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207 | How To Sell Your Business For Top Dollar & Plan For A Rich Retirement

207 | How To Sell Your Business For Top Dollar & Plan For A Rich Retirement


The first things we focus on is quality of
earnings. Ultimately, what earnings are you offering
to a buyer and what’s the confidence that those earnings will recur in the future. Because ultimately you’re selling futures. The past is what it is, but the buyer is buying
future earnings and cash flow. So we want to know what are we offering the
buyer and then what’s the outlook for the remainder of the current year – maybe two
or three years into the future. From Rea and Associates studio, this is unsuitable,
a management and financial services podcast for entrepreneurs, tenured business leaders
and others who are ready to look beyond the suit and tie culture for meaningful, measurable
results. I’m Doug Houser. Are you ready to trade your business in for
retirement and bliss? Not so fast. There are a few critical pieces of the selling
process to take into consideration if you want to sell for top dollar. Paul Gregory, a principle in Rea’s Amherst
office, and Andy Galfond, Senior Vice President at Brummel Capital Corporation are going to
explain how to sell a business the right way with plenty of forethought, preparation, and
expertise. Welcome Paul and Andy. Hello. Thank you. Glad you could make it. How was the trek from Cleveland? Pretty boring. Pretty boring? The usual. Yes. It’s a lot of traffic. Traffic seems to be. That’s good. So talk to us a little bit about preparing
your business for sale. So Paul, what do you see in terms of primary
pitfalls that people just don’t think about and don’t deal with? I think knowing how much you need, how much
you want out of a business, knowing when the right time to start planning to sell a business,
tax planning relating to selling a business, knowing who is going to help you sell that
business probably is one of the bigger factors. So Andy, is it your experience, for example,
that people don’t prepare enough in advance for this process? In other words, they come to you already too
late in the process in terms of their decision making, say, hey, I know I want to transition. And they’ve already got that in their heads
that this is going to happen in six to 12 months kind of a thing. Well, I think it depends whether they’re already
talking with buyers or not. So if they come to us and say, you know, we
want to begin discussing selling our company, there’s plenty that we can help them with
over a six to 12 month period or maybe a shorter period. But if they’re already talking to a buyer,
then that makes it more challenging to help them achieve the best outcome. Sure. And what about say an internal process where
it’s perhaps a sale to key management or family members or even in an ESOP versus an external
process. Is there a different length of time there
that needs to take place? Well, that process can run much more efficiently
because the insiders already know where all the skeletons are. They’re much more accommodating to any potential
issues with the company because they’re already living with them, as opposed to outsiders
where everything’s raised to a level of, you know, this is a big deal. We need to get to the bottom of this. Okay. Now Paul, one of the things I know you mentioned
to me is that not enough people continue to focus on running their business once they
start this process. What have you seen in terms of that? Yeah, the due diligence process can be long. The information flow can be continuous. And I’ve often seen that if you’re not hiring
someone from the outside to come in and manage that process, you’re spending a lot of time
getting information to the potential buyer or their consultants. And I’ve seen it where, you know, a company
will go in at a million dollar a clip monthly sales, and by the time you come out they’re
doing four and five hundred thousand dollars a month in monthly sales, and the question
is why. And when you look back on it, and it’s usually
looking back, you’re looking at the owner saying, well why don’t you have the customers
you had? He says, well, I’ve spent all my time on due
diligence and tackling these to do lists. And not only the owner, but obviously the
accounting and finance departments as well. I deal with a lot of small business, and usually
the owner plays a big part in the accounting and finance, whether he wants to or not, or
she, and they might have a controller, they might have a bookkeeper, and it falls back
on the owners quite a bit. Yeah. So they get consumed and then the business
gets ignored. And after all, you’re looking at a multiple
of EBITDA. If that EBITDA slips, then your return slips. And a business owner may have been spending
a ton of time growing their business the few months up to, trying to grow that top line
and then they lose focus. Yeah. Not a good situation. So Andy, how do you approach potential business
owners, in terms of their readiness and just their willingness to say, invest in the process,
not knowing where the process may take them? Well, we start with, you know, what are your
objectives in a transaction? What are you trying to accomplish? What are you trying to accomplish over a period
of time? And then we can take a step back and help
them evaluate where they’re at versus where they want to go, and what an appropriate timeline
would be to achieve those objectives. So that objective could be, as you indicated,
sell to management, sell at the highest price, sell to a private equity group. There’s all sorts of different objectives. But we also want to understand, what do they
need from a financial resource perspective and have they done the financial planning,
the tax planning to actually be able to achieve that outcome. We have a saying, can the owner afford to
sell their company. In other words, can they capitalize the earnings
to achieve their objectives, to live maybe 30 years after they’ve sold their company. And so we’re big proponents of a number of
steps. One is valuation, the second is financial
planning with someone that can help them evaluate all their flows of cash to live for those
30 years or so, as well as just timing. Sure. So you bring up a great point because you
got to think about more than simply I want to sell my business and I want a liquidity
event or whatever the case might be. You almost have to back into what works by
figuring out ultimately what their personal objectives are. Absolutely. And that starts with, you know, lifestyle
and have they run the company for lifestyle or they run it to build long term value and
can they capitalize that value in a sale transaction? Do they have any assets outside of the company,
or is most of their net worth the value of their company? That’s an important evaluation. And then if they sell the company for X dollars,
what are the after tax proceeds? You know, it’s the old saying, it’s not what
you make, it’s what you keep. So you take all that together and then plus,
you know, maybe they’re very philanthropic, maybe they have a special needs child, maybe
their kids are still in high school. You know, you have to kind of bake all this
together in the financial plan, together with the value of their company. Right. Or you know, and I’ve seen others go about
it this way. They’re tired of that business and they want
out of that business and would like to go maybe start something else. So you know, again, whatever your objectives
might be. Right? Sure. Roll that into a new venture. Yeah, absolutely. So Paul, from your perspective, what do you
see in the market right now? Is it a lot of folks that say, made it through
the recession and now we’ve had a good run for 10 years and they want some type of transition,
or are they typically family business type situations? What are you seeing most frequently in the
market? Yeah, I work a lot with clients between the
two and forty million dollar range. So I’m seeing quite a few of those getting
approached by different buyers. I’ve got a couple that are just looking to
get out, that are at retirement age. I think you’re seeing a lot, with the boomers,
the business owners, the 65 to 75 years old, there’s a lot of them out there, and they
haven’t planned on what they’re going to do with their business. So they’re coming to us now saying, what do
I do? And these are a lot of the conversations I’m
having with Andy. We’re talking about one right now who’s going
through the process. I think I’ve got three under LOI and a few
others that are thinking about it. It’s various buyers. None of them are internal. We’re not looking at ESOPs on any of them
because I don’t think they fit. But it seems to be ramping up. I think people may be scared of what’s going
to happen with our President and some of the other things that are going on right now. And the tax rates are probably at all time
lows, so I think some people are using that as a driver as well. Interesting. Now through the due diligence process, when
you begin that and somebody starts to, you know, poke around, what comes out of that,
Andy and in your experience? I mean, anything unique that you see in that
process? Obviously you talked a little bit about lifestyle,
you know, some of those things get factored in. How does that change the way a business owner
thinks? Well, we try to be proactive in presenting
diligence. So it’s that old thing. We don’t want to be asked a question we don’t
know the answer to. So we’re very compulsive in undertaking due
diligence prior to even talking to buyer candidates. That way if there are any issues that we see
that come up, we can address them beforehand or at least be proactive in letting buyers
know they’re out there. Because we don’t ever want to get that call
that, hey, guess what we found. You know, and now how are we going to deal
with that? So we are very compulsive about diligence
over a long period of time to make sure exactly what we’re offering to buyers and how those
different issues might affect valuation, how it might affect structure, terms and things
like that. Okay. So if you’ve got legal issues potentially
or say issues with customers, do you try to address those things up front, maybe enter
into longer term arrangements with customers? Or how much do you really reveal to your team? Well, I mean we need to be genuine about what
the issues are. I have a saying, it’s never what the issue
is, it’s how you handle it. But if we have that time of preparation, we
can get clients or customers under long-term arrangements. We can shore up things with vendors, address
management issues or shortfalls in structure and things like that. If there’s environmental or OSHA issues, we
can deal with all those. So there’s plenty to look at to make sure
that we’re offering the best company to the market. Okay. Paul, in your experience, are you trying to
assist the customer more in de-risking their business? What role do you see the firm taking in that? I mean is it about just sort of providing
the right information so that they can make the proper decisions? Or where’s that fit? Yeah, I think it depends on if it’s a current
client or a prospect. If it’s a prospect, we’re going to go in and
see if they have good numbers, if they’ve got the books, if they’re still using a laser
printer, if they’re still using ledger paper, some of those things. We’re going to take a look at that and try
to get things cleaned up and get them on a system and get their numbers representative. If it’s a current client, we’ve probably already
done all that and we’re going to be looking at … The big thing right now is state and local
tax issues. You know with the Wayfair case that was settled
a little over a year ago. I’ve been talking to Joe Pop and Kathy LaMonica
from the SALT group quite a bit about this. It’s the biggest hot button, and due diligence
right now is what are your risks. And we’re going to take a look at that and
at least let them know if they should be doing voluntary disclosures, which I know you’ve
talked about on the podcast. Or some of the other things, we’re going to
look at the contracts and make sure that their banking relationship, you have to notify the
bank. Are there meeting covenants, are they getting
the financial statements prepared that they need to have prepared? Things that you may not look at regularly,
but when a buyer’s coming in, you definitely want to make sure things are right. I always refer to that as kind of the basic
blocking and tackling. You have to have those processes and procedures,
you know, buttoned down and as you said, identify areas of potential risk that you can de-risk
for the client, so that when somebody comes in, as Andy indicated, that there’s full transparency
and they know what they’re getting. So that’s hugely important. What are some of the major pitfalls you see
right now Andy, in terms of lack of preparation or things that folks can think about in terms
of readiness? Well, one of the first things we focus on
is quality of earnings. Ultimately, what earnings are you offering
to a buyer and what’s the confidence that those earnings will recur in the future? Because ultimately, you’re selling futures. The past is what it is, but the buyer’s buying
future earnings and cash flow. So we want to know what are we offering a
buyer and then what’s the outlook for the remainder of the current year, maybe two or
three years into the future. You know, one of the things that most small
companies do not do is budget or prepare projections. So we need to work with them to prepare those
types of documents. And one thing we know for sure is that the
more you do it, the better you are at it. So the sooner we can get them to think about
doing those kinds of things, the better they’ll be going forward. You know, because part of the valuation is
a projection. But if the projection was prepared for the
process, how good is that projection? And we always like to ask the question, is
this something you do in the ordinary course of running your business? It’s a management tool. Or are you doing it just for this process? Now Paul, as you know, we help with that process
and come up with an adjusted EBITDA number, and there’s often a lot of let’s say noise
in that number, particularly with small businesses, because the personal life is commingled into
the business. Do you have a lot of those conversations with
folks about separating out what’s been a lifestyle business, and making the cash flow sort of
a clean number for presentation? Absolutely. You know, some of these clients have been
in business for 30 and 40 years and as you mentioned, I try to un-bundle my owners from
the business and keep things on the outside. But that often doesn’t happen. I take the owners right through the profit
and loss statement and go right down and say, okay, if you’re a buyer coming in, what’s
not going to be an expense going forward? And it’s pretty interesting conversation you
have. Sometimes they want me to leave the room during
that conversation, but you’re looking at autos, you’re looking at life insurance, you’re looking
at country clubs, you’re looking at the meals and entertainment line pretty close. And it’s funny, the owners always say, oh
yeah, they’re going to spend a lot less on everything going forward. So they want that EBITDA number to grow, but
normalized EBITDA is a big part of what we do, and there’s certainly a lot of value in
a company that may be going out for things that aren’t necessarily related to the company. Yeah, for sure. Andy, one of the things that I’ve found fascinating
in helping clients through this process and seeing other transactions out there, is I
hear a lot about this term, security and significance. So, in other words, somebody is looking for
security from a financial perspective, but what they often forget is what’s going to
be my personal significance going forward. Is that something you try to address with
them, is what’s your role going forward, that type of thing? Well, we absolutely talk about, well what
do you want to do? You know, have you gone into that dark room
and thought about do you want to be involved, for how long do you want to be involved, do
you care if the company is consolidated into something larger and you lose, you know, the
legacy that might be three or four or more generations? And those are very important questions for
a number of reasons. But the main thing is it impacts the buyer
list that we develop, because if we’re going to approach only strategic buyers that may
run the company only as a division where they may consolidate it into another location,
that legacy is gone. And younger owners in their fifties, owners
and sellers that are in their fifties and sixties, have they decided what they’re going
to do? You know, and we don’t want to get to the
11th hour and have the owner say, you know, I don’t know what I’m going to do after I
sell the company. I’ve got this pile of money, but my wife told
me I can’t stay at home, and they don’t want me. So we’ve got to get to those issues really
early in the process. And it really comes to one of the first questions,
why are you selling and what are you going to do? That’s a great point. Yeah, so look at their true underlying motivation
and what their goal is, you know, beyond just the financial part of it. Yep. Absolutely. Yeah, that’s a great point. So if I look forward, are you still seeing
very strong … You mentioned that the activity right now
seems to be hot and heavy. Do you foresee that over the next 24 months
or so, that transition activity still is going to be very, very strong? You know, there’s a couple of things that
really impact the environment. One is the economy, of course, and the other
is how much are banks lending. If the banks are pulling in the reins, that’s
pulling back valuations and then that puts some more sellers on the sidelines. But right now there’s an incredible supply
demand imbalance in terms of a lot more buyers and a lot more capital than there are sellers. So it’s still a seller’s market as far as
we can see. My crystal ball is not real good, but you
know, it feels like at least the next 12 months it should continue to be a sellers market. But if you haven’t made that decision by now,
you may miss the window to get in there. Because it takes time to go through this process. You don’t want to rush it, right? Exactly. And just a regular process where you know,
doing diligence, preparing marketing materials, identifying buyers, going through that whole
process could take 9 or 12 months, and that assumes that the preparation has been done. Now, Paul, I know we obviously try to remain
agnostic in terms of what type of transaction a client or potential client might enter into,
but can you maybe give us a few highlights as to some advantages or disadvantages going
one way or the other that maybe you’ve run into in the last a couple of years? Yeah, I’ve had a couple of clients go ESOP
route. I had a client years and years ago that went
to an ESOP that actually had to go out of business, which was very tough to see on all
the employees that were more members in the ESOP. But I’ve seen ESOPs work well too. But going into those, you’ve got to know there’s
a significant cost. There’s a time issue there. There’s going to be a lot of compliance going
forward. But in the right circumstance they can be
great. If you’re selling the internal management,
I think Andy mentioned it before, they’re going to know where the skeletons are in the
closet, which can be good or bad. And then obviously if you’re selling to private
equity, you got to look at the tax ramifications. With any of the deals, you look at the tax
ramifications. But particularly private equity, is it a stock
deal, or is it an asset deal, and you know, the cash flow that we mentioned before, what
is that actual after tax cash flow coming out of it. But I think meeting early, discussing, talking
about what your goals are, means a lot to the process of which route you’re going to
take. I’ve got one right now that’s probably going
to only be able to go strategic. ESOP’s not going to work. Too many employees are coming and going, which
is bad for an ESOP cashflow. They can’t really sell to private equity because
in this instance, owners went out. They don’t want to take part in the business
anymore. They want to hand over the keys and walk away. Right, which can be difficult to find that
perfect buyer. It’s got to be a strategic. So it just depends, and like Andy said, it’s
an early conversation with people that have been through this before. Most of the time the owner is talking to somebody
at a country club that said, I got X dollars. I would tell them first to divide X by two. Inflated, right. Yeah, obviously. That’s probably the pie in the sky number
they thought they were going to get. But then after tax you could take that number
by 60 or 70% and then cut it in half. That’s probably your actual sale price. For sure. Now Andy, what about the employees of the
company? How deep do you go in terms of involvement
in the process? Is it may be just another key individual or
two, or does it depend on the type of transaction being pursued? Because obviously you want to make sure that
that culture stays in place post-close, right? I mean that’s part of the value. Yeah, we always discuss that with our clients. Who knows yet how deep do you want to go? And usually maybe a CFO or controller or maybe
an operations person, a sales manager. But you don’t want to get too far down. You know, employees are going to say, how
does this affect me? And at the beginning point of a transaction,
it’s too speculative. Anything could happen. It could take a year, it could take two years. And the last thing you want to do is spook
your employees. So we try to keep that as very confident,
as confidential as possible, and just keep it among a select number of key employees,
make sure that those employees keep it confidential as well. Yeah. So if I’m a business owner, ultimately, where
should I start? What’s step one? Is it to approach an advisor like yourself
to say, you know, I’m thinking about this? Help guide me through the process. I think that’s a good step one. Then with objectives, what’s the time horizon,
what are the valuation requirements, and just talk through that type of buyers that you
would like to sell to. Have you been approached by buyers? It becomes kind of an iterative process and
a meeting type of process to make sure that they really think through all the things they
need to think through. You know, it’s the old thing that you don’t
know what you don’t know. And so we can kind of pick a lot of issues
and topics that then the owners can think a lot about and then keep revisiting it. But the sooner that the owners start thinking
about it, even if they’re not thinking about selling for five years, it’s not too early,
that preparation. And also, you know, again, I keep coming back
to the financial planning. But it’s so key to understand what are you
going to need and where are you now, which you know by evaluation. And then if you’ve got that three or five
year horizon, you can create a business plan to achieve that outcome. And so it’s one of those things you can’t
start soon enough. We had a client, he said, I wake up every
morning thinking what do I need to do today to get to where I need to be? And he was three, five years out from doing
something. Yeah, that’s a good way to look at it. So Paul, in your experiences you help quarterback
clients through this process. I mean, how do you work that? Do you bring in obviously other advisors like
Andy and their existing legal counsel, etc, to help guide them through that process? Yeah, that’s one of the first questions I’ll
ask, is who’s your attorney and do you want to work with that attorney on this process
of the sales process. And I will bring in folks like Andy. I urge my clients to utilize an outside advisor
to sell their business, because I think there’s real value. I’ve done that in my predecessor firm and
now here. At Rae, I’ve done that a few times, and every
time I brought somebody in to try and assist, and I think it’s key. Yeah, that’s great. I think you really have to look at it, as
you said, kind of that holistic view and not just from a financial or a perspective such
as that. Think about all of it. So speaking of quarterbacks, I know you’re
a Browns fan. What’s the outlook here? It’s been up and down. I have no idea. Yeah, Andy and I were talking about it on
the way down, and up and down is probably the best way to put it. But it’s still frustrating, but it’s exciting
frustrating. Yeah. Hopefully on an upward trend as they say. It seems like we’re on a roller coaster ride. We’ll see. Well, anyway, thank you both for being here
today. I really appreciate it. If you want more business tips and insight
or to hear previous episodes of unsuitable, visit our podcast page at https://www.reacpa.com/podcast. Thanks for listening to this week’s show. You can subscribe to unsuitable on iTunes
or wherever you get your podcasts, including YouTube. And while you’re there, leave us a review. I’m Doug Houser. Join us next week for another unsuitable interview
from an industry professional.

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