Armando (0:00 – 1:09)
Hi, I’m Armando Roman, host of the Founders Guidepost. You’ve built your business over decades, and now it’s time to think about that once-in-a-lifetime exit. You’ve come to the right place.
Here, you will hear business exit professionals talk about what you should know before exit. Besides hosting the Founders Guidepost, I’m CEO and founder of Axiom Founders Family Office, a Scottsdale wealth management firm helping founders and their families preserve their American success story. We oversee and coordinate a network of vetted professional advisors to help maximize their probability of achieving everything that is most important to you.
And we host the Scottsdale Founders Forum, a biannual live event for the founder considering exiting in the next 36 months. Here’s to your hard work and your American success story. Enjoy.
Hi, Armando here with Axiom, here with Stephen Boatwright, an attorney whose space focuses on mergers and acquisitions, business transactions, and that. Steve, thank you so much for your time today. How are we doing?
Stephen (1:11 – 1:26)
Yeah, I’m Steve Boatwright. I’m with Gallagher & Kennedy. We’re a full-service law firm and do quite a bit of buying and selling, representing buying and sellers of businesses and merger and acquisition activity, and I’ve done it for over 33 years now.
Armando (1:26 – 2:26)
Wow, fantastic. Excellent. So, Steve, the point of our conversation today is that I’d like to, if we can just have a just very informal conversation about that business owner who’s had a company now for 10, 20, maybe 30 years.
They’ve got a company now worth millions of dollars, and they realize it’s time for them to exit that company. They’re not going to live forever, and the company, they wanted to continue beyond them, and they don’t know what they don’t know. They’re coming to you for the very first time to talk about possibly selling their company.
Could you just maybe speak in broad, in the broad picture about things that they need to make sure they’re aware of, maybe how the process goes, maybe what they should expect, maybe things that you’ll help them understand so they can have a more, a more fitting exit once that exit actually does come about, if we can just have a dialogue about that.
Stephen (2:27 – 7:52)
Certainly. I mean, it’s a difficult process selling your company because it’s something that gives you, has given you probably security and amount of joy and meaning and purpose in life, and then all of a sudden, you enter a world of professionals who aren’t necessarily focused on maximizing your business in terms of the types of things that you focused on, but more focused on how to make it most profitable, more profitable, and moving some of the inefficiencies out that every business tends to have. So that said, you enter this world of accountants and lawyers and investment bankers and brokers, and it’s kind of daunting because it’s not the world you like or actually appreciate.
You’ve not generally had to deal with those people except when you had a tax problem or if you had litigation, so you’re already kind of a little bit, you know, jaundiced, if you will, by the whole process of dealing with professionals, and these professionals say, we’re good guys and we’re here to help you, and you, you know, often in the past had bad experiences with the professional. So the first thing you have to, you know, get over is just how do you handle, how do you deal with, how do you work with people in the professional space, and if you, particularly if you made your money in a blue-collar business where you didn’t have to do a lot of paperwork, you were out in the field, you had very minimal, you know, office clerical type of interaction, that’s even more painful because it’s not obviously something that you wanted to do or have done, and now you’re forced in the world of having to all of a sudden be kind of bound by the office and bound by the process. I just saw a study yesterday that actually the business owner, the owner that sells the company, and his employees spend more time in terms of their hours by far than any of the professionals.
In fact, there was one, I think they spent about the same time as all the professionals put together, and that in of itself is not a very exciting prospect because it’s somewhat like doing your tax return. You are heavily focused on a process that you’re not familiar with, not used to, and not comfortable with. So, the first thing that has to get handled is getting comfortable, and getting comfortable with your professionals is huge because that, you know, not every professional fits every personality, and if you aren’t gregarious and don’t like a professional that talks a couple hours on the phone with you, that maybe the extrovert is not who you need.
If someone’s curt and short and to the point, and you like more detail and longer hand-holding, then maybe that personality doesn’t fit with you. So, you have personality issues, you have issues with the trust and your trust level of your parties that you’re dealing with, and then you have expertise because just like if you go to the doctor and you have the wrong specialist, then you’re not going to have a good result. Unfortunately, in the legal arena, many people think an attorney is an attorney.
They have that word attorney by their name, and they went to law school, and they have a, you know, they’re a member of the sitting bar. They think, okay, I can hire this person, but attorneys that do litigation are very different than attorneys that do transactions work, and attorneys that do transactions work don’t all do buying and selling company work that may do other transactions work. So, finding the specialist in the legal area is critical.
Finding the accountant in the area of buying and selling your company is critical because you have experts in tax, and they need a seat at the table often, but the accounting firm that did your audit, or if you didn’t have an audit that consolidated your books, or whoever the independent auditor is, is also critical to your team, and then your banker is critical for really helping you maximize the value of your company because they know better than anyone what the multiples are in the industry, and how to handle the process and make it, you know, run more smoothly.
Armando (7:52 – 8:02)
Right, and you’re referring to the investment banker, the one who’s going to come in to help get that sale to happen versus the commercial banker who they banked with for the last 30 years.
Stephen (8:02 – 8:04)
Yeah, absolutely. Yeah, good point.
Armando (8:05 – 8:44)
And Steve, I’m glad that you said that. It that there’s a good team of people who really focus in this space, and I’m very glad to hear that you just made that observation that there are specialists. You know, attorneys specialize like other industries, and having not the lawyer you’ve had for the last 30 years who did all your, you know, maybe the divorce work for your daughter, or the estate documents for your family plan, or maybe the partnership agreement, but somebody who really understands this part of business transactions who can help be the advocate for the owner, for the seller of that business.
Stephen (8:45 – 9:55)
Absolutely, because attorneys have, if there’s one thing that clients have heard is attorneys are deal killers. That’s a bad position to be in as an attorney, and we never want to kill deals as attorneys, but if you think about it, the litigation person, the person trained in litigation is there to be aggressive and sue and take your position in an aggressive manner, and that’s the opposite skill set you need to close a deal, because being aggressive about details that aren’t important can really turn off the other side, because they have other options, and they don’t want to deal with necessarily an attorney who is used to arguing every point and litigating over points that they feel are important. So, it’s critical that, probably most critical in the legal area, to find an attorney that is not only likable, but is used to doing transactions, and used to negotiating and compromising versus trying to win on every single point.
Armando (9:56 – 10:30)
So, Steve, what are some of the surprises that that business owner encounters you’ve mentioned that, you know, this whole team, which sounds really exhaustive with the CPA, and the investment banker, and the attorney, while the person is still trying to run the business and do the normal day-to-day stuff, sounds very exhaustive. What are some of the surprises that the business owner comes across as they’re going through this process that maybe you have to coach them through and help them understand?
Stephen (10:31 – 11:42)
I think business owners often overlook detailed legal paperwork, so they’re a little bit miffed. At times, they have to button up things that, to them, were never important, didn’t matter. They made money and did very well, otherwise they wouldn’t have a seat at the table to sell their company.
And all of a sudden, people are asking about minutes of their meetings and things that they have never deemed important, things that didn’t, you know, matter in terms of their success, and now matter a lot. And so, cleaning all of the nitty-gritty detailed paperwork up is time-consuming, difficult, and sometimes they have let-go employees that know where that paperwork is. They have things that aren’t actually stored on their computer in the right way.
So, finding the right documentation when asked sometimes can be daunting, particularly if the organization’s not, you know, the business owner’s skill set.
Armando (11:43 – 11:54)
And if he or she’s had the company 30 years, it’s going back a lot of years to get those articles of incorporation, or maybe the partnership agreement, or documents like that, right?
Stephen (11:54 – 13:15)
Right, right, right. I mean, I had a client that was selling very successfully one of the largest junkyards in Arizona. I would have thought, of all people, this person being in the blue-collar industry was going to be a disaster.
And I think, to this day, it was the most organized, most efficient sale I’ve done, because every piece of paper he’d ever done, this was in the 90s, pre- storage of the computer, was in a black notebook. And I asked for something, there it was, you know, codified, organized, with an index. Here’s what happened on this day, here this is.
It made the process very easy, because I think the typical business owner, in fact, many people think, okay, the hard part of the attorney’s job is drafting that long document I don’t want to read. Whether it’s an asset purchase or stock purchase agreement, that’s the hard part. So, if they can get that done, then that’s all the pressure’s off, and that’s actually the easiest part.
The hard part is all of the exceptions, all the disclosure schedules that are attached, that relate to things that happen in the business that have to be disclosed, that sometimes are not pleasant, you know, to disclose.
Armando (13:16 – 13:39)
Yeah, and I’m making some notes here so that I can make sure to ask you about. You said disclosures and exceptions are where maybe more of the time needs to go into, or things that you have to hunt down, chase down, and really find those. What would be an example, Steve, that would fit in that exceptions and disclosures category?
Stephen (13:40 – 15:05)
Well, if you had a partner, or you had a shareholder, and you bought out the partner or shareholder in years past, but you don’t know where the paperwork is, you don’t know where the canceled stock certificate is, you don’t have a settlement agreement, that’s a pretty big deal. I mean, and I’m bringing up one of the bigger deals, because the buyer is now concerned as to whether that happened or not, and whether they have to go back to this person that you dealt with, and get them to be a party to the agreement, which is a nightmare, because usually at that point in time, you concluded a transaction at a number that’s probably a significant discount than the number you’re getting now.
So, you don’t want to have that person have a seat at the table when you thought they didn’t have a seat at the table in the process. And we find this, I don’t, I rarely find that situation. I mean, that most business owners are shrewd enough to realize they need that documented and they keep it, but we do find often that somebody that got an option or profits interest or a small piece of the business has been overlooked in terms of where they are, what they have, and fixing people are interested in buying everything and not having something hanging out there.
Armando (15:06 – 15:36)
Okay. You mentioned also that seller who to this day is probably the most organized business owner seller who you’ve worked with. And how did him, how did him being organized, how did that help?
Did it shorten the process? Did it get him a better price? Did it cost him less lawyer money, fees, and that kind of thing?
How did him being organized really help when it came time for him to sell that business?
Stephen (15:37 – 16:19)
All the above. I mean, his legal fees were probably half of what they otherwise would have been. The time of sale process was much quicker.
The fact that he could point to something fast created a high integrity. There was no concerns about his integrity because he got things back right away. And the documentation itself was much easier to do when there wasn’t five questions asked and no answer given and the professionals just trying to search really hard to find where the bodies were buried.
Armando (16:21 – 17:09)
And you mentioned integrity, which I probably wouldn’t have thought about when you said organized, but it sounds like what you’re saying because he was organized and he could quickly put his hands on information. When he was asked for information, he could quickly supply the right information or relevant information. And that helped the buyer understand that this seller has more integrity.
He’s not trying to hide things, not trying to delay things, not trying to beat around the bush or take the long way to get to the short answer. And so all that helped the buyer understand that they probably are working with a seller who has a high amount of integrity. Is that what you’re thinking?
Stephen (17:10 – 17:39)
Absolutely. And it was a great example in the junkyard industry because there are certain industries that are accused of having two and three sets of books and junkyards are at the top of the list. So the fact there was one set of books and it was all there together made it a much more seamless process as the buyer didn’t have to wonder what the real numbers were, whether he was getting the real documents.
Armando (17:40 – 17:55)
And if the potential buyer had a lack, if they didn’t feel that the seller had the integrity that he showed, could that affect his price at the end of the day? Absolutely.
Stephen (17:55 – 19:38)
Because there’s the hold back. I mean, people aren’t familiar with it. There are representations and warranties that a seller has to give.
That’s the biggest section of the document. It can go on for 15, 20 pages. And those representations and warranties have exceptions.
The exceptions are the full documentation the business has as to, for example, a rep that the company’s had no litigation. And then exception, oh, wait a minute, we did have a case. Here it is.
Here’s the status. Here’s what’s pending. So then all of a sudden, a business that’s worth X is worth less because there’s going to be a hold back for potential bad judgment in the litigation.
So if we don’t have or there’s uncertainty as to what’s out there, ultimately, then the shrewd buyer is going to want to hold back more money. And what that means is generally a year from the time of close, there’s amount of money sitting in escrow that assures the buyer, hey, when they made these reps, nothing different happened in the last year under their watch that we have to deduct the part of the purchase price. And if you can make that number as little as possible, then it’s all the better for the process of selling.
Armando (19:40 – 19:43)
You’re saying make the hold back number as little as possible, right?
Stephen (19:44 – 19:44)
Correct.
Armando (19:44 – 20:00)
Yeah. Okay. Do you generally see with the hold back that the seller actually gets the money or is it a part of the money or is it none of the hold back?
Or does it depend?
Stephen (20:00 – 20:32)
You know, there’s a lot of companies that have, in my experience, that have had either litigation or fighting over the hold back. And that’s, I would say 50% of my clients have had issues with the hold back because things that often aren’t due to them, but can just come out of the woodwork that they didn’t know about in that year period.
Armando (20:36 – 21:10)
So what other, I’m glad you brought, you mentioned the reps and warranties, a 15, 20 page document. That sounds like you put a lot in there that could eventually cost the seller some additional funds because of a hold back. Other surprises or in that first conversation, Steve, you have with the business owner who is now thinking of selling for business, other initial questions or thoughts or parts of that conversation that we should touch on?
Stephen (21:11 – 21:26)
Well, I think everybody, when you sell the business, you have to really determine whether the client is really interested ultimately in selling the business, as odd as it sounds.
Armando (21:27 – 21:45)
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Stephen (21:45 – 24:00)
Because if somebody, you know, kind of like your house, if somebody knocks on the door and offers you a pretty big number, it may not be for sale, but all of a sudden it is. In the business world, when you have, you know, times like we’ve had recently and people are getting really high multiples on the revenue or the EBITDA, there’s a lot more for sale than otherwise would be because people are saying, here’s an opportunity to sell. But then the rubber hits the road when they have to figure out, hey, it’s not all necessarily about money.
There’s other things that the business is meeting in terms of my needs, and maybe money is not really it. And so often they have this scary self-evaluation that happens probably too late in a process because they thought it was the money. And in reality, there are other dynamics that are not the money.
And rightly so, because you sell companies based on price and what you get, but you don’t think about, I mean, the number one thing people miss or not think about is their non-compete agreement. They think, hey, I’m making so much money. I’m going to have such a good time.
I could be out of the market, even if they’re not going to retire. And it’s, you know, also the retirement isn’t in the conversation. It’s just, I’m going to be out for three years, four years in this industry.
Either I’m going to start a business in another industry, or I’m just going to have a great time playing golf and hanging out. We often get the phone calls after, you know, three months, six months. They’re very unhappy all of a sudden because they are 90 hours in this business.
It’s all they thought about. And now time is marching really slowly and they’re helping their wife manage breakfast in the morning. And she’s not terribly happy with, you know, the fact that they want their eggs over easy because they care and they used to not care, you know.
Armando (24:01 – 24:25)
It sounds like on the family side, there’s got to be some conversation there so that everyone’s on the same page and that after the sale is done, that the owner of the business has a plan on what he or she is going to do. So the family harmony can stay the way it needs to stay. And there can be a successful exit of that business.
Stephen (24:25 – 25:05)
No, absolutely. Because it’s a tough thing when you sign away in a document that is pretty enforceable in terms of a sale of a company. You’re not going to do anything in the area that you spent 30, 40 years, you know, doing and you do well.
And then your sole solution is to go, you know, start over in a totally different business. Because by the way, you got some amount of money. And if you want to be active, you got to use some of that money.
And it’s pretty scary proposition to, you know, go in a totally different industry than one you’re familiar with and start over.
Armando (25:08 – 25:26)
Yeah. So what about when maybe there’s a minority interest in the company, or a couple of partners, maybe one primary founder, and maybe there’s a minority interest issues that pop up that are maybe unexpected with that?
Stephen (25:27 – 27:54)
Yeah, that’s a great point. As I tell people often, whether you’re an estate planning attorney, tax attorney, litigation attorney, environmental attorney, tax, you name the specialist and put attorney after it. There’s one thing we all have in common, and that’s disputes with partners.
That’s probably the most common thing is, my partner screwed me. I knew him for x number of years, I can’t believe you did this. Or an unhappy minority that’s thinking about suing.
And that whole dynamic really needs to be sorted out and taken care of before the sale process. Because if it raises its ugly head in the sales process, it’s the last thing that purchaser wants to see. He doesn’t, purchaser doesn’t want to fund litigation or be involved in litigation after the sales consummated.
So sorting out your issues with your partners is critically important. And the minority partners, there’s a whole different dynamic because often when you leave in the service industry, the buyer wants the minority partners to stay. So having a really frank conversation about early on what they’re going to get with the new owners, whether they’re comfortable with the new management is very tricky.
Because you want to make sure that you don’t spook the employee, and they leave and they are critical to the business and that impacts your sale process. Or they notify somebody outside of in the market that’s a competitor, they go to a competitor, or they’re very unhappy. And they don’t let you know when they’re in a new location, and it impacts your earn out.
So minority partners issues are huge issues and very difficult to manage in terms of timing. And that and we’re often surprised, even as attorneys, how things we think are sorted out, when money comes into play, all of a sudden, things change.
Armando (27:58 – 28:33)
So it sounds like from what we’ve talked about so far, the buyer doesn’t want to have any doubts or have any questions. They want to know what they’re buying. They don’t want any issues to pop up during that whole conversation with the seller.
They certainly don’t want issues to pop up later to become their problem now that they own the company. And so the more clean the organized that company appears to be, the more that buyer will have more confidence that this is the company they want to buy.
Stephen (28:35 – 29:12)
Yeah, absolutely. You’re managing risk in this process, if you can minimize the risks for the buyer, because you can let the buyer know and with certainty, here’s a problem I’ve had in the past. Here’s how I handled the problem.
And here’s what I foresee the problem could result in the future. It’s an ideal situation versus covering up the problem or having a buyer find the problem and then having it addressed where you haven’t been proactive in the process.
Armando (29:14 – 29:41)
So let me go back, Steve, to the reps and warranties that you mentioned. You said 15 to 20 pages, probably not that unusual. There must be a ton of information in the reps and warranties.
What are some of the things that you would want to make sure that are addressed in there to help the seller feel more confident that it’s all going to be okay for them once they sell the company?
Stephen (29:43 – 31:57)
The reps and warranties are, some are what we call fundamental representations and warranties, fundamental meaning they’re absolutely critical. They’re the foundation of the deal. So things like, do you have authority to sell the business is big.
If you don’t have authority, you kind of mess the whole transaction up. So that’s a basic warranty. Do you have somebody else that has a right that’s triggered by the sale and you haven’t disclosed?
Have you paid your withholding taxes? Have you paid taxes? Have you paid the right amount of taxes?
Those are some of the big issues that are involved. And then you have all sorts of issues that sometimes depending on the business, environmental issues can be big. If you have real estate, if you have intellectual property, the intellectual property issues are big.
If you have patents, where they have challenges, were they granted? Because that’s a crux of a business often is the, whether the patent is valid. If you do international work, do you have Foreign Corrupt Practices Act issues?
If you do medical work, it’s all about kickbacks because there’s all sorts of regulations with doctors and not kicking back things to companies you have to be aware of. So it is very industry specific when you drill down into the details and times change, 10 years ago, would you ever see a cybersecurity rep? Never.
Today, almost everyone has a cybersecurity rep because if somebody’s had a ransomware issue and you’re a buyer and you think you’re going to have number two, that could be a very big number. So, you know, representing your status of your software and your cybersecurity controls is huge now in a business. And so times change depending on type of business and the areas of concern.
Armando (31:58 – 32:43)
Okay. Just making some more notes here. Right.
The whole cybersecurity has become so much more important for everyone these days, home and personal, same thing. I do have a question for you, Steve. You know, some states, of course, are community property states and some states are not.
So in Arizona, where we are, of course, we are a community property estate or state, I should say. And how does that come into play with a business owner that maybe he’s had that business for 30 years. Spouse’s name has not been on it, but they’ve been married the whole time.
Does that come into play when it comes time to sell the company or does that not?
Stephen (32:44 – 33:10)
Yeah, even though there’s a case law with real estate, you have to have the spouse on it, selling a business, maybe not, but you really want to involve the spouse and make sure that there’s no community property issues that come back and bite you. So that’s a case by case basis. But yes, community property is an important concern.
Armando (33:10 – 33:21)
Okay. So it matters state by state, what those laws are within your state, it sounds like, and addressing them if there are any issues within your own particular state.
Stephen (33:21 – 33:21)
Yes.
Armando (33:23 – 33:43)
Okay. Are there other surprises that that first time seller goes through that come to mind for you? That, you know, you told the client, you told your client something and they came back with a big, you know, deer in the headlights look that you’ve got to be kidding Steve, what do you mean?
Where does this coming from?
Stephen (33:46 – 35:43)
Well, I think business people operate with a certain amount of presumed integrity and not everything they do is necessarily written down. It’s just a mutual understanding. And when you then are in the world of selling the company, those mutual understandings may not be documented.
And the business owner just assumes often that they would continue. And in this world of representations and warranties, one of the pitfalls that people often overlook is contracts are huge in terms of representation and warranty that you have the ones you say you have, they’re valid, they’re enforceable. And contracts extend to things that orally have agreed to that you haven’t put in writing often in the definition.
So it’s really critical that your supplier contracts, your customer contracts, your contracts that you may have just sent an invoice for years and never got around to drafting the formal contract that you realize that that is a contract that the buyer is counting on having. So if the seller has a unique relationship with that party, and the party goes away, that could be a huge deal in terms of the price, in terms of the holdback, in terms of all sorts of things, because customer contracts that disappear are quite problematic in terms of the numbers that are assumed when the purchase price is calculated.
Armando (35:47 – 36:14)
It sounds like that could easily happen with an owner who’s had his company 20, 30 years, the company kind of evolves, practices just evolve as well and become norms. And maybe nothing was ever written down. No procedures, no manuals, no contracts.
It just is how they do it and it works. But the buyer coming in wants to see documentation, it sounds like, on everything.
Stephen (36:15 – 37:06)
Yeah, I mean, I have a great story in that regard. I was a young associate. I was helping a client do a roll-up of steel fabrication companies in Nevada and California.
And we were working on a company in Los Angeles. And my client was full of the Harvard MBA types and the Los Angeles party was 84 years old. And he had no inhibition about telling us young attorneys with a straight face, sold my business three times, I’m selling it again, I’m sure I’ll get it back.
And he said that because he had a special relationship with the Navy in one of his major contracts. And even though my client knew, because we repeated the conversation a year and a half later, he had the company back.
Armando (37:12 – 37:19)
So was it that special relationship that when he sold it, that relationship did not transfer to the buyer?
Stephen (37:19 – 37:23)
Right, correct. It didn’t work out too well for some reason.
Armando (37:24 – 37:28)
Well, it sounds like he got paid three or four times for the same company.
Stephen (37:28 – 37:33)
Yeah, based on what he told us, it was kind of crazy.
Armando (37:33 – 37:36)
That’s why he was 84 years old or so.
Stephen (37:36 – 37:37)
And still running the business.
Armando (37:40 – 37:43)
He was a lot smarter than maybe people gave him credit for.
Stephen (37:44 – 37:52)
When you’re 84 and you’re the buyer thinking, hey, this is a perfect opportunity because the 84-year-old guy didn’t want to get back in the business.
Armando (37:55 – 37:58)
Well, he fooled those young whippersnappers, didn’t he?
Stephen (37:58 – 37:59)
Absolutely.
Armando (38:01 – 39:09)
So other things that come to mind, Steve, about that first time sale, you said it matters the industry, whether it’s manufacturing or services or a car deal or whatever. It sounds like the industry has its own specific things. And so that reps and warranties might need to cover very specific things to that industry.
You mentioned also the non-compete, how important that is that people, maybe the sellers downplay that too much. They don’t maybe have a good enough plan for the day after the sale, what they’re going to do for the next three, four, six months versus staying home and now causing the spouse some grief. Yeah, exactly.
What other issues? We talked about a minority partner. We didn’t touch on employees.
What about employees and the wholesale, the sale of a company that has a lot of employees? What things do you see pop up in that space that really need to be in front of the seller so that they understand to address things ahead of time?
Stephen (39:10 – 40:17)
I’m doing a deal right now with several hundred employees involved. And my client is, I think, a model seller because they have gone out of their way to communicate extremely well with the employee base and work on contracts they think are very fair. And a lot of this workforce didn’t have a contract, but they want them to have a contract so they feel comfortable in the transition, but not a contract that has some massive golden parachute that scares the buyer away.
So that’s really, I mean, very, very often the case if you’re struggling with your employees in general, and it’s not your strong suit, it’ll really come out in this process because in any service business, keeping your employees happy is a huge value proposition in the business. And so how you handle that is absolutely critical moving forward.
Armando (40:18 – 40:31)
You mentioned employee benefits as well. Are there issues that pop up in a sale that could stop the sale or could certainly affect the sales price related to employee benefits?
Stephen (40:32 – 41:20)
I mean, the employees that have health concerns or you don’t want to make sure that they are getting good insurance coverage or any other type of perk that they get is important to focus on. I mean, I think today, unlike 10 years ago, there’s a lot of uniformity in health coverage and other perks. So it’s not, frankly, it’s not as big of a deal as it used to be.
The biggest deal is if the culture of where the employee is going is so foreign to where the employee is, that’s going to be the first thing that the employee wants to leave over.
Armando (41:21 – 41:41)
Yeah. If the employee wants to still be in a good place to work and the employee has his or her own family to take care of, and if the sale is going to possibly negatively impact that employee’s family, then the employee to keep their family safe will go someplace else.
Stephen (41:42 – 42:32)
Yeah. Another great story. I was doing another deal with an airline, public company with an airline years ago.
And it was back when you went through files of, you know, not computer again, the 90s. And I found a file folder with 40 different loans to employees. And the company just regularly decided if an employee needed a little bit of money that they would loan, you know, loan the money and have a favorable interest rate and get paid back.
Well, my client wasn’t going to continue to do that. So again, it’s a culture issue of, you know, how comfortable are you with some of the practices that you’re inheriting as a buyer from the seller?
[Speaker 3] (42:33 – 42:33)
Yep.
Armando (42:35 – 43:32)
I could also see with the, you know, 401k plan or other types of retirement plans, making sure that those are all buttoned up and nice firm contracts in place so that when the seller lets go and the buyer takes over that there could be possibly issues if the 401k was not run properly, or maybe didn’t have a fiduciary looking at the investments and being part of that whole process that could, it seems like also be an issue for the buyer. So I would think that that would also be an area that the buyer is going to want to make sure that the 401k is being handled correctly.
It has the different steps in place, the annual reviews, and all those things that need to be there to help protect the new purchaser of that company as well.
Stephen (43:33 – 43:40)
Yeah, and we have representations on ERISA and 401k plans is pretty standard.
Armando (43:41 – 43:53)
What about issues related to equipment or facilities that maybe are a surprise to that first time seller? Maybe leases on equipment?
Stephen (43:54 – 45:50)
There’s, I don’t know, I haven’t had that come up as often because the leases are pretty standard on equipment. It’s pretty unusual to have heavy equipment based companies, particularly in Phoenix, because you copy machines and other things that are not a big deal. Again, every deal is different.
So if you have capital equipment that’s massively important to the business, then focusing on getting consents and moving on, making sure you can assume the same terms could be a big deal. You see very often you have to get third party consents when you do sales often, depending on the contract. And so again, another buyer beware is your landlord.
Is your lease going to terminate? Is your lease going to have, is your landlord have a right to double the rent because he terminates the lease and so the new tenant comes in? And the huge issue that’s very hard to solve are personal guarantees.
That’s probably one of the things that really rubs the seller the wrong way because they have a company, they’re individually on the hook for personal guarantees. The buyer cannot get them off the hook for that. Only the landlord can.
And so if the landlord wants to have the buyers, the seller still on the hook and the buyer, he certainly has a right to do so. And there’s nothing the buyer can do. And that’s not very exciting to the seller because the seller has no idea if the buyer is going to run the business in the ground and the landlord has their hand out for rent payments.
Armando (45:52 – 46:02)
And it’s so common for business owners to put personal guarantees on things because they have to, especially in the beginning, get that business going.
Stephen (46:06 – 46:12)
It’s easier in the banking context to get off the personal guarantees than it is in the landlord.
Armando (46:15 – 46:46)
Yeah, that sounds like it could be a problem. So you mentioned that 80 something year old who had that special relationship with the Navy. Let’s talk about the customers of the business.
What other issues might come up with the customers or the sales of the service or the products being sold that when it comes time for that seller to come to you and start getting this process going, what other issues might service related to customers?
Stephen (46:48 – 47:29)
The first, the biggest one that comes to mind and it’s a pretty apparent one is customer concentration. If your business is 50% with one customer, that’s often a huge non-starter for the buyer because if you lose that customer, you lose half your revenue. You have to get very comfortable that that customer is not going to go away or a group of customers go away because sometimes there’s pretty heavy customer concentration and sorting that out is quite problematic if the buyer doesn’t want to take on that risk.
Armando (47:32 – 47:37)
What about contracts with customers or ongoing contracts with customers?
Stephen (47:40 – 48:29)
Those are all over the map. It just depends on how quick is the customer paying, how quick does the purchaser want the customer to pay, what just all the detailed terms of customer contracts that maybe the buyer’s coming in and the contract ends in six months or a year and it’s been a 10-year contract. There may be a big renegotiation coming up for this valuable contract.
There may be even a termination clause on a change of control. Those are the biggest issues that are, I would say, not cultural issues but legal.
Armando (48:35 – 49:38)
It’s becoming more apparent that this can be a very long exhaustive process for that first-time seller where like you said, the investment banker, the CPA, the attorney, all those people asking for tons of data to help the seller or the buyer understand what they’re really buying and if they really want to go through this buying process. But it sounds like it also be very, very distracting for the seller when he or she is trying to keep that business running, keep the employees going, keep the sales going, keep the customers happy and keep the money coming in. It sounds like it could be very, very distracting for the sellers as they’re going through this process.
It sounds also like the seller, if there are things they could do to minimize that time, it’s going to be a lot more helpful for them. Ways they can minimize time, you mentioned being organized, can help shorten that whole cycle?
Stephen (49:40 – 51:15)
Yeah, absolutely. I’ve had many, many clients and they have to spend so much time in the process that they know they’re in a very bad quarter because their focus is now away from sales and it’s on the process. So, they’re demanding, I got to get the sale done before the quarter is over because once the quarter is over, the deal may die because my numbers aren’t going to be what I thought.
So, if you’re a micromanager, it’s an excruciating process, but the delegation part is absolutely critical because it’s who you have looking at your dropbox, your data dump, and how well those people are instructed to do that. And that function can be outsourced to junior legal, junior accounting. And clients that want to save money and do it themselves often meet with disaster because it’s critical that that’s done timely and it’s critical that the time spent by the owner is not looking for his articles of incorporation himself, not finding all that stuff himself.
And oddly enough, we have owners that are very suspicious of their employees as to why they are asking for things and they go and do all sorts of stuff themselves and it usually doesn’t turn out very well.
Armando (51:18 – 51:38)
So, with all that really has to get done to get that sale from start to finish, what kind of timeframe, when should they really begin, when should they really talk with you, Steve, so that they can kind of be ahead of the game versus behind?
Stephen (51:40 – 52:49)
Yeah, I mean, I say, and I do this periodically with people, I meet with people that are thinking about three to five years down the road, just kind of a gut check on what is it that they need to focus on that may take quite some time. If you have an unhappy partner and he’s still getting money from you and he’s not coming in the office and he’s getting his check until you sell the company, that could last a long period of time. But once the business is for sale, it’s almost too late to handle the unhappy partner because he’s going to want a whole lot more for his interest than if you deal with him ahead of time.
So, there’s many examples of things that need long lead time to prepare for. And even if there’s no big issues, but it’s just an organization issue, just getting whatever organization in place that you have to collect all these things that they’re in a repository that it’s easy to find is a huge part of the process.
Armando (52:52 – 53:49)
Yeah, three to five years sounds like a long time to begin to prep for the sale of the business. It seems like here in Arizona, a lot of outside money is looking to buy companies and they’re waiving some big fat checks. And they can be very tempting, of course, to take that big fat check, which of course, the three to five years of recommended lead time is just not going to happen with that.
So, it makes me wonder, is that seller, the owner of the business, maybe better off not taking that check and instead going back to the drawing board or back to someone like you to just have a dialogue with them? Because maybe their company isn’t worth that big fat check. Maybe it’s worth 50% more and they just don’t know it.
Stephen (53:50 – 54:46)
I mean, to your point, I’m saying in probably a dream world, three to five years, do people ever do that? Very rarely. So, in markets that are so frenetic and frenzied, it’s kind of like selling a home.
And if you focus on as a buyer in a home inspection, the seller’s like, I’ll just move on to plan B because there’s plenty of people that are going to buy a home now without a whole lot of looking at the home inspection. The same with the business. If business is in a hot space, hot market, and there’s lots of interested buyers, then you don’t have to be as careful about your legal due diligence as you would in other markets.
So, in a tougher market, it’s critical that you’re careful about that.
Armando (54:47 – 55:10)
So, we haven’t touched on banking. Every business has a banking relationship and that bank sometimes provides working capital, sometimes financing on equipment, sometimes permanent loans on other items as well, maybe affiliated trucks for that. How do banking covenants come into play much or not?
Stephen (55:12 – 55:58)
I mean, I think the banker, if the loans are being paid off at closing, a blown covenant is not going to be that important as long as they get their money. And many times, the buyer’s coming in with their own financing source. So, you do have, it’s rare they come in and negotiate with the existing banker of, I’m going to keep using you and extend my loan or redo my loan or worry about a covenant, because in my experience, the buyer has its own financing.
That’s how he’s doing the deal. And that financing has an opinion about how to handle the banking relationship that’s there.
Armando (56:01 – 57:07)
Well, Steve, other thoughts that come to mind for that seller? You’ve touched on a lot of things that could certainly help that first-time seller as they’re beginning to think about the process. Glad to hear you say, ideally, look three to five years out to begin to get these things in order, get, as you said, a repository of documents that will be asked for when it comes time to actually sell the business.
I’m just doing a little recap here. You mentioned reps and warranties and that holdbacks are not that uncommon. And the holdback can be 12 months money going into escrow.
And you may or may not get that money after 12 months. Depends on what happens during that time after the sale of the business. And I also, like you said, do you really want to sell?
How does a business owner determine if they really want to sell or not? Any tips for them, Steve, that you can say, hey, do this and you’ll know?
Stephen (57:09 – 58:04)
Well, I think talking to their advisors that are non-legal in terms of, they all have friends. If they find a friend that sold a company, visiting with that friend post-sale is, I think, absolutely critical, particularly if that friend is similar to their personality. That’s huge for figuring it out and talking to their spouse.
I had a client that sold and I knew the spouse and she called me and said, I got Don a key to his new office. He doesn’t know. I’m just letting you know it’s being delivered today because he’s not going to be in the home office anymore.
He’s driving me crazy. So, you got to get the spouse on board and involved and friends in terms of that counseling process.
Armando (58:04 – 58:20)
Yeah. It sounds like a whole emotional thing that that seller has to be prepared for and do a little soul searching ahead of time so that he or she is really ready to do it and has a plan for what they will do after the sale.
Stephen (58:21 – 59:51)
Yeah, absolutely. As we wrap this up, I must emphasize and stress the thing that I hope the business owner realizes is how much more complicated it is than just signing a document and how important it is. The attorney in this case is very much like the quarterback of the process because my background, I have an MBA in finance.
So, I read financial statements. I work more with accountants than I do other attorneys because there’s all sorts of integration of numbers and law and how numbers impact the legal situation and being astute enough, whether you have a CPA or you know how to get that information from the numbers people, whether it’s your CFO, your controller, your outside accountant, is absolutely critical in the process as well. And having an attorney that knows all these different areas enough to know he needs to get, if he has an ERISA issue, he has to get an ERISA expert or tax expert or something that is critical to make the business sell with highlight on that particular businesses potential issues they’re going to have that a specialist needs to dive in early on.
Armando (59:51 – 1:00:18)
Yeah. And you mentioned accountants. We did not talk about taxes and the potential tax impact or tax ramifications of how that contract is written up or what the sale really looks like.
But it sounds like since you said, you know, you work more with accountants than with lawyers, tax has got to be a big component of how is this really going to look for that seller when all the dust settles?
Stephen (1:00:19 – 1:01:19)
Again, I give you a great example, had a deal and the parties were doing an equity sale. And when they changed accountants before the payout happened on the back end for that year, and they were doing the account, and the new accountants came in and said for the buyer, I represent the sellers, the new accountants came for the buyer and said, you could have done a special election where it was treated like an asset deal. And if you’d done that, you could have amortized another $20 million in this business over time.
So if you would have that paragraph that wasn’t in there, you could save that money. And to have that paragraph now you have to go and get it signed by the sellers. And it’s those critical issues that are very complicated in tax that you need to focus on because they make a huge difference in the process.
Armando (1:01:19 – 1:02:07)
Right. And that comes back to one of your earlier points that you’re getting specialists, people who understand the business sale process. That’s part of what they do.
You don’t hire your family lawyer to represent you when you’re selling your company, because that is not his or her expertise. And the tax on a business sale is certainly I’d say a specialty within the tax area that your tax person, whether they’re a CPA or an attorney or what have you, that they understand business transactions, business sales. So they can, in your example, take that $20 million and allow that to be amortized for a better tax treatment that was worth probably millions of dollars of tax.
That one little paragraph right there.
Stephen (1:02:07 – 1:02:10)
Correct. Absolutely. Yeah.
Armando (1:02:10 – 1:02:43)
Yeah. Very impactful. That kind of stuff makes me feel very sad and take a big sigh because that was certainly an avoidable issue that would have helped, but the right team was not on board and therefore somebody paid a higher price because they didn’t have the right team around them at the time of the sale.
So Steve, this has been really, really helpful. Any other quick wrap up things that you want to make sure to mention that we didn’t talk about in this conversation?
Stephen (1:02:44 – 1:03:01)
I think that’s it. There’s all sorts of other things we could focus on, but I think we did highlight the major issues, I think, in a sale process. And I appreciate the opportunity to talk with you about it today.
Armando (1:03:01 – 1:03:47)
No, I do as well, because one of the great things about our country is we can start a business and have success and have phenomenal success. And that’s not available everywhere, but it certainly is available here. And when it comes time for that person to sell that company and really lock in their success from what they’ve built over the years, they need to have that right team on board.
Steve, if somebody wants to talk with you and has questions for you, I hope they will listen to our conversation here and realize that you’re someone, of course, who knows this space and that they could speak with you if they wanted to have that kind of a conversation. What would be the best way for them to reach you?
Stephen (1:03:48 – 1:04:08)
The best way is to reach me by email. That’s probably the best way of thinking of all the different ways, because often in this time of history, email seems to be the ubiquitous way to communicate.
Armando (1:04:11 – 1:04:13)
Steve, what is your email address?
Stephen (1:04:14 – 1:04:30)
It’s steve.boatright. And Boatright is B-O-A-T-W-R-A-G-H-T. B-O-A-T-W-R-A-G-H-T at gknet.com.
Armando (1:04:31 – 1:04:40)
Okay, so Steve Boatright, and I’ll spell Boatright, B-O-A-T-W-R-I-G-H-T at gknet.com.
Stephen (1:04:40 – 1:04:45)
Yeah, there’s a period between Steve and Boatright, steve.boatright. Thank you.
Armando (1:04:46 – 1:05:06)
And I’ll put that, when we get this posted, I’ll put that in there as well to make it easy for people to contact you. Hopefully, somebody will listen to this and watch this and realize it’s worthwhile to have a conversation with you and to help them really get to where they want to get to. It sounds like you.
Stephen (1:05:06 – 1:05:36)
And I mentioned some big deals. We do very tiny deals. We’re not focused necessarily on massive deals, so don’t be afraid.
You know, feel like your business isn’t worthy because it’s not big enough. Don’t go there. You are.
And I don’t charge for initial consultation in terms of just feeling some initial questions because I want people to feel free to contact me and not feel like they’re on the clock from day one.
Armando (1:05:36 – 1:06:08)
Yeah, fantastic. Thank you so much for offering that to people who are really needing to have your counsel for that first appointment. Fantastic.
Steve, this has been really, really helpful. I’ve learned from just having this conversation with you. Hopefully, others will learn who can hire you and at least have a conversation with you so you can help them realize their own American dream and have their own American success story with their businesses and make that transition as smooth and clean and simple as possible.
Thank you so much. I really appreciate it.
Stephen (1:06:09 – 1:06:09)
Thank you, Armando.
Armando (1:06:10 – 1:06:45)
Hope you enjoyed this episode of the Founder’s Guide Post. Whether exit is on your immediate horizon or maybe 10 years down the road, there’s something here for you. And remember, we all have an expiration date.
We just don’t know when that will be, which is why planning ahead is critical. And if you’re wondering if you’ve missed anything in your planning, contact me to schedule your founder’s strategy call. You may call our office at 480-367-9000 or schedule a call at axiomcorp.com.
Here’s to your American success story.
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