Armando (0:00 – 0:45)
Hello, founder. You’ve built a successful business. Now it’s time to think about that once-in-a-lifetime exit from your business.
You’ve come to the right place. Here, you will hear business exit for founders, successful business owners go through that exit process when they’ve never gone through that before. So in that, you’re helping the family, helping the owner, helping them understand what they’re about to face.
And sometimes they just don’t know what and if they get in the wrong hands, it just isn’t going to be the outcome that they really are hoping for. So I’m excited to have this conversation with you because of your success with the clients that you’ve worked with. You’re part of the Aspen Business Group.
Is that what it’s called?
Joyce (0:45 – 0:47)
Aspen Family Business Group. Yes.
Armando (0:48 – 1:13)
Aspen Family Business Group. And then also, I love that you’ve worked so much with family-owned businesses and helping with that succession, that transition, because the family is key to the owner’s ongoing legacy. And that’s truly what is most important to them when it’s all said and done.
And you help them navigate that as well. So what about you did I not say that you’d like to share as we begin our conversation?
Joyce (1:14 – 2:09)
Well, I like to provide a bridge between the family and the advisors that we bring together to really optimize the process. And that is something that I really value because if everybody has a shared vision of what we’re trying to accomplish, we can often achieve that. I love to say, if you don’t know where you’re going, any road will get you there.
And I really like to provide that roadmap along the journey because it really does feel like a journey. This often takes 12 to 18 months. And so this time frame is one where you can build a lot of value for folks, as well as communicate the process so that everyone understands where we’re going.
Armando (2:10 – 2:46)
Wow. So as we talk with business owners who are facing that exit, they realize there are lots of ways to get there. And they’re not really sure how because they typically haven’t gone through that before.
And sometimes a private equity phone call out of the blue gets their attention and they begin a conversation with that private equity firm. Not to say that private equity is bad, but just often that’s how a sale might come about. And I’ve heard you say before about those kind of phone calls that are unsolicited out of the blue as the lowest offer they’ll ever get.
Can you speak to that just a little bit?
Joyce (2:47 – 3:48)
Yes. I have experienced that multiple times where that phone call will come in and often I’m accessed in terms of a resource for the family. And those offers you get to kind of put aside and say, okay, that’s great.
Let’s see if we can’t build the value creation process ourselves so that we can have a more competitive offering. And you can imagine, just think about buying a home. If you only had one buyer, what would the price be that you’d get versus having a broad-based open process?
And that’s really, it’s very similar. And I think a lot of people have experienced buying and selling a home. And I think that’s a way that I often like to get started is to just really equate it to that process.
Armando (3:49 – 4:35)
Yeah. And it makes sense what you said that when there are multiple buyers out there, when you buy a house, the price gets bid up or the one who has the cash offer, the biggest down payment is going to get the home. But in the end, the seller ends up with typically a better end result because of the process that you go through.
So Joyce, you help companies or you help people sell their businesses and you come in when they’re maybe thinking about that sale process. They don’t know what that exit’s going to look like. They don’t know if their company is maybe in the best shape.
They don’t know if maybe you can help them tweak a few things, change a few things to increase that value. Can you talk about maybe that a little bit for that first-time seller?
Joyce (4:36 – 8:41)
Absolutely. Fundamentally, it really starts with what the owner’s goals are and the family’s goals. And I like to work to really create those goals first because if we understand value creation at its most core level, regardless of whether we want to keep the business for another 10 years or we want to sell it in the next year, we still want to be doing some optimization of value tactics.
And so to your point, I really think about these in three Venn diagram kind of circles. One is about the stability of the business, which we always want to be focused on. And I’ll get into three particulars there.
The second is around the business’s intrinsic value. And I have three elements that I like to talk about there from a value creation perspective. And then the third is really what I like to call capital efficiency.
So I’ll go back to stability and start there. One of the biggest aspects that are important is really the profit margin of your business. And irregardless of what industry you’re in, you really want to reach out for data to understand your margins versus margins of what could potentially be public competitors, companies that need to provide public information of their profit margins.
And I think that piece is really important to really start with that underlying profitability aspect. The second element of stability is really consistent growth. You can be growing two or three, 4% a year, but if you’ve done that consistently over say the last five to seven year period, that really shows this track record both to your family and to a potential wider universe of how you’ve consistently brick by brick built your business.
And then the third is really sort of the most important aspect of stability. And that’s really the monthly recurring revenue in your company. Do you have a stable revenue base or is your revenue really choppy?
And in today’s volatile economic environment, volatility and monthly revenue can be viewed very negatively. And obviously there’s certain business models where that’s just the reality, but the more monthly recurring revenue you have in your company, the more stable it’s viewed. So I always like to think about those three aspects of stability.
And then I’ll move to intrinsic value. And this is something that’s also incredibly important to potential buyers. So the first and intrinsic value is really around the diversification of your customer base or the absence of customer concentration.
If you have one customer that’s 50% of your revenue, that’s a problem. We’d want to begin to work to diversify that customer base before any kind of a sale process would be considered. And the reason why that’s so important is because buyers will potentially discount customer concentration because obviously if you lose that customer, you’ve had an immediate significant impact to your business.
Armando (8:41 – 8:49)
Right. So that’d be the business that’s trying to get that Walmart account, then they land it and the Walmart is 98% of their business.
Joyce (8:50 – 12:15)
Exactly. It’s be careful what you wish for. It’s the dog catching the truck.
You’re like, okay, you caught it. And now we’re going for a ride. And then all of a sudden you get the call that no business owner wants to get, which says, we’re moving on.
And so we really want to focus on diversification of customers. Another piece of intrinsic value is really long-term customer contracts. So if we have a business model where we’re able to go out and get, fill in the blank, a three-year or a five-year commitment from a customer, that’ll offset concentration, but it also builds intrinsic value into the revenue of the business model.
Because we have these really, really sticky customer relationships that are contractual. And that’s something that buyers absolutely love to see. So that’s something I always talk to business owners about.
And then the third part of intrinsic value is really proprietary products and services. A lot of times what you look for here is things you can patent, things that have some sort of protection, if you will, in terms of competitors being able to copy them. And those three aspects really build intrinsic value into your business.
And so I look for those. And then the third big element is what I call capital efficiency. And this is really for every dollar you invest in keeping your business, how efficient is it being utilized?
And so in this way, we want to look for relatively low capital expenditures. So everybody likes to talk about capital light business models and not every business is, and I completely understand that. But even if you’re in a capital intensive business, how efficient is your capital being utilized?
So that’s really important. The other piece that’s really important is to have relatively, and this is a tough one in today’s environment, but relatively low labor costs. So if you’ve got a very high percentage of your mix in other cost elements besides labor, that’s very highly valued, particularly in today’s world where we’re seeing so much inflationary aspects to wages.
And then fundamentally, and this is just a foundational piece of every single business model, a solid management team. So when you think about your team, and their skill level, and their ability to potentially transcend into a new buyer environment, I think no owner is doing themselves full service unless they really are always focused on that solid management team aspect. Because again, I think that really builds into how efficiently you can use capital and turn it into profitability.
Armando (12:16 – 12:36)
Okay. And then I guess once that sale, after the sale, keeping that management team on board, they keep running that business as they’ve been doing so efficiently, making good use of the monies, the dollars, et cetera, then that’s part of, or that is what the owner, the new owner, the buyer is buying from the seller.
Joyce (12:37 – 13:45)
Absolutely. And really that solid management team supports the stability, the intrinsic value, and the capital efficiency of the entire business model by their ability to execute against a strategic plan. And that’s something that I also always want to understand from every business owner, what do you see happening in the next two, three years of your company?
Because that really begins to build together with those nine aspects I just detailed, what I like to call the investment highlights of your company. And as I said at the beginning, this can be a plan for you and your family over the next couple of years. You don’t have to always be planning for that sale process, but once you have begun to investigate that keep or sell decision, you always want to be understanding those nine metrics and trying to understand where your business sits and how you would be perceived in the marketplace.
Armando (13:46 – 14:16)
Okay. So Joyce, when you come into a company and they’ve not had someone like you before come in and talk with them and say, you talk about those nine investment highlights that you just mentioned, what are some of the ahas you hear from them or some of the surprises you get, or maybe they say, yeah, Joyce, we got all that. And then you start to dig in and you realize, well, let’s improve these areas over here.
How does that conversation go? What are some of the surprises that you hear from them?
Joyce (14:17 – 14:23)
Well, I think the most frequent is always around where were you five years ago?
Armando (14:25 – 14:26)
That’s a compliment.
Joyce (14:27 – 15:58)
I think really everybody wants to understand, you know, why did we wait so long to get some helpful advice into our business? And I think that’s the one thing that every business owner should consider. Who do I have providing that external advice that’s going to give me a broader perspective?
And the reason why I say this is because that aha really contributes to something that’s incredibly important. And I stress to everybody, we always want to be working on our business. And yet a lot of times owners are too busy working in their business.
And the advisor network can really be utilized to give that broader perspective and to help owners and their families really transcend that every day in the business mentality that’s going to enable them to really look out a little bit more broadly, a little bit more holistically, and think about their business, if it’s at all possible, because it’s so much a part of who you are, right. But to really become that a little bit of a critic in terms of what the business could be doing better, how we need to optimize some of those nine metrics. I mean, really, really looking, you know, working on the business.
Armando (15:58 – 16:18)
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Joyce (16:18 – 19:07)
And then I think the other piece that’s an aha that I hear a lot is that some of these things can be really low hanging fruit. And don’t take a lot of money or time to really start to think about ways to do it a little bit better or a little bit differently. So, for example, going back to customer concentration, there might be a new customer that if you just spend a little bit more time thinking about or working with, you could actually add that customer in or a collaboration that would enable that new customer to come in.
And yet, a lot of times we really do focus on what we have versus what we could have because you just have only so many hours in the day. But by really prioritizing that sort of low hanging fruit in the business model, you know, we can do goal setting that really enable some of these elements to be improved without a significant investment in time and or money, really. It’s just a matter of setting some goals and really starting to work on them.
So, for example, as it relates to profit margin, one of the things I’d love to do is I like to come in and look at product or service offerings and rank them by gross margin. And a lot of times what you’ll find is there’s just as much effort going on to drive low margin activity as there is high margin activity. And so one of the things kind of thinking like a buyer you want to do is look at your own business objectively and say, how could I set a criteria and potentially minimize or eliminate any of my lower margin product or service offerings so that I can really begin to spend all my team’s energy on higher margin activities?
A lot of times that’s getting rid of small customers, right? That’s costing you so much money really to service versus larger customers that you might be able to develop a little bit more. And so as you start to work through some of these nine aspects, you’re able to really begin to think about if I’m really working on my business versus in my business, what would I stop doing that’s really not adding value?
And so that’s another aha that I’ve gotten from folks I’ve worked with for sure.
Armando (19:08 – 19:22)
So helping them take a step back and maybe look anew at their business, maybe that customer that calls you every week with some complaint or some issue, maybe that is a very low margin customer and really needs to just go out the door.
Joyce (19:24 – 20:00)
Saying goodbye nicely to unprofitable customers is something that a lot of companies don’t do as much as they should and actually has some incredible benefits for serving your bigger and more profitable customers better, right? There’s only so many hours in the day. We like to make very judicious investments in people.
And what if I could spend a little of that money that’s going to the unprofitable customers on my profitable customers and growing that business?
Armando (20:00 – 20:26)
Right. That makes a lot of sense. And so Joyce, with the business that it sounds like whether that business is intending to sell or thinking about selling or maybe transitioning that to the family member, regardless, these same optimization views that you’ve mentioned would be helpful regardless what path they decide beyond that, right?
Joyce (20:26 – 24:06)
Exactly. And I have a couple of other items, none of which are very super exciting, but super fundamental to really looking at that good business. And that is removing owner expenses from the business.
So if you do tend to include a lot of owner expense items in your P&L, what’s really powerful is to start to remove them and see how profitable your business would be without them. Because a potential buyer is not going to have your gym membership in there, for example, or all of your family’s telephone expenses. As we start to remove those expenses, we start to really understand how fundamentally profitable your company is on a standalone basis.
And while those transitions can be challenging for certain family members, the payoff is so significant in terms of being able to really look at your company as if it was owned by somebody else and how profitable it would be. So that’s another recommendation that I always have for owners. And then finally, and this one is probably the least interesting, but the most important, you want to really go back through your business and sort of, quote unquote, dot the I’s and cross the T’s.
So if you don’t have a contract with that big customer, but you really do have a contract with that big customer, go get the contract from the big customer. And really document and formalize the relationship so that you’re being viewed more professionally and they’re viewing you as a really valuable resource that basically does want and require the documentation. And sometimes those are difficult conversations, especially if you haven’t had them.
But it really is elevating the professionalism of your business in a way that’s really going to be a creative tier value creation. And I say that because in any process with buyers, there’s a need to create what’s called a data room or a data repository. And this repository would include things like your articles of incorporation, your bylaws, your operating agreements, your shareholder agreements, your buy-sell agreements, etc.
It’s going to include all your contracts with your customers, with your vendors. It’s basically going to document who your company does business with, how it does business, and obviously the home for all of your financials and marketing records, sales databases, margin calculations. It’s really an incredibly holistic look at your company.
And a lot of times what I find and what takes the most time is for folks to actually go back and dot those I’s and cross those T’s because they’ve never done it in the past.
[Speaker 3] (24:06 – 24:06)
Right.
Joyce (24:07 – 24:22)
And it’s hard to see how it adds value when you haven’t done something and you’ve had a very successful business, but that’s what adds a lot of value and credibility and professionalism from the buyer’s perspective.
Armando (24:23 – 24:54)
And so Joyce, when that company has been around, say, 30 years, and as you said, they’ve done it this way, they’re profitable, everything looks good, but they haven’t gone back to day one and done the documentation of the annual minutes. Maybe the offer agreement just wasn’t done ever because they just never did it. Is it in their best interest then to go all the way back to 30 years and year by year, build that out year by year so they have it in their data room?
Joyce (24:56 – 26:24)
It’s really important to do for the last five to seven years. You don’t necessarily have to go the whole way back, but you do want to show a period of professionalism that’s really in that five to seven year window because that’s how you’ll be able to show consistent growth, those profitable margins, that monthly recurring revenue that I talked about. You’ll be able to show org charts and how you’ve really grown the team.
You’ll be able to show some of that core labor costs and capital efficiency issues. And then we really want to see those customer files and customer contracts building over time to show that real progression and prove it. Because I think that’s the other piece.
A lot of times folks might not even have had banking relationships because if you’ve been funding your company completely out of cash flow, you might not have much debt on your company either. So nobody’s really potentially asked you to provide a lot of this documentation. And that’s the situation where I find it actually takes a little bit longer for us to go back and really dot those I’s and cross the T’s.
Armando (26:24 – 27:23)
Okay, right. So let me go back to something you mentioned a moment ago about reviewing or removing the owner’s expenses from the company. Now often people are very tax sensitive of course and when they can run some things through the business that, like you said, maybe the family cell phone bill.
Okay, the cell phone’s used for business and part personal and I can see how it could be either in or out or partially in the business. At the same time, the owners want to reduce their tax bill year to year to year so I could see why they would want to include it. So if they’re thinking of selling say in three years, when should they begin to take all those owner expenses out of the picture so that that prospective buyer sees a cleaner set of books and has less questions about anything that might be specifically owner related?
Does that make sense?
Joyce (27:23 – 29:23)
Yeah, and specifically related to any kind of tax issues, I certainly don’t have any advice that I want to share because that’s not my area of expertise. From the sale process preparation perspective, what you do want to do is create your financials at least two or three years before you begin a sale process with an adjusted EBITDA line, so earnings before interest, taxes, depreciation, and amortization. And a lot of times when I first arrive, the company goes down to operating income or net income and you do want to work with your accounting team to really begin to get to EBITDA because that’s earnings before interest, taxes, depreciation, and amortization is really what buyers look for.
And then a year or two before the sale process, you want to begin to adjust that and those adjustments would be the removal of any owner expenses, anything that’s extraordinary to the company, maybe a one-time severance payment of an employee that might not be serving the business as well as he or she could be. And we want to start to get to that adjusted EBITDA level so that we’re able to really present the true financial performance of the company to a buyer community that has already begun the professional transition to standalone financials. And of course that’s up to your accounting and tax professionals to advise you much more fully than I can, but that’s kind of what I’ve seen as a method that works pretty well.
Armando (29:23 – 30:18)
Okay. Okay. And that makes sense.
So you’re looking at, you want to get nice, clean financials that are really specific to that business, that industry, anything that gets in there, that creeps in maybe from the family side of the picture that should really be removed. It makes those financials cleaner when those are in fact removed. Correct.
Yeah. That makes a lot of sense. So what have we not touched on that as you are doing your work with business owners, whether they’re going to transition to the next generation, Gen 1 from Gen 2 of the business, or they’re going to look for just a seller or go through an ESOP, whatever that might be.
You mentioned you’re looking at a lot of areas with them, really at the whole business model, the revenue model, optimizing what they have, how they’re using those assets. What else is in that mix that we haven’t touched on yet?
Joyce (30:19 – 32:47)
So I think one of the biggest things is really trying to focus on the best group of advisors. And I find particularly in the lower middle market that you might not have the best accounting firm. You might not have the best attorney.
You might not have a lot of your estate planning in good shape. And I think that a lot of those advisors become absolutely critical to optimizing the situation. And I’d always ask you to consider having sort of a board of advisors.
They don’t have to have any fiduciary duty, meaning they don’t have to be responsible to the company in a traditional board of directors sort of way, but they can begin to really advise you through this journey in a way that, as we talked about at the beginning of our podcast, really working on the business versus in the business. And I think getting a trusted set of advisors is absolutely priceless in terms of really optimizing all the incredible hard work, blood, sweat, and tears you put into your company over all these years. And I think people tend to wait on that much longer than they probably should if they want to optimize it.
Because the time to really be much more external in terms of what the market looks like, what the economy looks like, what the competition looks like, what the potential competition looks like in a couple years, is really two or three years before you might want to think about selling your company. So that you can be responsive to all of that, be professionalized to really address that, and really fundamentally be able to create the kind of value that all your hard work has provided to you and your family and your future family. Yeah.
Armando (32:47 – 33:40)
And that makes sense. Just when you describe that the current advisors that maybe have been with the company since day one, when it was pretty much worth zero, and now it’s worth 30, 50, 100 million dollars, it’s a whole different enterprise. The family’s in a whole different situation.
So that advisor you had on day one, or maybe that you acquired in the first five or 10 years of growing this, have you outgrown them? And then even separate from that, the whole exit is really a specialty. It’s a specialty.
So that CPA or attorney you’ve had along the way, if they don’t see exit very often, if they don’t see sales or transitions very often, it would be wrong to assume that they’re going to be really great at it because they just haven’t done it enough to really understand.
Joyce (33:41 – 34:55)
Right. And I think the other piece that’s so relevant around that piece is how current are they in the economy, in the market, in the buyer universe? I think that’s something that I’ve really seen be incredibly additive to value.
So for example, if I bring an investment banker to a family that just did a transaction, very similar business, and they were the ones who sold that company, they know who purchased that company. But in many ways, and they’ll never tell you exactly, obviously, but they know that buyer universe really, really well. And they’re super current in what that business is worth, and who’s actively interested in buying businesses like that.
And so that’s an example of incredible value that a trusted advisor from your starting years wouldn’t necessarily be that current, have that level of understanding of the current marketplace, for sure.
Armando (34:56 – 35:51)
Right, right. So let’s talk a little bit, Joyce, about that buyer universe. What is that?
When you’re working with a business who’s not gone through this before, and you’re looking at that buyer universe to find the right fit, you mentioned that you want to make the family that their goals are clear. And that, of course, helps you understand how you can really help that family the most. When you go to that buyer universe, how do you, let’s say you’ve done all your work, and you’re feeling really good about where this company is, the EBITDA looks great, and they’re showing consistent growth, the data room is all built, and now you’ve got this really nice, solid company you feel just fantastic about.
And now you’re going to go to the buyer universe. Can you talk about that part of this, of how that part of this cycle looks, so the owner can understand that a little more?
Joyce (35:52 – 36:19)
Oh, sure. So I would create what I would call an investment highlights presentation that’s based on, quite frankly, those nine elements, as well as their financials. And fundamentally, you know, you need to at least have had a review, maybe not a full audit, but you need to have a financial review by a trusted accounting firm.
Armando (36:20 – 36:21)
Review financials, yep.
Joyce (36:21 – 36:46)
Yeah. And so after we have that, then what I do, and the way my process works, is I want to take that to the top five to seven investment banks in your specific industry that have had the most transactions in that space in the last couple years.
[Speaker 3] (36:46 – 36:47)
Okay.
Joyce (36:47 – 45:10)
Because I want the most current, broadest buyer universe brought to the table to really support the family’s goals. And so I really am the intermediary with the investment bankers, because there’s no way with what I do and the way my consulting practice works within Aspen, that I would ever be current in all of these specific industries, because it’s just too fast paced and fast changing a business environment. But what I do know is who the top bankers are in your industry.
And I want to take that, as I said, to the top five to seven bankers, and basically ask them to pitch the business. And in doing that, the family is able to really be brought into and own the decision process so that they know what their business is. And we’ve all worked together to come up with the optimization plan and the execution of the optimization plan.
And now the core family group that will really be the decision makers is able to be brought into the investment banking decision so that they can see all the pitches and they can really understand the specific value that that banker group would be able to bring to the sale of their company. And then they make that decision based on the proposals that are made. Again, I’ll use my investment highlights deck to get the bankers interested in making the pitch process happen.
And then whichever banker the owner select is then brought in to begin their marketing process. And that process, depending on how well we’ve done our data room setup, can really be as short as three to four months. But if we mutually determine that there might be value in creating a little bit more of that data room build out, we’ll do that.
And while we’re doing that, they’re going to be creating what’s called a confidential information presentation. And that confidential information presentation is going to be truly a 100% marketing document of your business. And that is very iterative and collaborative with the company.
And it also includes projections of what the company feels can happen if some of these levers are utilized for growth. And that’s something that we work on in the optimization process. We might take the lowest hanging fruit and go ahead and do those.
And there might be some higher up the tree fruit that we might not want to invest in, but we certainly might want to talk to potential buyers about. And so at the same time as the confidential information presentation is being prepared, we’ll also be asked to vet potential buyers. And that’s where the buyer universe is really established.
And the owners have a very high degree of approval and review of that list, because there might be competitors that should never see the presentation. There might be sensitivities to certain groups, and that is thoroughly vetted. And then a non-disclosure agreement is created.
And at that point, any potential buyer universe is asked to sign that non-disclosure agreement before they receive the confidential information presentation. And so at that point, your deep beliefs about what your business is and what it can be will be out there to a buyer universe. And that process, as I said, three to four months to prepare that, another month, six weeks, depending if you’re in the summertime, especially, to kind of get that out to the buyer community.
And then roughly five to six months after you start the whole process with the banker, you’re ready to receive what’s called indications of interest. So the shorthand for that is IOIs. And indications of interest, particularly for a family, can be incredibly helpful because it’s the marketplace telling you what your business is worth.
And one of the steps we might have done back when we started was to do evaluation for estate planning purposes for other reasons that’s certainly not market-based. And I’m sure a lot of the owners that’ll be watching this podcast have done those valuations for all kinds of different reasons. This will be the first time the family’s ever seen something from the marketplace.
And it can be very interesting because obviously the more competitive the process is, the more the number could be higher than anything they’ve ever seen before. But it’s really important to have that caveated by the reality that sometimes the indication of interest number is simply to get that potential buyer to the next step. And that just about almost always indication of interest numbers are the highest numbers you’ll see.
And then by the time we begin to work down the other side, numbers usually go down. And the reason for that is what’s called confirmatory due diligence. So before we get there, there’s usually another step, which is called a letter of intent, which some of our viewers might be familiar with just in terms of whether they’ve done any kind of acquisition themselves.
But basically a letter of intent is still never really binding, but it does give the sellers a little bit more clarity as to the guardrails of value and the conditions that are going to be required to get to closing. And that becomes really important for the confirmatory due diligence process that I just talked about. And confirmatory due diligence is really a period that averages probably 45 to 60 days.
And it’s basically a thorough vetting and confirmation of everything that you’ve presented in your confidential information presentation, in your management meetings, which is really a meeting that those potential buyers get to come to and talk to you and your team about the future of the company and what was in the confidential information presentation. And so fundamentally that’s where that preparation process to really build that solid data room begins to pay great dividends because you’ve already really done that work to put the facts and figures and reports about your company into a data room that’ll then be thoroughly vetted.
Armando (45:11 – 47:29)
Okay. So let me recap just a little bit to make sure I followed along here and really to just talk about that process and what your role is. So when you come into a business for the first time, let’s say they’ve never talked to somebody like you and you’re coming in with your lens looking at that business and helping them understand what you see and what needs to be shored up and what needs to be addressed so that that business can be in a much better place say in 12, 18, 24 months down the road.
And now they’re making the best use of their assets. They’re very efficient. They’ve looked at the optimization because you’ve helped them really create that and take that company that’s worth X and just made it a much tighter ship and a more professionalized, more sellable entity altogether.
You’ve taken the family expenses out of it and it’s just a nice clean operating business. And so now you’re feeling good through your lens as you look at it, you’re feeling really good about what you see and you’re able to talk with the family, the founders of the business, and then begin to look at investment bankers to decide which one of these firms is going to help do this family, this business justice, which is going to be the best one for us to choose. So then, and correct me if I’m wrong, but you’re then taking that business that you’ve helped get into tip-top condition to several investment bankers and say, Hey, this is us.
We’re wondering if you are the right firm to represent us as we go through the sale process. And you go to maybe half a dozen different investment bankers. They then come to you, as he said, with a pitch and say, yes, we know your industry.
We know all about your space. We’ve just done transactions real similar to yours. And that’s why we’re the best.
So you might get six different investment banking firms coming to you, offering to sell your business to the buyer universe. And then you and the founders family of that company, you’re helping the business owners understand which of those really is the one that makes the most sense for them to list their company to sell. Is that right?
Joyce (47:30 – 47:52)
Absolutely. And we have a list of criteria that I give every decision maker from the family perspective access to before those presentations. And we use that those criteria in order to help make a really informed decision as we’re listening to their presentations.
Armando (47:53 – 49:12)
Okay. Okay. So the investment bankers, I just kind of in my mind, see this, they’re coming in, maybe there are four people in the room from their end.
You’re there with the family listening. You’ve already given the family, the ownership criteria that to look at, do they know the industry? Do they know business is about your same size and whatever criteria you’ve decided are really pertinent.
Then those four people leave the room and then you have a debrief with the family, the ownership and talk about that. And you repeat that process several times at the end of it, there’s been a joint decision made as to which investment banking firm really is going to be the best fit. Yep.
Perfect. So then you help select or the family selects that particular investment banking firm, then they begin their process. And as you said, you’ve already built a data room, but there might be some more fine tuning of that or more additions to it based on what investment bankers are recommending.
And then from then, then the buyer universe is contacted to give those indications of interest where people say, yes, I’m interested in buying your company potentially. And we think it’s worth between X and Y. Is that where the value comes in from those indications of interest?
Joyce (49:13 – 49:54)
It’s always a range. And it’s after a thorough exploration of that confidential information presentation, which you can just think about as probably the best marketing presentation you could ever pull together for your business. And that’ll be led by the bankers in terms of coming up with that.
And then you get the indications of interest based on everyone reviewing that book and maybe asking some questions in advance of the indication of interest deadline. And then you’ll have your buyer interested universe.
[Speaker 3] (49:56 – 49:57)
Okay. Okay.
Joyce (49:59 – 52:42)
And then the family needs to decide who of those interested buyers they want to move forward with. And the banker will have a very clear point of view about that. And they’ll go through what they know about those individual buyer entities and the family will be able to make an informed decision as to who they want to move forward with in the process.
And the reason why that’s so important is because you’re doing this process simultaneously with still running your company. And so you don’t want this process to overwhelm your ability to continue to deliver results in your company because that’s what they’re going to be assessing. So it’s almost like having two full-time jobs at the same time.
And so it’s very important to really narrow the universe of buyers because you still have your day job of running your company. And I think this is another aha at the end that most owners would say is like, wait a second, I never realized I was going to have two full-time jobs and I have to completely optimize. And that’s the other reason to have strong advisors helping you because even though you’re incredibly capable of running your company day-to-day, how about if you overlay that with another incredibly intense job, which is selling your company.
And that’s the other reason why the advisors are so important. So for the management presentations, what’s come next, you really want to keep those to fill in the blank four to six, maybe because they’re usually three, four hour in-person. They’re back to in-person now during COVID, obviously they were more virtual, but now they’re very in-person.
And again, think about your day job when you’re spending your whole day with potential buyers. So this is another learning curve that folks need to really understand fully. And another reason why that solid management team is so important when you’re spending a lot of your time with a buyer community.
Armando (52:43 – 53:32)
And Joyce, I’d like to touch on an area. You mentioned that there’s a buyer universe, which then gets this information, indication of interest come back. Then the ownership of the business will look at those indications of interest, which are people who are saying, yes, I might be interested in buying your company.
And then narrow down that pull to maybe whoever they want to begin walking down that path with. And I imagine that at that part, you started out the conversation talking about goals. What is the family really want when they exit this business?
If they want to keep that corporate culture intact and keep all their employees still working in that same company, this is where that comes back into play, I would presume, so that they pick the buyer who wants that also.
Joyce (53:34 – 56:04)
Exactly. Those goals are so important. And another piece of those goals is simply put, what are you selling?
Do you want to sell 100% and completely diversify your assets? Do you want to sell less than 100% and keep a certain percentage of your company for the next life cycle of the business? And I always have to start and end with owner goals, because the only way advisors can deliver fully on owner goals is if we know what they are, and we know what journey we’re on.
And I think that’s a really important part. If I’m not ready to fully sell my company, that is okay. In fact, that’s awesome.
For a lot of financial buyers, that’s what they want. They want the owner to stay in, you know, 20, 30, 40% in so that they get an ongoing founder’s commitment to the next stage of growth. But again, that’s all up to the owner and the family to decide what their goals are, you know, from a secession, from an asset diversification perspective.
And it all doesn’t have to be decided up front. Part of the optimization process is to allow time for some of these ideas to grow and percolate and allow for, you know, conversation with advisors like you and others that might be helpful in that asset diversification decision. But by the time we come to the decision to hire the banker, that’s where the family’s goals have to solidify, because most investment bankers are primarily compensated on a closed transaction.
And there’s very little monies they get during the process. So fundamentally, we have to be able to share certainty to close and know what we’re selling when we go out to the investment banking community.
Armando (56:06 – 56:43)
Okay. Well, I can see how that goals conversation you have with them in the beginning and helping them to get clarity on those goals throughout can be extremely critical so that when it’s all done, there’s no regret. They feel good about what they’ve done.
They’re excited about it. They’re excited about the next stage, whatever that next stage looks like. But the last thing they want to have is to have regrets about how the process went or how they ended up.
And they’ve spent so many years building this company through blood, sweat, and tears. And now to have a regret at the end is just not what anybody wants for their business.
Joyce (56:44 – 58:02)
Exactly. And that’s where the planning and the goals and the advisor’s expertise becomes so critical. So on the asset diversification element, knowing what you and your clients might have in mind right up front really guides some of that goal setting for sure.
And so all the bankers are going to want to know is what are you selling? And we have to know what that is. We’re selling 100%.
We’re selling X percent. Whatever that is, they’re fine with that. But we do need to know what that is because what we’re trying to do is bring professional investing returns to a family business that has worked so hard to get a business to a place that they deserve professional financial returns for that equity that they’ve created.
And to do that, we really do have to follow a process of professionalization. And that includes what we’re doing in the company and how we’re working on the company.
Armando (58:03 – 58:45)
Okay. So sometimes, Joyce, people will maybe not know really what they want, but then sometimes they really want to grow the company and really want to see it have a much larger footprint. And they know that they just can’t do it themselves.
They need a big partner, a big company that has a global reach, that has a distribution system and or a marketing system to really make that happen. But they might want to stay with that company and be part of it and continue that excitement. So if they know that and you know that and the investment bankers know that’s the desired outcome, then it just seems like it makes the whole process more efficient from start to finish.
Joyce (58:46 – 59:59)
Well, and I couldn’t agree more. And we have to keep running the business well while we’re doing all of this extra work, right? And so the more efficient we are in terms of the goals, the more we can actually do both.
And that’s another hard lesson learned. There’s often a tendency to want the process to be as big and as broad as possible. And that’s often sub-optimizing to the business’s results.
And we don’t want that to happen at all. I mean, any softening of the company’s revenue or profitability during this process is going to come back to the owners with a reduction in value. And that’s not what we want at all.
We want momentum. We want continued growth. We want them to be delivering on a budget that they’ve set.
But we also want them to achieve exactly what they want out of the sale process. And that’s where this planning and the strength of the advisors helping the family with this planning really pays off.
Armando (59:59 – 1:00:18)
Okay. So I think what you’re saying is that if they spend too much time on the sale, if the owners spend too much time on the sale process, it could diminish or will diminish the value, will reduce the value that they will sell for because they’re taking themselves away from running that business day to day.
Joyce (1:00:19 – 1:01:11)
Exactly. You are absolutely in a process of working in and on your business at the same time when you’re in a sale process. And that’s the hardest thing.
The first time I was in that chair, the crushing weight of that workload really, really hit you. And you got to do both. And that’s where your team’s going to be tested.
Your advisors are going to be tested. And this is absolutely team sport. There is no way that the owner can do this on their own and optimize it at all.
They can do it, but I would bet that they’re not going to be able to optimize it.
Armando (1:01:12 – 1:01:33)
Okay. And then Joyce, anything that we’ve touched on a lot, touched on that you think really needs to be part of this conversation for that, that owner who’s not gone through a sale before they’re hearing your words of wisdom and what that process looks like. Anything that really should be part of the conversation that we haven’t touched on yet?
Joyce (1:01:34 – 1:03:04)
This is an incredible journey. And depending on your goals, it may or may not have a final destination to your point about wanting to maybe continue and grow even further with the business. But you have to really take time out for self-care in this process, whether that’s a run in the morning, a meditation session, whatever the owner does for self-care becomes even more important because of how incredibly difficult this journey is and how long it takes.
So that old phrase, it’s a marathon, not a sprint. You can’t sprint through this process. You just can’t physically do it.
And so being able to really, really care for yourself and probably remember that you have a family during this process is also incredibly important because you can get so skewed by this workload that you really lose that ability to have good perspective. And that’s something that I wouldn’t want anybody to get caught up in. So that would be my other words of wisdom if they exist as wisdom, but definitely advice.
Armando (1:03:05 – 1:03:49)
And it sounds like what you’re getting at as well with that is that to keep that family good and solid, you don’t want to sway too much in a direction that cuts them off or alienates them where they don’t see you. Because that at the end of the day is what matters most to people. And so once the company is gone, that’s what’s going to be there to go forward.
And so being cognizant of the self-care as you mentioned, if they run every day or every other day, great. Keep that routine, keep those to keep some sense of balance as they’re going through this marathon to get to the end of this exit process in the business.
Joyce (1:03:50 – 1:03:50)
Exactly.
Armando (1:03:51 – 1:10:48)
Okay, good. So let me just recap a little bit. You’ve talked about a lot of good things.
I’ve been making notes along here. You said, Joyce, that one thing that’s really, really important and it’s the first thing you said is goals. Talking with the ownership to understand what the goals are.
And they might not know on day one, but that might be an idea that gets more clear as they continue walking down this path, but making clear on those goals. You said optimization of value and doing that through, you look at it in three areas, stability, intrinsic value, and capital efficiency. That’s what you’re thinking of in terms of optimization of value.
And you said for stability, you want to look at margins. Are the margins profitable on the different products and services that they have? You said you want to look for consistent growth.
And that just shows a track record of the company’s going in the right direction consistently. You want to see monthly recurring revenue that that is there. That’s part of that stability that is so key to having a good viable ongoing business.
You talked about intrinsic value, about a customer base that does not have concentration, where your only customer isn’t Walmart. You’ve got many customers, and maybe they’re all Walmart ties, but you’ve got not a concentration of one client for intrinsic value. You talk about long-term customer contracts, having contracts of three to five years, that that adds a lot of value and ongoing intrinsic value to the business as well.
And you talked about taking care of the proprietary things that company has, trademarks, intellectual property, patents, all those things that are proprietary, that making sure that that’s nice and buttoned up so that it’s clear that the company owns that value. And that is part of what creates the intrinsic value of the business. You also talked about capital efficiency, how efficient are the dollars being put to use, whether it’s equipment or whatnot, trying to keep low labor costs in the business as well for the capital efficiency, and having a solid management team that knows how to execute and run that.
So those are all part of the optimization of value, as you mentioned. And then you look at things from an investment highlights area, with all that together, what does this company really have? What’s going to make this, why should a potential buyer look at this business?
What is it that’s really there for them to look at? And you mentioned also, I asked you, what are some of the ahas that you hear from your clients as you’re working with them? One of the common things is, why did they wait so long to have a conversation with you and to bring you into the scene for them, or to work with them?
You again talked about profit margins and ranking those margins, maybe those low profit margin products versus they just go out the window, get rid of them. They’re consuming too much resources, they’re not lending to efficient use of the resources that you have. You also talked about removing owner expenses, things that are maybe discretionary or things that are just really family related, get those out of the picture.
They just make it a little more confusing, they’re not necessary, get them out of the picture so that it’s very clear what this business is, how it operates, and what the expenses are. And you said, dot the I’s and cross the T’s. And that got to the data room, making sure that you’ve got those contracts written out, you’ve got the articles of organization, the operating agreements, the customer contracts, that you’ve got all that in a place that’s accessible, the data room that will store all those types of documents.
And really, if a company’s been around for maybe, say, 30 years, at least going back to five to seven years, the most recent five to seven years, to show that you’ve taken steps to really professionalize the business and make it look and work the way it needs to. Maybe not going back 30 years, but at least the more recent years anyway. And you mentioned that two to three years before sale, that’s when you’ve really got to begin doing this process, making sure that EBITDA is really where it needs to be and that you’re focused on that, because that is what the buyer is looking at.
And getting the right advisors. You mentioned that getting the right people who really understand your business and they understand where you are, what you’re doing, because the best advisors will help you get the best outcome. And they’re very key to this.
You also walked through the hiring of the investment banker process, making sure that that investment banker understands your industry and has recent experience, recent relevant experience, that’s going to help you get the best outcome for your business. I love what you said also about you helping the owners of the business interview the investment bankers, identify those that might be suitable or might be the best fit, but then having them come in, having them make their pitch, their presentation to ownership, and then you already have teed up the owners to have some kind of a matrix where they’re deciding or they’re evaluating those bankers based on certain criteria that are deemed important. Do they have relevant experience? Are they the right team?
Do they really know your business? Do they have the right types of buyer pool to look at? Whatever you deem relevant in that whole process.
And then indications of interest, you talked about that. Those are people who now have received, these are prospective buyers who said, yes, I might want to be interested in buying your company and it’ll be a value between X and Y. And you’ve said that sometimes, or not sometimes, but often that is a real eye opener for the owners of the business because now they have an independent third party who’s thinking about buying the company.
And now they’re seeing a real dollar sign attached to that or a range of values. And that is probably the first time they’ve really actually seen that for that purpose. Maybe they had an appraisal for estate planning purposes, but this is a different purpose.
And you walk through the rest of it. I like what you said, that this is a team sport. You don’t go it alone.
This is a team sport. The team’s got to work together and have the same goal in mind. And the very last point you mentioned about self-care.
Owner, as you’re going through this exit process, keep your gym routine or keep your workout routine. If you meditate, if you do yoga, whatever it is that keeps that balance and keeps you in harmony, keep that because this is a marathon and that’s going to help you have a successful finish. Does that sound about right?
Joyce (1:10:49 – 1:11:11)
That sounds absolutely right. And Armando, your summary was terrific. I really appreciate the opportunity to have this conversation with you.
If this helps even one owner get more value for their hard-earned work, that is a benefit to all of us in our community.
Armando (1:11:11 – 1:11:22)
That’s right. Everybody wins. I agree a hundred percent.
So Joyce, let’s say that there’s a founder out there who really liked the conversation and wants to get a hold of you. What’s the best way for them to reach you?
Joyce (1:11:23 – 1:11:31)
So my email is joyce.acquireretain.com.
Armando (1:11:38 – 1:12:18)
Okay. So Joyce at two words, joyceacquireretain.com. Right.
Great. That’s it. Joyce, this has been really, really helpful.
Thank you so much. I hope that the right business owner listens to this and learns something from it. And if nothing else, they’re in a better position as they begin that exit.
But if they have questions and they want to reach out, you’ve provided your email. Thank you for that. And I hope that somebody will reach out and have a conversation with you and explore that further with you to see if it is a good fit for you to work with them and then to work with you to help them realize those goals that are so important to them.
Joyce (1:12:20 – 1:12:21)
Thank you so much. Have a great day.
Armando (1:12:22 – 1:12:56)
Great. You too, Joyce. Thank you very much.
Really appreciate the conversation. Thinking of exiting your business, you may have only one chance to get this sale right. Your family depends on it.
Come hear experts who plan and negotiate successful business exits for a living. Bring your questions. Live panel discussion followed by Q&A.
Join us Thursday, April 27th, 2023 at the next Scottsdale Founders Forum, a biannual live event for the founder considering exiting in the next five years. More information available at ScottsdaleFoundersForum.com.
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