JT Schroeder: What to Expect From an M&A Advisor | Charting Opportunities

William Bissett: [00:00:00] JT is an m and a advisor out of Atlanta and. I’ve had the opportunity and pleasure to get to know him over the course of the last, uh, what, 12 or 15 months now, and does a great work with, with his clients, um, very educational and, um, excited to have him as a partner and as a colleague to be able to sit up here and just talk about what’s it like.

From a acquisition perspective when somebody goes out and buys a business. So before I get too much further, um, I should stop and recognize our fantastic audience that has joined us to own the streaming version here on YouTube as well as LinkedIn. I’d be remiss if I didn’t say, I appreciate y’all dialing in and listen to me ram into a microphone.

So with that being said, so jt, you know, obviously one of the things that you and I talked [00:01:00] about a fair amount over the course of the last couple weeks and months is when somebody goes to sell a business. And most of the time when we think about it from our client’s perspective, they built one business.

Um, they’re in their fifties, they’re in their sixties, and they built one business and they’re gonna sell one business. Whereas most of the time the people that they’re selling it to have bought. Multiples of businesses this year. Um, and for years prior to that. So we’re dealing with professional buyers and a one-time sale seller.

Um, so with that in mind, you know, one of the things that we talked about, you know, earlier as we kind of think about our questions is how, how do professional buyers approach a deal differently from that one time owner? That one time seller?

JT Schroeder: Yeah. So, um, thank you by the way for, for having me here.

Appreciate the, uh, the [00:02:00] hospitality from Triple C and the friends here at Portus. Um, so, uh, you said it exactly right. Um, you know, the professional buyers buying 30, 40, 50 businesses over the life of a fund or, uh, an investment period and. A lot of the business owners that we work with, almost all of them are founder, family owner businesses, that it’s their life’s work, it’s their legacy as a family, and they might be approached by a buyer, strategic financial, what have you, to sell their business, and immediately outta the gate, they’re at a disadvantage.

Um, there’s a power imbalance that exists between the buyer and the seller. The buyer is frankly prepared. Um, they do this professionally. They’re acquiring the business for strategic reasons, whether it’s, again, a financial buyer or a strategic buyer. They’re buying it for a strategic rationale in some way, shape or form around the industry, around the market, what have you.

And they’ve identified or have been introduced to your business or a business that fits that, that profile. And [00:03:00] they’re coming prepared, meaning they have formal m and a council. They have accounting, both internal as well as external. They have some sort of an advisor, whether it be, I mean, they have a full board and all that, right?

Um, but they have some sort of an advisor, whether they be in-house or external. A buy side advisor like myself, we’re primarily we’re, we’re we’re sell side guys. Um, but they, they have a team of professionals to assist them. Um, the biggest deal done last year was the merger of Norfolk Southern. Um, and, uh, uh, help me with this.

Uh, it was the, it was the two, the two train, uh, businesses, $88 billion. And there were advisors on both sides. Okay? So the biggest companies in the world are using advisors. And I’m not talking about just m and a advisors like myself. I’m talking about the rest of the members around the deal table because again, um.

It’s a complicated process. Uh, it’s not like selling your home. [00:04:00] It’s not a four bed, four bath and a certain zip code. Uh, it, it’s a living, breathing organism. It has a sales team, it has suppliers, it has customers, it has operations, equipment needs, et cetera. And, um, there just exists this imbalance of power between a buyer who does this regularly and a seller who is doing this once.

So I hope that answers the question. It does. It, it, it gets us certainly down the right path, right? Um, so when we think about sellers, oftentimes sellers, the first thing, and maybe in some regards, the only things that they really think about is, I have a target price, right? Like, I want X And they know now most of the time, that that X is derived from, I have a million dollars in revenue and my.

EBITDA multiple should be five. And so you should give me $5 million. Um, so that’s like the firewall says like, I, I need $5 million or I need [00:05:00] 10 or 50, or whatever it ends up being. Um, but that’s not how, um, so that’s the only thing that they have in mind. Um, but what are buyers actually buying? They’re not buying a EBITDA multiple.

They’re buying what? Well, I think it’s, I think it’s worth noting. Um, and you know, we’ve, we’ve run a lot of different processes. We’ve run processes hoping to get the highest price. Uh, we’ve run processes, uh, for gentlemen or owners that, you know, are, are dealing with some sort of medical issue and has to have to sell the business ’cause there’s not a succession plan in place.

Um, but from a, from a, a process or who do I sell to perspective, really at the end of the day, it’s the best buyer and sometimes the best buyer is not the best price. Um. The, the best price. Uh, that is certainly a consideration. There are things that can be done. We talked about deal team a minute ago.

Having a deal team on your sell side for you. There are [00:06:00] things that can be done to mitigate your tax liability. ’cause ultimately the best price may not be the best net price. So there are some things that can be done to raise the net price and certain tax strategies and what have you. You know, John and, and William can certainly discuss.

But, um, at the end of the day, you know, selling a a business, um, is oftentimes given that it’s a founder, family owner business, uh, is oftentimes, uh, as emotional and psychological as it is financial. Um, you know, leveraging the advisory network that you have can help identify those pain points as to how much truly is enough for me and my family based on our goals.

Uh, but more importantly, what is the right buyer to continue the legacy of my business? Was the right buyer to take care of my people who are sometimes family come over for Thanksgiving dinner. My customers, my suppliers I might go hunting or fishing with. I wanna make sure that they’re taken care of and that frankly, my reputation as a seller is not tainted by the sale to you, the buyer, [00:07:00] right?

And so, uh, working with folks, uh, to identify the right buyer, uh, is frankly more important in my opinion and my experience than the highest price. I’m not saying the right buyer isn’t the highest price. I’m saying it’s flipping the priority to finding the right fit for your business and doing the legwork to understand what your sensitivities are as an owner, but also, um, no different than they’re, than the buyer’s gonna be diligence in your business.

You should diligence that buyer. We just talked about that buyer having done 40, 50 transactions, talk to those transactions to get to understand those people and did they do what they said they were gonna do? Um, and you know, obviously things are going to certainly change, uh, ’cause you no longer are the owner of your business or certainly the majority owner of your business.

Um, but, you know, do your homework. Do your work. You’re only gonna do this once. Most people are only gonna do this once. There’s not many people that sell more than one business over their career. It’s [00:08:00] worth the effort to prepare yourself and establish proper expectations and understand your sensitivities and articulate those sensitivities to the people around you.

Yeah. Um, last month we had kind of sticking on the price point, right? Sure, yeah. Um, I think a lot of people think I’m gonna get an offer and then that offer is, is is what I’m gonna end up getting. And as you get past the LOI, then that’s where the real. Process starts, right? Or I shouldn’t say the real start, but it’s the next stage of the process starts and John Lesnik, who was here last month, um, ended up backing out of his deal after the LOI, um, as the terms of the deal continued to change and they ended up going and selling to an ESOP instead.

Um, and so talk a little bit about how, um, how those terms change, why those terms change and what you can do to be prepared for it and to mitigate some of that after you think, Ooh, I found my person, I [00:09:00] have my price, I can go celebrate because that’s the number that I’m gonna get. Right? Sure. Like how do you mitigate some of the post LOI risk in the deal?

So I’ll, I’ll answer your first question first because the mitigation will take a little, uh, bit of explaining. But, um, number one reason deals fail is financials to number one reason is a set of financials were presented to a buyer. The buyer’s going to do what is called a, a quality of earnings. You might be audited, you might be reviewed, you might have a great accounting firm that does all of your financials.

Quality of earnings is very different than an auditor review. Quality of earnings is a cash proof. It’s a qualitative analysis, not a quantitative analysis of your earnings of your business. Um, that’s number one reason that deal, number one reason that deals reprice and ultimately fail as a result of that reprice.

Okay. Um, other reasons that they, that they start failing is, uh, frankly, sloppiness. Sloppiness on contracts, sloppiness with regard to HR sloppiness on [00:10:00] processes and procedures. You got them to an LOI by providing a certain set of information and telling a certain story once under LOI, it’s now a confirmatory diligence process.

They’re confirming what they were told, and the more things that they can’t confirm becomes the death by a thousand cuts. Okay, so how do you mitigate that? You mitigate that by building a business or preparing your business for a transaction that is worth keeping. So I’ll say that again. A business worth selling is a business worth keeping.

So what type of business would you want to keep? That’s the business that you should look to sell. And there’s things around account, you know, financial reporting. You know, we pre COVID, I would say a quality of earnings, one in five transactions that we sold would do a sell side quality of earnings on a lot of sellers viewed that as sunk cost.

It’s an, it, it’s relatively expensive to do. Um, but [00:11:00] it, it, it’s one in, one in five. Pre COVID. Post COVID is about four and a half out of five. I’ve done the sell side quality of earnings. There’s been a lot of volatility coming outta COVID. What is, what is this business’s true earnings power. So a lot of times that sell side quality of earnings will identify.

Maybe some skeletons in the closet with regard to reporting, maybe some, uh, some issues on revenue recognition or what have you, um, that can be, uh, addressed or at least put, brought to the forefront. So the proposal that you receive is aware of those issues when they do their own buy-side. Essentially, the buyer’s not gonna find anything that we haven’t already found ourselves.

So the price that the buyer puts on a table is taking into consideration that risk. Okay. Um, other things to help mitigate that. Pretty simple blocking and tackling of a business that likewise you would want to keep. Are your I nines in order? Everyone says yes. My I nines are in order. Do you know that for certain, you know, I see, I see a head shake.

I don’t know. Um, do you know [00:12:00] that for certain, right? Like, like are your contracts signed? I know that sounds silly, but there’s a lot of businesses out there that send out a po, send out a contract, and it’s signed by one party, not the other. ’cause you got an email that said We’re good. Right. Buyers aren’t necessarily looking for reasons to chop legs after an LOI is entered into, but don’t give them one.

Right. So it’s, it’s professionalizing everything within your business. I’m not asking, I’m, I’m not saying be a public company. I’m not saying anything that any public companies have problems with it. Um, but I’m just simply saying that, um, you know, these professional buyers that are buying your business are also professional sellers.

And I’m, I’m referring to private equity, right? Private equity buys businesses, private equity sales businesses where private equity adds the most value in, uh, ownership of a business is professionalizing that business for the sale five, seven years after they bought it. That’s the big synergy case that they have.

A strategic buyer has a synergy case because they can share costs and they can get rid of some people and they have a bigger sales [00:13:00] organization. Right? But, um, the reason private equity buys your business for seven times and sells that same business for 10 times is because they professionalize it. In all aspects.

They professionalize a sales organization, an ERP system, uh, again, HR function. You know, a lot of business owners that we work with. You know, I’ve, I’ve, I’ve, I’ve worked with business owners that started their business out of their carport. I’ve worked with business owners that started with one truck and a guy and knocking on doors.

Okay? A lot of these guys, a lot of business owners, maybe some business owners that are listening today, started their business with one goal. Let’s go get a sale. And then that goal turned into, all right, we gotta fulfill that sale. How do we find a, a product, a raw material to convert? We gotta get some equipment, we gotta maybe get some people to work on this, right?

And then all the business starts, starts growing and growing and growing. But the last thing that they start focusing on is the financial reporting. The hr, yeah, we need to hire people, but are we doing it the right way? Do we have actual HR process? Right? Again, the more professional your business is, that’s like the tail wagging the dog to some [00:14:00] degree.

But when you’re selling your business, that’s at the forefront of the, of the diligence. Is this business worth buying? At a premium an a asset. Right now, we were talking about this earlier, uh, an a class asset, I would say a business that is professionalized is trading at an a plus price. A B asset is trading at a C price.

There’s a dislocation in the market and that’s all comes down to professionalism around the business. So, and I talked for a while, so hopefully that answered it. That’s interesting. So I’ve been told to hold the microphone lower, so I apologize. I’ll keep playing around with the right distance. Um, anyways, I think of Rick, am I good?

Yeah. I think of Ricky Bobby. Right, right. What’s the right distance? What do I do with my hands? Yeah, what do I do with my hands? Um, so, um, but no, so you mentioned it that. The, the business was centered around the first thing being a sale, right? Like a lot of business owners, the first job was to create an income for themselves.

Yep. And then [00:15:00] they were really stinking good to their craft. And so the, the business grew and it grew and it grew some more. Um, and so their great grasp craftspeople and not necessarily great institutionalized business owners, right? So how, how long does it take to take somebody that built a phenomenal business as a craftsman and institutionalize it into a professionally ready to be sold business?

And I’ll, and I’ll add a layer of complexity ’cause you mentioned it with pre COVID co post COVID. Has that changed over the course of the last five years with more sophistication, more money in the private equity space? Yeah, I mean there’s a, there’s a lot to unpack there ’cause it’s certainly in industry specific.

So thanks for asking a really easy question that allows me to drink more while you talk, so that’s the purpose. Yeah. Yeah. Thanks for giving me a beer too. Um, so, uh, um, look, I mean it’s [00:16:00] obviously company specific is the answer, right? I mean, of course it depends which is I think the, the go-to and all people in finance, you know, cautiously optimistic, right?

You’re not an attorney though, so. No, I’m not. That’s why I can say whatever I want. Um, so, you know, look at, at the end of the day, um. It’s circumstantial to the extent that there’s a broader market, right? There’s geopolitical risk everywhere. There’s tariffs, there’s, and I’m talking about the environment that we’re in, right?

You know, five years ago there was a COVID environment, there was a supply chain issue environment. There’s always going to be something, right? And your industry, or your business is going to be impacted differently by that. Um, I, I just, I would say that at least from, from our perspective of involving or starting to talk about a deal team, it’s not something you wake up on a Monday morning and say, I wanna sell this business.

Let’s go find somebody, right? This is something that you should be preparing for ideally many years out. But, you know, we’ve been involved in transactions. I feel like the most impactful transactions and smoothest transactions that we’ve [00:17:00] been involved in, uh, you know, two, three years prior to go to market.

You have to look at your life stage, right? How old are you? Are you in your forties, fifties, sixties, right? Um, depending on who you sell to, you may be asked to stick around for a couple, two, three years. If you’re in your sixties or seventies, you’re probably closer to an exit than the guy in their forties, right?

So, um, it depends on your motivation. You know, are you, are you looking to sell to a private equity firm and maybe roll some equity into that deal and maybe get a second bite of the apple later on? Are you looking to sell to a strategic and go fishing? Right? So I think it’s, um, it, it, it really does take time and it takes conviction to do it and being intentional about it.

And it’s not a full-time job. It’s really surrounding yourself with, with good people. You know, I’ve, I’ve run into a lot of businesses that are, I run into businesses that are $10 million of revenue that have a CFO. They’re paying 300 grand a year. I run into a hundred million dollar businesses that don’t have a CFO, and they got a controller, they’re paying 60.

Okay. So [00:18:00] is there a right revenue to hire a CFO? I think that’s, again, circumstantial to your business, complexity of your business, right? Um, but you know, as far as COVID is concerned, um, that obviously turned the world on its head. Uh, and like I said, pre COVID, I think earnings were relatively, you know, predictable.

Um, post COVID, you know, particularly in the industries that we work, we work, um, more broadly and, and I would call blue collar businesses, so industrial services, et cetera. Um, I actually grew up in a pest control company. As, as an example. We do manufacturing, distribution, construction, um, and you know, post COVID, huge bump, overreaction, you know, supply chain issues.

Everyone needs a bunch of inventory and they need it right now. And then post COVID, it was this destocking, we have too much inventory. Supply chain came back. So these businesses fluctuated like this right now. You have a little bit of a saw tooth with one month is good, one month’s not so good. When is the right time to take this business to market?

Um, [00:19:00] frankly, as far as you can put COVID in the rear view mirror, it’s a good start. Uh, but it it, it’s circumstantial to your industry. Um, to be honest, I know that’s not a great answer and it’s a long-winded answer, but, um, it, it, it’s, uh, it’s also a feel and it’s a life stage. And you know, I had a, I had a client that I sold about a year ago, two years ago.

I met him 10 years prior. I, I had a deal sold last year. Met him two months prior. So it, it’s, it’s circumstantial on your personal, you know, as well. ’cause, ’cause your business and your personal life, whether it’s assets or time, are so co-mingled that a sale of the business is really hard to bifurcate.

That both your personal and your time, your, your, your, your finances and your time and, um, thinking through that, planning for that. You know, is important. Um, those that know me well, know. I love to use the word bifurcate, so it’s awesome to hear you, um, say that as well. You’re welcome. Um, I appreciate it. Um, but, um, [00:20:00] you said something in there that I think every time I’ve talked to you, you’ve mentioned in the past, um, which is you mentioned your, the team, um, right.

And the team that’s there to support and help the owner. Can you expand on what you talk about when you say team? Sure. Caitlin, do you mind pulling that third slide up? Keep going. One more. Thank you. I don’t know if people online can see or not. Um, your deal team is important. Uh, you know, uh, selfish plug, we’re right in the middle at the top, but, um, you know, your, your deal team, you know, consists of those parties up there and maybe some derivation, uh, of additional advisory work.

But, um. And I’ll start with the right side. You know, the, the m and A attorney is important. I think everybody in here knows an attorney, fortunately, or unfortunately. I don’t know if there’s any attorneys in the room. No offense. Um, I’m clear. All right. Um, but, you know, an an m and a attorney is an expert in m and a.

It’s, it, it would be [00:21:00] like, you know, I have an attorney. He’s a, he’s a business attorney, he is a divorce attorney. And unfortunately I’ve worked on deals with divorce attorneys. Um, but you know, an m and a attorney is no different than going to an orthopedist for a knee surgery and not a cardiologist. And I know that that’s life and death ’cause it’s medical.

But, um, you know, they understand the market. Uh, going to an expert, um, that knows market terms, uh, is extremely valuable and important. Time kills deals at the end of the day. And if you have an attorney that doesn’t know what he’s doing or doesn’t do this professionally. Time’s gonna drag out and the deal’s gonna die.

We actually did a deal, uh, we were talking about this earlier. We did a deal, uh, we closed it about three weeks ago. A general contractor and, uh, water wastewater and the deal got delayed due to some I nine issues. Um, deal got delayed about six weeks, and during that six week period, he had a gentleman unfortunately fall off the top of a water tower and die during the sale process right before closing.

That’s a [00:22:00] problem, obviously. Um, it’s terrible for the family. It wasn’t his fault. It was a sub of a sub, but the point being, um, time kills deals, it had the potential to completely, you know, the deal would’ve failed and it wasn’t one of even his employees. So, uh, strongly suggest m and a attorney. That’s, that’s frankly, uh, you know, one of the most important, uh, uh, members of the deal team.

Um, other deal team member, um, as you can see on here, is your management team. You can’t do this alone. This is a, uh, and I dunno if I can say this, but this is a colonoscopy of your business, okay? You cannot do this alone. Um, the request list that we get for diligence, confirmatory diligence, I’m talking after the LOI, moving towards closing.

It’s 3, 4, 500 requests. It’s, it’s massive. Um, and you need help and you need to have somebody on your team that is ingrained in the business. Not a third party like us, but ingrained in the business to help you gather that material. Because if you fall [00:23:00] asleep at the wheel of running your business, it’s going to affect two months later when you go to close the transaction.

’cause every day, every month that you close, you know, financials, they’re gonna be requesting financials. And if the business is on a decline, ’cause you’re focused on answering a request list, it’s gonna suffer. Okay? So bring people under the tent that you trust that also won’t be too upset about. The business transacting.

Okay. Um, up on the left side, wealth advisor, also a little shameless plug. Um, but I do think it is very, very important. Your business, more likely than not, is an ATM to some degree, to your lifestyle. Um, most business owners that we work with, their business is by far their largest asset. They might have a couple houses, boats, cars, whatever planes may be, but their business by far is their, is their largest asset.

And when you, um, approach an m and a transaction, at the end of the day, you’re decoupling or you’re turning that ATM off and having a wealth advisor. [00:24:00] Advise you from a tax planning perspective, charitable giving perspective, et cetera, um, is extremely important. We, we’ve actually, another funny story. We’ve actually, uh, actually sold a business.

Uh, it was, uh, I’ll just say building material and supply business. Um, there were four owners. One of the owners, uh, we were on the funds flow. Uh, you know, it was, it was a large transaction. It was a nine figure transaction. And one of the owners, uh, was pocketing about 30, $40 million. And he, uh, he sent me his wiring instructions to a checking account at Regions Bank.

And I said, uh, you know, his name was Kevin. I said, Kevin, uh, do you have anything else? Like, you know, has his bank account ever had $40 million in it? He’s like, no, no, but I talked to my banker. We’re good. Just, just send it here. And I was like, I, maybe you should talk to a wealth advisor, jt, stay outta my business, blah, blah.

Okay. Um. What ended up happening was the bank froze the funds for four weeks due to a ML and OFAC because they didn’t ever have $40 million in the bank account. And they froze it and had to get copies of the purchase agreement, which he was reluctant to share, et cetera. So there are [00:25:00] ramifications to not being organized and a wealth manager, wealth advisor can certainly help you with that.

And like I said before, gross numbers important. That’s the country club number. Your net number is more important. You could actually sell a business for less gross and make more net than the other guy next to you. So, um, having that wealth advisor is important. And then CPA tax advisor, we talked about a sell side Q of E, they can certainly help from a tax perspective to limit that overall tax liability.

They can help prepare the financials in a way. From a quality of earnings perspective that a buyer would not necessarily find anything that you haven’t already found yourself, maybe you can even make those changes. And then last there in the middle is, is an investment banker. Ultimately what we do is we, we, our role is to act as the quarterback of the transaction.

There’s a lot of planning that goes before. There’s certainly a lot that is done after, but as far as the transaction is concerned, running a, we, we talk about professionalism. That I think that’s the theme of the conversation here, right? But we talk about professionalizing your business. Running a professional process is equally important.[00:26:00]

Um, dealing with, uh. A buyer by yourself, DIY as you say, right? Doing it yourself. Um, you lose leverage. You lose con, you lose, uh, you know, a competitive process. Um, the material that is shared is typically not presented in a way that maybe it would’ve, that would’ve yielded a better value for your business.

So, um, we do this professionally. Investment bankers do this professionally. Um, highly, highly recommend you hire professionals around that, around that deal table maybe even more, and certainly involve your management team. You talk, you talk about it. Uh, time kills all deals, right? So that by thousand cuts, um, basically all of that is, um, a result of kind of sort of red flags, right?

Yeah. Fire walks in the door, they see something, they all of a sudden start to sniff around. Um, how, um. Like during your process or during the m and a process prior to actually going to market, how do you try to [00:27:00] uncover and, um, flush out those red flags And then, um, if you don’t, how does that process unfold when the buyer finds the red flags?

Yeah. Um, I think that’s just a trust issue. Um, you know, ultimately when you look to hire advisors, um, it’s hiring people that you trust. Retiring people that you can have a, I’m not say have a beer with, I mean that jokingly, of course, but, um, uh, because I don’t have one by the way, that’s why I’m joking. Um, but, uh, but no, it’s working with people that you trust that you know, have their best interest in mind.

And, and what I mean by that is you can be open with these people about your personal financial situation, be open with them about what you believe are maybe some shortcomings about your business. Uh, you know, I, I actually used the analogy I was talking with Chip earlier. Uh, we were just joking, you know, talking, having a, having a beer.

Um, but I, I said, you know, uh, uh, and the analogy I used was, and I’m from Atlanta, so I’ll just [00:28:00] say the Atlanta Falcons, which I’m not an Atlanta Falcons fan. But, um, you know, when Atlanta Falcons tried, um, uh, tried signing, uh, Matt Ryan, and at the time, that was the largest contract in the history of the NFL, they tried signing.

Matt Ryan. Matt Ryan told him everything about his touchdowns, his completion percentage, his wins, his two point, uh, his two minute drill, everything Falcons told him. Oh yeah, we agree. Like, here’s a billion dollars. No, they told him about his interceptions and his incompletions and his fumbles and his losses.

Right? And that’s really the process here. The process here is, um, coming to terms of what was the largest contract in the history of the NFL, by identifying shortcomings by the falcons, identifying shortcomings of Matt Ryan’s performance. If you can identify those shortcomings, you have one or two options.

You either, um, you either make them, you either change them right, uh, into a positive, or you simply just own own up to them. This is a shortcoming of my business that [00:29:00] frankly, we, we perceive as an opportunity for you, uh, the buyer. Okay? And, um, the more opportunities you can present, the buyer opportunities are a little different than risks, right?

The more opportunities you can present to the buyer, the more, uh, frankly, the more attractive you become as a business, uh, and possibly even a, a above. Premium purchase price for that business. So what we do is exactly that. We do what a buyer does. Um, we look at financials, certainly not a Q of E, but we look at financials.

We look at how business operates, we look at the personnel. We look at, um, again, suppliers, customers, and just poke holes in the business and ask them tough questions that sometimes a little bit uncomfortable. But at the end of the day, if we can be honest with each other, if we can be transparent, if we can be candid, then that builds trust.

And that, that, that transparency of, you know what, I have a great business. Here’s some things that I’m lacking. That transparency is super valuable. And I, I tell all my clients like, don’t be afraid to tell me the good, the bad, the ugly. ’cause I need to know before they know. [00:30:00] And if I don’t know that before they know I can’t help you, I can’t help, I can’t help spin the story.

I can’t help tell the story. I can’t help address the issue. So I just advise, just be transparent with your advisors. You hired them for your advice and, and they can’t give you good advice if they don’t know all the, all the variables. It’s, it’s almost like an attorney with the witness on the stand.

Right? Like, um, uh, you, you don’t want to have not told your attorney the information because then all of a sudden the other attorney finds out and you’re, you know, you’re caught in a bad spot, right? That’s right. That’s right. Um, so if you’re at the negotiating table and they find out about it, um, you hadn’t had a chance to digest it, unpack it, yeah.

Um, understand the positives and weaknesses of what they just found out. Right. Look, it’s, it’s, we’re not the judge Jerry or Executioner. Yeah. At the end of the day, we’re on the same team. Yeah. Um, but I just need to know what they’re about to find out. Yeah. And, and we can spin it a certain way. We can, we can couch it a certain way.

We can story tell a certain way to make it into a positive as best possible. Um, financials are a key component of the deal, right. We would agree that financials kind of [00:31:00] matter from time to time. Pretty important. Um, what, um, what do they look for right out of the gate? Right? Like a buyer, like, um, when you’re presenting financials and then they receive ’em.

What are some of the first things that they’re looking for? What, what do you mean? Uh, the, the buyer? Like a strategic buyer’s coming in the door. Sure. You presented everything. What are the, what are the first, what are the kind of things that they’re looking for to, um, find red flags? To understand how the business operates?

Like what, what about the financials other than the ebitda, right. Um, or where the margin is. What are the things that they start to unpack and dive into? Um, so first I would never share financials with a buyer until working with an advisor. Okay. Um, but, um, you know, what is a buyer looking for? A buyer’s looking for stability, right?

A buyer’s looking for some semblance of growth. Um, not only in top line, but also in margin. Um, understanding if you’re a manufacturer, understanding [00:32:00] certainly things like material margin, conversion costs, um, if you’re a service provider, understanding things like attrition. Customer loss. Customer gain.

Okay. Um, you know, a lot of business owners, again, like nobody up here is from the IRS. Nobody up here is in judgment whatsoever. But business owners, myself included, um, you know, we, we live in a business owner world, let’s say with, uh, certain business owner type expenses that we put onto our businesses.

Okay. Um, would be referring to personal expenses. Not, not me, of course. Yeah, of course. No, not me, of course. No, no. Um, but some, some people I know do other people. Um, yeah. Uh, but point is, you know, that’s not the business that the buyer is buying. The business the buyer is buying is a business that William doesn’t own any longer.

So, you know, being able to present a set of financials that the buyer. Financials of a business that the buyer is buying is super important. That’s where the quality of earnings actually comes in as well. So, so what are they looking for? You know, if you got a lot of [00:33:00] volatility, hey, what’s next year? The year after gonna look like anybody with, uh, you know, uh, an excel, you know, any sort of Excel background can put a financial model together.

What is it substantiated by? Is substantiated by a backlog? Is substantiated by margin improvement, is substantiated by new hires. Uh, you know, what, where’s it coming from? So, um, you know, I would, I would highly advise against sharing any sort of financials with a perspective buyer that haven’t been either reviewed.

And I’m not saying reviewed from an accounting perspective, I’m saying reviewed by either a third party, uh, Q of V or investment banker, because you could be shooting yourself in the foot based on what you’re presenting. It may not be accurate either. Every dollar of adjustment, uh, we just talked about, you know, owner expenses that are gonna run through a business.

If you sell your business for seven times earnings, every dollar of expense is $7 on purchase price. I had a couple commas and zeros. It’s a pretty meaningful impact. Um, I’ve been places in the past where people, uh, almost [00:34:00] recommend from the very beginning to keep two sets of books, um, one that qualifies for tax purposes and one that qualifies for non-tax purposes.

Um, how do you, for people that run personal expenses through the business, what’s the best way to handle those as you approach sale time? Not necessary. Yeah. Don’t do two sets of books. Yeah. Don’t do two sets of books. It, if the second set of books meets a, it makes it to the investor or buyer in some way, shape or form.

You open up a whole new can of worms. Just do one set of books. Do ’em legit, do ’em under accrual. If you run personal expenses, run ’em through ’em. That’s okay. Just make sure you’re keeping track of ’em. You know, and you, you, you travel, you have a couple cars. You, you know, I mean, we, we, we sold a business, uh.

About two years ago, he had $6 million in adjustments. He built his lake house. Uh, he had a plane, he had $6 million in adjustments. [00:35:00] Buyer looked at it, adjustments were substantiated, bought the business. Just be honest with yourself, you’re not, you’re not. Again, it’s, it’s, don’t hide behind what you’re doing.

Just be transparent about what you’re doing. Be transparent with your advisors. But certainly, um, you know, I don’t think it’s worth the effort to do two sets of books. That’s a, it’s a pain in the butt to do one set of books, so. Yeah. Um, yeah. Uh, what, um, you know, we were talking about it a little bit earlier, um, in terms of, you know, again, to stay on the theme of professional versus first time, um, what are some areas of disorganization that you typically see or you might see mm-hmm.

From a seller, right? Like, um, that the buyer’s not gonna wanna see. Like, where can sellers be more organized, more structured in the way they approach their business so that when, you know, if they’re 10 years away now, so that they can start thinking about, Ooh, I should be doing [00:36:00] this better and better so that when it is time to sell the business, I don’t have to last minute rush to get everything together, right?

Sure. Um, that’s a good question. So contracts. Number one, make sure your contracts are good. And I’m not talking about just making sure they’re signed. I know we talked about them making sure that both parties have signed it, but like it’s, it’s okay to spend a little bit of money to have an attorney review a contract, especially if it’s a meaningful contract.

Um, it’s okay to spend a little bit of money to have an attorney review an employment agreement. Okay? Um, it’s not wasted dollars. Uh, it may feel like it at the time because, oh, well he already approved that one. I’m just kind of changing the name and the PO here. Um, just, just have, uh, make sure your contracts are what you intend them to be.

A lot of contracts have change of control provisions. A lot of contracts have consent rights, assignment rights. Like, you know, you don’t necessarily want one of your customers to block your sale, and that customer is a meaningful customer. So, um, contracts would be a very important [00:37:00] thing. People, personnel, you’re, you’re, and I’m not talking about hiring and firing, I’m talking about the actual process.

I’m talking about, um, you know, employee handbooks, that’s easy, right? But I’m talking about what do you do to recruit, how do you attract new talent? How do you hire them? How do you train them? Um, when you do have to unfortunately get rid of somebody, what is the process that you’re implementing? Is it professionalized or is it, here’s the do see you later, like, have you done the right things around reviews, et cetera.

Um, the, uh, I’ve mentioned the I nine issue, right? Everyone, you know, some states don’t require you verify. Some states do, um, like do, do it, do it right. Um, a lot of, a lot of contractors actually that we’ve worked with, um, they, you know, they have a Hispanic, typically a Hispanic, you know, hourly employee. Um, and for convenience have given them an I nine that is in Spanish.

Just for convenience ’cause they can read it and what have you. Um, a Spanish I nine is only legal in Puerto Rico. [00:38:00] It’s not legal in the rest of the United States, so that i nine is in and of itself on its face fraudulent. So things like that, that a lot of people just don’t know. Um, frankly, I didn’t know that until the, until that particular deal, if I’m being perfectly honest.

Um, but you know, you learn something new every transaction. So, uh, but yeah, it, it’s, it’s just, you know, having a third party CPA that is either doing your review or doing your audit. If you’re a smaller business, it’s okay, you know, have John Smith pc. But I would recommend as you become a larger business, working with John Smith, PC doesn’t carry nearly as much weight as working with maybe a larger regional firm.

Or even a national, I’m not suggesting you need e and Y or Deloitte, but the point is like, you know, there’s a good, better, best level. Okay. You know, if you’re working with a good advisor, but you want the best for, for your business, you should look to upgrade, um, to that, that best CPA advisor. So, uh, all goes back to the professionalization, right?

So that’s what a [00:39:00] buyer looks at and if they see one thing, then they see another, and then all the stuff they’ve already looked at, they’re gonna circle right back to and look at it with a fine tooth comb a lot finer than they looked at it the first time. And that’s when the deal drags and that’s when the death by a thousand cuts comes.

Um, so as we start to move towards wrap up stage, and I guess questions may be questions from the audience, um, one kind of selling question. Um, so when. As a seller, as a, as a business owner, as I’m ready to sell my business, right? Mm-hmm. I know that it’s two years away from selling the business, and I start talking to m and a people.

There are certain m and a people that specialize in selling, um, red pools, and there are other ones that specialize in selling blue pools, and then there are others that just sell businesses. Mm-hmm. Um, the general thought, and everybody, everybody has a reason one way or another your, um, your experience on what they should look for and how they should evaluate that [00:40:00] as they move through the process of hiring m an m and a advisor.

Sure. Um, so, and it’s okay to just say that everybody should just hire you. That’s a perfectly suitable answer as well. Thank, thank you for, thank you for that. Yeah, you’re welcome. Um, so it’s, it’s not like hiring a, a realtor for your house because it was your wife’s friend at Fent from tennis. Okay. Um, so no different than you would frankly.

Due diligence on the buyer, you should due diligence on your advisor. And you know, again, we’re, we’re not the right people for a tech business. We’re not the right people for healthcare. Um, we do really well in our industrial, frankly, ’cause I don’t understand it. I don’t, I don’t know, I don’t know how to spell ai.

Okay. So, um, but, but I would, I would just suggest that, you know, you do work on them, not necessarily the industries that they’ve done. I mean, that is important, right? Certainly if it’s tangential or it has a widget and you make a widget, right? Like, or if it’s distribution and you’re a distributor, I understand that.

Um, but. Nobody can be the expert. There’s [00:41:00] maybe one guy in the world that’s an expert in blue pools using your example. Okay. Um, there’s, there’s, uh, there’s a lot of investment bankers out there and it’s really finding the guy that, that you jive with. Um, it’s asking him to give you references. Now, what’s interesting about references, I think they’re kind of funny ’cause everybody gives references, myself included references of people that are gonna give you good, you know, good referrals, good testimonials, right?

Um, talk to people that have worked with them. Talk to, you know, uh, an m and a attorney. Hey, you know, if someone asked me, jt, what, what m and a attorneys have you worked with? Can I speak with them about your, how you work? That m and a attorney has no reason to tell say anything good or like, who have you worked with?

Oh, well, you know, here’s math and, you know, speak to him and I hope he says good things, you know? Um, but, uh, ’cause we were part of the same deal team together. Um, so I would just say the same thing, just, it’s, it’s just taking the time to do diligence. Not because somebody works at Keller Williams and plays tennis with your wife.

Okay? Um, take the time to due diligence with, on them. Uh, so, uh, parting [00:42:00] thoughts before I close up, um, for buyers that are two to five years away from selling the business, any, um, any hot tip for the day? Um, any hot tip? Yeah. Like buying Nvidia or anything like that. Any hot? No. Do not buy Nvidia Bitcoin. Do not buy Nvidia.

Reinvest in your business. Reinvest in your business. Uh, and that’s the hard part that we see in, in, uh, a lot of the business owners that we work with is that their ROI on reinvesting in their business is higher. Most business owners is higher than they believe it will be in the public markets. So that is a difficult conversation, but it’s also a diff a different risk.

Um, it’s a different risk appetite. So I would say, um, continue driving your business. Try to make yourself as obsolete to your business as possible. If you are in control of the largest customer and you have the supplier relationship and, and, and you make yourself less attractive to a third. Because that, that business is reliant heavily on you, in which case your [00:43:00] transaction, either price wise or structure IE earn out or what have you, could change materially.

So make yourself as obsolete as possible. If you left for a month and went to Greece, is the business going to gonna survive and continue to grow? That’s what you should be asking yourself. And how can you do that? How can you in, uh, continue to, to implement automation? How can you continue to implement ai?

If you’re not implementing AI right now, you’re already behind. And, and I’m talking even just scratching the surface of it, AI is a game changer across all industries, ours included. Um, and again, it’s, it, it’s just scratching the surface. And I’m, I’m firmly of the opinion that ai, uh, will, will, and it already has started to evolve into industry specific.

Um, actually, I was at a plastics conference not too long ago and they were talking about using AI to, to minimize scrap on plastic injection molding, AI scanner, and here’s how you do it. And well, and it. Just, I mean, again, it blows my mind that it can do that. Um, but implementing that saves cost.

[00:44:00] Implementing that makes you a better business, a more attractive business. So I would just say continue to invest in your business. Continue to invest in your people, and, um. If you’re two years out, I’ll be over at the bar. Uh, have a beer. Uh, no. It’s funny. You’re exactly right. We always tell clients that they’re going to, um, they’re gonna sell the best business they ever own.

Mm-hmm. That’s right. Um, and then they’re gonna take the proceeds and they’re gonna dump it into a bunch of publicly traded crappy stocks. Um, and you better get ready and comfortable with that and the volatility, um, that comes along with it. Right. So, um, yeah, reinvesting in the business and slowly starting to understand what a, um, what a different portfolio starts to look and feel like.

That’s right. So, that’s right. Um, thanks for coming up, um, all the way from Atlanta. Um, I think JT might have made a record time today, by the way. Um, hopefully there are cops paying attention to our, our I got waste conversation. Yeah. These drives a white, um, a white Cadillac, right? Yeah, sure. But no. So, um, no.

But thanks again for coming next month. We actually, [00:45:00] um, we’ve got a, a great guest, uh, Martin. Um, Martin sold his business in 2020 right before COVID, I think. Um, I drank entirely too many bottles of champagne with Martin at the end of, of January and actually rolled in, um, a portion of his proceeds into the company and that ended up closing out about six months ago.

Um, so Martin’s gonna come up and we’re just gonna talk about what selling to a strategic buyer was like and how the rollup ended up being beneficial for him and what he learned throughout the process. He ended up, um, talking to a couple different m and a folks, settled on the right one, and even with that, still had some hiccups along the way, right?

So it’s gonna be a fun conversation to talk to somebody that’s been all the way through. The second bite of the apple is, so many people like to call it, um, he’s English, so he talks funny. Um, and he likes beer. So it’ll be a really good conversation. Um, hopefully the folks online can join us in person or if you’re remote, [00:46:00] um, join us.

Um, join us that way as well. So, but thanks again for making it all the way up and, um, uh, thanks for your partnership. Yeah, likewise. Thank you for inviting me. Appreciate everybody

thoughts about, uh, making yourself obsolete. Mm-hmm. Going through this process. If one of your top management people is finding to stay with acquire, but you plan as a seller to leave, sure. Is it better for that person to take the lead in the conversation? Or is it better for the seller to still do that even though they’re, so, that’s a great question.

Hold on a second real quick, jt, just to repeat, um, just talking about for the, our virtual folks, the, um, making the seller obsolete and, um, who should take lead in different circumstances if the seller really turns out and runs on day one. Um, who, who should take the lead in different contract negotiation?[00:47:00]

So, so, good question. So I would, I would hope that the seller that has made himself obsolete is also groomed to that person to step into the role of running the day-to-day of the business. Um, it depends also, I guess, on who you would sell to, right? So a strategic buyer, um, not necessarily as interested in hiring another president, right?

Um, so they’re looking at the business in a, from a different lens. A financial buyer who’s looking at acquiring the business as a platform, that’s their CEO, that’s the guy that they’re investing in, right? So yes, involving him in that process, extremely important. Um, I’m not saying who leads it and who doesn’t, right?

Usually the owner has been part of it for 20, 30 years and has seen the evolution of that business over that period of time. Uh, but certainly involving him or, or that, that second in command that is the, the rising star or the one being groomed, um, extremely valuable. Uh, but I would just caution you to be careful.

You would really wanna have to trust that person. We’d really want to make sure you incentivize that person, um, to say all the right [00:48:00] things and to be, um, a good advocate of not only your business, but the transaction in and of itself, and make sure you’re aligned with that person. And I’m talking about financial alignment.

A lot of our, uh, clients, actually, I would say all of our clients, um, compensate those key people on closing through some sort of a bonus, a transaction bonus, um, through some sort of a, a thank you, you know, uh, payment plan type bonus out of their own proceeds. Right. So I would, I would say, um, just be careful with that, but yes, absolutely.

’cause that’s ultimately the guy that’s gonna run your legacy when it is sold. So involve him on that management team right there. Yeah. Support and diligence. You said legacy, which I hate to disrupt and ask another question after I disclosed. Um, do you coach owners about, um, how to let go of their business once it’s no longer theirs, right?

Like it is no longer theirs. Right. [00:49:00] They spent 20, 30 years building it up. Yeah. And somebody else comes and takes control of it and they go. Hard left. Like, do you have conversations or how do you Very much, how do you prepare people for the fact that you can’t, you can’t take it personally. It’s, uh, it’s 10 o’clock at night after they’ve had a couple bourbons, many, many conversations.

Um, my wife’s accustomed to it now, so, uh, but it’s a psychological, emotional journey to, I, I, I had a client sold his business. It was about a 70, $80 million transaction. And, uh, it was around, actually around this time of year, Thanksgiving, whatever, right? And he sold his business, super excited, called all his customers, they’re all his buddies, his suppliers.

And then he goes into the office to do his annual Christmas cards on the, on the postage meter. And he goes in, didn’t think of anything of it, did his, you know, personal and company Christmas cards. And the guys are like, wait a sec. That’s not your postage meter anymore. What the hell are you doing? He was so fed up, he’s like, I’m outta here.

And he left for like three weeks and it took him a minute just to psychologically get over the fact that [00:50:00] nothing in that building was his anymore, including the postage meter, including to do Christmas cards for the same customers and suppliers of a business he doesn’t even own anymore. So there is a psychological aspect to it for sure.

Um, and it’s preparing them for what life looks like after the fact. And that’s where again, this transaction team and alignment through this deal team is extremely important. ’cause there’s, there’s a lot of, uh, behavioral psychology within an owner. Um, you know, you, you, you, you are, you are William, the wealth advisor of Portis tomorrow.

You’re just William. Still a good guy. But the point is, the point is like sometimes I, you know, owners identify themselves as, I’m, I’m JT the car guy. I’m, I’m, you know what I’m saying? Right. And so like, like first question most people ask is, what do you do for a living? They shake your hand, right? So you’re no longer that person.

So you have to come to grips with that. There’s only so many golf courses to play. There’s only so much fish to catch. Um, again, depending on where your lifestyle is, [00:51:00] like having those conversations with your advisors and trying to truly understand what you want from the transaction, both financially as well as post-transaction, extremely important.

There are a lot of fish. Yes, Caitlin. Okay.

Um, in addition to what you about.

Success. Success. Repeat it for the audience or, yeah, sure. You can repeat it.

I’m just kidding. Um, yeah, I think it was, uh, what mindset, what mindset, what mindset shifts do they need to prepare for? Yeah, yeah, yeah, yeah. Mindset shifts and what was successful, maybe not successful. Yeah. Do you have a Yeah. What, what made somebody, I got all kinds of bad stories, but Yeah. I, like, bad [00:52:00] stories are better than good stories.

Yeah. Yeah. Um, so, uh, I had a, I had a client that, um, he, he, he sold his business. He still owned a minority piece of the business, a meaningful minority piece of the business. Um, not shortly after they sold the business. They moved, they consolidated some locations and what have you. And, uh, he, he had an office.

He had a beautiful office, but he had no furniture in it. So he went to Costco. Bought a bunch of furniture. He, he had the cash and he was just gonna invoice back the company. He, he bought a bunch of furniture, like, you know, brought his furniture in, whatever. And then, you know, the, his partner, uh, remained nameless, came in and is like, what the, what the, I didn’t, I didn’t get an invoice.

I didn’t, I didn’t prove this. He’s like, yeah, but I’m, I, I, I needed somewhere to sit, like, what the, what are we doing? And it became a pretty knockdown, drag out, lack of preparation. And he, he literally walked out. He was done. He’s like, he gave us two weeks and he was out. So he wasn’t prepared to have a conversation with a partner.

He wasn’t prepared to work for somebody. Right. And so, you [00:53:00] know, that would be a bad one. Um, you know, I mean obviously there are good stories out there. You know, a lot of it comes around the strategic aspect of buying a business and you’re no longer in control and a financial aspect of it. A financial buyer buying the business.

And while you still have some meaningful ownership, um, that financial buyer is relying on you to continue to operate the business, but now they’ve brought resources. So I think it’s a, again, it’s um, it’s a mindset shift for sure. Um, because you are, uh, you are no longer in control. And that’s a hard thing for people who own businesses, who have egos.

And it’s okay to have an ego. Um, but, and, uh, you know, that business may even act, actually have your last name on the wall. That’s a, that’s a tough thing to come to grips with. And it takes take time. It takes time. I had, I had one client actually who said, I don’t care. ’cause every time I get pissed off, I just open up my bank account.

So I That’s what he said. Yeah. [00:54:00] He did the ultimate drop Yeah.

Service businesses. Um, to see what employees are gonna say. Acquisition quality of business. Yes. That usually look like, so I would highly, highly recommend you not do that until towards the end of the process. And I’m not even talking pre LOI, I’m talking pre the LOI gets you to a price and then it’s confirmatory.

I’m talking deal documents are pretty close to being done. Um, most buyers will want to meet with. Not necessarily the rank and file, they’ll wanna meet with, you know, the key executive, the key management, right? Whether it’s project managers, whether it’s a CFO, A COO, what have you. Um, certainly the commercial organization.

So your, your sales, your VP of sales or head of sales or what have you. Um, you don’t necessarily wanna spring that [00:55:00] on, you know, the employee and just say, Hey, you’re gonna meet with a buyer of our business and I didn’t know my business was for sale, right? So you want to have that, you wanna set that groundwork, and that’s where I go back to compensating.

I think some, uh, thank you bonuses, right? You know, compensating them for participating in the process. But more than that, thank you for helping me get this business where it is to be sellable, right? So that goes back to involving management. But yeah, there’s absolutely a time, but there is a place as well where you should be okay, uh, or should be comfortable, let’s say, with allowing them to speak with your key people.

And so that point generally. That’s right. You would, you would want to, but, but again, going back to the professionalism and legal, you would wanna make sure that that employee is locked up with, again, if you choose to compensate them, which you should, if you’re gonna have them involved. Before you close, you should, you, you, you have a contract that says, I’m gonna pay you ex on close.

And if by signing this you are con you are, you know, confidentiality, you can’t disclose with anybody or you lose that [00:56:00] opportunity to earn that, et cetera. So lock ’em up, talk to an attorney

with one minute to go of question and answer. Anything else? Jeff, what’s, uh, what’s your recommendation on what, uh, what a seller should, or excuse me, a seller should say to lending, uh, to an inbound inquiry? ’cause they’re getting them all the time. Right? And, you know, what should they interact with them at all?

How do they just respond? That’s a great question. Um, that’s a really good question. A question for our online people is what should, um, I own a business, what should I say to people that are calling me all the time to, um, to buy the business? Are you in the market to sell your business, I guess would be my, my ass back to you.

Um, because you know, if you are in the market to sell your business, you’re not necessarily, [00:57:00] uh, in a place to want to disclose that to them. Um, you know what, what, what a seller look, there’s investment bankers, guys like me out there constantly calling your business. There’s private equity that have now hired a whole business development group that are constantly calling your business.

Right? So, and there are strategics that are out there with a corporate dev guy constantly calling your business. Um, you know, it’s, it’s, I get it. It’s really hard. Um. You know, what do you say to it? If you’re in a process or you’re preparing for a process? A year, two years, three years? Um, I actually tell our clients or our prospects to just hand ’em off to me, Hey, I’m not, you know, just, Hey, I’m JT Schroeder.

Uh, you know, you inquired with Jeff, his name, sorry. Um, you inquired with Jeff. We’re not doing anything whatsoever right now, but we’ll keep your name on file. Thank you very much for your interest. You know, have a great day. Um, it just depends on, ’cause you don’t wanna lose that contact if somebody is calling you for a particular reason.

Now a lot of these are either robocalls or just some junior guy that’s, you know, trying [00:58:00] to prove it, prove to his boss. He made a hundred calls this day. But, um, I would, I would keep track of who’s calling you, that’s for sure. ’cause if you ever do go to market, you know, you can reference that. Here’s a list of folks that have shown at least some interest in our business, but don’t feel obligated to respond except to us.

That’s kidding. Quick question. Do you recommend valuations for company that’s five years out? Um, or, um, gosh, no. I’m 20 years out. Uh, valuations? Yes. No. How do they, there’s a, there are some tax implications to be getting a valuation depending on what that valuation might be. If it’s a formal valuation, there are some tax implications on reestablishing basis.

Um, I, this is my personal opinion. Yeah. Yeah. Um, my personal opinion evaluations, hopefully there’s not a valuations person on this call on this phone. Not right now. Um, unless somebody is willing to pay you that amount of money, then the valuation that they did is worth the paper it’s written on. If [00:59:00] somebody said, your business is worth $50 million, unless he’s willing to stroke that check, it ain’t worth $50 million.

And running a formal process will prove that. There’s never been a valuation that was done that I’ve ever seen. That was correct. And there’s been a lot of companies that have done them. Um, frankly, I think the more relevant exercise is working with an investment banker like ourselves to get a range of value and comps in your space.

And I say range because a class A asset trades a class A plus pricing. That might be a, the range might be seven to nine times, and that might be a nine times, you might be a seven, you might be a six, you might be an eight. Right. But getting that investment banker to show you the comps, why those comps were where they were and where you fall within that range, in my opinion, is more valuable.

And frankly, it’s free. So it should be free, at least from an investment banker. A valuation guy will not be, but there are, there are benefits to valuation. So for those that are, there are benefits to valuation for Yeah, of course. [01:00:00] Stock option plans and those sorts of things. Yeah. So Tim two.

Do, do you mean he asked how long the transaction average transaction takes? Do you mean from the time that you engage with an investment banker or from the time an LOI to close? Okay. Yes, yes, yes. Uh, um, so a, a typical transaction from time of engaging investment banker to go to market is typically about 60 days.

Could be less, could be more. And what I mean by 60 days, it’s really availability of information, right? Investment bankers, putting together a book, financial model, et cetera. Telling the story, spending time with you, visiting your sites, et cetera, right? So typically call it 60 days to be conservative. Um, marketing process is about 60 days as well.

So that’s processing NDAs. Um, that’s, you know, they, they would’ve prepared the, the marketing material up to that point, processing NDAs, [01:01:00] q and a site, you know, answering questions, uh, et cetera to get to an indication of interest. And then ultimately a letter of intent. Okay. Um, indication of interest is, you know, a range of value that we believe that a buyer believes that the business is worth.

I highly recommend doing that as opposed to going straight to an LOI because you may receive 15 or 20 different lois and not really know how to make heads or tails. Um, you can’t simply engage with all 15 of those. You have a business to run. You have a day to day job, right? Um, I recommend funnel of, uh, I’ll just use easy math, right out of a hundred, out of a hundred parties that you reach out to, about 30 or 40 of ’em will typically end enter into an NDA.

Of those 30 or so, about half of ’em will show some sort of interest, right? Maybe 10 to 15 of ’em will show an indication of interest. It’s really only worth your time to, to entertain 3, 4, 5 of them. Um, if you entertained all 10, 15 of ’em, that means site visits. That means they’re coming to see you and you just don’t have that bandwidth in your day.

Um, so that’s relying again on [01:02:00] the diligence that you’d be doing of the buyer from LOI to close. This timeline has stretched and tightened, um, depending on a lot of variables. Again, availability of information, negotiating, uh, a purchase agreement with a divorce attorney as opposed to an m and a attorney.

Um, it’s, it’s, you know, call it 60 days. Um, no, typically 60 days to 90 days. So start to finish. Call it six months. Yep. Which side? Never, uh, let them price your goods in my opinion. In my opinion. Nope. Nope. Uh, let the buyer tell you what he believes your business is worth. You lose a little bit of, you lose negotiating leverage.

Um, providing guidance is one thing. Providing them a you gotta be here in order to dance is something else. Okay? So what we do, we don’t provide any sort of guidance. Um, we let the, the market speak for itself. Um, we let the market speak. This [01:03:00] isn’t a truck, this isn’t a house, right? Like this is a worth living, breathing organism.

So market says it’s worth 20 to $25 million, and we have 10 proposals that prove that. Okay? Now a good investment banker would leverage those against each other, create the, you know, they’ve already created the competitive environment. Now let’s leverage those against each other and get to 25 or 30. How bad do you want this deal?

How bad do you wanna win this deal? In order to win this deal? You gotta get to 35. Right? Whatever the case may be, right? And that’s, that’s where the expertise in negotiation, in all aspects around structure and price and all those things become valuable.

Yes, 95% would be exclusive. Very, very rarely will a buyer, um, issue an LOI have you sign it and then allow you to go continue to talk to other folks because they’re gonna invest resources, time, et cetera. So Processi.

Uh, the LOI is the end of the bidding process. Once you sign that [01:04:00] LOI and gone exclusive with somebody, you have to cease conversations with everybody else. But that’s also going back to your question, uh, before on timeline to close the deal from LOI to closing, keep that exclusivity as short as possible.

The seller would buy buyer because leverage loi. That’s right. That’s right. That’s right. And if you have an LOI that requires exclusivity for 90, 120 days, that’s probably a red flag that the buyer doesn’t have the money, that the buyer doesn’t have approval for financing. Um, the buyer may not even have board approval.

So just those are some red flags. A hundred I’ve, I’ve seen Lois with 120 day exclusivity. It’s like we have a quality of earnings. It’s a great data room. What are you, what are you waiting on? Four months to close this thing? It’s ridiculous. It may end up being four months, but we’re not giving you exclusivity for four months.

Good. [01:05:00] Thanks. Any other questions? John had one good last question. I’m a seller. I’m looking engage your advisor. What does the engagement look like? Retainer and piece transaction? Yep. How does that work? So, um, I’ll start structurally and then we’ll talk fee, but um, structurally back to your question on exclusivity with a buyer, all of our engagements, I speak to our firm.

Okay. And I know every firm does things a little differently, but I would say broadly on the investment banking world, it’s an exclusive engagement. Um, we don’t want to be, it’s competing with our own client, much less. Some third party we don’t know, and maybe we’re talking to the same buyers and that just reflects very negatively, um, in the market.

So it’s an exclusive arrangement. Um, it’s typically, uh, from our structure, it’s typically a year. It doesn’t take a year, right? But it’s typically a year and it’s, it terminates at the closing of the transaction or, uh, you know, you can back outta the deal or what have you. Standard contract stuff. [01:06:00] And then as far as, um, you know, fees are concerned, uh, we charge a retainer.

Um, it could be a monthly retainer, it could be a lump sum retainer up front. We net our retainers from our fees, from our success fee. And our success fee is when you’re successful, we’re successful. So what we, what we typically do is understand what the goal is of the buyer, of the seller. I’m sorry, seller wants to sell the business for $30 million.

That’s my number. Um, what we do is we do a threshold step up. So we don’t do a reverse Lehman, in my opinion. Uh, alignment between your advisor and the company, uh, is really important. So, um, a Lehman formula is, anyone know what a Lehman formula is? Okay. Lehman formula is like 7% on the first 5 million, 6% on the next 5 million, and it’s a step down as you get higher, right?

Um, it, it’s formulaic, it’s complicated, but the, the higher the purchase price is actually the less incentive that the advisor has to get you that high purchase price. Um, [01:07:00] so what we do is we do a smaller fee on that threshold amount, and then we do a higher fee on anything over that, just the overage. So it’s incentive to, Hey, I got you your number, but then I got you your number, and then some.

A lot of our clients, actually, all of our clients appreciate that more. Like, it’s a, call it a bonus to, to us for running a better competitive process.

Be careful, I’ll, I’ll say this back to your thing. We, I say be careful, but we do it too. So you really have to trust the advisor. Be careful about tail periods. M and a advisors, um, there’s, there’s, uh, a lot of m and a advisors will become exclusive and then they don’t do a bunch of work. They don’t do anything.

They didn’t find you a buyer, they didn’t find you the right buyer, what have you. Right? You terminate the agreement. You have a three year tail period that says if you do a deal in the next three years, I get paid. Be careful with those types of contracts. That goes back to hiring an attorney and have ’em reviewing that.

Um, what we do is, is we don’t have the [01:08:00] world as our exclusivity. We we’re, we are exclusive to the world, but when the deal is, is, is terminated, we’re only exclusive to the parties that we’ve actually processed NDAs with. So just word of advice, that’s how I would approach that. Um, ’cause that actually means I talked to the person that actually means I engaged with the prospective buyer, um, as opposed to just sent a cold email out to 15,000 people.

So just be careful with tear tail period provisions. Awesome. Thanks. I appreciate it.