Welcome to M and A Tod, the number one podcast and all things related to mergers and acquisitions brought to you by Morgan and Westfield, a nationwide leader in mergers and acquisitions for small to mid market companies. We bring you exclusive interviews with industry experts in business sales, valuation, private equity, investment, banking, and more. It's our mission to provide you with insight and guidance on how to build your company's bottom line and maximize value for eventual sale. Here's your host, Jacob.
Welcome to m&a Talk. My name is Jacob orals, your host and president of Morgan and Westfield, a nationwide m&a firm. And joining us today is Chris younger, he has completed over 70 m&a transactions. He's been an attorney at Silicon Valley's legit largest law firm, graduated from Harvard Law and also president of a billion dollar communications company. And we are going to talk about the basics of selling a company or I would more or less say the fundamentals of selling a middle market company. And Chris, welcome to the show. Thanks so much. Appreciate it. So you have an interesting background president of a billion dollar company. 70 m&a deals that you've led attorney at Silicon Valley's largest law firm. He wrote a book. You graduated from Harvard, I believe, right? Law School. Yep. Harvard Law. What haven't you done? That's still on your bucket list. By the way?
I don't know. I've always wanted to play in the NBA, but I don't think I'm tall enough. So that one may be off limits.
Yeah. I mean, you both. What don't they teach you? Of course, there's a book titled this. And that's not the point. But what don't they teach you in Harvard? That? Or what Didn't you learn doing law that you learned when you first started doing m&a or, or selling businesses?
That's a great question. I think the you know, look, legal profession is very focused on the contract. Warren Buffett, I think said, you know, if you are dealing with a bad person, a good contracts, not going to help. And if you're, you know, if you're dealing with a good person, then the contract hopefully doesn't matter. And I think the pieces that it sometimes gets lost, right? Especially if you've got a buyer and a seller and the two attorneys, and maybe a banker in the middle. Sometimes those messages get, you know, it's It's the game of telephone tags, so that by the time the seller, here's a buyers potential issue, you know, it's gotten blown way out of proportion and become a big issue. But I think the, you know, the biggest thing that you don't necessarily learn in law school is well, how do you make sure that you are selecting good people to work with. And it's a, you know, in our business, that's probably the most important thing that we do is make sure we're picking great clients, and then hopefully picking great folks, for our clients to partner with.
I always advise my clients on that. And it seems like a lot of sellers. I don't want to say they don't listen, but maybe they don't understand the importance of it. Because we just had this happen on a deal. We had, I think six ello eyes come in. And I said, I really, I trust me, I really liked this guy. He's very cooperative. He's this. He's that. And then another deal was I, you know, I just don't like this buyer. Something just doesn't feel right. And it's weird, because usually, in retrospect, your gut is usually right, isn't it? Almost always. Now, do you think that's the case for owners though? Or do you think it's a pattern recognition for people like me and you that do deals,
I'm sure, we have the benefit of just having seen lots and lots of different buyers. And so you, you do develop a sense for who's going to be a good fit. And I think for business owners that are going through the process, you know, the good news, hey, you've got six offers that your client can evaluate. And I've always told our clients look, if you've been in business, you've run a successful company, you've dealt with people, you've dealt with new customers, and you've dealt with supply chain. My guess is that they're going to be pretty good about evaluating the people side. But even if, and I do believe, and I've watched this, and I don't know if this has been your experience, when we look at a series of bids, the highest bid usually is the one that has the best fit, because that buyer, you know, they they value the same things they're excited about the same growth story they there's a you know, as a good connection, and so, you know, in those circumstances are the clients not having to make a choice between The, you know, the good price versus a good fit that usually can go hand in hand?
What are sellers getting themselves into here? No, that's a loaded question. Yeah. And I know why you're laughing. And I would laugh to that question too. Why are you laughing? That question to sellers? To put it bluntly?
Yeah, it's funny, we always survey our clients after the deal closes. And the the one consistent comment 100 Plus transactions, the one consistent comment is I had no idea how difficult this would be. I think the when you combined just the amount of work that's required to get a company ready to take it out to market to meet the different investors and, and then you add on to that the stress of running a business, and then layer on the stress of dealing with attorneys, and then layer on, you know, lots and lots of issues that you've got to resolve and address during the course of a transaction. It's a lot. And I do think it's hard for somebody who hasn't been through that process to really appreciate it. But it is, if you figured out how to help an owner understand that upfront, let me know we haven't we haven't quite figured that out yet. But it is, you know, it's it's definitely a process and it's stressful.
It's good point, I haven't other than just constantly mentioning it on his podcast, and asking 100 different people from different angles. Explain how difficult it's been? Why is it so difficult? Look,
the usually the stakes are very high. The dollar amounts are big. The types of certainly the types of transactions that we're working on, is real money. And these are big investments. And I think with, you know, obviously, there's been lots of changes in terms of how readily available information is, and that raises the expectations on the parts of buyers that pay, you're going to have access to all kinds of different information about your business, whether you do or not. And they're going to ask you a lot of questions. And there's going to be a, you know, a pretty deep deal team. You know, I was just talking to a prospect this morning around, you know, yes, you'll have the buyer, but you'll have the buyer's attorney, you'll have the buyers accounting firm or quality of earnings firm, you'll have maybe a set of consultants that talks about environmental or employee benefits or insurance. And they're all going to ask a lot of questions. Oftentimes, they will overlap. And those questions will get kind of geometrically more annoying, the farther you get into the process. And then you combine that just with, look, there's a lot of stress on a business owner who's 10 days or 14 days away from cashing a big check and all they can see your problems between here and there.
I just had a perfect analogy come into my mind, if you've ever watched poker on TV and the games, I don't know how long they last, but I don't know, maybe a day or two. Now imagine that poker game last year. It's the biggest poker game your life with the $50 million jackpot or whatever the purchase price is, at the last minute, you might lose it, you might lose the whole deal. And if you lose it, you have to go back six months, your hundreds of 1000s of dollars into this. And I've seen that I've had clients that have I've played psychologist more times than I can count. And they'll be drinking wine and calling me on the phone and bawling their eyes out. Again, I'm going to ask you this just so they can really comprehend. Because I know for sure some listeners, owners of middle market businesses are listening. I'm like Now come on, I can handle this. I've done so many things in my life. You're just dealing with with these. Why again? Why is it so difficult? What are you hearing from owners when you do that, that survey,
I think what we typically hear is just the amount of work, the amount of you know, especially when you're in diligence, and you're dealing with attorneys, it's nonstop, right? In addition, you're trying to keep the you know, the train running of your business, which is critical. As you know, during the course of a transaction, if the wheels start to fall off of the business during a deal, there's no faster way to kill it. So I think there's just an incredible amount of work. So there's not a lot of sleep going on. And I think you add on to that just the level of stress associated to your point of, hey, it's it is kind of a binary outcome, right? It's either gonna be a deal or not a deal.
That's a good point. We got grand slam home run or nothing.
Right, Ryan or do nine months of frustration. So it's, I think you combine those two. And I look I think most sellers because they understand their business and their industry exceedingly well. That's probably why they've been successful. I think it's hard for them to understand A lot of different question lines, that a buyer goes down. And so I think that can get frustrating and annoying to them, particularly if they've done it, you know, four or five times in a row. And, you know, the buyer is not very well coordinated, but it is a I also think it's a very emotional time for them. Most business owners are very committed to their team, they're very committed to their customers. And I got to imagine, Hey, you, a lot of them are waking up at two or 3am thinking, Hey, have I have I taken the best care of my team or my customers or my brand? That could? So yeah, it's hard to describe that, and the right amount of detail for somebody to truly get it before they go through it. But it is, like I said, that's the universal comment we get.
Would you say that the framework here is a two step framework. Number one, it's being prepared. And you're you can be prepared by knowing what you're getting into. And you can do that by talking to people talking to people like you and me, and talking to other entrepreneurs that have been through the process. And then number two, one way to soften the blow is actually by thoroughly preparing your company for sale in advance, you're distributing that work over several years. So it's much, much easier if you come into it prepared. What do you think about that? Oh, I
totally agree. I mean, I, we've done some rough calculations on just the number of hours, both with our team, as well as our clients team to get a business ready to go to market is somewhere between 15 102,000 hours, and you can try to collapse that all into two or three months, right, which is a typical kind of investment banking process. Right? Right. Right, you could spread that out over two or three years, where it's much more manageable. And if your business performance starts to flag during the due diligence process of a deal, you're gonna have problems. And, you know, if a business owner is trying to cram all that preparation work to get the business ready, into a much shorter period of time, the odds that they're gonna take their eye off the business ball, making sure that their business runs well, are pretty high. And that will start to rear its ugly head, typically, during the due diligence period. And so the ability if you can, as an owner, right, if you can spend that time to prepare, you know, a year, two years, three years, we've had some clients prepare seven years, you're going to be so much better off and the process is going to be it's still be stressful, don't get me wrong, but it'll be much more manageable.
So question, though, if you prepare, are you increasing your chances? Or are you just reducing the stress?
I think both right, I think the stress level, and look, every business has issues, when they go to market, every business is going to have problems, I have yet to do a deal where the business didn't have some some issue that could degrade value, or potentially get in the way of a deal getting done. If you have runway, you can help address some of those issues, you can build your story around those issues. We're a big believer that, hey, if you're going to market lead with your chin, so that buyers are fully informed about the business. And if you can work on those issues, right, if you can get ahead of those before you go to market, you're definitely going to increase your odds. And you're also going to increase the valuation.
Why do you need to do that? Because I again, I know what owners are thinking, and I know this, because I've heard it so many times. Come on, take away No, we can just go to market. And when we have an issue, we can just solve it right then and there.
Yeah, I think the it's one of those where do you want to solve it under the spotlight of a buyer in due diligence where their incentive is to use that to decrease the purchase price or restructure your deal? Or do you want to solve that on your own terms with your team and being thoughtful and not trying to do it in five days, you know, to be responsive to a buyers diligence request. If I've got six months to go deal with it, then my odds of being able to truly address it and eliminate it are much, much greater.
Can you think of a problem that might arise during due diligence that would illustrate this point that would be really difficult to to solve last minute.
Yeah, I'll give you a great example. We represented a company it was in the kind of industrial space and it had an environmental issue. And they had pretty much ignored it. We found out about it literally, as we were signing the letter of intent. They said, Hey, we were going to have this potential issue. And we talked to him and said Look, that's they're going to do a phase one, they're going to see that there's a problem, then do a phase two, they're going to do a phase two, that's going to delay everything. And it at a minimum that's going to cost us in terms of an indemnification at a maximum Middle, it'll ruin the deal. Right? It'll bust the deal because and destroy
trust. Yeah, for sure for sure act to purchase price. For sure. The buyer is going to do more thorough due diligence, more stringent reps and warranties, bigger escrow.
That onion peeling right is just going to continue for a very long time.
So explain that. What happens here when a buyer discovers say, Oh, you didn't tell me about this? What happens that from the buyers perspective? Well,
it's, you know, you raised the point of, hey, what else is the seller hiding? And at some level, they've demonstrated that perhaps I can't trust them. And so that diligence process is going to get elongated, they're going to ask a lot more questions, because now they're anxious. And they'll ask a lot more questions about every other area. Besides whatever the area was that issue. I liken it to if you're, you know, buying a home, and you walk up and the landscaping is messy, and the, you know, the house is kind of dirty. You know, your first conclusion is, well, they obviously didn't take very good care of this house and what else is wrong? Right. And, you know, your bid for that house is probably going to be lower than it otherwise would be if it were cleaned up and look good. It's
good point, because you increase your chances, and you increase the purchase price as well. Exactly, exactly. How much do you think you can increase it by with proper preparation?
Yeah, it's funny, we went and did an analysis. So at our bank, I looked at all deals that we had done. And a one way to measure kind of how good your deals are is just a premium to the median bids. Hey, were we able to get an outlier? And How significant was that. And for all the deals that we work on, that includes people that haven't done any preparation just showed up and said, I'm ready to go to market, that premium is over meeting is about 20%. For clients that have spent the time doing the prep work with us, at least for a year. That premium is 41%. So yeah, so I'm sorry, at least a year. Yeah, yeah, you got to invest some time in it, just because, you know, as you probably see, as well, one of the biggest challenges is just, hey, the team's not necessarily deep enough. And that takes some time to build that and really build out a high quality team that's going to drive valuation north.
How do you help owners do that the prep work, because most bankers don't do that to the No,
I think it's, you know, at one level, I think you have to be willing to make a pretty significant investment of time, you're not going to make much money during this prep phase. On the one hand, so I don't think a lot of bankers are quite frankly, willing to do that. Their economic model is not suited to it. And I mean, fortunately, my business partner and I have been operators. And so it's probably a little bit easier for us just haven't been in their shoes, to give them that advice. But it really starts with an assessment is, hey, where's the business today? We patented a business assessment that's got an algorithm that helps us just prioritize the risk factors in the business
that I think I southern your website, right on your homepage. Yeah,
yeah. What's kind of a we call it a health assessment, but that, you know, I was trained as a lawyer, right, so trained to issue spot. And that's what this assessment is designed to do is just spot issues. And we the way we built that was we went back to the last couple 100 deals that we had done and just said, what are all the things that went wrong? Yeah, yep. Yeah. And then you use that to come up with really a prioritized list, hey, here are the things that we should go start to work on. That's on the risk side. The other piece, and I'm sure you see this, I think entrepreneurs generally have a good intuition about where their growth is going to come from. That's not the same as having a really credible growth plan that would survive due diligence from a professional investor. And so part of the job is also how do we build that growth plan so that it's relatively bulletproof and will survive what we know is going to be, you know, a lot of scrutiny during due diligence.
What do you mean by that? Because some people might not know the difference between
Yeah, I mean, it's, it's really, at some level, you've got to speak the language of the investors. And so, hey, all our growth plans, we've got to convert into some type of financial forecast. We've got to look at the underlying markets and understand where the ceilings are, how big those markets are, how fast they're growing, you know, ideally, right? You're, you're putting your canoe into a fast moving river versus something where you've got to paddle upstream. And it's a and then it's really around, Hey, what are the requirements for this business to grow within this particular market, people systems, equipment, whatever it is r&d, new products, and then how really how much of a stretch is that growth plan for this business and this team?
I got one last week and a set of projections. And I said, Look, we need to We go line by line, and tell them what our assumption is for each each line, trust me, like every investor is gonna ask this. He said, Well, there's no basis basis, basically, like, well, I don't think we should show these to the buyer if we cannot explain why a number is gonna go up or down. And I say that because the reality is we get that a lot
in their defense, right? I think most successful entrepreneurs, they've had this intuition, they've acted on it, they tend to adjust pretty quickly. You know, they they've been successful, what they haven't had the experiences as having, you know, convince an investment committee or a lender, that, hey, this growth plan is, you know, is executable and low risk. I think that's that word, hey, how do you identify what the risk factors are in the business? And what can we do about those? And then how do you just build a really credible growth plan that is going to be attractive?
I think it's important to note that, hey, you can still sell your business with a hockey stick set of projections, but you're not going to get a premium. Right? Right. You don't need the solid set of projections to sell your business in most cases. But again, you're just not going to receive a premium.
It's I liken our jobs, right to telling the right story to the right person at the right time. And some buyers are going to buy into your story and some buyers are not. But you got to have a story for those buyers that are going to buy into it that you know, that makes sense. I
like that a lot. How do you help owners? Is that just on a weekly or monthly coaching? individual coaching basis?
Yeah. So we again, we start with that assessment, really understand the business, we develop a plan for the business owner that says hey, here are the things that we'd recommend. And then it's either monthly or quarterly of Alright, how are we doing? Update the financial model, update our market checks out in the market to see what's going on. And then at some point, pe will feel comfortable a the valuations in the fat part of the bell curve are going to meet the owners needs and then it's okay. If as long as those are still your requirements, we feel like we're in a good spot.
When you did law, by the way, what type of law did you practice? Corporate Law and securities law?
You did some acquisitions? Yeah, m&a. And then in Silicon Valley, that was in the mid 90s. So IPOs were a big deal as well. What do you learn doing that the biggest lesson for me, and that was just the kind of the importance of client service. That even in our business today, and I explained this to our team, you know, we're, we're ultimately just in a service business. There's a lot of smart people out there that are willing to work hard. So it's all about what's that experience for that client. And I think that's no different in the law firms as well, which is, then you know, you're in this game as well, the just being responsive, right being on it. And I learned that certainly, when I was at Wilson Sonsini is, you know, if a client went more than two or three hours without a response, that was a problem. And then I think you I mean, obviously, you do get a good grounding in contracts. But as I said before, and maybe I've, I'm old and jaded now, but, you know, you can get spun up really, really quickly in a contract negotiation, you know, where it doesn't really mean that much. And unfortunately, for you know, business owner who's never been through it, they don't know the difference. Right. So it's a having great, I will say, having great deal counsel that does that for a living every day all day is really, really important.
How long does it take as a m&a attorney to get your a handle on the basic rudiments of the contracts and understand reps and warranties and escrows to the point where people aside you can do the contract stuff in your sleep and you got to not in your sleep? Do you have a really good handle of it?
That's probably four or five years, I would guess of that count. You know, if that's all you're doing, you're gonna get a really good grounding and what matters what doesn't matter? A what standard or market where we see clients go awry is they have a lawyer that doesn't do deals or doesn't periodically,
the biggest mistake Oh, terrible, terrible. Why just, why can't you have your dentists do your heart surgery? Cheaper?
Sometimes it feels like a dentist. Yeah. Well, they ended up number one, they're slow. They This is not something that they can quickly turn. Whether it's putting an agreement together or con.
Yeah, come on, Chris. They're half the price. Come on, they'll
end up taking three times as long so you'll end up paying more.
So is a $800 an hour m&a attorney cheaper than a $300? General corporate attorney
100% 100% Yeah. And it'll take them well, I'll give you a good example. We were just working on a deal where, you know, we had a client who insisted on a on their friend, right? It was a neighbor as As a lawyer, and took them 67 days to put a purchase agreement together. Oh, yeah. Yeah. And it was,
how long should that take a week? Maybe?
Well, interestingly, we were working on another deal where the lawyer had the purchase agreement done in four days. And, you know, you know, the phrase, right time kills deals. So you want your lawyers to move fast. The faster you move, the better it is for you as a seller. I always tell clients, there's nothing good that happens to the seller between letter of intent and closing nothing. So we're going to try to keep that period as short as humanly possible.
You ever seen the purchase price go up during that time period?
I think in the 200 deals that I've worked on, maybe twice, it's rare, you know, where it was a super competitive process, and the business was outperforming and we were able to go back. It's not it doesn't happen very often.
67 days, it's terrible. What happened with the
deal finally got done, but it was I mean, it almost died just because the buyer, you know, they concluded that we weren't serious. And by the way, the agreement that we got was horrific. So made it took a lot of work.
How much money did they quote unquote, air quotes? Save, really lose by using this attorney? And your opinion? Well,
here's what's interesting. And I, I didn't see the actual the detail in the bill. But that legal fee was north of 200,000. For mid market deal.
Yeah. Really? Yeah. You got the neighbor discount?
Yeah, exactly. Twice normal. Yeah.
Yeah. Do we have a rough estimate of the deal size? It was the
kind of overall enterprise values about 50 million. Yeah, yeah. Nuts.
What kind of mistakes did you see made in the not knowing how big the escrow should be or basket caps.
This particular attorney had claimed he had had some experience in in m&a, but it was all public company m&a As a junior attorney somewhere. And so which is,
as you will know, not remotely relevant. Not
even. Not even in the same zip code, right? Yeah,
no comparison. Yeah,
he believed that we shouldn't have any reps and warranties if there's that kind of lay down
public companies, because are you gonna go after public shareholders? Exactly. You're gonna go after Grandma sitting in St. Louis. It's a company verse
immerse your? Yeah, it was so lucky. We try our best to get clients to pick, you know, just folks that do deals for a living and are practical and understand the lay of the land, it will definitely end up being cheaper.
It just happened to me to the seller use their brother in law, I think, and I had to explain how the LOI process work. They didn't know that he there's this whole thing called due diligence. I am not joking. Attorney did not know how due diligence worked. And I had to explain it. Oh, boy, I don't know if he believed me. I think he thought I was making it up. And listeners. These are real stories. We deal with this. So if you're thinking of using your brother in law, don't please like, maybe if your brother in law is gonna pay you to let him do it. Millions of dollars. Otherwise, I don't think I would do it.
In 2008. We had a deal. It was a company that would provide staffing services, so highly, highly impacted by economic cycles. Right. And they wanted to go with their corporate attorney had been their attorney must have been 50 years. They're in house. Well, it wasn't in house. He was he had had he was in a firm but and remember, this is in 2008. So we're kind of racing against the clock. He took six weeks to turn the letter of intent.
Six weeks. Yeah. to redline it or prepare it
to redline at CES we Yes, yeah. So we're just sitting there watching value evaporate, as this lawyer tries to put comments together. So yeah, it's to your point, it's really important piece of advice. Well, because their
standards, that's what people should know is and that smooths out the negotiations and expedite some because if I'm an attorney and you're an attorney, we can say, hey, you know, the ABA study says the standard cap on this is 8%. And you say, Well, okay, what about 9%? Versus I might come in and say, hey, I want a 50% cap, right? And you're gonna roll your eyes as the opposing counsel and then we're going to spend three weeks arguing over that. And you're probably going to complain to your client. So this guy's an idiot, he doesn't know anything about this. We're gonna waste a ton of money here,
and time and aggravation. And like I said, There's just nothing good happens during that period of time. So, you know, the longer that takes, the bigger the risk it is.
So I would liken this to, if you send in your brother in law to go poses an auto mechanic, and he's not really an auto mechanic, but he has to deal with other people who are actually auto mechanics. Now they're gonna know, instantly this guy's no clue what he's talking about. And we're gonna have to explain, okay, this is what this is how a catalytic converter works here. And that you're really paying this person to learn on the job, aren't you?
Oh, for sure. Well, and not just the legal fees. It's what you lose in the traction, you know, or if the deal starts to go sideways. I mean, there's just so many things that can go wrong.
We'll take a quick break, and we'll be right back.
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Welcome back to m&a talk. So what other major mistakes are commonly made?
I think we talked about just the lack of preparation. One of the things that we see business in it, it actually is frustrating just to watch is, you know, a business owner, they've spent 30 years building their business, and it's a nice company. And you know, they get a call out of the blue, for whatever reason they take that call. And they just start negotiating with the with this particular bidder, they haven't done any preparation. But, you know, it's always the Hey, we can get your, you know, $50 million, and we can close in 45 days, right? And I It must be the 45 days piece that really resonates with the business owner, oh, my God, I could be done with this in 45 days, I don't have to go through all this headache
and calculating how much they're gonna save by not having to pay you. Oh, for sure. For sure. So you're saying an auction with only one buyer is not good. So
we're not? Yeah, not, it's not going to generate the results that you want. So
why is that? By the way? If we have to explain why an auction, like just imagine an art auction, and one buyer shows up? Right? What happens there?
Somebody's getting a deal. That's nobody's getting a deal.
Now, what if that buyer says, hey, if any other buyers show up at this auction, I'm out?
Well, we always hear that right. Nine times out of 10. They're still they're still hanging around. So they're still hanging around?
Why is an auction process? So important, by the way?
Well, look, the private markets are just inefficient, right? I'll give you a good example. We did a deal a few years ago, the bids ranged we had about 32 bids for this company has a really a nice, attractive business. The bids ranged from 13 million to 90 million. And then a whole obviously, everything in between. And a lot of bids, right? And that 50 to 60 million, which if you had asked us, hey, where do we think that business would have traded? That's what we would have guessed. You know, I was talking to business owners and say, hey, when you know, Joe, private equity guy calls you out of the blue, you know, do you think they're the $50 million bid the $13 million bid or the $90? million bid? Right? Yeah, they're probably somewhere around 40. Because they're gonna they obviously know where the market is, and they're trying to get a deal. They probably wouldn't insult you with the 13. But
that's why they want to close it so fast. For sure. Before you find out, for
sure. Yeah, yeah. Look, again, most of these folks have worked 20 3040 years on their business. I it It pains me to see them lose a bunch of value just in the last chapter. Because they've, you know, they just haven't done the prep work or haven't talked to enough biters or just been disciplined about the process.
Yeah, I've come in a few times in those deals and said, Look, I can pay for my fee times 10. And a few phone calls, just with my mere presence in the buyer, knowing for sure my presence, what stories do you have along those lines?
Oh, lots of them to your point. Obviously, introducing a banker into the mix just means, hey, this is now competitive, you need to put your best foot forward. You know, you're not gonna be able to play any games with us because we know how the game is played with what we do every day. Exactly. 100%. You know, we're going to make sure that our client is well protected. And I would say we went back and did a study on though you know, the one off deals as we got engaged. How many times did the deal happen with the original bitter versus another bitter and then how many times with the original bitter did we end have, you know, are you able to increase value just by the threat of competition. And as interesting, probably 25% of the time, the deal was done with that original bitter 75%, it was another bitter that we were able to introduce into the mix. And then that 25%, you know, you're getting 20 3040 50% premiums, which sounds like it's great. And it is, but all that is, is just getting people to behave better.
It's not difficult for us, is it? No, no, it's part of the game, it really isn't. No, you go through the right process, you bring the right buyers, you present the business, he present the case, he tell him the story. And it's just like an auction.
I always say, you know, if you can get the science of the deal, right, you don't need that much of the art of the deal. It's a really good way of putting that, you know, if you can get your process right and do the right preparation. And we've got lots of people that are interested, you don't have to, you know, play games with a buyer, you don't all you have to do is just say, look, here's, here's where you landed, right, you're not the top bid. So yeah, we would love to see you win, but you're gonna have to help me.
Where's the art?
I think the art you mentioned before, on the level of counseling, I think there's a lot of art in that, we have a chart in our office where on the x axis is the time horizon, and on the y axis is the amount of counseling that we're doing during the course of the deal, right. And it kind of goes asymptotically up to the right. As the closing day gets nearer, in the reality of, I'm going to transition my business. And it takes a lot. I think that and then I think there's probably a fair amount of art just in managing the different parties and making sure that communication is happening the right way too often, you know, the game of telephone tag between the buyers, the buyer to the buyer's attorney, to the banker, to the sellers, attorney to the seller,
oh God, an email tag, it's terrible. The message is get all garbled up. Very early in my career, I learned never make assumptions ever, ever, ever. If somebody says, hey, this person is concerned with this, I pick up the phone and call that person. And it's usually a totally different story, for sure. And a lot of times you ask him a few questions, and they talk themselves out of it. Are they classic negotiating strategy? I don't know if it's classic, but it is probably now as you ask him a couple of questions. What do you need? What are your concerns? And you get to the bottom of it? Yeah,
for sure. We were just on a deal where, again, I just I was watching this happen. And to your point, I finally just got I got the two business people on the phone just said, Okay, we're going to talk through these issues, because I don't think they're nearly as significant as our attorneys have made them out to be. So let's work. Let's work through it. We got it done.
Yeah, another deal I was just working on. The seller was a little reticent with the buyer. And I can't remember who I told the buyer, the seller said, Look, why don't you guys just go out to dinner? Yeah, oh, deals don't have to do that. With the family. 100%. Yeah, they just said they just needed a comfort level, there was a,
we were just having this conversation with the team this morning about how important it is to help that seller build a bridge to the buyer, both with respect to post closing integration efforts. But also, you know, we're going to lean on that at some point during the deal to get stuff past the logjam. And if we've picked good clients that are good to work with, and we've picked the right types of buyers, to your point, you're going to resolve those issues nine times out of 10. And if you can't, that means there's something more fundamental going on that we probably do need to pay close attention to.
Yeah, that's a good point. Because one thing I always look for I don't necessarily always explicitly state this, but in the back of my mind, I'm always looking at how much do I like this this buyer? Sure, because I'm gonna have to work with this person for the next six months. Yep. And you know, 100% problems are going to crop up. Exactly. And when you have a buyer, I'm sure you get these buyers that say, I'm not going to fill out your buyer profile. I, you know, I've done this, and I've done them like, I do not want to do a deal with you. It's gonna be a nightmare. If you refuse to fill out. Tell me anything about yourself. And I'm supposed to know who you are. And I, I don't know who you are. Yeah. And you've done all these deals, and you won't fill out you won't let me know how much cash you have. And that buyer to me is not worth working with under any circumstances.
Yeah, I mean, you've you've obviously been through it a bunch of times where you know, that certainty of closed calculation is a really, really important one, right? Absolutely. You just you don't want to waste time the clients time energy, because it can get pretty demoralizing, right for that client if their deal doesn't happen,
too. Well, that brings up a good point, because what about the relationship after the closing? Don't they just take the money and run? Right there, right.
Exactly. Yeah. That's our guarantee. You take your money and you're done.
What happens after the closing? Well,
I think certainly true for most of our clients, these are folks again, that care about their people, they care about the business. So they're going to stick around for certainly some at a minimum, some transitionary period. And you know, maybe that's a year, two years. And I was told, Look, if you want to ensure the smoothest transition, stick around, so you have a hand in it, and I think you can help the buyer. You know, make sure your folks are well cared for and make sure the business is well cared for. And it, you know, communicates to the buyer during the negotiation process that you care about the right things. If your message is, I'm leaving on day two, that this poses a whole lot of risk for the buyer, right? And that will degrade valuation, if not knock you out of the box. I mean, there's lots of private equity firms that won't even look at a business if the owner or CEO is going to leave. So
what about strategics? To what extent will they consider a business if the owner wants to leave?
depends on kind of what that owners role has been historically, but, you know, if they're important to product development, or they're important to some of the key customer relationships? Look, there are some strategics that probably, you know, have enough hubris that they believe they can do it better. But I think most smart strategics are going to know we're much better off, you know, making sure that we have handled that transition, you know, with all due care,
how long of a transition? You think, though,
it varies, right? I think we were just working on a deal with that transition was 90 days, which we felt was exceedingly short, and actually a little bit short sighted of the buyer, just because strategic, I'm assuming, yeah. And then we've had others that have gone two or three years, right, where the relationship has worked. The owner, you know, has gotten what they wanted out of the deal, both financially and then qualitatively for what they're doing. And then we've had other ones that have, you know, God's still going right, that they continue to work with that buyer. I always joke, I think most entrepreneurs are poor employees. But there are some that can make that transition and make it work.
What's that like, shifting from owner to employee?
Well, it's, they have
to bite their tongue and just trudge through it.
I think the challenge is, and look, most big businesses, they do certain things for a reason. And you know, whether they're a public company, and they now have to report different information. And most entrepreneurs have a hard time. I mean, they're just you're talking about two different radically different views of the world and approaches to the world. And I think that can get pretty frustrating for an entrepreneur, if they don't necessarily understand it. Well, why are they asking for all this information? And why are they taking my time away from taking care of customers or selling to a new prospect to fill out all this information? And then I think the you know, the other piece is a you don't hold the cards, right? Somebody else holds the cards and and will make the final decisions. And hopefully, if they're smart, you know, in my prior life, I did a roll up where we bought 27 companies. And I was always of the belief that, you know, the whole, the whole reason why we liked that business is because we love that entrepreneur. And so we tried to make it as easy as we could for those entrepreneurs just to exist and do what they do best. But it's always a challenge
to how did you structure those to incentivize that owner to continue playing a role in that business,
the biggest element we had was they all became investors through some equity in our business. And so they had a stake in the parent or the subsidy or the the parent, yeah, the parent, they had a stake in the overall business going forward. And that seemed to motivate folks. And I also think, for the most part, the entrepreneurs that we, you know, whose businesses we acquired, you know, it was in their DNA to work hard and deliver good results. And so, you know, that helped a lot just picking the right entrepreneurs.
I know this is a loaded topic, but how soon before they want to transition out, should have known or start preparing. So if they want to be out 100% within X number of years, say five years, how soon out, should they start preparing?
If they want to retire? In five years, I would say start now. Take it two or three years to really prime the business, run your process, be able to commit to a future buyer that hey, you're around for a couple year transition to make them feel comfortable. Whether you actually last two years or they want you around for two years is a different story. But I think that message of hey, I'm here and I want to ensure that the business does well post closing is important. So by five, six years is a good that's I would say you know, best practice.
I know it owners are thinking in response to that. It's a long time.
It is it is I liken it to any other business process right you know if you are going to employ lament an ERP system, a new ERP system, you're going to, if you're going to do it right, you're going to do a ton of research on the alternatives, you are going to look hard at your processes to see what kind of changes you need to make. You're going to hire the experts to help you implement it and do the change management. In order to do that, well, it does take some time and planning, you know, for our manufacturing clients, I say, Well, how long does it take you to plan for get up and running and get to profitability in your new manufacturing plant takes a while. It takes some discipline and it takes some just practice.
Now you had practice law before you were president of the communications company, right?
I did. Yeah. Practice is the right word. Yeah.
Practice is the right word. Yeah. It's funny, like practice meditation. Did you understand how difficult these were when you're practicing law? Or did you understand the full m&a lifecycle before you practice law?
No, no, I think the and even when I practice law, you know, we're kind of brought in, hey, once the LOI is getting really close, right, just a little sliver of the deal. Yeah, exactly. And, you know, look, I think every lawyer believes that their job is going to be the most important and getting that deal done. But there's so much more to that deal process than just the negotiation of that purchase agreement, right. I mean, that's obviously an important piece. But you know, the dynamics with the buyer and how things get a feel to both parties, and what's the level of diligence that's getting done, and how prepared as a client, all that stuff?
How do you think that affects attorneys? Because they lack that full perspective and experience?
I mean, yeah, I, my wife's an attorney, so I have to be super careful. But see one,
listen to this.
Yeah, exactly. Exactly. Yeah, yeah, make sure I don't give your email. So I think it's, you know, the look, and I'm not saying that the contract is not important, it is important. But what I would consider, you know, more modest, or more minor issues start to take center stage. I mean, that's when a deal is very risky. You know, when the lawyers have really kind of overtaken the business deal and overtaking the business negotiations. That's very risky. Because I think the look, the lawyers are doing their job, they're, you know, I was trained as a lawyer, you're an advocate for your client. And, you know, you don't want to give an inch if you don't have to. And, you know, whereas I think a lot of business people understand a little have a better intuition around, look, there's give and take in every deal.
Lawyers have really seemed to change in the last decade or so Haven't they? Because at this point, they seem like they're really for you heard a lot of war stories before, about attorneys killing deals, and I don't encounter attorneys like that very often, that are there to kill the deal and look for every possible red flag and rip it apart. It seems like most have embraced a new perspective.
Certainly, the active deal attorneys tend to be pretty practical, you know, two, three terms of the agreement and it's done, you know, back to the horror stories, right? If you have somebody has not practiced in the deal world, then that's going to be a different story. But we have four or five go to attorneys here in Denver that we use quite a bit. And, and it's a pleasure to work with them. They're responsive, they're on it. They're practical, get stuff done. You know, there's no sky is falling moment. You know, that's so aggravating right? When the lawyers come back and say, well, this deal will never happen, right? This is just totally unreasonable request. This thing's Yeah, this thing's good. We'll be DOA.
Right? What are some of the best or worst exit stories that that you've remembered from your personal experience?
This one is the illustration of the lack of preparation and put it in the one of the worst buckets, I'll change the names to protect the innocent, but it was a guy who had you know, he had built his business over probably 30 years, it was kind of in the staffing or personnel assistant type business and was about a $50 million business and he was earning about $10 million a year. So it was a nice business, right? I mean, it's pretty good margins. And for whatever reason, yeah, he, like a lot of business owners, he had gotten all those calls from people wanting to buy his business. And for whatever reason, he took this one particular call and maybe he was having a bad quarter or something he was stressed out. He's like, in again, I think that buyer use the old phrase or hey, we, you know, we can close very quickly. And so he went down the path and started asking for, you know, they said, Hey, we just need to get some information they got, you know, this guy obviously put his best foot forward. He wasn't telling his story, warts and all. And then they met and then the guy put a letter of intent together for I think it was $65 million. And then over the course of three or four months on, uh, you know, obviously this guy wasn't prepared for diligence. So the 45 Days turned into 90 turned into 120. By the time we got the call, you know, that deal was 45 million. And I liken it because, you know, they're some of their customers were like the Walmarts of the world, or, you know, these huge customers. And I say, Well, how long do you think they spent preparing for those sales, right to those big key accounts here, they probably spent six 912 months, but they spent no time preparing their business, you know, on what's worth a hell of a lot more money. And we told her, we said, look, if we were in your shoes, we would just step away. And you know, there's folks that will pay 70 or 80 million for this, I'm sure that she be here. He just said, Nope, I'm done. I want out, you know, they were pretty much committed to that deal. Yes, terrible. I mean, they basically
left 25 million on the table, at least Yeah, I just gave
it to that buyer. It was disappointing. On the flip side, we've had other business owners, as I'm sure you have that, you know, very intentional planners. We had one particular client was run and kind of a, you know, a lifestyle business and said, Well, I want to get this to the point where we can sell it, when executed, did everything they were supposed to do. And, you know, I think when they came to us, the business was probably worth four or 5 million, then he sold it for 30, you know, three years later. So those are great stories. Wow, what they do built, the team thought they were in the manufacturing space. And so they had to think a little bit differently about their private label versus their branded products. And then they really had to diversify their channel mix.
How important is industry experience for you? Because I know you're gonna laugh at that I we always get people and they say, Well, have you sold to a bicycle manufacturer in Indiana? Like, no, we have not sold a bicycle manufacturing company in Indiana before.
You know, it's funny, every once in a while I get jealous of firms that specialize in a particular industry, because obviously the, you know, for them, they can repackage materials in the same format, they can go out to the same bitters that they always go out to. And it certainly is a you know, lower headache, lower, you know, in terms of the amount of work that it takes, they can do much better. My view has always been a look, the, you know, 80% of business is pretty similar. There's 20% that I think a good banker is going to get up to speed on 15 out of that 20 And then they're going to rely on healthcare tech. Yeah, yeah, boil and gas or something like that, you know, some of those are probably off limits. But in today's world, right, the the ability to get access to buyers as I mean, it's very easy. And also think that, you know, folks that have done a lot of deals in a particular industry. You know, if you're going back to the same 20 or 30 bidders every for every deal. At some level, you got to ask, well, who are they loyal to? Ultimately, right? Are they loyal to all these buyers that they're selling all the clients to? Are they you know, when we sold our communications business, we hired Bear Stearns, we were selling to Avaya. And I remember sitting at the conference table, Bear Stearns was at one side and a VI was across the table and I was like, this is weird. It's pretty sizable deal and where's the vias banker. And then a dis clicked. And I called a halt to the meeting and I pulled the Bear Stearns guy and I said, Are you are you going to work in with Avaya? He said, Well, yes, but not on this deal.
70 other deals? Yeah.
Yeah, that's what I you feel like all your clothes are off.
On this deal. But yeah, brilliant.
Yeah, exactly. I was just like, oh, yeah, it was. That was terrible. Oil boy. But we hired them because they were the experts in communications, right? That was the they were the banker to go to and as I reflect on it is you kind of want, if I'm a business owner, I really want the person who's going to be a huge advocate and is going to push really, really hard. Because that's how you're going to get the best deal.
Yeah, that's a tough one. I'm developing a sub specialty in food and beverage right now. It's just an industry I'm passionate about and any specialties for you any particular
industries? Yeah, we do a lot in consumer products. We do a lot in SAS. And then we've got your, what I would call traditional mid market, Colorado businesses and across the country distribution, manufacturing services, those types of businesses. We've done a lot in consumer products and in SAS, we just seem to have a tend to attract those.
Now. Chris, how important is your Rolodex or a banker's Rolodex?
You know, I think that has shifted quite a bit in the last 20 years call it I think before the advent of the Internet and information being readily available. A big part of the bankers job was building that network of buyers, right having all those different relationships. I would say, certainly, in our case, right of the 100 Plus deals that we've done, we've known the buyer maybe two or three times ahead of time. So I just don't I think in today's world if you have if you represent a high quality asset It doesn't matter if it's Chris or jack or Jane, whoever it is, the buyers are going to be interested in it. And you know, your job is to write to tell the right story, right, you got to position at the right way. But it's not hard to find the buyers and it's not hard to get them excited about really nice businesses. And so I, again, in today's world, you know, every bankers Rolodex is huge, because we've got all these databases and everything else that we pay money for, to be able to get to get a hold of folks. Yeah, we
all have the same Rolodex basically, exactly. Exactly. How important is knowledge of the business?
I think, very important, right? I think he have to get to know the business, get to know the business owner, really understand the ins and outs of K, how does growth happen? How are profits driven? Where are the, you know, Achilles heels in this industry or for this particular business? Because you're going to have to answer all that, to be able to tell their story, persuasively and effectively.
And to what extent can you explain a business to a strategic buyer?
I think, for a strategic buyer, it really starts with a lot of questions, what is it about this particular acquisition that is important to them? And that will help you position the business in the right way. And certainly think about and anticipate what the potential issues or objections would be. But it really does start with why Hey, what what is it about this particular asset that's attracting you as a strategic buyer, and a, tell us about some of the other deals that you've done, and kind of what worked and what didn't work? And that allows us to get much smarter about how we position the, you know, our clients business?
Now, do you follow a formal or informal auction,
ours are generally pretty formal, I would say, 70% of the deals that we're doing our formal processes, you know, hard bid, dates, part, loi, dates, price, 30%. Some of those are just helping those one off deals, if that's what they want to do. And then some of them are more just more controlled auctions, or just reaching out soft to different bidders and trying to get a sense for what we could get done.
What's a formal auction, for those that don't know, where you're
reaching out to a fairly large number of folks, I mean, we might talk to 200 potential bidders, you solicit bids from them, after they've reviewed all the materials. And then you know, you might get 2030 bids, and then from there, you're selecting a smaller group to come in and meet the team. And then from there, you're asking for final offers. And then, you know, ideally, picking one or two to go forward with and get a deal close with.
And that's with a rigid, strict timeframe. Yep,
yep. Hey, here's when the initial bids are due. Here's the time period that we can hold management meetings, hopefully, you can make yourselves available. And then here's the timeline for the final loi bids,
what determines for you what type of auction you'll follow, whether it's formal or informal.
Some of that's the desires of the client, how you how, you know, obviously, that formal auction is in more involved, it's more work in some business owners who may or may not be up for that. The other piece, quite frankly, is how attractive is the asset? If the business is in a good industry, I mean, you just mentioned, you know, food and beverage, hey, if you've got a really nice business and a good industry with good tailwinds, you can run these formal processes, and it'll work really, really well. For a business that may not have been doing so well, or as an industry that's out of favor, there's much tougher to run a hard process like that. Because you won't get the 20 or 30 bids, you might get for bids. And that, obviously, is not a happy day for the banker or the client. So
is there a minimum EBITA threshold for a formal auction in your in your mind?
Yeah, I would say for us, the formal processes that we run are, you know, certainly north of three, probably north of 5 million in EBIT da to really attract the institutional money and you know, the folks that are going to hopefully pay a premium,
what's your take on selling to strategics versus PE firms?
A lot of that is really priorities of the owner. Some owners, if their goal is not to stick around for the next sale, right, which you would do with a private equity firm, a strategic buyer can look you know, attractive, right? There's a I think, for some owners, for whatever reason, right? Maybe it's a health issue or stresses you or whatever it is they want to transition out sooner. strategics are reasonable fits, obviously, you will know Right? When with zero interest rates, the private equity buyers were pretty aggressive on valuation, so they're hard to ignore that starting to level out a little bit. So we're not seeing it as much. We're seeing the bid between strategics and the private equity start to look a little bit more competitive with one another.
What's the temperature like with the buyers right now with the market the
way it is? Here? We saw this in oh eight no nine. We saw it in the.com era as well. A lot of flight to quality There's still a ton of capital out there. And they've got to deploy it so they can earn their fees. So from a market standpoint, if you've got a high quality asset, it's going to do well.
It's a mediocre businesses that are really tough to sell, right? Oh,
yeah. It's pretty challenging right now. We're also seeing I mean, obviously, I think bank lending. I can't remember the last deal we did with a traditional bank lender, it's all been on one of these alternative credit funds. That's, you know, fairly flexible, but more expensive capital.
How do you think that's impacted prices, the cost of money?
I think it also depends on the industry. We've seen some industries get hurt worse than others. But we've definitely seen valuations compress. And it makes sense, right? When you run the DCF, and, you know, six, or eight or 10% interest rates against, you know, two or four is a big difference. And that's nificant impact on cash flow and their ability to grow.
How much do you think that's impacted? valuations?
You know, it's probably 15 to 30%, depending on the industry. And I just think in some industries, you know, deals may just be on hold for a while, such as I'm in Colorado, so we've got a lot of emerging food companies, you know, Whole Foods change their selection process. So that, hey, that's now become centralized in terms of brand selection is not regional or local. So we're seeing a lot. I mean, those deals that we watched a lot of really nice companies, evil burritos, and Justin's nut butter and a bunch of companies that did very, very well. My guess is, you know, today, those deals are much, much harder to get done.
Well, I pick your brain here for an hour. I'm out of water getting thirsty from asking so many questions. Well, it
was a lot of fun spending the afternoon with you, and thanks for doing what you're doing for business owners and really appreciate the podcast. It was a lot of fun.
Likewise, what do you think is the most important takeaway here for owners? Prepare,
right? Plan ahead? Pretty simple.
Yeah. Simple. Easily said. Yep. I don't know. Do you think that's easily done?
Yeah, I actually, I mean, just maybe it's because that's what we do every day. I feel like there's a script. Right. And it's not that challenging to follow.
Yeah, you're absolutely right. Well, sage advice. That's Chris younger with class six partners. That's class six with a VI Roman numerals, their partners.com. And the name of your book again, is harvest harvest. Wonderful. Yeah. And Chris younger will have his contact information in the show notes if you pull that up in your application. And thanks again for joining us for sure.
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