Armando (0:00 – 2:00)
Well, hello, founder. You built your business over decades and 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 your business. If you’ve never sold a business before, this podcast can be super helpful to you. You will come away with an understanding of a successful business exit done right.
I’m Armando, host of the Founder’s Guidepost, enjoy. But first, a quick disclosure. Opinions expressed are those of individual professionals.
The Founder’s Guidepost is a service of Axiom Founder’s Family Office Inc., a registered investment advisor, licensed or exempt from state registration in all states in which it operates. The Scottsdale Founder’s Forum is a biannual live event for you, the founder, considering exiting your business in the next 36 months. More information available at ScottsdaleFoundersForum.com.
Hello, Armando with Axiom. John Farr with Columbia. Thank you so much for this time this afternoon here.
I’d like to have a conversation with you about what you do, but really in the context of that business owner who’s had a company, say, for 25 years, built it, so now it’s worth well more than $20 million. They know they have to somehow get out of this company. They don’t know what they don’t know.
They’ve never sold a company before, and they’ve got value. They’re very smart at what they do and that, but they don’t know what an investment anchor is or who you are or what you do. So if you could introduce yourself and let’s just have a conversation about that would help that business owner understand what you do and how you might be able to help them as they go through that once-in-a-lifetime transaction of selling their business.
John (2:02 – 4:04)
No, you bet. So I think first and foremost, entrepreneurs don’t know what they’re worth, right? They’re very good at their jobs.
They tend to be good operators, but they don’t spend their day thinking about their company’s valuation. So they don’t know what they’re worth or comment. They don’t know what they don’t know is very true.
They know they don’t wanna get taken advantage of. So what you tend to see is that they ask for the sun, moon and stars when someone approaches them. It’s very typical for a company to be approached by a large strategic in their industry.
So they offer a number, say it’s 50 million. Well, the entrepreneur says, well, I’m really good at negotiating. And I’ll negotiate with them and I’ll get them up to 55.
At which point that entrepreneur might feel like a hero, not realizing the company’s actually worth 70 million. So it happens every day. In fact, in the Southwest where we’re headquartered, about 75% of transactions actually get done.
I don’t know if you do this on Rondo without an agent at all, which is crazy. So the people that they’re typically sitting across the table from are professionals who are hired to do this for a living. They’re not entrepreneurs.
Their jobs are to buy companies for less money, which serves their owners. Not those entrepreneurs that they’re talking to. So it’s very much the case that a lot of these owner operators get outmaneuvered in those negotiations.
Even if they are good negotiators, right? It doesn’t mean their experience and understanding what the terms are, what’s a market negotiation for M&A versus the things that they are accustomed to negotiate pricing with vendors and customers and things like that. So just being good at negotiating doesn’t get them there.
So we can talk generally, I mean, what do you want to talk about the process, the auction process, or what we typically favor for these guys?
Armando (4:05 – 4:11)
I think all of it really, because when that business owner comes to see you for the first time and they don’t know what they don’t know.
John (4:11 – 4:11)
You bet.
Armando (4:12 – 4:18)
You can get them through a fire hose or give them bigger picture for them to think about. What do you think is most appropriate?
John (4:19 – 8:34)
Sure. Well, we’re an investment bank at Columbia West Capital. It’s our job to run an auction process effectively.
Sometimes it’s not always a perfect auction. Sometimes it’s just a handful of potential bidders. It’s our job to make sure enough investors are sufficiently looking at this business to ensure that they get the best offer.
And that means valuation possibly, but it also means terms and conditions as well. So that starts with materials, right? We’ll work with the company to properly position the business in a manner that greatly improves sale results.
So you try to do that upfront before you launch an auction process. You make sure the materials properly communicate the expected growth. What are those growth drivers, the competitive advantages of the business?
What are any attractive attributes of the company? You talk about management, you talk about next year’s revenue, the year after that. Why are you keeping these customers?
Why are you better at what you do than your competitors? So you’re talking about this positive attributes. You’re also talking about the negative attributes.
How do you position around those? You try to predict those tough questions, right? Armando, and you say upfront, I want to answer these in this material.
It’s called a confidential information memorandum, a CIM. So we call it a SIM, right? And that SIM, you want to address those tough issues that you know you’re going to get asked, and you want to speak to them so that you’re communicating them in that perfect way.
And hopefully in a manner that compels the readers, those investors to be accepting of whatever risk that may be. So it’s a sales document. And by creating that upfront, you’re creating scale to a process.
So if you have one, you’re able to go out to 100 investors, 200 investors at once. You can never do that on a one-on-one basis. That’s what’s typical when people are approached and they don’t have a banker.
They’re put in the situation where they have a one-on-one negotiation, right? If you run an auction process, you’re trying to go to everyone at once, right? Most entrepreneurs don’t have that luxury to go to 100, 200 investors at once.
So by approaching them at once, that means that ideally you have multiple offers that are also being put forth at once. And that’s what greatly enhances your negotiating leverage, right? The whole process is designed to put the advantage towards the seller, as opposed to towards the buyer.
I say the seller because we’re typically working for those business sellers. So that’s the attribute of a process, an auction process that ensures better results. And then I think you wanna have a very tailored investor list as well, right?
Who are the buyers that your banker’s going to? You want somebody who knows the industry, ideally, who likes that bite size, right? Investors who buy billion-dollar companies are not the same investors who buy $50 million companies.
So you want an investor list that is attracted to that size range, to that industry or the broader attributes of that industry. You want people who have good reputations to state the obvious. And then you want someone who fits, and that could be fit around the client’s ideal transaction structure.
It could be fit more from a qualitative perspective. Your owner may say, I only wanna sell to someone who’s willing to keep all of my employees, or who wants to keep my brand alive. That’s important to me.
Or to ensure that my nephew gets to stay as head of sales. And that’s a tough point, because my nephew’s not very smart. You have all kinds of things where fit matters and growth strategy matters.
And you say, is this buyer going to continue to run this business the way I had in my vision when I founded it? Do they have my philosophical goals in mind? So that’s pretty important too.
Armando (8:34 – 8:49)
So you really have to understand the seller and the seller’s motivation and what he wants, not just a check at the end of the rainbow, but what does he want for that company after he no longer runs it, he or she no longer runs it. It sounds like.
John (8:49 – 9:46)
Exactly, exactly. It’s critical. And what’s funny is when I sit down and I have those introductory meetings, Armando, that number one point that the entrepreneur mentioned they really cared most about is often not what they’re most concerned about later towards the end of a process.
You realize sometimes a lot of entrepreneurs do soul searching, and you’d be crazy if you didn’t do some soul searching. Because with most of our clients, at least, they built this business not over a few years, but maybe over decades. It’s extremely important to them.
They’re not clinical and detached about it. It’s very emotional. And so we find that people, thinking about the things they care about most evolve throughout the transaction period.
We try to be amenable to that. Make sure that we understand their goals and it takes a lot of dialogue and communication to ensure that.
Armando (9:48 – 10:01)
And I imagine the sooner you can ferret out what they’re really trying to get to, it’s better for everyone because now it’s on the table. And you as the person helping them get to the finish line, you can work to that, I would think.
John (10:02 – 11:03)
It’s critical, right? It’s critical. And I think you want to have an agent that you’re comfortable sharing some of those thoughts with.
And we often joke that the psychology of what we do is often more important than the spreadsheet running. We do a lot of negotiating for a living, but a lot of what we do is spend a lot of time on our side of the table, right? Talking to our client about what matters most to them and making sure that we get those points out of any transaction.
So there’s a lot of education with what we do. There is a lot of spreadsheet work with what we do and a lot of fixing of numbers and looking at things like ad backs and doing a lot of those things behind the scenes to make sure the material that we’re presenting to those investors is both attractive, truthful, and relevant to what those investors are excited about. But it’s just as much at times a psychology job as a finance job.
Armando (11:03 – 11:15)
Oh yeah, I can imagine. I can imagine. So what about, you mentioned auction.
How does that relate to price or value of the company? How does that work?
John (11:17 – 15:30)
Well, the mere presence of a banker tends to help the investors understand. They have to put their best foot forward, we call it. When they approach you in a one-off basis, right?
If they just knock on your door and say, hey, I’d like to buy you, they know that they’re not in the middle of an auction. So why would that investor ever provide the largest price that they could? They’re not in the business of overpaying for companies.
So if you think of it like this, it’s their whole job to underpay, and then maybe I’ll say cynically, to take advantage of these sellers. Now, this doesn’t mean they’re all bad guys, but you just have to understand what their job is. So it’s our job on the other hand to provide more options and to remind those investors to know that there are also other investors looking at this transaction.
So running the auction process with a banker signals, I’m not gonna be able to take advantage of this seller. All right, it signals that that investor is going to have to pay a full and fair price for the business. So that’s the start.
A right up front, you’re signaling to those investors how this process will be run. And then along the way, you’re going to understand as an investor what’s important to those sellers because the bankers should be communicating that along the way. We provide deadlines or indications of interest.
So basically, client offers that might strip the most important 10 details of a transaction. They’re short letters. They don’t necessarily define a hard nominal figure.
It’s not exactly 50 million, but it might be a range of 40 to 50, or it might be a range of six times to seven times even dot, however the case may be. You get a range, right? And from there, you have a sense for how many of those, call it 100 investors you went out to are actually gonna bid on this business.
You wind up with those, call it five indications of interest. You now have five people to negotiate at once. By that, I mean, the banker should be working hard to figure out what those investors’ concerns are, answering those questions properly in a manner that allows them to say, oh, you know what?
That’s not as big a concern as I thought. Maybe I can pay another $5 billion for this business. Your banker should be working all of those at once, which an entrepreneur would never have time for, but it’s a critical part of the process whereby we ensure that we’re able to get those numbers up.
We’ll give them an opportunity to meet with management in management presentation. So we might invite, call it three back. And then afterwards, we might spend more time with them.
And between some back and forth, we might ultimately realize that there is one single buyer who both has provided an attractive offer in terms of valuation, but also in terms of personality fit in terms and conditions, right? The structure of the investment and what requirements are put upon those sellers. So it takes a long time to get to that one group.
But why we wanna be there in that moment is because if that one group you realize isn’t the group we thought it was, if maybe they start jerking my client around or over-negotiating or retrading, which is very common, you wanna have those other backup offers, right? Because if you have backup offers, you get to negotiate a little bit harder and you get to say with confidence, you know what, I don’t think you’re treating me fairly anymore, I’m going to my next guy, right? And you might realize after saying that, that that investor who’s jerking around might’ve just been kidding, right?
They’ll turn about face, they might suddenly be awfully nice and they might rush to closing. Other times you realize they just weren’t the right group to begin with and you’d rather be with that better number two. Columbia West isn’t gonna decide for that entrepreneur, but what we are gonna do is make sure that you have many options.
Armando (15:31 – 16:12)
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I can say this could be very overwhelming for that seller who’s never sold his company, his or her company before, and it’s for the first time. So what about, can you talk about due diligence, John? What that really means?
And you hear the words due diligence, but as the investment banker representing a seller, what does that really mean? How are you helpful in that process?
John (16:13 – 18:39)
I like to start up front, right? The best due diligence begins before we launch. Gathering materials and figuring out where we have challenges.
It could be operating challenges, could just be marketing challenges, things we do well, but we don’t talk about, we don’t realize it’s a differentiator that makes us look better if people knew it. So sometimes it’s about putting pen to paper about standard operating procedures that are attractive to buyers. Sometimes it’s about, just a very specific example, technology which has been used internally that they developed internally and have never marketed.
That could be technology that could be used for any buyer for their business. And so there could be incredible cost synergies or revenue synergies associated with that. Due diligence helps look for problems, but also helps look for positive attributes like that.
But generally speaking, when people talk about due diligence, what they mean is confirming that there are problems I didn’t realize existed. And that could be around contracts, customers, vendors who are going away. Obviously lawsuits and people who’ve left that we forgot to tell investors about things like that, that investors want to ensure are not problematic environmental concerns.
The goal from Columbia West perspective is to essentially do a mini due diligence prior to launching that sale. That way we’re looking at that same material that investors are going to look at. We’re gonna look for problems.
And sometimes you find problems and you say, this is an easy fix. Here’s what we have to do before launch. Those are always the best ones, right?
Things we can fix such that investors will never see it, not because we’re hiding it, but because we’re fixing it before it becomes an issue. On the other hand, sometimes problems are there, they’re real and they’re not going away. You have to think about how to mitigate them and how to communicate them and when to communicate them.
You have some problems that need to be stated upfront. Some minor problems can wait until later, right? Sometimes you want to confirm who your final bidder is, who you may go exclusive with prior to sharing some of those.
It really depends on the issue, but we’re trying to both communicate them as well as in cases where we can resolve them.
Armando (18:40 – 18:58)
It sounds like you’re doing your own deep dive into the company so that you can identify those areas and you can help create the solidness of this company and shore up things that might need to be shored up before you even go to approach or you begin to look for maybe a potential buyer.
John (18:59 – 19:03)
Exactly. And there have been cases, Armando, where we said you’re not ready to go to market.
Armando (19:04 – 19:21)
And that was my next question for you. When that does happen, how you’ve done some work and you’ve come to the conclusion that they’re not ready. Right.
Either give them to maybe a consultant to help them or give them some guideposts or something to say, go do your homework and then come back.
John (19:22 – 21:04)
That’s correct. A very common pop button is financial reporting. Nice business, but the owners can’t tell you a darn thing about it because all they get is a summarized P&L at the end of a quarter.
It’s not helpful for investors to understand that business when the owners cannot explain their business in terms of what I’ll call financial alacrity, right? You have to be able to talk about your business, not just like an operator, but to someone who understands finance and has those types of questions. So there’ve been many cases where we have said, you have to fix that issue or you have to develop some more reports.
We have to settle that lawsuit because it could be a half a million dollar problem, but they’re gonna think it’s a $5 million problem. And you don’t wanna go to market right now because they’re taking 5 million off the price, right? So situations like that, where there’s a disconnect between expectations between the seller and the buyer, those can be very good things to fix early.
So sometimes you really have to put your foot down and God willing, those clients understand we have their best interest at heart. It’s almost like a doctor. You have to, you cut based on what you know are going to achieve the client’s goals.
Even if the client isn’t sure how to go about it, it’s our job to know how to go about it based on what their needs are. So you really have to manage the project in a way that’s going to ensure success.
Armando (21:06 – 21:21)
And so John, when they’re thinking they wanna sell, how soon before, if they wanna sell in 12 months or 24 months, when should they see you? How far in advance from that sale that they wanna have should they come see you?
John (21:22 – 23:28)
The sooner the better. Certainly we have people approach us and say, I’m ready to sell. We’ll meet with them and decide if they’re ready to sell.
We have gotten engaged immediately, but it’s always better to do it more in advance. It’s like running a marathon, right? What you do the day of is not near so important as what you do leading up to it.
Some people can throw their shoes on and run 26 miles, but most people need to train first. So I do think that in a perfect world, 12 months before you sell would be ideal. And that doesn’t mean you have to engage your banker like us at that moment, but you probably ought to be talking to us, understanding the process, understand what will be expected of you and gearing up for that.
You probably wanna decide who your team is at that point. And that means banker. That means transaction attorney.
That might mean wealth manager for a lot of these business owners who’s, let me make up an example. They have $2 million worth of liquid net worth, but they own $100 million business, right? So they’re not gonna keep all that money in a Charles Schwab account necessarily, right?
They might need some people with some more robust services to manage that money for them. Groups that have people who might do mortgages, who might do estate planning, as well as money management, who might have a better sense for fixed income treasuries and other safer products for people who now have created that nest egg and they just wanna make sure that they protect it. So, I think you might have a good suggestion for the wealth management side, but I think charitable giving, deciding if there are certain charities you want to give to now upon your exit, which will ensure that you might not have to bear the tax consequences of taking that money.
There’s all kinds of tax planning that one can do prior to selling and we encourage people to do that.
Armando (23:29 – 23:52)
I wanted to ask, I’m glad you brought up taxes because I was gonna ask you about taxes. When does that come into the conversation? From my perspective as the wealth manager, what I’m looking at is net after-tax, what do you have?
And how can we take that and get you a monthly income for the rest of your life now that you no longer have a business? So the net after-tax number is really, really critical.
John (23:52 – 24:48)
Absolutely, it’s the only number that matters, right? It’s not valuation. As much time as I spend on it on a day-to-day basis, it’s how much money does my client actually take home after taxes?
And I think that is a function of ours. It is also a function of the attorneys in structuring and we work with the attorneys on the transaction structuring. And then I think it comes down to guys like you at Axiom who are spending time with people up front and ensuring that they’re establishing the right vehicles ahead of time.
Sometimes an estate planning attorney I think would be very helpful as well to meet with. So, I mean, you’re talking about four functions that all work together to effectively maximize what that client takes home and actually puts in their pocket.
Armando (24:48 – 25:04)
Right, and the conversations amongst them, maybe not all the same at the same time, but certainly having dialogue so that something isn’t overlooked that dramatically cuts the net that gets to that seller, the owner of the business.
John (25:05 – 25:10)
Exactly, exactly. So those are all very important.
Armando (25:11 – 25:57)
Yeah, and I’m glad you brought philanthropy as well because philanthropy can have some tax benefits as well before the sale, after the sale, maybe even being part of the drafting of the documents possibly as to when does that take place to get the maximum impact for the seller, assuming that the buyer is gonna be okay with what might impact the buyer if it does at all. But philanthropy can be very, very impactful, not just from the seller feeling like they ended up where they wanted to be, but where they had a substantial impact and that it just made the most sense in the big picture to have philanthropy as part of that sales picture somewhere along the line.
John (25:58 – 26:51)
Well, if you’re ever going to give, you should give on a pre-tax basis, right? I mean, that’s rule number one. So what this allows someone to do is gonna make $10 million on a sale who had planned one day to give a couple million dollars to their favorite charity.
It allows them to do that in a manner that avoids those taxes. It’s a no brainer. If you’re gonna do it, do it then.
And that stuff takes time to organize. And you would ideally do that prior to initiating your auction process. If you fail to, can we hustle up and try to get it done?
Of course, but transactions can be stressful. They can be time consuming. And don’t forget you as an entrepreneur you’re still running that business, right?
You still have a day job. So you try to take as much off that plate as you can early.
Armando (26:52 – 27:04)
Do people come to you at times when they already have a letter of interest or letter of intent, and now they’re not quite sure they’re doing the right thing or in the right place. And maybe they think they need to engage you at that point. Does that happen?
John (27:04 – 29:51)
Happens all the time. And we’ll certainly do it. On one occasion, we said, you need to take that because that number is way too high in most cases.
In most cases, those investors, as I said, underpay. And we typically can look at it. We’ll do some valuation work and we’ll assess that they ought to be worth something.
It could be 20% more, it could be, I’ve seen things as high as 50% more, right? Someone so grossly underpaid that it was laughable. And you see it all the time.
But again, entrepreneurs, they don’t know how to understand how much they’re worth. They hear someone in the market traded for X dollars, but they may not know what that competitor has, their technology. They may not know a number of attributes that cause that valuation.
So they tend to do this relative analysis on maybe one or two names. It’s our job to bring in a lot more names and to really refine what that business might be worth. You can do comparables, you can do comps on revenue, comps on EBITDA.
And when I say comps, I mean based on precedent transactions that have occurred in the market, companies who have sold. You can do it based on the comparison relative to public companies. We call this public comps.
So if Coca-Cola is trading at 12 times, what does that mean? Your small $50 million beverage company ought to trade for it, right? So you’re making a relative comparison.
You can do a summary of assets, which is not as typical in our market, or more realistically, a leverage buyout model or a discounted cashflow model are also helpful in generating potential valuation. So all of these are different methodologies, right? Including that sum of parts analysis.
But from our perspective, I’m gonna try to kill that, sorry about that. But there’s a number of different methodologies. But the point is, you ought to run a few to really understand what you’re worth prior to contemplating a sale.
And if nothing else, you wanna make sure you’re putting a lot of eyes on it, a lot of investor eyes. Because if you go out to a full number of potential buyers, and there’s a market clearing price, you know that that’s what you’re worth, irrespective of what one might theoretically say you’re worth if you’ve run an auction process, that outcome is exactly what you’re worth. So it’s extremely common to see people underpaid.
The lower middle market is rife with people who built a hundred million dollar businesses to sell for 70. Wow.
Armando (29:53 – 30:25)
Do you have a, and I’m just gonna ask you that, John, just what you said, just what you touched on. When they’re not going through an auction process, not going through the formal process that you would take a business through, and estimate your guess on how much money they’re leaving on the table. You just used an example of a hundred million dollar sale, maybe they went for 70 and they left 30 mil, presumably or conceivably on the table.
Sure. Any generalities or assumptions on how much people are really leaving on the table in general?
John (30:26 – 31:50)
No, it’s all over the map. I might generalize and say we tend to improve price at least 20%, but it’s really all over the map. Our last sale was to a, so let me step back.
It’s hard to know exactly how much we improve valuation if they never had an offer to begin with. So my sample size is for those companies where someone came and said, here’s what I’ll pay for you. And then we work with them to sell the business.
So the last company we sold was actually a 53% premium to what that original offer was. That one’s kind of extreme. I can’t promise clients we’re gonna improve their valuation by 53%, but 34% was a recent one, 23%, 6%.
One of the more recent ones, we only improved valuation by 6%, but we did a transaction that included almost no reps in the warranty. So that’s, a lot of people aren’t gonna understand what that means, but we chose to focus on negotiating risk management instead of valuation. In that case, I would have actually suggested as a seller, you take more risk and you focus on negotiating the valuation.
But at any rate, that one was still an improvement well over our fee.
[Speaker 3] (31:50 – 31:51)
Wow.
John (31:51 – 32:41)
But we’ve had some nice ones in terms of valuation improvement for our clients. We try to pay for ourselves, ideally five times over. I mean, that’s just a personal goal.
That’s not an industry goal, but at Columbia West, we have a personal goal. We want to really move the needle on valuation. But what you’ll find is that sometimes sellers don’t just care about valuation.
It’s not uncommon for us to sell to that second bidder or the third bidder because the personality fit was there. And you gotta respect that too. They have a vision for their business.
And just because they’re selling the company doesn’t mean they’re gonna just forget about all that and walk off in sunset. Most entrepreneurs, they wanna make sure that their business is a good hand, so that matters too.
Armando (32:42 – 32:55)
Yeah. So here in the Phoenix Metro Valley where we are, are you seeing any trends with the activity that you’re seeing? Certain types of industries, certain types of buyers coming in, private equity coming in.
What are you seeing?
John (32:55 – 35:21)
I think just more. We’re seeing more. I know that we all talk about the baby boomers and that could be a broader macro trend that we’re seeing.
My gut is it’s a little closer to home. I think what we’re seeing is that entrepreneur who was in a nice calm place a few years ago and they thought, my life’s pretty easy, I’ll just do this for five more years. Well, now they’re having supply chain issues.
They’re dealing with COVID issues and employee issues and mask policies. And now there are a lot more angry people walking into their office. And I think what you’re seeing is the PETA factor.
I won’t spell that out, but what you’re seeing is this job is harder than it used to be. And I don’t think I wanna deal with that anymore. I was already getting ready to sell in the next three to five years, but now I think I’m gonna sell now.
I think that that hassle factor is a big driver for us right now. I think some people are realizing that business is harder. So maybe this business will fare better under a larger umbrella.
Right? I could have handled those issues better with a large board and an HR department. And maybe I would have had someone who sources all of my equipment and has just a vendor policy professional.
Small entrepreneurial companies don’t have that, but large companies do. And so I think there’s a bit of concession among some of the more entrepreneurial people that this would be a heck of a lot easier if we were bigger. So we’re seeing that.
Other than that, I think you’re seeing people handle the cycles, Armando. Right? Some say, we just got wallets last year.
I’m not gonna sell until I get back to where I was and then I’m gonna sell. Others, on the other hand, we have some clients who grew during COVID. They were big beneficiaries of COVID.
We’re seeing some of those go to the sale process sooner than they might’ve told you they would a few years ago. So it really does depend. And it’s been an extraordinary market in that regard to see some people really suffer and some people really benefit.
You thought you’d seen everything, but this has been a market where I think we’ve all learned a good bit over the last few years.
Armando (35:21 – 35:25)
It’s been amazing, the extremes. People have had the extremes.
John (35:25 – 35:26)
For sure.
Armando (35:26 – 35:43)
Out in the middle of extremes. And it has been amazing to see that. What about the, not labor shortage, but people just not being available to hire.
Maybe that is the labor shortage. Is that impacting what you’re seeing or hearing from your buyers?
John (35:43 – 37:00)
Absolutely. So from the buyers, well, I think buyers are asking that due diligence question. They’re saying, I know you’re projecting 20%, but if I do the math on a unit basis, that means you need to hire 12 more people in the next year.
Are you gonna be able to do that? We’re certainly seeing that. And I would, if I were a buyer.
We have one business that is a contracting business that is very much suffering from that. We know another distribution business, current client of ours, who is definitely struggling to find greater labor in the face of their significant revenue growth. It’s a phenomenal growth story, but they have to have the labor to fulfill that new demand for customers.
And so it is tough for some of those folks. You’re hearing that a lot in healthcare. We’re reading articles about healthcare services finding nurses, finding other PAs and other people in hospitals, as well as in physician’s offices.
That’s a big deal. So, but skilled labor as well as hourly labor, they’re both, you’re seeing stories about people suffering from that. In other examples, people aren’t bothered by it at all.
So again, it’s pretty unique at this market here.
Armando (37:01 – 37:38)
Wow. Wow. So when you meet with a seller who’s not been through this process before, and you’re telling them what you do, how you do it, how you can help them, I think you’ve painted a pretty good picture in our conversation so far about the value you add in how you really take them to many buyers all over the country or even outside the country.
So many people get to see that company that that person that has been built and they can bid on that and try to acquire that. So it just sounds like from a marketplace standpoint, there’s no way that seller could do that themselves.
John (37:39 – 39:08)
No. Even sophisticated sellers who’ve sold companies before, they typically hire bankers. Warren Buffett hires bankers.
Amazon, all the largest companies in the world hire bankers. As do the economies of learning, economies of information. And if you’re good at what you do, you’re better at going out and getting one more customer.
Right? The delta of what you’ll pay a banker can easily be made up for most businesses. So it’s that theory of better advantage, right?
You have to do what you’re good at, Armando. I have to sell businesses for a living because that’s what I do. But for your manufacturer of certain expensive products, they’re better off focusing on that.
But it’s also time. I mean, not to cheapen what we do for a living, but no one running a business properly would be able to put in the amount of time that our team is going to put into a company sale. We’re typically staffing four people on a transaction.
We’re going out to a very large number of investors. Most entrepreneurs just can’t afford the time that’s required of that. So subsequently, most investors who decide, excuse me, most companies who decide to sell themselves, that they’re typically going out to three investors, five investors at the most.
You’re just not seeing them run an efficient auction, if you will.
Armando (39:08 – 39:27)
It sounds like they would just be set the time that they would have to devote to that effort. They’re taking away from their business. And even if they can think they can do both, they’ll be probably speaking to both and not be at their optimal self.
And that’s not really going to help them or serve them well.
John (39:28 – 39:30)
Correct. That’s correct.
Armando (39:33 – 39:54)
So about the auction process, and thank you for that. You talked about multiple sellers. You talked about value versus that auction really leading to the market value.
And that’s what the seller actually gets. What have we not touched on so far, John, in this conversation that comes up in that first or second conversation with a- Sure.
John (39:55 – 40:41)
No, I think the grossly underrated attribute of running an auction process is this greater certainty closure. People, when they think I’m getting ready to sell, they don’t think there’s a great risk that this deal isn’t gonna go forward. But the reality is, if you’re doing a one-on-one negotiation, the odds are extremely high that it’s not gonna go forward.
So what happens is they spend six months, they spend a lot of money on lawyers and CPAs, all for naught, because they don’t get a transaction done. Having that backup bid isn’t just for greater valuation. It also has to do with giving you an ability to close in the event that something goes wrong with option number one.
Armando (40:43 – 40:54)
And you said about, I think what you said is about 75% of the sellers don’t go through someone like you to do that. Why do you think that is?
John (40:55 – 43:03)
Well, I think it’s expensive, right? I get it. Investment bankers, let’s be all honest and upfront, they charge a lot of money nominally, right?
But if your banker is paying for their sales multiples over, it’s well worth it, right? If I told you I was gonna charge you a dollar, Armando, and then you’re gonna get $5 back, that might sound very obvious, but I think what you see is that entrepreneurs are still reticent to let go of that dollar, right? It’s still one of those things where they read that contract and they say, well, how do I know you’re actually gonna do this?
Right? And that’s fair too. I think, I don’t even like investment bankers, Armando, right?
They have a reputation. Let’s be honest. I don’t like my species, but you have to do it the right way.
And you wanna pick a banker who’s got references and a reputation, God willing, for doing the right thing, even when it didn’t serve them to. So interviewing is really important. And I think that’s one reason why people might not use bankers, because they got a buddy who had a bad experience with one.
And I’ll tell you this, I bet they did, because there are a lot of guys out there who do not do the right thing. But with that said, particularly when you get to a certain enterprise value range, you should be able to find a FINRA registered investment bank who is audited by the SEC, who is held accountable in terms of their behaviors, who has clients who can say, Columbia West or whoever that may be, sold my business, they did a good job with it. And I think they’re honest and upstanding guys.
You should be able to find references before you make that decision. So it’s not just about your engagement letter, it’s about having that trust and believing they’re gonna do the right thing. But you need to trust their capabilities too, right?
You need to trust both their integrity as well as their ability to negotiate a transaction without blowing it up and getting you more money than you could by yourself.
Armando (43:03 – 43:34)
Right, right. And you mentioned trust and feeling comfortable with the person. And that’s really true no matter what you’re doing, that you’ve got to feel good about the people on the other side of the table, that they’re going to be the right people for you to get that outcome that you want or help you get the outcome that you want.
You’ve got to feel good and then check in on the references, doing some homework on them as well, so that you’ve done a little bit of your own due diligence before saying, yes, I wanna go with X, Y, or Z. That makes a lot of sense.
John (43:34 – 43:39)
Exactly. Exactly. Well, thank you for giving me some time.
Armando (43:39 – 43:48)
No, certainly, John, very, very, very helpful. So John, if somebody wanted to get in touch with you and just ask you questions, how would they, what’s the best way for them to reach you?
John (43:49 – 44:12)
You’re welcome to share that information. I know that you’re a great steward of your client’s money. They can go onto our website as well.
At columbiawestcap.com, that’s C-A-P.com. My name is John Farr, F-A-R-R, and we would love to hear from business owners who are contemplating selling their business or raising equity capital or debt capital.
Armando (44:13 – 44:28)
And is there a range or industry you’re looking for or enterprise value that you’re looking for? What are those, what are some criteria that are really in your sweet spot to add the most value to that business owner?
John (44:28 – 45:21)
Sure, certainly. We spend most of our time working with companies that are going to be attracted to institutional investors, right? So we’re not doing a lot of kind of smaller cap rounds for entrepreneurial businesses that are kind of young in their life cycle.
We tend to work with those entrepreneurs who are going to appeal to institutional investors who are typically, in their minds, looking at businesses north of around 20 million enterprise value. So subsequently, that tends to be our default as well. Most of our clients are north of 20 million in value, meaning enterprise value.
It’s hard to say what revenue that would equate to, as you know, because businesses are, different industries have different profitability. But we say enterprise value of around 20 million, or we say capital raise needs of around 7 million plus.
Armando (45:22 – 45:39)
And are you also, when you mentioned capital, are you also, when people are exiting, helping them to find a partner? So if they’re looking for a partner with a lot of money, for example, versus just not right sale, is that part of what you would also help with or not really?
John (45:39 – 46:11)
Yeah, in equity capital raise, we would do all day long. And conceptually, the process is not materially different, right, whether you’re selling, making up a number 20% of your business, or selling 100% of your business. You’re still creating that marketing material, going out to a large number of investors, making sure that you’re appealing to them and running that auction process to ensure that they give you term sheets for that capital raise that is attractive from a valuation perspective, as well as terms and conditions.
So we do that as well.
Armando (46:11 – 46:20)
So it’s not always people just wanting to sell and get out. It’s people wanting to bring in new money to grow even more.
John (46:20 – 47:13)
That’s correct. Happy to do that. As long as it’s a private transaction.
We don’t do public securities. We don’t do IPOs. We don’t do things such as derivatives that would be on a capital markets desk.
Everything we do falls under the umbrella of what’s called investment banking advisory. So an owner entrepreneur needs equity capital to grow. They need money, but their local commercial bank said, I can’t give you that much.
You need 20 million, but the commercial bank will only give you 10 million. We tend to be that next call. We understand that your commercial bank is the cheap money.
You would prefer that. So think of it as looking at the cap stack, right? The cheap senior up here, and it goes mezzanine and inequity below.
We work on those bottom tranches. So we’ll help entrepreneurs find money. And when they’re ready, we’ll help them exit.
Armando (47:14 – 48:02)
Okay. Well, thank you. That’s helpful as well.
I spoke with a business owner last week who is going through some of this. And he said to me, if I got my number, I would sell it all right now today, but that’s probably not gonna happen. So what he’s looking for instead is a partner that has money that can fuel certain parts for their company to grow.
He’s looking for that versus an outright sale because he thinks that’s most realistic for him now where the company is at this point. Okay. Interesting.
I’m glad that we added that to the conversation as well, because in my mind talking with you, I was thinking of an outright sale versus maybe a partial sale or raising money to continue growing the business, making that footprint even larger. And you said the process is pretty much the same. Is that what you said?
John (48:03 – 48:06)
With some nuances, yes. It’s very similar.
Armando (48:06 – 48:12)
Okay. So the people bringing in that new money want to know all the same things pretty much.
John (48:13 – 48:13)
Absolutely.
Armando (48:14 – 48:15)
So solid on those numbers.
John (48:16 – 48:36)
Absolutely. Due diligence is very similar. They worry less about flight risk, right?
If the entrepreneur is leaving their money in, they’re less worried about the entrepreneur disappearing overnight the way they might in an M&A process. Those questions aside, it’s awfully similar.
Armando (48:36 – 48:43)
Okay. Is there anything that we didn’t touch on, John, that you want to make sure that we do touch on before we wrap up?
John (48:43 – 49:20)
No, except I’d say I’d love to talk to whoever you feel like made sense. It’s healthy to talk about this before one goes to market. Talking to a banker doesn’t cost anything and it would be wise to do so.
Having that coffee or that lunch doesn’t obligate someone to use a banker, but I think it does help you to get smart. So I would encourage them to do it. Every case is different.
In your particular case, your situation is going to vary from your friends who just sold or vary from the transaction you just read about. So it’s important for someone to give you advice specifically for you.
Armando (49:21 – 49:33)
Yeah. So if my friend or neighbor who has a similar business sold their company for 10 mil, I shouldn’t necessarily think that my company is also worth 10 mil. Mine could be worth 15 because of different factors and nuances in the company you’re saying.
John (49:33 – 49:34)
Exactly.
Armando (49:34 – 49:53)
Yeah. I’m glad you added that. I think that people hear a number in a similar size company and think theirs should be worth in that same ballpark just because it’s maybe more normal human nature than anything else.
And so again, the way that people should contact you is to go to your website. Is that what you said? The best way to reach me?
John (49:53 – 50:08)
That would be great. And I’m Jon Farr. My email is jfarr at ColumbiaWestCap.com.
They can reach out to me directly or they can go to the website and check us out. Either way is fine by us, but happy to have that dialogue.
Armando (50:09 – 50:12)
Okay, fantastic, Jon. Thank you so much for this time. Really appreciate it.
[Speaker 3] (50:12 – 50:13)
Okay, take care.
Armando (50:14 – 50:48)
Thinking of exiting your business? You have one opportunity to get this exit right. Your family depends on it.
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