Armando (0:00 – 1:34)
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 professionals involved in the buying and selling of companies talk about what you should know before you exit. If you’ve never sold a business before, this podcast can be super helpful to you.
I’m Armando, host of the Founder’s Guidepost. Enjoy. If you like this information, please subscribe and share.
Hi, Armando Roman here with Founder’s Guidepost. Guest today is Bill Koenig with Monmini? Monmini and Company.
Monmini. I rehearsed that a few times, but I hadn’t. So, apologies.
So, Monmini and Company, banking firm in the middle market space. And Bill, excited to have this conversation with you because when you and I had several conversations, what you helped me understand is that in this middle market space for that founder who is now becoming a first-time seller, they have surprises. They don’t know what they’re going through.
You’ve held the hands of people as they go through this for the first time. And you’re very good at helping to simplify things so that it makes sense and it minimizes maybe some of the fear, stress, anxiety for that first-time seller. So, we’ll have a conversation today about that process, and maybe you can add anything about your background experience that you think might be helpful as we have this conversation.
Bill (1:35 – 2:43)
Well, first of all, Armando, delighted to be here. Thanks for having me. It’s always a pleasure to sit down with you and have these kinds of conversations.
So, yes, Monmini and Company, French-Canadian last name. So, none of us are French-Canadian, so we all get a pass on how to pronounce it. But what we are is a middle market investment bank, FINRA registered and certified that’s based out of Santa Monica, California.
I, in particular, based in Scottsdale, Arizona. So, I’m boots on the ground here. I also have a colleague, excuse me, a gentleman named Mark Chambers, who is also with me here in the Phoenix market.
So, we kind of lead the charge in the Intermountain West division. What we do 80% of the time is sell-side mandates with founder-led businesses that are typically sole leaver of private equity or strategic buyers anywhere in the contiguous United States. So, been around for 20 plus years, the bank.
We’ve got about 19, 20 full-time professionals in three different states. I already mentioned Arizona and obviously California, but we also have a managing director that’s based out of the Pittsburgh, Pennsylvania area that is an expert in packaging and food distribution.
Armando (2:44 – 3:28)
Fantastic. And within your space, the, let’s go through, if we can, just step-by-step what that first-time seller is going to experience and how you’ve helped walk people through in the past that process. What does that process look like for them?
When they’ve never gone through a sale like this, this is a monumental task. It’s a once in a lifetime experience for them. And to get it right is just incredibly important to the family beyond the sale.
So, this is obviously a very stressful, high anxiety time for them as they go through the exit. Let’s walk through that step-by-step if we can.
Bill (3:29 – 7:50)
Yeah, absolutely. So, when I have a conversation with any founder about a first-time exit, there’s really five or six key questions they should ask themselves. And the first one is, why are you selling?
What is your motivation to sell? And that’s a big one because sometimes sellers are looking for a partner to bring in equity capital to help them grow the business and they want to stay involved. Other times, they may have family members involved in the business that they want to sell to.
And then other times, they may want to sell and just retire and go off into the sunset. And so, how you answer that question, i.e., what is your motivation to sell, often determines what buyer I, as an investment banker, would approach as part of the sale process. The other thing that’s really critical is understanding what drives value in your business.
Every sector, every industry is a little bit different. And there’s a number of traps along the way that sellers need to be aware of. One of the big ones is avoiding the management trap, the business becoming too dependent on one particular founder in that business.
So, that founder exits, key customers could leave, key supplier relationships could go away. Those are all things that will impact how a potential buyer looks at that business, just from the lens of whether or not they want to buy the business, but also how they would value the business. And so, these are all risks that they’ll try to mitigate in the process that a seller can help mitigate long before they go down that path of selling their business.
The other thing that is critical is removing the barriers to a sale. Oftentimes, clients will come to us, they want to sell their business, but they have a number of onerous agreements, either shareholder agreements, lease agreements, customer agreements, agreements with suppliers that require notice and approval as part of the sale process. And what you can find is that a business will suddenly be in a position where they don’t have control over their own destiny, and they could potentially lose key customers or supplier relationships.
So, it’s important to get those addressed early on in the process. Getting the accounting and financial house in order. Armando, you had a very talented M&A attorney on a couple of months ago who talked about that, and she was spot on.
Get that process undertaken early, get the house cleaned up. You wouldn’t sell your home without painting it and fixing the roof and preparing to chip concrete. The same thing goes with a good business.
And then finally, dovetailing off that is getting sound accounting and tax advice. So, those are really the key things that really drive the initial discussion that we have with clients. And we can go into detail about each of those.
But really, understanding your motivations, I mentioned this earlier, that will drive what type of transaction you pursue and what type of buyer you will pursue. But the other big one is understanding what drives value. And there’s a number of key things from a macro standpoint that may impact your business to micro factors that will impact the value of your business.
The macro stuff is pretty easy. Where’s the overall general economy? What’s the availability of financing?
What’s the cost of capital? Is it going up or is it going down? And how could that impact my business?
The micro issues, which are really in the control of the seller, are the degree of customer concentration. If you’ve got a business that’s doing 50 million in revenue, but half of that revenue comes from one customer, that is a huge risk that any buyer is going to be concerned with. Same thing with supplier relationships.
If you’re dependent upon just a handful of suppliers, they have tremendous power over what they charge in your supply chain. So, all those things need to be taken into consideration. And people will have expectations of value sometimes.
They’ll be in, say, the tech sector, for example. They’ll be a value-added distributor of IT hardware and services. They’ll look at cybersecurity businesses that are trading at 14 times and they’ll think, well, I should trade at 14 times.
Not necessarily. Cyber businesses will have a huge recurring revenue component. A value-added reseller of hardware may not.
And so, they may only trade at five or six times. So, it’s important to understand where the valuation of your business is going to shake out.
Armando (7:51 – 8:21)
It sounds like when you have the initial conversation that you may be having several initial conversations with a founder because if they’ve not gone through this before, they don’t know what they don’t know. And you’re bringing to their attention a lot of areas that they might not have thought of at all. Right.
So, it may take them several months to even be ready to have a second conversation with you because they just haven’t done some of those things. Is that what you find at times?
Bill (8:22 – 8:44)
Yeah, absolutely. And sometimes we find that they think they’re ready to go through a sale process and they’re not. The financial house is not in order.
The legal house is not in order. And we’ll be very candid with them that these things need to be addressed and mitigated and cleaned up. Otherwise, the process could fail completely or it could result in an outcome that’s not favorable to the seller.
The price and the terms just aren’t what they expected.
Armando (8:45 – 9:12)
Okay, good, good. And so, let’s go through that. You just put a lot of information out there that they need to be aware of, making sure agreements are in line, financials are in order, and getting those ducks in a row so that they can begin the process with you.
When they begin that process with you and you’ve gone through and made sure that all those things are where you want them to be, at that point, then what do those steps look like for that founder going forward?
Bill (9:13 – 13:31)
Yeah. So, normally there’s a pre-marketing phase that takes place where we sign the initial engagement agreement. And then we go about building a data room that’s targeted to the due diligence that the buyers are going to do.
So, we’ll build an electronic data room that includes all the financial information, not just historical financial statements, but detailed customer information, detailed sales trends over time, details of key supplier relationships. We’ll put in information regarding the management team that’s going to continue on and stay with the business, their bios, their backgrounds, how long they’ve been in the industry, how long they’ve been with the business, key employee registers, stuff that we’ll eventually disclose to a handful of buyers when we get to that point. We don’t disclose it initially, obviously, but we try to get as much of that data populated into an electronic data room as we can.
And then we spend a lot of time preparing marketing materials that are going to be buyer-facing. Usually, we’ll prepare a one-page teaser that doesn’t have the brand of the seller on it, it’s anonymous, and we’ll send that out to potential or prospective buyers. Farther along in the process, when it comes time to actually share detailed information on the company, we’ll send them a confidential information memorandum, which can be anywhere from 25 pages to 100 pages, depending on the complexity of the business.
Those initial marketing stages, there’s a lot of time spent betting who we think potential buyers are going to be. And again, that goes back to the seller’s motivation, what they want to do post-close. But it’ll typically be a mix of private equity buyers, strategic buyers, family offices, and others that we think may have an interest in that particular sector or business.
That’s usually, you know, that’s kind of like stage one of the marketing process. Stage two is the actual launch, you know, where we’ll go into full-on marketing mode, which takes, you know, anywhere from 6 to 10 weeks, kind of start to finish. But we’ll, you know, obviously share that prospective buyer list with our client, we’ll get approval on everybody we go to, we’ll send out those initial non-branded teasers with non-disclosure agreements that these prospective buyers can sign if they have an interest to take the conversation further.
That’s a fairly intensive process. There’s a lot of Q&A that goes back and forth. There’s a lot of managing of getting those NDAs signed, all stuff that we take off the plate of a seller so they can continue to focus on running their business.
But what we’ll do is typically, you know, and there’s different approaches you can take to a process. There’s, you know, a real predefined process where you may only go to one or two prospective buyers. There’s kind of a hybrid middle-of-the-road process where you may go to 20 or maybe 25 prospective buyers.
And then there’s a full-on auction, right, where you may go to 100 plus prospective buyers. They all have their pluses and minuses. You know, obviously going to just one or two buyers is probably not going to get you the best price in terms, but it’s much easier to keep things highly confidential.
The middle-of-the-road where you go maybe to 25 or 35 prospective buyers, you know, it’s kind of the maybe the best of both. You can get the best price in terms, you can create the competitive auction environment, but you can still keep things fairly confidential. That’s typically what we’ll do.
Most sellers we find want us to kind of stay in that bucket. Others, you know, want to go to as many possible prospective buyers as they can. We may even go international if they want to go that far, which we can do through our alliance partners in Europe.
So, you know, that kind of finds the marketing stage. Once you get through that and to the end of that marketing stage, we typically get the buyers whittled down to maybe two to five that are really serious. We’ll get written LOIs from those prospective buyers.
We’ll then prepare a management information memorandum, you know, for a management meeting that goes into a lot more detail on the business. Shares a lot of the nitty-gritty stuff that you just generally wouldn’t want out there in the broader market, but that you’re willing to share with respective buyers so they can really fine-tune their offers. And then we go back to those buyers after those management meetings and ask for best and final bids and get to the point where we actually choose who the winning bidder is going to be.
Armando (13:32 – 14:07)
So, Bill, a question for you. When in a smaller market, when maybe the logical buyer might be the competitor across the street, how do you help the founder navigate sharing too much information with the competitor across the street? I imagine the founder might be reluctant to even show anything to the competitor in a smaller market because they don’t want to divulge that information.
Yet, maybe that is the best buyer for them. How do you navigate that and help them navigate that process?
Bill (14:08 – 15:53)
Yeah, we went through a specific case that’s now public information here in town that involved that very scenario, MicroAge, you know, in C-Store or Custom Storage Inc. Custom Storage Inc. was looking to sell, had been through a process a few years prior to COVID, decided not to continue on.
You know, MicroAge was clearly the best buyer and they were also a competitor, right? So, they hired us to basically approach MicroAge and tell them, look, we have a perspective seller that’s in your space. We didn’t tell them where they were geographically.
We told them as little as we could, you know, in terms of not them being able to find out who it was. But we shared some high level data with them, you know, kind of revenue footings and EBITDA footings, etc. And, you know, what their client base consisted of, you know, high level, you know, government, state and federal, private industry, and they expressed an interest.
And so at that point, we got an NDA in place that we felt was pretty ironclad. So, our seller could sue them if they ever breached that. And then we disclosed who they were, you know, had some more high level meetings with them and asked them to, you know, share a letter of intent without having the benefit of all the data that they would get, you know, in a more formalized management meeting.
And we got them to the point where they were comfortable doing that and the seller was comfortable disclosing that. So, it’s a bit of a, you know, chicken or the egg thing, you know, how much do you disclose before you get that letter of intent? And how do you manage that process?
It’s more of an art, I think, than a science sometimes. But we try to use the, you know, the legal balance of the law as best we can to get agreements in place that will protect, you know, our client, the seller, not only from them using that information to gain competitive advantage, but, you know, hiring key employees, you know, for a period of maybe 18 months or two years or longer, and not being able to solicit clients either or customers.
Armando (15:54 – 16:03)
Hmm. Okay. So, it sounds like there is a way that that can be navigated, but it sounds like it can be a delicate process as well.
Bill (16:03 – 16:16)
Absolutely. Right. And I think it’s something that, you know, sellers don’t want to do on their own.
Obviously, if they pick up the phone and call, then right away that buyer knows who they are. They can use us as a kind of camouflage intermediary, for lack of a better term.
Armando (16:16 – 16:34)
Right. Okay. So, once they get beyond that, you said buyers maybe go to one or two buyers, maybe to 20, 25 buyers, or have a full-on auction.
Once you get beyond that, and now you’re at that next stage, what are the steps again that happen after that?
Bill (16:35 – 17:50)
Yeah. So, once we get to the point where we get that final best and final, we’ll choose which seller or which, excuse me, which buyer we’re going to go with, sign that letter of intent. It’s a non-binding letter of intent that both parties have the right to exit.
That’ll typically have an exclusivity period of 60 to 90 days. Sometimes there’s extension options built in, but that gives the buyer the opportunity then to do a deep dive on due diligence. It also gives the buyer some comfort that the seller and us as the seller’s rep is not going to continue to market the business.
And so, it’s kind of a quiet period in terms of the sale process. That’s when the fun begins. That’s when typically the buyer will come in and bring their full legal accounting and due diligence teams.
90% of the deals we sell require quality of earnings. So, the buyer will typically hire an accounting firm to come in, do a quality of earnings, includes both the gap accounting due diligence, but also tax due diligence. Legal due diligence will start at some point in that quality of earnings process.
They’ll do IT due diligence, whether or not they’re going to use a rep and warranty policy, which we can talk about. It will also dictate whether they bring in an insurance partner to do more heavy due diligence.
Armando (17:51 – 18:11)
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More information at ScottsdaleFoundersForum.com. Okay.
Bill (18:11 – 18:28)
But it’s an intensive process, and then it goes back to that data room that we built at the beginning of the process. If that’s been sanitized, it’s built, it’s well-defined, it’s annotated against the buyers due diligence list, it makes things a lot smoother and easier for both buyer and seller.
Armando (18:31 – 18:43)
And so, when that process begins, how long of a process is that typically? If everything is rolling smoothly and things are continuing to move at a normal pace, what kind of timeframe are you looking at?
Bill (18:44 – 19:06)
It can be as short as 30 days to as long as 90 to 120 days. I’d say most of them kind of fall in that 60 to 90 day timeframe. Signing of LOI until actual closing of the deal, 60 to 90 days.
The entire marketing process can take anywhere from four months to eight or nine months or longer. Most of them take about six months.
Armando (19:07 – 19:29)
Okay. So, at this stage of where you are with that business, what are some of the surprises or unexpected situations that come up for that founder, and you’re trying to help him or her understand and navigate and feel good about? What are some of the surprises that seem to pop up?
Yeah, what frequently pops up goes back to that founder trap.
Bill (19:30 – 20:45)
The business being too reliant on one or two individuals that want to go the sunset. And oftentimes we’ll spend a lot of time adjusting EBITDA or cash flow to take out non-recurring expenses, but also overhead burden that may not be there in the future. And a lot of times a founder may take out or pay himself an exorbitant salary or herself an exorbitant salary.
They want to add that back because, oh, I’m not going to be there anymore. Well, yes, you’re not going to be there, but they’re either going to have to promote somebody internally and pay them and then backfill the position that was lost, or they’re going to have to go hire a new CEO or bring in an operating partner to run the business. And that person’s going to want a salary bonus in stock.
So that’s not really an expense that goes away. So that can all impact value. That’s one of the things that comes up.
The accounting, like I said, may not be as clean and pristine as it should be. And that creates issues with the quality of earnings process. They’re not getting information in a timely manner.
Maybe things haven’t been properly documented or accounted for. That creates issues where the seller has to go back and dig four or five years into the past to try to bring up stuff to justify expenses. That can hold the process up.
Armando (20:46 – 20:55)
And so, Bill, on those financials, is it better for the seller if they’ve had reviewed or audited statements in that process?
Bill (20:56 – 21:40)
Yeah, I would say best case, you’ve got at least three years of audits, right, if not more. That’s the cleanest way to get through that process. 80% of the businesses we sell don’t have audited financial statements.
Sometimes they’re just compiled. Sometimes they’re just internally prepared by a local CPA or bookkeeper. I would say, again, if you know you’re going to sell your business and exit at some point, then two or three years prior to that process, ideally you move to CPA-reviewed financial statements and then maybe eventually an audit, at least one year before you sell the business.
That’s not a deal killer if you can’t do that or if it’s cost prohibitive, but it certainly makes the process a lot cleaner.
Armando (21:41 – 22:09)
Yeah. And if they, as you said, 80% don’t have audited statements or maybe reviewed statements, it sounds like they might also need to consider changing to a different CPA firm so they can get that or maybe keep the same firm, but have the audit come in as a separate firm if they’re really serious about thinking about selling that company and getting the maximum value for it. That’s right.
Yes.
Bill (22:09 – 23:01)
And I used to believe this, and we did as a firm as well, that we would try to encourage sellers in certain cases to do their own quality of earnings upfront, right? Because it was a nice dry run for what was ultimately going to come anyway. It helped get them focused on cleaning up the financial house.
The last 18 months of the transactions I’ve sold, almost all of them, some of them had terrible financial reporting, frankly, and they were big businesses. They were doing over a hundred million a year in revenue and they did not have audits and they didn’t get QOVs upfront. And yeah, it took longer to get through the QOV process, maybe 45 or 60 days versus 30 days, but they got through it.
It ultimately didn’t impact value. And so I’ve kind of come to the conclusion that getting a quality of earnings upfront, maybe it doesn’t have a whole lot of value if you really looked at it on a case by case basis.
Armando (23:02 – 23:15)
And so when those closed, you said that the ultimate value of the business did not suffer from not having that. I would have expected that maybe it might’ve had some kind of impact on value, but it sounds like it didn’t.
Bill (23:16 – 23:51)
Well, it could. That’s why I say case by case, right? Certain industries are not as in favor as others.
Everybody knows that anything with a recurring revenue component is heavily sought after, lots of buyers out there bidding on it. Other industries with lower margins that don’t have a recurring revenue component, maybe aren’t as highly sought after, there’s fewer buyers. And so those buyers may view that less desirable industry sector and the lack of financial rigor is a way to beat them up on valuation.
So it really needs to be looked at on a case by case basis.
Armando (23:51 – 24:14)
Okay. Okay. That makes sense.
And so then you mentioned the data room, having good solid information, maybe having good financials, reviewed financials, that process can take 30 to 120 days, typically 60 to 90 to get through all that. And then once they’re through all that, then what should that seller expect once they’re at that point?
Bill (24:14 – 24:54)
Yeah, well, all these things kind of happen concurrently, financial diligence, tax diligence, drafting legal documentation. But when you get through that due diligence process, then it’s really the closing. It’s the final legal review between buyer and seller on the documentation, the signing and the close, and then the wiring of the money, which is typically sign and close, how the M&A world works these days.
So at that point, it’s over. A lot of heavy lifting to get from point A to point B. And then depending on what the ultimate desire of the seller was, whether they want to stay on and continue to manage the business or exit, will determine what their life is going to look like for the next several years after that.
Armando (24:55 – 25:25)
And what do you see then, Bill? When you started with, what is the seller really trying to get to? What is their motivation?
So when you’re going through this process with clients, how does that end of this look like? Are they getting a check and they walk away into the sunset? Are they staying on for a year or two?
Are they becoming an absentee owner? What does it look like once this process is done for most of the people you’re working with?
Bill (25:26 – 26:47)
Yeah, for most of them, it involves rolling equity, anywhere from say 20% to 40% in the new entity that’s buying their business. And so they’re partnering right along with private equity. Almost every private equity deal or every private equity buyer we deal with wants that management team or those founders to roll some equity.
There’s been cases where we’ve been able to negotiate that not happening, meaning there’s a full exit. Maybe the founder stays on for one year as a consultant or maybe an employee, or they pay him a salary or consulting fee and they don’t roll equity. But that is not the preferred method with most private equity buyers.
With strategic buyers, it can go either way. Sometimes they want them to stick around for a short period of time and then they can retire. Other times it’s longer.
But again, it really depends on what the seller’s desire is. And then we can mitigate around that. If a seller says, absolutely, I’m done, I’m burned out, I can’t take it anymore.
I want to get my big check and I want to go off into the sunset. Then there’s ways to handle that. We can do a talent search.
We can bring in CEO talent, executive talent, the private equity groups or strategic buyer may have that talent on their bench that they can bring in. It typically adds a layer of cost because you’ve got to pay that person and that can affect valuation. But for some sellers, it’s worth it.
Armando (26:48 – 26:55)
Hmm. And when they’re rolling equity, they just say 20 to 40% is being rolled into the new, the acquiring entity.
Bill (26:55 – 27:17)
Yeah, that’s pretty typical. That’s a pretty typical range. I mean, it’s been as high as 49%.
We did one deal where it was actually 50-50. And other times we’ve done minority equity or minority sales. We’ve sold 30% of the business to a private equity buyer or a strategic with an option to buy more later on.
But again, that really came down to the seller’s motivation. That’s what they want.
Armando (27:18 – 27:39)
When that situation is there, Bill, say the private equity becomes minority owner of the company buying, say 30%. They’re putting in money obviously into the company and relying on management to continue executing, continue growing and running that firm in a good manner. What are the conditions that have to exist for that to happen?
Bill (27:39 – 28:23)
A very solid management team. If that buyer is going to partner up and do a minority equity ways, they’re going to want to make sure that that management team is stellar. Not only from a business acumen, but also from a cultural fit.
That’s very important that there’s an alignment of interests where they want to take the business. And those are critical, not just for the buyer, but also for the seller. There’s over 4,000 private equity buyers out there or private equity firms out there, but they are not all created equal.
I mean, they’re just like individuals. They all have their own unique personalities, desires, culture. It’s very important to find the right one.
And that’s where we come into play. That’s the value we bring by maintaining a database of potential buyers and knowing who they are and what they want and how they work.
Armando (28:24 – 28:35)
I’m glad you touched on that because as you said, with 4,000 private equity firms out there, how is that founder supposed to know one from the other? They won’t. They won’t.
Bill (28:35 – 29:12)
And there’s certain private equity groups that are very good at partnering up with existing management and growing the business and kind of letting that existing management team do what they’ve always done and staying out of their way. There’s others that are much more hands-on, much more involved in the day-to-day operations. Some people like that.
Others don’t. So it’s incumbent upon me as an investment banker to know, again, what’s the culture of the business I’m selling? What’s the motivation of my client?
Is the seller, what are they looking for? So I can go out there and find them the right buyer, not only from best price and terms, but also cultural fit.
Armando (29:13 – 29:37)
And that really gets back to your first question. What is that seller really trying to get to? That’s right.
That’s exactly right. What’s their motivation? Because then you can bring in the pieces and take it in a certain direction.
And if you don’t know that, you might go in the wrong direction just because you don’t know. So it sounds like those initial conversations with that seller are really critical to the successful outcome for them.
Bill (29:38 – 29:43)
There’s a lot of critical conversations that need to take place early on, but that is definitely one of them.
Armando (29:45 – 30:03)
When you’re helping or when you’re vetting the different private equity firms, Bill, on behalf of that seller, do you have that seller at the table with you after you’ve done some vetting to tell them why this firm makes more sense and why this one doesn’t?
Bill (30:03 – 31:31)
We will have those conversations with the seller as our client. We don’t typically put them in front of these buyers until it gets down to the stage where we know those buyers are serious. And the way we measure that is with a written either indication of interest or letter of intent that we’ve gone through with our client and we’ve vetted.
What is the best price in terms or which offers do we like? Which ones do we not like? We will go back and negotiate the best price in terms based on what our clients want us to do.
But we try to keep them out of that process until we know who that handful of critical buyers are because it’s time consuming. There’s lots of questions. There’s lots of time that they’re going to have to spend together.
And our sellers need to focus on running their business. That’s another potential trap that we should talk about is that somebody has got to continue to run the business on a day-to-day basis. And the sales process is incredibly time consuming.
So we take that burden off the seller. We’ve had sellers in the past that we’ve had to coach, let us manage the sales process because if you don’t continue to manage the business and you lose a key customer or revenue starts to decline, cash flow goes down, that’s going to put stress on the sale process and potentially impact value in a negative way. And that has happened in the past.
Even though the macro environment continued to be strong, you know, our seller stopped paying attention to the day-to-day operation of the business, you know, in lieu of the sale process, things didn’t go well.
Armando (31:33 – 31:53)
Wow. Yeah, I can see how that could be detrimental to the seller as they go through that process. Definitely.
Okay. Making some notes here. So you might see me with my yellow pad here, my pen making some notes on the conversation.
What have we not touched on so far, Bill, that really needs to be part of this conversation for that first time seller?
Bill (31:54 – 32:33)
Well, I think number one is don’t go it alone. You know, a lot of times we’ll see sellers that have gone to the market, you know, negotiated a sale. They didn’t use legal counsel.
They didn’t go through a competitive auction process to get the best price in terms and then sold their business on the cheap. You know, a lot of times we’ve heard, you know, I sold my business for five times and, you know, I got X amount of dollars and they’re very happy when the market is really willing to pay eight, nine, or maybe 10 times or more for that same business in that sector, right? So you could, you know, sell, think you sold a business for $50 million when really it was worth $100 million, a lot of money.
Armando (32:34 – 32:35)
Right, right.
Bill (32:35 – 33:33)
And it’s not just the price, but it’s also the terms. I keep saying that, but there’s, you know, the reps and warranties that you’re agreeing to. There’s the tenor of the rep and warranty.
There’s the networking capital adjustments that are involved in these transactions, all of which, you know, can expose a seller to potential liability, take money out of their pocket. So it’s important, you know, not only to have, you know, good accounting and tax advice, but good, solid, relevant legal advice. You know, a lot of times we’ll see sellers using a general litigation attorney to do M&A work.
It’s like using, you know, a cardiologist to do brain surgery. You know, they’re both highly competent professionals, but, you know, I don’t want my heart doctor doing brain surgery or my brain surgeon doing heart surgery, right? They’re very specialized.
So make sure you get a good M&A attorney behind you. It doesn’t have to necessarily be a gold chip firm. You know, there’s lots of sole practitioners that are very good at handling M&A transactions with deep resumes.
Armando (33:34 – 34:03)
But getting the right expertise when you need them. And if you’re going through a once in a lifetime sale, then it’s very possible that your current attorney, maybe he or she has that experience, but if you’ve never engaged them for that, it sounds like there’s a good vetting process that has to happen to make sure they are in fact the right attorney and or the right CPA to add value in this last piece of that business cycle for you. That’s right.
Bill (34:04 – 34:05)
That’s absolutely true.
Armando (34:06 – 35:14)
And so Bill, I’ve been told that here in Arizona, it’s not uncommon for sellers to find the buyer themselves and go it alone. I’ve been told that 80% or more of business sales don’t engage someone like you to help them in that process. And I’ve spoken to many business owners myself who have told me that they don’t need somebody else.
They can negotiate, they can find the buyer, they can do it all. And they feel very competent in that. And as you pointed out, they might leave a lot of money on the table and just not know it.
So if you can speak to that seller who thinks that he or she doesn’t need somebody like you on the outside to help them, just go through some of those high points again of how you can be helpful and how you add value. You talked about vetting those private equity firms with 4,000 firms. How is that seller supposed to know which of those 4,000 potential buyers is really going to be true to their word and really going to be a good cultural fit and really going to be the right people for them?
Bill (35:15 – 36:37)
Right. Yeah, I think there’s a number of things. I mean, number one, there’s adequate preparation.
We can help with that. Number two, we can help set valuation expectations because we track and manage and monitor what goes on in the global capital market in terms of buying and selling. So we know where multiples are.
Number three, we can help with identifying risks to the business in terms of what might impact valuation. You know, number four, there’s, you know, taking the burden off of them of selling the business and going through all that tremendous marketing sales process and the market material preparation so they can stay focused on their business. We can help with the negotiation, you know, along with their legal counsel, what to look for in terms of getting the best terms, not just the best price, you know, avoiding, you know, potential legal traps later on.
You know, and there’s, you know, we can help them see things from the buyer’s perspective, which oftentimes sellers don’t, and that can hurt them. That can sometimes result in a breakdown of negotiations on an otherwise, you know, adequate transaction would be good for the seller. So they need to understand where the buyer’s coming from.
And then I talked about this, you know, you know, we can help them identify, you know, who the key critical people in the organization are that are going to continue on, who’s not going to continue on and how that may potentially impact things going forward.
Armando (36:38 – 37:24)
And let me, let me see if I can make it to the point as well, that you touched on at least a couple of times here with private equity. They’re, they’re, they’re, they’re looking for companies to buy. They are professional buyers.
This is what, this is, this is what they’re doing is buying companies. If that lender has never sold a company before, it just makes logical sense. There’s no way you’re going to do it right or know what to do and know what questions to ask.
If you’ve never gone through this process before, even if you’ve gone through it maybe once or twice, you’re still not an expert. And that really is your expertise and what your firm, your firm does. And the value you can add certainly sounds it can outweigh the costs, the fees that you would generate from that seller.
Bill (37:25 – 38:28)
Yeah. You know our fees like any investment banking firm are typically, you know, based on size of the transaction, right? So, you know, larger transactions, our fee may be, you know, 2% of the enterprise value, right?
On smaller transactions, it may be pushing, you know, north of four and a half or 5%. And, you know, I’m talking about businesses with 10 million of revenue. Most of the times our fee is kind of in that 3% bucket and that’s paid at close and it’s only paid if the deal closes.
So it’s not like there’s a ton of liability that a seller is taking on by hiring somebody like us. The transaction doesn’t close, there isn’t any real economic impact there to them. So, but we’re talking about, you know, a business with, you know, 5 million in revenue, if they sold it on their own for say five times, that’s a $25 million valuation.
We might be able to get them 10 times, you know, or $50 million. So, you know, our fee is relatively small compared to the additional value we bring. And that happens almost every time we take on an engagement.
We can get them a premium valuation by going through a competitive process.
Armando (38:28 – 39:10)
So I spoke with a company recently who got an unsolicited offer for $30 million. And $30 million sounded pretty good to them. They had EBITDA about $4 million a year and they had had, they’d been hitting that number for several years now.
It’s more recent, but maybe three or four years now and $30 million sounded pretty darn attractive. So it’s hard for them, it might be, I can see how it can be hard for them to, to not just say, yeah, I’ll, I’ll take the check, write the check. Here’s how you make it payable.
But to your point, maybe it’s really worth $60. You know, it may be a good offer, right?
Bill (39:10 – 40:02)
But you don’t know until you look at where similar companies are trading. You don’t know until you look at the company’s trailing 12 month or 24 month EBITDA, right? And are there any ad backs, things that should be taken out of there that would push EBITDA higher?
Every time we go to market, we go with an adjusted EBITDA figure, which is never, you know, the actual trailing 12 month EBITDA. You know, there’s always ad backs, non-recurring items that are things that we can wash out. And those are often, you know, accepted by buyers as being valid ad backs, which drives the valuation higher.
But a seller wouldn’t know that, you know, if they didn’t, you know, talk to somebody who’s in the industry or they also wouldn’t get the best price or not bought, you mentioned price before, but the best terms by not going to market. You know, there could be things in that purchase and sale documentation that are heavily skewed towards the buyer. And the seller would never know that had they not done M&A for a living.
Armando (40:03 – 40:08)
Right. And you’d mentioned reps and warranties, maybe you can just touch on what that really means.
Bill (40:09 – 41:36)
Yeah. So after, so there’s two ways of handling that. There’s kind of your standard escrow holdback that happens at close where a specific dollar amount will be held back for 12, 18 to 24 months, depending on the deal.
That is then used to cover, you know, breaches of reps and warranties, things that pop up post close that weren’t adequately disclosed to the buyer. That was all kind of the traditional way of doing it, you know, five, 10 years ago. Today, we’re seeing a lot more use of rep and warranty insurance where insurance company will step up and provide a policy in favor of the buyer that covers breaches of reps and warranties up to a predefined amount in exchange for a fee.
Those fees are typically split between buyer and seller, but it’s a point of negotiation. And that serves, you know, a couple of interesting or solves a couple of interesting problems that A, the seller gets their money right away. They don’t have to wait for some predefined period of time.
The buyer doesn’t have to go to the seller who may very well be their partner post close and say, hey, you breached this rep and warranty. You know, we’re going to hold back $100,000 or you’re not going to get that $100,000. We’re going to use it to cover this.
That then angers that partner, potential executive, right? Instead they go to the insurance company and make the claim there. The seller’s never involved in it.
So it’s much cleaner. It seems like both parties tend to win under that circumstance with rep and warranty insurance. So we see that a lot more.
Armando (41:38 – 41:48)
Okay. That makes sense. Are there things in the reps, if they don’t have the rep and warranty insurance, are there things in the reps and warranties that you would prefer to see for your seller?
Bill (41:49 – 42:11)
Well, we try to water that down as best we can. We try to make that a negotiation process and legal counsel will be heavily involved in it as well. The seller’s legal counsel trying to get the dollar amount as low as possible.
The time for the holdback as short as possible. But that are, you know, obviously that’s all in favor of the seller. So these are all points of negotiation that pop up.
Armando (42:12 – 42:33)
Okay. Okay. So what else have we not touched on yet, Bill, that you think is pertinent for that first-time seller who is hearing this conversation and wondering if it’s time for him or her to sell?
And really, should they reach out to you and have a conversation with you? What have we not touched on yet that would be pertinent to that first conversation?
Bill (42:33 – 43:02)
I think we covered all the high points and kind of ticked down the list. I would just say that it doesn’t cost anything to talk to anybody like myself that’s in investment banking. I mean, obviously I prefer people to call me, but I wouldn’t go it alone.
I would at least have a preliminary conversation with a investment banker and, you know, give a sense of all the issues that we brought up today, what the process is going to look and feel like, and get some constructive advice.
Armando (43:04 – 43:30)
And just to, I’m realizing as we’re having this conversation now that we didn’t, maybe at the beginning preface, you know, what is an investment banker? What is it that you’re really doing for that business owner? And what you’re doing for them is helping them either get additional money to grow the company, or you’re helping them to exit to sell that business, or somehow they’re going through some kind of a transition and that’s where your investment banking expertise comes in relevant to them.
Bill (43:31 – 44:26)
Yeah. You know, I think I mentioned at the beginning, 80% of the opportunities we work on are sell-side mandates, but the other 20%, you know, is kind of broken down equally between buy-side engagements where we will be hired by a business to go out and find acquisition candidates that, you know, fit their predefined acquisition knockout criteria. Okay.
Other times we’ll be hired to go out and find senior debt financing and do a debt placement. Well, it could be senior debt, it could be mezzanine debt, but just general debt products. And then other times we’re hired to go out and find equity.
You know, maybe it’s a business that’s pre-cash flow positive that needs to raise some equity. We’ll be brought on to do that. We don’t do that as frequently.
And then occasionally we’ll do evaluation or fairness. So those are all things that investment bankers do. But the percentages of where we generally tend to focus our efforts are just what I delineated there.
Armando (44:26 – 44:46)
Okay. So say a business wants to get a larger footprint and they want to acquire some smaller companies, maybe in their same marketplace, or maybe acquire to expand their footprint and become more regional. That would be them buying smaller companies or buying other companies.
You can help them in that process, you’re saying, right?
Bill (44:46 – 45:27)
Yeah, that’s right. We can not only identify acquisition targets that make sense, but we can help them define their knockout criteria. And what I mean by that is what geographies they specifically won’t look at, what industries they specifically won’t look at.
So we get it narrowed down to a specific set of targets that they are interested in going after. We make the initial outbound calls to those targets. We do it on an anonymous basis.
And then we can help with the vetting and the due diligence from a buyer’s perspective, the financial due diligence. We can help, you know, line up M&A counsel if they don’t have those contacts. We can help negotiate letters of intent, purchase documentation, and ultimately, we can help them negotiate the price.
Armando (45:29 – 45:55)
And it sounds like you can also, if the company is thinking of growing so they themselves can exit in two, three, four years, it sounds like you can help them decide what types of business lines they could add or should add to add more value to the company, or what they should be looking for in that business they’re going to acquire to really add the most value for their own exit in the next few years.
Bill (45:55 – 47:07)
Yeah, it kind of morphs a little bit. It can morph a little bit more into consulting engagement versus a pure M&A transaction. But I think that’s a good point, right?
I mean, if you’re going to have a discussion about M&A, it’s important to have a discussion about what drives value. And that’s really more of a consulting exercise. You know, I mentioned earlier, you know, diversity of revenue base, diversity of supply chain, but also, you know, product and service gaps that may exist, you know, for our client and how they fill those with acquisitions.
You know, there’s always the buy build argument that goes on, do we build it ourselves? Or do we go and buy it? We can help kind of guide the thinking around that.
You know, in the return on investment capital is always kind of an interesting topic for us. You know, unlocking capital that may be in the business with sale leasebacks on real estate that they may own that they don’t need, or even selling real estate that’s critical to the operation, but that, you know, may have millions of dollars of capital tied into it that can be redeployed to either do an acquisition, do a tech refresh, launch a new product or service, you know, and what’s the highest return on capital so we can help kind of guide some of the thinking around that as well.
Armando (47:07 – 47:26)
Yeah, yeah. And I can see how that could certainly add value when they decide to sell. Absolutely.
And you can help direct that conversation and direct shape, I guess, shape what they will look like when it comes time for them to sell. So they really have the most choices available to them when that time is right.
Bill (47:27 – 48:04)
Yeah, that’s exactly right. And we can also help optimize their capital structure. You know, we had a conversation yesterday with a company that it’s got some international, you know, manufacturing processes in other countries, EU and Mexico, and they’ve got a line of credit that just isn’t right for them.
It’s got no multi-currency draw features on it. They have no ability to do leases in foreign countries. But there’s lenders out there that do that, you know, that are very sophisticated in that sense, that are banks that have low cost of capital.
And they weren’t dealing with one of those banks. It wasn’t the right fit for them. So, and they hadn’t even thought of that, you know, that they could do this, they could get multi-currency draw features.
Armando (48:05 – 48:46)
Hmm. So Bill, let me ask you specifically in Arizona, our marketplace here has been changing the last maybe 10, 15 years, I’d say for the better. We’ve got more of a, we’re less focused on certain industries now, I would probably say, but from your perspective, private equity seems to be hovering over our state to buy up Arizona companies.
From your perspective, are you seeing that and what advice suggestions might you have for those local Arizona businesses that are getting phone calls every week from unsolicited offers from people wanting to buy their companies?
Bill (48:47 – 49:37)
Yeah, I am seeing that. And it’s driven by the, not only the favorable macro economic environment in Arizona, but also what’s going on, you know, adjacent states and how difficult it is to do business in those states. So, but yeah, I get calls every day and I’m sure every founder that’s in this market is getting bombarded with calls from private equity buyers.
You know, again, my advice is don’t go it alone. You may get on the phone with a private equity buyer, they’re very convincing, they’re very smart, they’re very personable. They’re hard not to like most of them.
I find it very entertaining to work with them because they are smart, but they’re also looking out for their shareholders. They’re not looking out for your shareholders as a seller, and they will negotiate the best deal for themselves. So, I would not go it alone.
Armando (49:38 – 49:56)
Right. Are there certain industries you’re seeing here within Arizona that are more attractive than others? You mentioned recurring revenue as part of what adds value to a company, people want to buy recurring revenue businesses.
Are there certain industries here that you’re seeing that are very, very attractive right now?
Bill (49:57 – 50:57)
Yeah, anything within installed recurring revenue base that’s in the technology industry, you know, digital transformation, cyber security, either pure cloud or hybrid cloud, those are all, or software development, those are all heavily sought after businesses. Building industry, from a general perspective, you know, HVAC, home services, which could include landscape, pool, anything that has a recurring revenue base that does, has to do with the home is highly sought after. You know, building industry products, there’s been a lot of interest in around that from certain private equity groups, and large express car washes, believe it or not, has been heavily sought after the last 24 months with very high multiples.
But again, it has a recurring revenue component. It’s environmentally friendly. It’s, you know, everything, anything built around that kind of do it for me concept with the consumer, those businesses seem to be very attractive.
Armando (50:58 – 51:21)
Wow. And let me ask you a multiple, you talked about multiples earlier, a multiple range, people hear multiples. And as you mentioned, you know, someone in cybersecurity, their their multiple might be quite a bit higher than somebody else.
What is that multiple range? Just numbers like from one to what or what was that range look like?
Bill (51:22 – 52:09)
Well, there are typically a multiple of adjusted EBITDA. And I would say on the low end there, you know, they can be down the four range, higher range can be, you know, north of 15 times, depending on buyer and depending on industry, certain industries command a much higher multiple, because the growth prospects are much higher for those industries and others, or there may be a tremendous amount of diversification. You know, the consolidation hasn’t taken place in that industry.
And there’s still a lot of mom and pops that buyers view as being able to, you know, cobble together, you know, and then grow that business considerably over time, that would all drive a higher multiple, generally speaking, businesses that have no low margins, either low gross margins or low EBITDA margins, and low growth industries tend to trade kind of in that four or five range.
[Speaker 3] (52:09 – 52:09)
Okay.
Bill (52:11 – 52:38)
And risk, you know, without getting too technical, you know, it’s things that the math behind multiples is, you know, a company’s weighted average cost of capital, their growth prospects, in what goes into that weighted average cost of capital is obviously degree of leverage, you know, which increases the risk component. All that kind of goes into the thinking of how one would come up with a multiple, and how a multiple gets assigned to a particular industry.
Armando (52:38 – 53:06)
Okay. So if my competitor across the street, who I think is just like me sold his company for $20 million, and I think we’re the same thing, and I think I should get 20 mil for my company. Tell me what you would say to that owner who’s who’s thinking that, and why they shouldn’t make that assumption and why instead, they should have a conversation with you, before they just assume their company is worth the same as their competitor down the street.
Bill (53:07 – 53:51)
Well, if they said that to me, I would say maybe, but you know, let’s do a little digging here. Let’s look under the hood. And let’s see what’s really here, right?
Let’s identify things that wouldn’t put you in the same level of multiple as your competitor across the street. And on the flip side, let’s look at things that could potentially result in a much higher valuation than your competitor across the street. For somebody like me, to go through that detail, looking at the revenue diversification, the supplier diversification, the quality of the management team, the quality of customer base, you know, we would try to compare all that with what the competitor across the street had, and determine where the valuation range would shake out.
And it could be substantially higher.
Armando (53:54 – 54:05)
It’d be wrong to assume that because you think from the outside looking in that company is the same as yours, and you should sell for the same money, that that is a bad assumption, it sounds like.
Bill (54:05 – 54:11)
It can be a horrible assumption and a very costly assumption, one that can leave, you know, a tremendous amount of wealth on the table.
Armando (54:11 – 54:51)
Yeah. And I would think, too, that, you know, one thing that people seem to do is when you look at your, say, your personal residence, and your neighbor’s house sold for X, and you say, well, my house is prettier, my yard’s bigger, my pool’s bigger, so I should get that plus. And so I can see the same reasoning going to when you think about a business, your company.
So I can see how that logic would kind of flow through from your home, which all of us have probably bought or sold a home along the way. But selling a business, even though it might be somewhat similar, it can be very, very, very different in terms of the value and how that whole process works.
Bill (54:51 – 55:00)
Yeah, but it’s a very good, you know, basic analogy, right? You know, the shack across the street, you know, your home is probably going to sell more than the shack across the street, right?
Armando (55:02 – 55:03)
You would hope.
Bill (55:03 – 55:07)
Yeah, you would hope, right? But deferred maintenance matters. We all know that when it comes to the sale of a home.
Armando (55:09 – 1:00:50)
But it sounds like in a business, it matters as well that, like you said, the data room, having good clean financials, having all those things that matter. I’m going to do a little bit of a summary here. You said a lot of things here.
But first thing is Momany is the name of the company, right? Momany, that’s right. All right, I got it.
Got it right that time. And you focus on the middle market. You’re an investment banker, of course.
And you said one of the first things you want to do is understand is why is that seller selling? Because that will help you just tremendously really help them more when you really understand why are they selling. And it creates a lot of what you’re going to be doing for them.
And you also want to understand in the company what drives value. In that business, in that industry, what is driving the value, the price of the company? What drives value?
You mentioned also a few things here. You mentioned about having barriers to sale, maybe the agreements with suppliers, with vendors, with customers, with your lease, with your equipment, et cetera. What barriers might exist that you haven’t maybe addressed before you’re going to sell and making sure those get addressed before you begin to try to sell the company, addressing those barriers.
You talked about building a data room where you’re beginning to store all of this information in a place. And that data room is where you’re getting all those documents and keeping them. You mentioned a few things, getting together an initial memorandum that you can, maybe it’s a one page kind of teaser that you’ll put together once you know more about the business, get that one page teaser out to see who’s interested.
And then the process begins helping to really identify the buyers. Is it going to be just a couple of logical buyers? Is it really more of 20 to 25 buyers?
Is it maybe going on a full-on auction where the buyer universe is just so broad that an auction will help build up, drive the price up and build value for that seller as well. In the process as well, getting the best and final offer, letters of intent, and exclusivity with the time once you get those letters of intent. I know I’m jumping around to different areas here.
You talked about getting a quality of earnings report, maybe even having them prepare that before engaging an outside firm to prepare that or getting an outside firm to engage it. Sometimes that quality of earnings can really be beneficial, but you’ve also found that even if they don’t have that, even if they might not have the best cleanest financials, depending on what drives value in that business, maybe those financials are not as critical. Whereas in some businesses they’re extremely critical because of value drivers in the business.
You also talked about a process going maybe 30 to 120 days. It’s a 60 to 90 days. It’s maybe more in the normal range of that sales process.
Maybe a good chunk of people, they go it alone. They really shouldn’t because if they’ve not sold a company before and they’re up against a professional buyer, say a private equity firm, you’ve got all the expertise on that side of the table and on your side, it’s just not there. You also talked about having the right team.
Maybe your CPA has been great up to this point, but does he or she really understand the selling of the business or having a good M&A attorney versus your normal corporate attorney or business attorney that maybe doesn’t have the right expertise and just making sure you’ve got the right people on your team because this is such a critical part of the business. You also mentioned to me about rolling equity, that when companies sell, often they might roll part of their equity, maybe 20 to 40% into the new business. That’s not that uncommon for an outcome when that seller is selling.
If a private equity firm is going to invest, say maybe by a minority interest in the company, well, one of the key drivers is that you’ve got to have a good, solid management team in your company so that that is even a possibility. But really getting back to your question about what is the motivation? What are they really trying to get to?
Why do they want to sell? All this just matters so much. The value add, just a couple of things, reps and warranties we talked about and holdbacks.
You mentioned rep and warranty insurance, that often that cost is split between buyer and seller and that that can alleviate a lot of maybe sensitive issues beyond the sale, especially if that owner has stayed on with the company and it can alleviate maybe some awkward situations where any claims go to the insurance company versus to the seller who is now part of the acquiring company. We talked about a lot. I like what you said about the multiples as well, that it’s a wide range of what multiple can be.
It’s a multiple of EBITDA or EBITDA, maybe four to 15 is a range. It just helps to emphasize that your business might be different from the other guy’s business and different from the other guy’s business. It really drives home with the point that they really need to have a conversation with you or someone like you before they begin to walk down that path of selling.
At least they’re getting good expertise on their side and they can end up a higher probability of ending up with the best outcome for them and their family beyond that sale.
Bill (1:00:52 – 1:01:02)
Armando, I put together a PowerPoint presentation that walks through all this stuff, which I’d be happy to share with you or any of your clients if they have an interest.
Armando (1:01:03 – 1:01:15)
Okay, great. Thank you. Bill, if someone liked the conversation that we’re having here and really has questions they’d like to ask you, how should they reach you?
Cell phone is best. Okay.
Bill (1:01:16 – 1:01:21)
That’s a 602-769-4501.
Armando (1:01:22 – 1:02:02)
Your cell is 602-769-4501. Correct. Okay, great.
So, Bill Koenig with Monomi. Monomi and Company. They’re getting closer.
Okay, good. Well, Bill, really enjoyed the conversation and the presentation you mentioned. If anybody wants to get a hold of that, we’ll make sure that you’re in contact with them so you can share that with them and answer any questions that they might have.
Bill, really enjoyed the conversation. Anything we didn’t touch on that we should before we finish up here?
Bill (1:02:02 – 1:02:04)
No, I just want to thank you for having me today. It’s been a pleasure.
Armando (1:02:05 – 1:02:14)
No, my pleasure, Bill. Excellent. Well, let’s hope that the right founder hears this and gives you a call so that you can help them have a very successful exit to their business.
Bill (1:02:15 – 1:02:15)
I’d be delighted.
[Speaker 3] (1:02:16 – 1:02:17)
Perfect.
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