What you Need to Know About your Future Customers and Acquirees

Welcome to day 3. I'm pleased to introduce our featured speaker this morning, Bo Burlingham. Bo is editor-at-large of Inc. magazine and the author of 5 books, the most recent being Finish Big: How Great Entrepreneurs Exit Their Companies on Top. Bo joined Inc. in 1983 as a senior editor and became executive editor 6 months later. As executive editor, he was involved in much of the magazine's early coverage of innovative companies that have since emerged as leaders of the so-called new economy. A former Fulbright Scholar and Woodrow Wilson Fellow, Bo graduated from Princeton University in 1967 with a BA in public and international affairs. Bo and his wife, Lisa, have been married for 44 years and live in Oakland, California, and Sancerre, France. They have 2 children and 4 grandchildren. Please join me in welcoming Beau this morning.

Thank you, Justin. Hi everybody, good morning. Good morning. Okay, great. We're all here. Listen, I need to, I want to start off with a bit of a confession, which is that I didn't write this book for You. Now, I do hope you'll all read it. In fact, it reads like a thriller, and I'm sure you'll enjoy it. In fact, you probably want to buy copies for your in-laws and your children and so forth. It's actually great for the whole family. But in fact, I wrote the book for your clients your present and your future clients. I'm sure you are all, or most of you heard these statistics that over the course of the next 5 to 10 years, somewhere between 1.34 and 2 million businesses are going to change hands just because of the aging of the baby boom generation. Most of those people, as again I probably don't need to tell you, are totally unprepared for what lies in front of them. And so I wrote this book really for them, and now the challenge is to get them to read it. Let me tell you how, and I should say that the fact, of course, that they are unprepared actually represents an opportunity. For M&A professionals who begin now to develop relations with them that will in fact determine the success of your firms in the future. But let me tell you first about how this came about. This is, as Justin mentioned, I've been at Inc. for almost 33 years now, and for the last 20 years I've written a column with this guy, his name's Norm Brodsky. Norm, that's Norm in the company he used to own called City Storage, which was a record storage business in Brooklyn, New York. Those are his boxes. He loves his boxes. Somewhere around 2006, 2007, I was getting together with him to decide what was the next column we were going to write and he happened to mention to me that he had just come back from a conference, an industry conference, and that a private equity firm had approached him about buying his business. And he'd given the firm and said, well, you know, I'm not sure I'm ready. I've got a couple of conditions and he named them and the firm didn't blink an eye, said fine, we can do all that. So Norm said to me, I guess I'm going to sell the business. Now this came as a big shock. He'd been in business for, you know, 25 years at that point and he was having such a great time doing his business that I was very surprised that he was going to leave. But then again, he had always told me that his ultimate goal was to sell the business. So me being a journalist said, why don't we write about it in the magazine? And Norm said, why not? Now I'm sure some of you can think of a couple reasons why not to write about the negotiations for the sale of your company in a national magazine. But we went ahead with it anyway. And it sort of developed a life of its own. We literally for the next 7 or 8 months did a series called The Offer, and it gave our readers in as close to real time an account of what Norm was feeling, about what Norm was considering, about the kind of issues that they were talking about, and so forth, and it developed a huge following. At one point we asked, readers to tell us, you know, to give Norm advice about whether or not he should sell his company. And we got hundreds and hundreds of emails, most of them saying, yes, Norm, go for it. And eventually Norm decided, yes, he was going to sell his company, was going to go through with the deal. And we put up a— we had a cover story in Inc. magazine saying Norm decides to sell. About 2 weeks later, when the closing, the week of the closing, I called him up to find out how he was feeling and what our next column was going to be, and he told me, "I'm not gonna sell." And I said, "Why not?" And he said, well, it turned out that he had found something out about the buyer that had been withheld from him. Through all the negotiations, namely who was the key decision maker. And he had included, he had negotiated a number of things for the sake of his employees and now he felt he couldn't count on the buyer to follow, to come through on the promises that had been made. So he backed out. Now eventually I will say that he did sell the company. We didn't write about that part. You know, there were times when we were writing about it when the buyers who weren't so happy that we were writing about it would say, if I tell you this, is it going to wind up in Inc. Magazine next month? So we decided after this first round that we would wait and write about it afterwards. And he did wind up selling the company for about $100 million. And you know, moved on. But the response that we'd gotten to that series, it convinced me that there was a tremendous hunger out there for information about what it's actually like to go through the sale of your business. And that led me to believe maybe there was a book there. So I talked to my publisher and I began to go out and realized very quickly that I didn't know very much about the subject. Even though I'd been at Inc. for like 25 years at that point, it wasn't a subject that we'd ever covered very much except for this series that we'd done with Norm. So I went out and I decided, okay, what I need to do is to talk to people who've been through this. And over the course of the next couple years, I did somewhere between 100 and 150 interviews with people who had sold their companies. And what I found was that about half of them were reasonably happy and had moved on, and about half of them were totally miserable. They regretted that they had sold their companies, they were feeling lost, they didn't know who they were anymore. They were just terribly unhappy. So I decided that that was the story for me. What's the difference between the ones who've had a good exit and those who've had a bad exit? Now let me define what I mean by a good exit. Number 1, I'm talking about owners Feeling that they've been treated fairly during the exit process and appropriately rewarded for the work they've done in building their companies. Number 2, that they had a sense of accomplishment and that they could look back and know that they contributed something of value to the world. Number 3, they were at peace with what had happened to the other people who had been on the journey and helped build the business with them, namely their employees. And number 4, that they discovered a new sense of purpose outside of their business and had moved on. And for some, there was a 5th. For some people, the company was going on without them and doing better than ever. That wasn't true for all of them, but it was true for a number of them. A bad exit was basically people who were missing any one of these things. And some of them were missing several, and that was the source of their regret. Now, as I say, I did all these interviews and I decided to write this book basically about what the people who'd had good exits had done that the people who'd had bad exits hadn't done and vice versa. And I came up with 7, 7.5 things. Now, I'm actually not going to go through them right now. I don't think I have time. And in any event, they're mainly for people who are selling their business. Rather, I want to talk to you about some discoveries that I made in the course of working on this book that I think may be more relevant to you. The first one was that as long as I've been at Inc., I'd always thought of exits as an event. An exit was something that happened at the end. And I think that was true also of most of our readers. But the more I worked on this, the more I realized that that was in fact the wrong way to look at what building a business was about. We tend to think of it as sort of like building a house or building a factory or something like that. But that's wrong. The right metaphor is that it's a journey. And like every journey, it has a beginning, a middle, and an end. And the end is not when you build a great company. The end is when you leave that company. And that was something that I do now when I go out and that I tried to emphasize in the book. It changes sort of once you realize that when you go out to start a business and build a business, you're on a journey, it does change the way that you think about what you're doing. The second thing was that I realized that an exit is not actually an event, it's a phase of the business. You know, you have the startup phase, you have the growth phase, you have the mature phase, and you have the exit phase. And that there are actually 4 stages to this. Let me go through them. Number 1, the first stage is what I call the exploratory phase, and that's actually the phase when you're educating yourself, and again I'm talking about people who own companies now, when you're educating yourself about what exactly is involved in building a business and exiting a business. And how do you find out about that? Well, you talk to other owners who've exited, you talk to potential acquirers, maybe in some cases it will be large companies in your industry, you talk to people like you, and you just, you read books. I am constantly urging people to read Basil Peters' book, Early Exits. Frankly, you can also read my book, Finish Big. And you really are just sort of learning what it is, what the options are for you, and what is going to determine what your options are at the end. The second phase is the strategic phase. And that's when you actually begin building into your company the kind of qualities that are going to allow you to have the exit that you want. You know, the problem that most people get into or that many people get into is when they start their business, they have all the options in the world about where they're going to wind up. But as they go along, they start making decisions that wind up limiting limiting their options. This is a phase in which I know some of you actually specialize. I mean, I was listening to Peter Hickey before and it's what his company, Mous, works on. I'm good friends with the folks at Evolution Capital Partners and they are exceptional in the strategic phase in terms of providing the kind of guidance, information, support, and so forth that allows their entrepreneurs to have the kind of exit ultimately that they want to have. The third phase is the execution phase, and that's what I think probably most of you are— come into the picture. It's when you call up a broker or an investment banker and you say, I want to sell my company, and then you go through the process of looking for a buyer. The problem is, is that most business owners start at this phase, and it's a big mistake. The chances of your having a bad exit are increased exponentially if this is where you start. But, you know, and I guess I would say to you that if people come to you at this point, you could do them a big favor by helping them understand that there is much more to a good exit than doing a deal. The final phase is the one that most people forget about, and that's the transition phase. That's what happens after the deal when you go from being the owner of a business to being— well, that's the question— to being what? People who have— the people who told me, who I talked to, who had sold their businesses, They— almost all of them told me that the biggest worry that they had after they had sold their business was when people— biggest problem they had was people would ask them, what do you do? And they wouldn't know how to answer that question because, of course, people are really asking them, who are you? There are some people I interviewed, one person who took him 15 years before he could figure out what exactly had happened to him. I say this because, and what the revelation to me was that there are things people get out of their businesses that they aren't really aware of until they don't have them anymore. It's their sense of purpose, it's their identity, it's their tribe, the people they go in and work with every day. It's their structure in the sense of knowing what they're supposed to do next. The business tells them that. It's their sense of accomplishment. That's one of the great things about business is that you can— is that it tells you how you've done. When you suddenly find yourself without any of those things, it's very disconcerting if you haven't prepared for it. And you wander around. This one person who eventually he decided that what he needed to do was to get a PhD and he wound up doing his dissertation on the experience of private company owners once they leave their business. It was a very therapeutic experience for him because he discovered that he wasn't alone. This is the one that people in particular need to be prepared for. And I do have a whole chapter in Finish Big about it. I would say this, that there is a— the best way actually to prepare for it is probably by talking to other business owners. And there's actually a group here in Chicago I'm going to be talking to them a little later called Evolve, which is in the process of setting up. They have— they are a former Vistage Group that decided that they were beyond Vistage and they really wanted to have a group talking about the whole exit process and what's involved and how to do it right. And since then they have begun setting up other discussion groups around the country, and it's growing. That is a very effective way to sort of get people to understand what lies ahead and to understand it from people who they trust because they've been through it themselves before. In fact, if I were in your shoes, I think I'd be very— I'd try very hard to have somebody on your staff who is in fact a former business owner who has built and sold a company and who can talk to clients about it as a peer. It's one of the tools for building a long-term relationship and ultimately, I think in your business as in most other business, your success depends on building long-term customer relationships. I think there's probably a bit of a trap in your business, you'd know better than I would about being sort of trapped into having a deal mentality. Which can work against building those relationships. Now, I should tell you that a large number of former owners, as you know, will wind up going back into business. This is Norm, who actually did go through a period of a couple of years when he felt sort of lost, and then he began doing what he knew how to do best, which is starting companies. And he now has 3 companies that are all have done quite well and have very promising futures. One, which is going through a bit of a problem right now, is a chain of hotels in the Bakken region of North Dakota. Another is a chain of fast casual restaurants in New York called Kobayaki. And the third is something called Ben, which is a It's an online education program on entrepreneurship, taking advantage of the relationships that Norm and his partner have with well-known entrepreneurs like Tony Hsieh, for example, of Zappos. I suppose it's worth remembering that Norm is not alone. There are a large number of these former owners who will start businesses, and I don't need to tell you how important it is in terms of the value of your own companies to have repeat business. I realize that the competition for the best deals is already pretty intense. I've been told on good authority that the great frustration is that here's all this money out there, how do we get people to pay attention to it? And take advantage of the situation that exists right now. But as I've seen, you know, over the past 33 years, the firms that offer the highest level of service will be the winners in the end. And I just hope that with the help of my book, you can be among them. Let me just open this up for questions. Do we have any questions? Yes, Jeff. Did you explore at all when you were interviewing these owners that had sold their businesses, that had taken those proceeds and gone on to build other businesses that weren't necessarily where they made their money? Right. What their success rate was doing that? One thing I found about almost all the people who I interviewed was that they didn't want to have employees anymore. And so when they went out to start businesses, they did it a little bit differently. Norm, for example, has partners in all of those businesses. The— how they've done, you know, does vary from person to person. There is, I suppose, a danger in developing a certain euphoria afterwards and thinking that you're more brilliant than you actually are and underestimating the role that luck has played in your success. So there are cases of people who have, for example, after exiting their businesses, invested in residential projects in Florida in 2006. And, but I would say that most of them actually do wind up doing pretty well. The thing that I found with a lot of them is that there are a lot of people who wind up doing things, in fact, the people who've had the best exits are people who have figured out a way to help other entrepreneurs with the expertise that they've acquired in the course of building their own companies. Norm, for example, spends 30% of his time counseling other entrepreneurs. Basil Peters is another great example. I've learned so much from Basil, and Basil basically is sort of devoting so much of his time these days to trying to help people to understand this process. Yes.

Inc. is a reputed magazine. I think many people recognize that. There was an article in Inc. magazine that was not complimentary to the people who help owners exit, the business brokers, the M&A guys, Investment bankers.

I'm familiar with that article by Norm Brodsky.

Okay, and I think we as an association also recognize what Norm said. Mike Knoll, 17 years ago, said, gee, there is a need to educate people, the middle people, so that the owners get proper advice. So my question is as follows: I think Inc. magazine would do a service to all the business owners if you write an article on educational programs, not just at AMAA, but there are others, and let them know that the business owners need to talk to people who are educated in providing services to them rather than anybody who just said, I am a business broker.

Right.

So I would like to request you to, you know, take the—

I have to say I totally agree with you about that. I've been doing my best to get Inc. to write more about this subject, particularly after doing this book. As I said, when I did this book, I've been at Inc. for a long time, but it But once you start looking at the whole exit process, you begin to see the whole process of building a business in a different light. And I think it's— I agree with you totally. It's something that we should be paying a lot more attention to. And I'll do my bit. And if any of you want to write to Eric Schoenberg, the editor-in-chief, or Jim Ledbetter, the editor of Inc. magazine, and tell them how important you think it is. That all helps.

Yeah, I think the— like, at AMAA, we have a 5-day boot camp in mergers and acquisition.

Yeah.

And we have, I think, about 700 or 800 people who have gone through that. And it's a large number, but it is small relative to the need of the country.

Yeah.

But not people recognize it. There are other associations of My main request is, I think, if it's your support, I think there should be some coverage of the educational programs that would help the owners. Okay, thanks.

Well, absolutely, couldn't agree with you more, yes.

What are the typical characteristics of the companies, the sellers you interviewed?

I'll run through them very quickly. Basically, the 7 things that I identified as being the difference between having a good exit and not. Number 1 was knowing who you are, what you want, and why. I found that to be one of the most important characteristics of entrepreneurs in general. Yes?

What size were they? Where they located?

You mean the companies that I interviewed?

Yes.

Oh, they covered the gamut. They were all mid-market companies. They were not— well, with a couple of exceptions that I would say that they were, you know, probably $10 million in sales and up. And they were from all over the country and they were in every type of business from manufacturing, retail, distribution, service companies, you know, what have you. It was, by the time I was done, I'd pretty much talked to at least one of pretty much every type of company around, yes. Do you have a segment on family businesses versus non-family businesses and the emotion involved in the family business itself? I purposefully did not address family businesses for a couple of reasons. Number one, there's a lot of great literature by people on that whole issue of family succession. The second, I mean, I think that there's a lot in my book that is of great relevance to family businesses in part because family businesses face a lot of, owners of family businesses face a lot of the same challenges that other people face.

One last question, Ken.

Having been in the business for 30 years, I've gone through 4 stages, uh, in various— however, I would like to know about the force within the individual that causes him or her to trigger the process. In other words, what's causing them to investigate the next step? From my experience, it all revolves around the concept Well, that's interesting. I mean, my experience is that people finally look at the exit process when they suddenly realize they're not going to live forever. And that it often takes something like that. I mean, I can't tell you the number of times I've talked to people or talked to an audience and said, how many of you are planning to exit? And, you know, maybe 5 or 6 people. I said, what about the rest of you? Are you planning to live forever? People, it's amazing how people can actually go through building their business and not realize that there's going to be an end to this sometime. I've been trying to get through by tying My sort of pitch to people, what I tell people including young people who are just starting their company, that what buyers look for is the opportunity for growth and minimizing, the minimization of all the things which might get in the way of that growth. That's the same thing that everybody who owns a business should want. The opportunity for growth and minimization of everything that might get in the way of achieving that growth. In other words, I'm telling people that if you want to have a great company, you need to start from the end. You need to build a company that someday you could sell for as much money as possible whether or not that's your plan. If you can sell it for as much money as possible— and I also urge people, frankly, to learn from the most finicky buyers in the world, namely private equity people, whose livelihood depends on making good decisions about this. But my point is that too many entrepreneurs have got it backwards. They think that if you go ahead and you build a good company, then you're going to have a good exit. In fact, if you build a company so that you can have a good exit, then you're going to have a great company.

Thank you, Bo, for an excellent presentation. Really appreciate it.

Thank you. Thank you, everybody.