of buyers. I've had some processes where, you know, I've gone for a week to 10 days just solid giving management presentations to potential buyers. The management meeting, now it's not just you, but it's you plus the team, team of your leadership, talking, you know about the business, answering questions generally about a four hour presentation. It generally mimics what's contained in the SIM or the sip. Very repetitive and, and then there's questions and interactions and potentially tours of a facility. If the sale process is being done in the open and not hidden in a conference room in a hotel somewhere. And so those come generally, then it's at that point where, where some type of, an indication of interest is going to be due and it's between the SIP and the SIM and the management meetings where the indication of interest comes due. You got the book? Tell me what you're thinking. If I like what you're thinking, then you're going to get the management meeting. If I don't like what you're thinking, you may drop out of the process before you get the management meeting. And I'm sorry I didn't stage that appropriately, but it's. You get a teaser. Okay, like the teaser, I'll sign the NDA. I want the book. Got a Fireside chat? Maybe not. Once I've got the book, within a couple of weeks I'm going to have to give an indication of interest. Come in. We invite a subset of those 25. Maybe it's 10, maybe it's 5. It's some group of those people who gave an early indication of interest. We're going to invite them to come in, get a management meeting. Once we've had the management meetings, then people are really starting to do work from a buyer perspective. They're building models, they're trying to understand at what price do I want to come in for an offer offer. What's my growth story going to be post close and what can I underwrite for my limited partners and my investment committee? Who governs how I invest the money that's in the fund? And so those bids come back now they come back and instead of a range, usually after you get the book, it's an indication of interest and it's a range. Me as a seller, I love to take all of the indications of interest. And I stack them up as a horizontal bar chart. So you got some who are this way, some who are that way, you know, as you're going down. And then I look for the midday point. If I'm seeing a tight midpoint. I feel good as a seller because I know that the buyer universe is understanding my story. When I see wide bid ranges, then it's okay. They're shooting in the dark. They're including a high number because they want to get a management meeting, but they got a range because they're hedging against not really understanding the business, or maybe they're not as interested. I can learn a lot just by stacking and looking at these bids. But then the management meetings happen. Now, when these next round of bids come in, they're not arranged. They're typically going to be a number. And now I can also get, potentially in a letter of intent, some of the salient business points that they're going to ask me for when it comes time to contract. All during this process, the investment banker is really earning their keep, and they are creating the competitive tension. They're driving the numbers up, trying to be as helpful as they can to the universe of buyers, but to be helpful to all of them, to move them all up, because they're generally paid as a percentage of the sale price of the company, in addition to a retainer and expenses. So the higher value they can bring to the seller, the more that they're going to get paid for representing you. And generally, at some point in that process, you're then going to have, call it exclusivity. Someone's going to be awarded the bid. Okay, but we're not going to necessarily tell everybody else yet that they didn't quite get it. We're going to slow them down, and we're going to let this other party move ahead and give them some kind of a fixed window to start doing their work and affirm their bid, and then they'll be awarded. And then we head off into diligence. Diligence. Diligence, I always say, is like a proctology exam that never ends. So if there's a thousand questions that could be asked about your business, they're going to find 2000 ways to ask those thousand questions. And this is where all that prep work with the accountants and preparing the financials. And this is also why entrepreneurs don't want to sell alone. They want to have a team of their people be under the tent, because those are people that can help them at that point. Point. Answer the multitude of questions. If you're truly a small business, you may wind up using your outside accountant who's been closing your books because you don't have a cfo. Perfectly fine and helpful, but there's going to be all kinds of questions. So generally I like to make selling a company a team event and a team of people from the leadership team are going to be involved and all of those people can then be helpful in terms of getting the diligence information. There's going to be several different tracks of diligence. Generally it starts with financial data. The buyer wants to confirm your earnings that are reported. If you have a Q of E, you're ahead of the game. They now get a quality of earnings that's been done by a competent accounting firm and they work off of that Q of E. They probably do their own, but they want to get very comfortable around the financial dynamics of the deal as they are getting comfortable with those financial dynamics. Then they'll turn on their legal fees and a bunch of different outside advisors. But there will be a. Call it a financial track. Want to understand all the financials of the business? It's going to be a legal feedback track. Two facets to that. One is we want to understand potential liabilities, trailing liabilities, lawsuits that are pending or pass, wage and hour misclassification type stuff. And also then there's the physical contracts because we're buying a business or selling a business and there's a contract that has to be negotiated. So those are the legal tracks. You're going to have the HR tracks. What's the benefits packages look like, what are the insurances like? The commercial insurances, the workers comp, all of those types of things. What's the safety history of the business, liability, general liability type, insurance investigations, just all kinds of different work streams that are going to be done. You have to understand that when you're selling your business, doesn't really matter to who this diligence takes place because there's a fiduciary responsibility to make sure as a buyer, spending money or engaging a bank to borrow money to buy your business, they have to go through a myriad of hoops and jump through a bunch of hoops in order to properly represent the asset being purchased or the asset being sold. And the bankers have to be comfortable loaning the money against that. And or if it's a private equity firm, we got to make sure that we've done our best to be a good fiduciary to our limited partners who've given us the money that created the fund that we're investing from. So a ton of work that gets done. Depending on size of business, there might be some government HSR type filing that needs to take place for bigger companies. So there's a myriad of stuff going on during diligence. Legal contracts get generated based on the quality of earnings reports. There's some negotiation back and forth, but ultimately then that leads to contracts and a closing table and a wire that takes place. Generally speaking, from the time we hire an investment banker takes about four to six months to sell a business. It can take longer or shorter. I've sold businesses for hundreds of millions of dollars in as little as three weeks. And I've had a recently, it's very common for some buyers to come in and say, here's my bid, I want exclusivity. Don't do the management meetings with all these other buyers. Here's my market clearing price. I'll close in three weeks. I'm not borrow any money, no contingencies. I just need to do my quick diligence, which I'll knock out in a couple of weeks and then we'll get the contract done and I'll have you closed with money in the bank in three weeks. I've had them go as long as a year when I'm a buyer because the seller is totally unprepared and diligence is where it takes time. If you're unprepared. I need this list of things and the person's doing it by themselves and they don't have help and they don't have good records or it takes a while to create everything and diligence can drag out for a very long time. So again, goes back to prep work Once you're in the business to be a seller and you have your business prepared, the more prepared you are, the faster all this stuff goes and the sooner you're sitting at a closing table. In a nutshell, that's it. Typical process, four to six months from the time you launch and hire a banker can take longer or it can be done really short and in a truncated fashion when you've got a hot asset and a bunch of buyers who want that asset. One thing I do like to do that I think I should mention is generally speaking, when I'm a seller, not necessarily a buyer, but if I know it's going to be a broader process, I like to work the circuit, I call it. So all the investment banks typically have some type of a cadence where this firm has a show this time of year in Chicago, this one's in New York in the winter, this one's in the spring. And they'll invite 300, 400 private equity guys to come and see. And then they present 20 or 30 companies that they're not engaged with, but they're going to come to market and they're hoping to get engaged with. And so they'll try to add some value before you hire a banker to start connecting potential buyers and sellers and generate some early interest. And what I find is if I do that first, before hiring a banker and launching the process, I'll have the buyer universe worked up into a little bit of frenzy. They know my company, they know the asset, they know it's coming. As soon as they get the mandate, find out who got the mandate to represent me as a banker, boom, they're all over it. It launches the process with some energy, and it helps the entrepreneur, frankly, get used to talking about their company to potential buyers and working the kinks out of their own presentation methodology by doing some conferences ahead of time.

Great tip. That's a great summary that explains the process. I think one of the biggest things when selling a business, underestimation of all that work you described that goes into it. And it can be really distracting for the management team when you're answering all those diligence requests, taking on those management presentations. How do you keep that intact? How do you, you keep from this sale process distracting your management team to the point it makes a performance impact on the business?

This is a big issue, especially when a process is going to take several months. If it's a traditional process that's not truncated, and it's going to last four to six months, that's a long time for a management team to get tied up. What I like to do, let's talk about the business and the executives. Let's talk about getting a number of people in the tent, as I like to call it. We are going to run a process, sell our business, monetize our asset, roll over, keep going. And usually the senior people on the team have got some stock or they've made some cash investments in the business and they're going to get. Call it a payday. And so then what I like to do is just kind of break up the team and say, look, we have to be focused on the ongoing concern which is running our business. So maybe the business has a founder who's a CEO, maybe there's a president, maybe there's a COO who's going to Be responsible for running day to day operations of the company while some of these other are highly distracted. You can do that if you have a broader team that's under the tent. You can say, okay, your focus is going to be running the business. Your focus is going to be working through the diligence in the process. Unfortunately, there's going to be times where you have to do a little bit of both. I find it's very useful when someone who is going to be outside of the active process, they may show up for management meeting, management dinner, but day to day, you run the business. Mr. President, I'm going to focus, focus on diligence. I'm going to have the CFO with me, I'm going to take the controller and push them on that side of the tent, marshal my resources in advance. Fortunately, if it's a sizable company, you've got a lot of assets, you'll have a lot of employees, there's a lot of people you can tap on. When you think of that accounting firm that you brought in to help you prepare the business. Larger accounting firms have what are called transactional diligence teams where they have a group of people who can help either the sell side or the buy side with some of the this work. Here's the information I need. Get me the raw data, but then I can have an outsourced team assemble it, put it together, populate a data room and take some of the heavy lifting off of the management team. And so this is why I like to say that selling a business as a team sport shouldn't be an individual sport. And it's really because there's a lot of work to be done. And if you don't have a wider group of your management team participating, it's a whole lot of work for an entrepreneur, especially if they also have a business to run. And that's why in some cases I've seen deals take a year, could have taken 30 days. I was ready to go, but I couldn't get the answers to the questions, couldn't get the information. It was piecemeal, it was extended. And then while this time is going by, you're constantly having to go back to the financials. Okay, the financials I verified were from January, we're now in June. I got to see numbers for more recent periods to make sure business is still on track. And so longer process, more complicated. Better to have more people under the tent. Divide up your troops. You're going to handle day to day operations. Pull me in when you need me. Okay? Us guys, we're going to handle our team, we're going to handle the sale process, we'll get some surge resources. The banker will bring resources to the table to help you as well. And so it's a team sport, lots of different people playing their role and if you orchestrate that correctly, it'll lessen the impact everywhere.

How do you feel about earnouts?

There's a time and a place for earnouts off the cuff. I usually say I don't like earnouts. I don't like earnouts because if I'm buying a business and I have an entrepreneur who's rolling forward into a new entity, I want us to be aligned. I never want us once the deal is closed. I don't want our success to be an opposing event or the entrepreneur. If I drive the growth of my business, don't care what happens to the overall business, I get a bigger earn out. And sometimes earnouts are very messy. There is a time and a place for earnouts though. So let me give you one example where an earnout is very much a applicable. A business that's growing really fast and has a big book of business that is on the come. So it's signed deals or it's in the backlog. It's not bids, it's actually backlog. But the business isn't going to ramp on for some period of time. In that case, the entrepreneur really has two choices. I can sell now or I can wait until all of this revenue ramps on and I'm going to get paid for it. There's no wrong answer, but again, I go back to times never your friend. World events can happen. One way to capture the total value is if you include an earn out over a specific period of time, which essentially gives the entrepreneur a payday for the close and then lets them ramp on that revenue that's in backlog. Or it lets them do whatever work it was that was pending and then in a year, almost like a true up, it's almost like a okay, now you're getting the rest of the enterprise value. So it's a methodology that can be used to lock in a total enterprise value. And it's most helpful when a company is growing really rapidly and it needs that time in order to recognize the revenue. And the buyer of course isn't going to pay for that on the come. It has to eventually get there. So an earn out lets them hedge in case it doesn't come. It lets the seller lock in the purchase price for the future business that they know is coming, you get two paydays as a result of that. So that's a good example of when an earnout makes sense. I'll also do earnouts in new geography or new business lines. So I'm making a strategic pivot. I'm selling widgets that look like this. I buy a company that sells a different kind of widget that looks different. If it's a strategic pivot or a new business line, I don't have to worry about separating my revenue from the revenue I'm acquiring and I can track it easily in that particular case. There also could be a potential to do an earn out. But generally the reason to do the earn out is growth. Growth is happening. Other than that, the joke about earnouts is they're just a lawsuit waiting to happen. The only question is, who's the plaintiff? Because they generally aren't smooth. Let me tell you why they're not smooth. Let's say I buy five businesses. I wasn't in the Midwestern United States at all, and I buy five businesses and then I give one of them an earn out. And so I'm plowing money in as the new owner into all of my businesses. I've got trucks crisscrossing. That's my revenue. You took it with that business business. I don't like it when people are opposed. I want everybody aligned. You align by doing a rollover investment in the mothership. We're all owners of the same baseball team and we care about the team winning, not about which player had a good day or a bad day. We want to win as a team loses a team. Earnouts are divisive when it comes to that team dynamic. The time and place is usually fast growth or strategic pivot. New business line. Let me give you another great example that this current pandemic, how many companies were hammered in 2020? 2021. So you're looking at 2019 earnings. You're looking at the last three years. You're looking at 19, 2021, 19 is positive. The other two are garbage. How do you buy and value that? And it could be 22 is projected to be really strong. And early indicators are based on backlog bids, et cetera. We're going to have a great recovery. And so the seller wants to get credit for 22, even though it hasn't played out out yet because 21 and 20 stunk. And so then the buyer says, okay, I'm going to pay you X, and I want to see this recovery actually happen this year in 22. And as a Result of that, we'll do an earn out. So fast growth or something that impacted earnings. That's an anomaly. Those are the two best reasons for an earn out. Other than that, I don't like earn outs.

It's a lot of consideration, right time, right place for them. In your experience, who are better acquirers? You're strategics.

That's a loaded question. Yeah, again, let's go back to it's a loaded question because there's not an official right answer. It's like Star Trek and the Kobayashu Maru or whatever the heck that was called, that training exercise that Captain Kirk had to beat. First of all, there is a seller and the seller's own personal circumstances. The right answer to that question is who meets the needs of the seller and takes them to the place they want to be that they scripted long ago as the first step of this process. That's the right answer. Having said that though, let's just talk a little bit about what the typical differences are. When you are sold to a PE firm directly, you become a platform investment. As a platform investment, you are the company, you are the leader and you're going to work with that private equity sponsor to bend the growth curve to do M and A, to improve organic growth, to do a bunch of things to improve your business. And 100% of the risk belongs to you in terms of execution. If you sell to a Strategic. Maybe that Strategic is a huge Fortune 500 company. So it's not owned by private equity. It's owned by shareholders. Or maybe it is private, but it's not owned by private equity that large. Strategic generally moves very slow. It generally takes a lot of approvals to get a deal done. And then you're going to join this massive thing which may or may not frustrate you. They may pay the most the most money. They have the capacity to pay the most money. So it's not necessarily the wrong answer. But it's different than a Strategic who's backed by pe, who's doing a buy and build like I do, where I bought companies and put them together across my last two platforms. Because then I get the benefits of being a platform. I get to make a rollover investment. But now I'm spreading my risk. So If I buy 20 companies and I'm one of the 20, all 20 of us need to execute or not. But maybe I have a bank bad market experience for a year and 19 other guys have a great one and so I get to ride their coattails. So it's really about risk diversification because the returns that are modeled are going to pay you the same either way. When you're with a strategic backed by a pre, you know, private equity firm or you're selling to a PE firm direct, it's like same kind of return thresholds are going to be generated. One is I own all the risk of execution. The other is I'm joining a bunch of people and we're sharing the risk. And then again, large strategics tend to move some slow, but also tend to be the ones who can pay the most if they really want something because they're the big behemoths who've got the massive cash flows. But you're going to be rewarded with, okay, I'm one of 400,000 employees now I'm going to get a great payday. A lot of entrepreneurs get frustrated in that scenario, but sometimes it's the right outcome. So there is no right answer. It goes back to what were your goals and objectives the day you thought about selling and who's going to guide you on that best path to get you the best outcome. That should help you determine determine whether it's a strategic or a private equity firm or a strategic backed by a private equity firm.

One of the biggest things I hear that can put the risk in selling a business is just flat out having the wrong advisors. Can we walk through how do you get top quality advisors to produce the best outcomes? A lot of times we get those referrals and then we look back and.

Like, oh shoot, each of those advisors is a little different, but God, I can tell you that when you choose a bad one and I see this, the easiest examples for me are life lawyers. When I choose a competent M and A attorney, that person knows what market is. They know what market conditions are today versus six months ago or where conditions may be turning to. They know what's reasonable and customary for a given industry or a given size deal. And they're generally highly skilled at getting you through the paperwork part of selling a business. When I choose a generalist who doesn't necessarily sell businesses every year day, they may focus and I see it as a buyer all the time, they focus on the wrong things. When a red line comes back on a contract, the things they should have been arguing or positioning for aren't touched. And the things that they're focused on really have no merit towards. Call it the salient points of the deal. They're arguing in the weeds, but they're the wrong weeds. They missed the road totally and they're in the weeds. I always am offering reasonable and customary documents to begin with anyway. But some buyers aren't. And if the opposing counsel's returning a red line and they're not attacking the right issues, instant signal to the other legal group. I've got a novice here. They don't know what they're doing. And I can take advantage of that for my client. And that's what they're paid to do. They're not paid to get the seller a best deal. They're paid to get their client the best deal. And so they're not doing anything wrong. And what you need is two competent attorneys who can meet each other and say, no, don't pull that. We know what reasonable and customary is, and we're to get to a fair document quickly. And I oftentimes see people who aren't specialists actually cost more because they spend more time arguing things that don't need to be argued and less time arguing things that should be argued. So the agreement that we end with isn't a fair and balanced agreement. It isn't a good agreement. It's not optimal for the seller. So I see that most often in legal. And you can fortunately start with Google, but you can talk to your friends, you can talk to your attorney that I need competent business representation. There are the top 400 law firms in the United States and you can look them up and Google them based on the number of attorneys. Any decent sized firm is going to have a business practice within it, along with a trust practice. And oh, by the way, remember in the beginning we needed tax advice. There's probably some kind of lawyer that we're going to need to set up a structure for us for this windfall that's coming. And so you can do research, you can ask for referrals, you can interview people. In my book, I put a list of questions, Some things that might stimulate someone thinking about asking, how many entrepreneurs have you represented in the last three years? How many businesses did you represent? Sellers on? What was the average transaction size, et cetera, et cetera, et cetera. And then you can start to qualify. Hey, I'd like to talk to some of your clients who sold their business. Can you give me a list of referrals? But you have to do diligence. There's no easy, cheap way around this. You can get referrals, but due diligence, Check them out, talk to clients, understand their area of expertise. Expertise with bankers, same thing. Bankers are usually come in different sizes, shapes and flavors. Some people are known for selling A healthcare kind of company versus an industrial company. Bigger ones may have multiple practices that specialize in each vertical. And so there's here again, you could choose the. A great tool. I got a great wrench, but what I really needed was a screwdriver. And so again, it's do research, ask for referral referrals, ask to speak to clients and try to find the best that you can. That's my advice. You have to be diligent. Oftentimes, if you're hiring one professional, you may be able to then leverage their expertise. So an example, Deloitte does my taxes every year. If I was selling a business and I was an entrepreneur, my first stop would be to my tax partner. I would ask him, hey, I'm going to sell the business. We're going to need to work through my tax advice. But can you please recommend from within this huge firm who I might talk to and interview as it relates to transaction diligence, Q of et cetera. And hey, when I'm talking to that team, could you talk to me about competent M and A attorneys that you've worked with in this area over the last five years? A lot of different ways to get there, but you need to get there. No quick exit to that question. You just need to do the work and network and do your diligence.

Adam, what's the craziest thing you see.

In M and a craziest thing I've seen in M and A? Usually I'll go to valuation, and I would say it's just people who have a complete unrealistic expectation of what their business is worth. I have a business that earns nothing, but look at all my revenue, and I want two times my revenue or five times my revenue. Or you have an old car and it's worth a grand and I want 100,000 for it. And that's not necessarily crazy. What I see is people who have. Have not been properly prepared to understand what the potential of their business is worth, who then get poor representation. Someone wants to get the engagement, hey, your house is worth 10 million and it's really worth a million. And so then you have a busted process. People get disappointed. I could tell you stories all day long about bad timing where people delayed selling a business and market conditions change. And then there was a material change to the value of their business business that never, you know, they were never able to recover. Think about the pandemic and businesses being closed down. What happened to restaurants? What happened to movie theaters? So malls were already dying as if they didn't need another reason to die to not be able to have people in the stores inside for a couple of years. There were so many industries that were impacted and it was dumb luck. We didn't know which ones would be allowed to stay open or not because we didn't know there was a pandemic coming. We didn't know that we would get to that. Remember when I started seeing people wearing masks and I thought my God, I can use imagine everybody on this airplane wearing a mask. That's ridiculous, never going to happen. And then boom. Two years of wearing masks everywhere. A lot of things in life can happen, can change and have reasonable expectations, hire good, competent advisors, build a good business and then be realistic in your expectations and you're going to have a good outcome.

Adam, thanks for hanging out with me today.

Hey, it was good to talk to you.

My pleasure. Take care of to the deal.

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