Armando (0:00 – 1:26)
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 Roman here with the Founders Guidepost. Today here with Mark Young of CKS Advisors. Mark, how are you?
Great, great, great day to be in Phoenix. It is a great day to be in Phoenix. That’s right.
So Mark, today, let’s have a conversation about how you help that first-time seller. You’re an investment banker, of course. You’ve got a lot of commercial banking experience.
Maybe you can touch on a little bit on your background and that and how that helps you with helping that founder go through that first-time business sale.
Mark (1:26 – 1:53)
Sure. Well, throughout my career, I think the common theme is I’ve worked with entrepreneurs, helping them with their businesses, whether it’s what I do today, which is helping them transition from their business back to when I first got started in my career, which was I did a lot of corporate and commercial financing for business owners. Again, working with them to help them grow their businesses with financing.
Armando (1:53 – 2:23)
Well, good. And so as an investment banker, it’s funny. I had this conversation today with a business owner who was going through that first-time sale, not quite sure what to do.
And one of the questions was a business broker versus an investment banker. Armando, what’s the difference? When they go through this for the first time, a lot of new terminology, they don’t know what to expect, timeframe, value of the company, the process.
I guess, where do you begin? When you have that initial conversation, where does that conversation go?
Mark (2:24 – 3:34)
Sure. Most of our clients, it’s the first time they’ve gone to look to transition their business. So they’ll say they don’t know what they don’t know.
So we really try to elicit questions from them. So what they’re looking for in terms of their questions or things that they want to learn. At the same time, we try to fill in the blanks, if they haven’t asked the questions they should be, to help them to best understand what the process is.
We feel like if they understand it and feel good about what they’re headed in, the process will be much better. If there’s surprises to them, things around the corner that they’re not aware of that might come up, and there always are some, but we try to get as much as we can out onto the table in the beginning so that they feel somewhat comfortable going into the process. They’re all nervous in their own way about this process because they’re looking to sell their baby that they’ve grown, built and grown for years, and now they’re ready to transition it.
And they’re wanting to do it the right way and they want to feel good when they get done. So we want to make sure they go into it with their eyes open.
Armando (3:35 – 4:09)
Yeah. And so Mark, when you’re helping them go through that process, the goal, of course, is to transition that business into a new owner’s hands. And that can look like different ways.
It can end up different ways in terms of the deal, how that works. As you’re going through that process though, and you mentioned trying to minimize the surprises and address things up front, and I think that’s probably best all the way around. What are some of the steps that this founder, this owner is seeing once they actually engage you?
What is that really looking like as you begin to walk down that path with them?
Mark (4:09 – 5:28)
Sure. We actually, even before we’re engaged, we’re asking lots of questions because we want to understand the business, the industry they’re in so that we can take a look at it and we can be prepared to present them in the best light. Our role is to really level the playing field with the buyers.
And most of the buyers for our clients are institutional type buyers, so they’re professional buyers. They do this for a living. And so our client, in most cases, they haven’t done it before.
So it’s our role is to level set them with those professional buyers. So we take a look at the company, we look at the financials, we look at the team, we look at how the business is run. We focus a lot on how active day to day the sellers are today.
The ideal situation is where the seller has really positioned them to sell their business and they’re not involved on a day to day basis. But that’s oftentimes not the case. So we want to get in and try to understand what the seller’s current role is today and position it with potential buyers down the road.
So they’ll know what they need to do to fill in when they come in.
Armando (5:28 – 6:02)
And so once they start, say, working with you, and now you’re, as you said, learning the company, learning what they’re doing, how they’re doing it, looking at the leadership and who they have in the different roles with the company, you’re then gathering that and you’re helping to, as you said, I forget what words you used, but you said really putting that package together, making it look as good as possible, as presentable as possible. So then you can take those two different perspective buyers who are interested, at least at that point, in possibly buying the company, right?
Mark (6:02 – 7:27)
Sure. So we take a look at the company. We get in and we understand what the company is all about, the cashflow streams.
And then we focus on what we think are the select buyers. We don’t put it out on a billboard or put it out on the internet. Our approach, and that’s like most investment bankers, is we’ll go to a select number of potential buyers that are looking for the type of business that we’re selling, the type of industry, the size of business.
And so we typically go to no fewer than 50 buyers, but no more than 100 potential buyers. Our goal is to go to people that have expressed an interest in this type of a company with the goal of creating a controlled auction. And so we like it when we have more buyers or more interested buyers because then we have a chance with the client’s assistance is to go through those and weed out the ones that don’t make sense, but potentially get three or four or five that want to go down the path in the process.
So we’re not going to put it out on a bulletin board. We’re not going to send it out to a thousand different potential buyers. We think that’s a waste of a lot of time and not the right approach.
Armando (7:27 – 7:34)
Yeah. You mentioned controlled auction. And most people think about an auction, they think about that bidder who speaks really, really quickly.
[Speaker 3] (7:36 – 7:36)
That’s not me.
Armando (7:36 – 7:43)
Bids their price up. But when you say controlled auction, talk about that a little bit more, what that really means.
Mark (7:44 – 8:53)
Well, it’s just really the process that we run. We let the buyers that we’ve contacted know that we’re running a process and that we’ve contacted a certain number of other buyers. They’re qualified buyers and they’re all looking at the same information and they have the same timeline.
So we set out a timeline. We set out once you have the information, you have 30 days to get back to us with a term sheet and then those who give us a term sheet, then we say, okay, we’re going to select whatever number of the term sheets to take them to the next step. So the buyers understand there’s a process and we control the process with the client.
The buyer doesn’t control it. So we’re on our time, not their timeline. So that creates a sense of urgency for the buyer groups because they know there’s others that are probably keeping pace if they aren’t.
So if they’re interested, they probably better keep pace. And what we think that does is it keeps people’s feet to the fire if they’re interested. And if they’re not, then they can fall away and not waste our time.
Armando (8:54 – 9:29)
Yeah. Okay. And so the idea of an auction, at least when I think about, again, that fast talking, the guy out there who’s bidding that price up, from the person who owns that business, of course, they want to see that price getting higher and higher.
When you’re taking a company to market and you’ve, like I said, looked at the financials and made sure that they’re in sellable condition, do you have an idea before you go to market what you think that might bring or some kind of a range for price?
Mark (9:29 – 10:41)
Sure. So even before we even engage with the client, we’ll give them a sense of what we think the range is. And we do that by taking a look at the company, taking a look at the cash flows, the consistency of the cash flows and the size of the cash flow industry they’re in.
And then we compare that out to several databases that we have to give us a range of what we think the company might transact for. We bring that back to the client and give it in a range format because we want to make sure that the client is comfortable that if the sales price comes within that range, that that’s something that they would want to transact. We don’t want to have a situation where we take a company to market and then it’s what we think is within the range, but they don’t want to sell, then the company’s been on the market.
The clients invest a lot of time in the process and then they decide that they don’t want to sell for that range that we thought it would sell for. So we get some buy-in there because it is a long process. The typical process is six to nine months once we get engaged.
And there’s a lot of work that goes into that and we don’t want it to be wasted effort by the client. We want it to be a success.
Armando (10:41 – 10:56)
And Mark, how important are the company’s financials? When you’re doing your work and going to potential buyers, how important is the accounting and books and financials of that company for you in that process?
Mark (10:56 – 11:53)
Sure. I think I said in the beginning, we want to level set it. So the expectations of the buyers that we work with at least is that the company’s going to have good books and they’re going to stand up to their due diligence.
So we often require our clients to have at least CPA review financials so that we know that the books and records will stand up to the due diligence because most of the buyers bring in a large accounting firm. They’ll bring in their group that that’s all they do is look at potential purchases by their clients. And so they’ll come in and they’ll want to look at the books and they’ll want to make sure that they’re going to hold up to their scrutiny.
And when that happens, we take negotiating chips out of their hands about issues with the financials. Once the buyer starts finding issues with the financials, then your negotiating ground starts to slip a little bit because then they start to get the upper hand.
Armando (11:53 – 11:59)
Yeah. So the seller gets in a weaker position if his financials are not strong.
Mark (11:59 – 12:00)
Right.
Armando (12:00 – 12:00)
Yeah.
Mark (12:01 – 12:22)
And so we look at it as an investment. So we’ll see what they’re doing today. Sometimes we don’t need to do anything.
Sometimes we need possibly somebody to come in. It might be even their own CPAs to come in and show us some things up. But we want to go into the process knowing that we’ve got pretty sound financials and that we’re not going to lose ground there.
Armando (12:23 – 12:54)
Okay. And you mentioned reviewed financials for many privately held companies. They don’t have audits.
They don’t have reviewed financials because they just don’t need them. Sometimes banks will have loan covenants and they have to get audits reviews, but it’s not uncommon for a privately held, privately owned business to not need or want any of that when they’re going through that review or if they have not gone through that review for their financials. It sounds like what you were saying is that when they have that review, they’re in a stronger position.
Mark (12:54 – 13:36)
They are. What it boils down to is they can hand to a potential buyer a third party reviewed financial statement. So that’s a third party has looked at the numbers and they’ll back up the numbers.
And so if a company needs that, and again, that’s our preference, we have a couple of firms in town that they’ve helped us out and they can pretty quickly put together what we’d like to see at least two years of reviewed financials. And so it wouldn’t be the first time that we had them come in while we’re preparing the marketing information on the company, that they’re getting the books and records ready for us so that they can come together when we go to market.
Armando (13:37 – 13:42)
Oh, so then these things could happen simultaneously at the same time going on.
Mark (13:42 – 14:06)
Yeah. And when we’ve had them do it, we found that we’ve had clients that were really on a cash basis rather than the accrual basis that they thought they were on. Or we’ve had another client where they took a lot of customer deposits, but they weren’t recording those properly.
And if we’d gone to market with those sets of books, it would have been a nightmare trying to get it closed.
Armando (14:07 – 14:30)
I’m only laughing because in a small privately held company, that stuff kind of doesn’t matter until trying to sell that to somebody who doesn’t know anything about your books and records. And having the independent third party that outside CPA firm validate to some extent with reviewed financials gives that buyer a heck of a lot more assurance that they can trust those numbers.
Mark (14:30 – 15:42)
Yeah. Yeah. Yeah.
And again, the buyer’s expectations are with certain sizes of companies that they will already have that. So that’s one question we take off the table if we come to market with those. For some smaller companies on the smaller end, we’ve got a couple of people that we work with that can create a financial statement that isn’t CPA prepared, but it is GAAP and it’s a financial model that the buyers can use.
And so we’ve used with our smaller clients. So we have some options, but we think the CPA reviews are a good investment. When you think about it, you know, that’s $10,000 to $15,000 per year to get a review, sometimes $20,000.
So it might be $30,000 to $40,000. But if you’re talking about increasing the multiple of a sale by a half or three quarter turns, meaning almost a full turn on whatever the cash flow is of the company, it’s a small piece of the total valuation. So again, like most things, we want to look at it as an investment, not as an expense.
Armando (15:42 – 15:58)
Yeah. So you’re saying that if they spent say $30,000 to get a couple of years reviewed financials and the company sells for say $30 million, but it would have sold for maybe $25 had they not had that difference is well worth the money. Yeah.
Okay. That makes sense.
Mark (15:58 – 16:07)
And even to the point that selling for less or maybe not even selling at all because the buyer backs away.
Armando (16:07 – 16:35)
Okay. And so when you’re going through your process, gathering records, make sure the financials are good, maybe having reviewed financials put together, then you’re going to market, you said, to maybe 50 to a hundred different potential buyers. You’re also putting together some kind of a packet for them or those prospective buyers to see, you said, right?
Where they all see the same information and then they can decide whether that’s something that they’re interested in or not. Sure.
Mark (16:36 – 17:35)
And the initial package that we send to the 50 or a hundred potential buyers, it’s not really a package in as much as it’s a one page, we call it a teaser. So it’s a one page, no names, no locations, just the general overview of the company to see if they would be interested in such a company. And then if they are, then we go ahead and have them sign an NDA.
And then we share with them a larger package that gets in more detail, none of the secret sauce yet, but more of the detail, they can start to get a better idea of what they’re looking at. But we do the first pass with the teaser to get rid of people that might not be interested. And it weeds out guys that don’t want to sign an NDA, but we do the one page teaser and we typically get maybe 10 to 15% of the people we send out to signing up to go forward from there.
Armando (17:36 – 18:10)
Okay. I’m glad you mentioned that because the one page teaser, you said it’s anonymous. So they’re not many times people when they’re selling, they’re paranoid.
They don’t want people to know they’re selling their company. They don’t want employees to know or customers. So that one pager is anonymous.
Their information, their company name is not there, but it’s the teaser as you called it. If they respond back to you and say, yes, I’m interested. Then you have them sign a non-disclosure agreement where then they will get more information and they will know the company that that teaser is talking about.
Correct.
Mark (18:11 – 18:37)
But within the next document, and it ranges between 20 and 30 pages, typically it’s a PowerPoint. We don’t share customer names. We don’t share, like I said, any of the secret sauce, but it’s more detail of what the things that we think the buyers want to know about that company.
And with the goal at that point is eliciting as many term sheets from those recipients of that document.
Armando (18:38 – 19:02)
So the term sheets, that makes me think about the seller. Sometimes sellers are very specific what they want as an outcome, maybe not so much money, but maybe they want to be out in two years or one year or the earnouts and different things like that. When the prospective buyers give you a term sheet, I’m wondering how much flexibility that seller has with that.
How negotiable is that?
Mark (19:02 – 20:23)
Sure, sure. With the teaser, we generally will put in that some guidelines to what the seller is looking for. We don’t want to be specific because we don’t want to limit the potential buyers at that stage, but we give them a general idea of what they’re thinking about in terms of that, if they’re willing to stay on a couple of years or maybe stay on for a short period of time, we’ll generally mention that.
We don’t mention too much about whether or not they’re willing to take an earn out or not. We don’t want to get into those types of details. But once you get into the next phase, the term sheets will come in with some specifics around the buyer is thinking about, and we’ll, through the process, we’ll massage that to where it gets as close to what are the goals of our clients are and whether we have other term sheets to massage those term sheets with, or whether or not we’ll pretend we have other term sheets massaging the one we have.
But it’s nice to have more, but we, like most investment bankers, sometimes you just get one, but they think there’s other buyers and we don’t tell them any different. And we massage that to where we can get them to then get to something that’s more comfortable.
Armando (20:24 – 20:46)
Right. And that’s obviously better for the seller because the seller, you can help them get, when a buyer thinks there is more competition or maybe competition at all, they’re going to put their best foot forward. Maybe they’ll pay a little more than they were initially willing to pay, but that helps your client, the seller, be in the best position when it’s all done.
Mark (20:46 – 21:02)
It is. And that’s why just, you mentioned what you picture as the old auction setting, the more people that are on that auction floor, whether or not they’re real buyers or not, the chances are for a better success for the seller.
Armando (21:03 – 21:07)
Yeah. So, Mark, could you talk about, you mentioned turns and you mentioned multiples.
Mark (21:08 – 21:08)
Yeah.
Armando (21:08 – 21:20)
Can you talk about multiples and what that really means? Again, for that first time seller, multiples and the EBITDA acronym, can you talk about that and explain what that is?
Mark (21:20 – 24:37)
Sure. Sure. So, I’ll just clear up one thing.
When I mentioned turns, I mentioned multiples, those are the same things. And so, let me go into that. So, most businesses in the middle market, which is where we operate, which is businesses valued $10 million to $250 million and even larger, are typically valued on some multiple of the company’s cash flow.
Buyers are looking to buy a stream of cash and they’ll put a multiple on that to value that stream of cash to create an enterprise value. Let me talk about EBITDA, which is cash flow for our type of client. So, we look at a company’s cash flow.
So, it’s their net income with some adjustment to it to get to the earnings before interest taxes and depreciation. So, what we do with that is we work with the financials to come up with what would be a go forward cash flow number. So, we’ll take their financial statements and we’ll add back to the company cash flow expenses that wouldn’t be occurring in the future.
And then we’ll add to that expenses that the buyer may need to incur because some things that maybe the seller hasn’t been doing or would need to do as a buyer to come up with what’s an adjusted cash flow. Then we go over to the other side, which is the multiple. And then we look at the size of the company, both revenue and cash flow.
And then we look at the industry that they’re in. And then we come up with a multiple range. And for example, most of our businesses typically sell or clients sell somewhere between four and eight times.
And so, we’ll look at where our client would fall within that range. We had a client sell last spring for 12 times. But we had given our client a six to eight range that was acceptable.
But we got into a controlled auction process. We had a lot of people interested. So, the price got bid up by those buyers.
But then we look at a more of a closer range is typically, we might say five to six times. We’re not going to give a client a four to eight range, that’s too wide. But we’ll say we think it’s going to fall in this range based on what we can see within the market.
And again, we get the client to buy into that number. But then we put it to the side, we never put a price on the business, because we want the market to set the value. Because oftentimes, they have a different perception.
And if their perception is low, we try to coach them up. But if their perception is high, we try to coach them up more from there. But we had an example, I don’t know, three or four years ago, where we received 12 term sheets for a company.
And the term sheets came in ranging from about 24 million down to about 12 million.
Armando (24:37 – 24:38)
Oh, that’s a big difference.
Mark (24:39 – 24:52)
Yeah, big difference. And they were all qualified buyers. They were all experienced in buying companies within this industry.
But they all had a perception, a different perception what the value is.
[Speaker 3] (24:52 – 24:52)
Yeah.
Mark (24:52 – 25:18)
So that’s why you want to go out and go to as many qualified buyers, because you just know where people are going to stand. The difference of the high and low was the low guys had just closed a couple of deals, and they were pretty busy. And so they said, okay, if we can get this for a buy, we’ll buy it.
If not, we’re busy with the others, where the guys at the top end were really wanting to get into this industry, and we’re willing to pay up to do it.
Armando (25:20 – 25:53)
Wow. So thank you. That’s helpful.
You mentioned cash flow and multiples. Multiples range from four to eight normally, but can, as you just showed, sometimes be a lot more than that, 12. And the cash flow, just to use an example, and to keep it simple.
So if the cash flow on a company, the EBITDA on a company comes out to be flat million dollars of cash flow a year, and the multiple ends up being five, then you’re taking that number five times that $1 million, and the price of the company then becomes $5 million.
Mark (25:53 – 25:54)
Correct.
Armando (25:54 – 25:54)
Correct.
Mark (25:54 – 25:57)
Sorry, I didn’t go that far with my example, but yes.
Armando (25:57 – 26:31)
I just wanted to keep it simple and clear so that people hear multiples and EBITDA, and it’s for that first time seller, it’s all brand new territory. They’re overwhelmed, maybe not overwhelmed, but it can be very emotional, a lot of stress and anxiety that comes along with this once in a lifetime transition. So I just wanted to make sure that math was said so it’s simple to understand.
What surprises, Mark, as you go through your process with that first time seller, what are some of the surprises that you hear those sellers tell you?
Mark (26:31 – 26:49)
Often, after closing, as much as sometimes they feel somewhat pain going through it, or a client that’s had to go through and get the financial statements upgraded, they say to us, we should have done that a long time ago. Yeah.
Armando (26:49 – 26:53)
And that makes sense. Having good financials tells you what’s happening in your business.
Mark (26:54 – 27:32)
Yeah, because they can see during the process when that’s done, the questions don’t focus on the financials. The questions focus on other, most likely, more positive things. And so then they see why we were so laser focused on getting the financials right in the beginning.
They’re surprised about the amount of due diligence that the sellers or the buyers do. But in the end, I think they see why they need to do it because they’re buying a company and they don’t know anything about the company in terms of the details. And they need to have that to be running the company going forward.
Armando (27:32 – 27:56)
Yeah. And when you say due diligence, you’re looking at, you’re asking for things like prior tax returns, looking for the stock certificates, looking for that loan that was paid in full 10 years ago, those documents. They want to have documentation to back up or to really understand what is happening in that business and what has happened in that business for some years back.
Mark (27:57 – 29:20)
Sure. Yeah. We go through a pretty lengthy due diligence process at the same time that we’re preparing the companies to go through or go to market because we want to be able to, once we find the right buyer, say, let’s go and close in 60 or 90 days.
We don’t want to be gathering, like you say, tax returns or corporate records or insurance policies or HR documents and plans and things. So we build out a pretty robust file. And we do that for two reasons.
One, so that when we go to close with the buyer, we’re ready to do that. At the same time, if there’s anything missing, we have time to track it down ahead of time so it doesn’t delay the closing. We want to find out that if there’s any liens on the company by a prior lender, we want to know that day one of the process of working with the client so that we have all those liens cleaned up by the time we go into the closing with the buyer.
Because we don’t want the buyer to find things. We want to find them ahead of time and fix them if we can or tell them about the issue. And it gives them confidence that we have looked at things like that.
So we’re thinking ahead.
Armando (29:20 – 29:47)
Yeah. And I think that gets back to what you said earlier, that when you talk about financials, maybe not being strong or not being reviewed, that it can put the seller in a weaker position, which means the seller’s not going to get what he or she wants or maybe the price they really wanted. And the more of those weak things that come up in this whole process, it just sounds like it’s lowering that price or that potential price for that business.
Mark (29:47 – 29:58)
It is. You want to have as many of those chips on your client’s side of the table and you lose them when there’s things like that that come up. You lose some of those chips.
Armando (29:58 – 30:21)
Yeah. And they don’t want to do that, obviously, but if they don’t know going in, then they might inadvertently shoot themselves in the foot because they just didn’t know. But that sounds like it’s part of what you mentioned.
You talk with them a lot before you even get hired. So you understand and you help educate them. And so there are fewer surprises as you’re walking down that path with them together.
Mark (30:21 – 30:41)
Right. Right. Right.
And at each stage of the process, we’ll typically sit down with the client and say, OK, now this is the next stage and this is what typically happens here. These are some of the issues. And so we’ll take you through that.
But just so they have more of an idea of what’s going to happen in that coming up phase.
Armando (30:43 – 30:56)
And Mark, for industries, the process that you that you run when you’re going through a sale of a business, is it industry specific or does the ministry not so much matter?
Mark (30:56 – 31:56)
It’s not industry. The process is not in industry specific, but some of the documents that we collect within the categories of due diligence differ by the type of company that it is. For example, somebody that has a number of locations, there’s going to be a lot more real estate information collected if they own versus lease.
We’re going to collect different types of documents. So if it’s a manufacturing business versus a service business, there’s just certain things that the buyer would want to learn about a manufacturer, raw material costs, inventory costs, those sorts of things versus a service provider. So we’ll you know, so probably 70, 75 percent of the due diligence information that we collect is the same for every type of company.
That 20 to 25 percent is going to be industry specific.
Armando (31:57 – 32:11)
Okay. And then for the work that you’re doing, does it matter when in the investment banking space that you work in? Are there certain injuries that you specialize in or really is it the same?
Does that does that industry matter when they come in your door to you?
Mark (32:11 – 34:33)
Sure. Our experience has been oftentimes have no specific industry experience when a prospective client comes through the door because we’re focused here in the Phoenix, Arizona market. We don’t specialize by industry and most people don’t when they’re working with the lower middle market.
We do have experience with a lot of different companies based on our 35 years worth of working with businesses. So, you know, we haven’t dealt with that type of business before, whether it’s through investment banking or corporate finance. We’ve probably looked at something pretty similar to it.
So it doesn’t take us very long to get up to speed. There are some investment banks nationally that do focus on specific, but they tend to do larger deals within those industries. Sometimes they’ll come down into our lower middle market space.
But what the industry information tells us is generalists like us, one, we can get to all the buyers that we need to because of the databases that are available to us. And we’ve gone to into large public companies and found the right buyer. We’ve gone to large privately held companies.
We sold a business a few years ago to the largest window manufacturer in the world. And so we have the ability to get into the right buyers. That’s something that a client would want to know.
But at the same time, we have fiduciary responsibility to that client and they’re our client and we’re going to take care of the client. What we find and what the industry says is if you find a investment banking firm that works solely in an industry, they specialize in an industry, they’ll do multiple transactions with one or two buyers. Whereas you as a client, their client, they’ll do one transaction with you.
You look at that and say, so who are they more beholding to? Those buyers that they’ll do multiple transactions with, are you the one-time client for them?
Armando (34:34 – 34:52)
I’m glad you brought that up because it seems like you want to go with the specialist whenever you can, but that might not really serve you well if that relationship with that buyer is stronger than this one-time relationship with you, the seller.
Mark (34:53 – 35:43)
Right, right, right. And years ago when there wasn’t the internet, it was really hard to find the right buyers because you couldn’t go in and figure out who was buying what businesses and what industries. So somebody’s experience, somebody’s Rolodex was pretty important.
Today, not so much because we have access to databases that will tell us who’s buying companies in what industries and at what valuation. So we can do that. And so that Rolodex isn’t as important.
The guys that specialize in one industry will say, well, we’ve got firsthand experience with these buyers. Well, if we come to them with a company, they’re not going to tell us to go away because we’ve never worked with them, but they’re going to appreciate we brought a company to them.
Armando (35:44 – 35:52)
Yeah, right. No, that makes a lot of sense. That makes a lot of sense.
And you said, did you say six to nine months typically from start to finish?
Mark (35:53 – 36:58)
Yeah, yeah. And a lot of it depends on if the financial statements are ready or where they might be in the accounting cycle. Oftentimes, it makes sense to go out to market with somebody’s year in financials.
So they’re typically done in February or March. But if you’re talking with somebody in October, well, you’re probably not going to get going on financials until the beginning of the year. But right now, for example, if we were to engage with someone, we probably have their financials by the middle of March or the end of March.
And we could be working on the marketing package at the same time. And so we could probably go out to market in 60 to 90 days. And then you’re in the market for 30.
You’re working with the term sheet providers for about 30 days. And if all goes well, you can close in 60 to 90 days. But again, that’s with a lot of work up front, both the financials being right, but the due diligence being done ahead of time.
Armando (36:59 – 38:20)
Okay. So a question for you, Mark. Some businesses are very, very, very steady, Eddie.
They’re just kind of cruising along. And it’s very normal, the revenues, the profits all very, you know, again, very steady, Eddie, very even from one year to the next. That’s probably not the norm.
But sometimes people get very complacent. And the owner might be very content with that. But I did speak with an owner recently who wondered, he was wondering, and actually said this out loud to me.
He says, you know, I’ve thought about, should I really just ramp it up and start driving my sales up? And they really look at making this business show that it’s growing on a growing trajectory, just kind of keep it where it is. And his question was, if I sell it now the way it is in this condition, I’m going to get a range of whatever these numbers are.
His thought was, if I invest two years to begin to build more revenues and make this more valuable, you know, what’s it going to cost me financially and emotionally and that to do it? But then what’s the reward for that extra two years of just doubling down and making that more valuable? So I wonder how you might, how you might, if you had that question, how you might address that for that seller?
Mark (38:21 – 38:23)
Sure. Well, it’s one of those answers. It depends.
Armando (38:24 – 38:42)
Are you wondering if you’ve missed anything in your planning? We hear that a lot from very smart, very successful people. And that’s why you may be interested in our Founders Stress Test, even if you’ve already sold your business years ago.
For more information, go to axiomcorp.com.
Mark (38:42 – 40:41)
It just depends on the situation. If somebody wants to do that and they can get a lift in their performance and their profitability, it’s probably going to be worth it as long as the personal cost wasn’t too much, if that’s what they were looking at. Because not only do you get a increased cash flow, but the larger cash flow gets you get through some breaks in the multiples and where the multiple range might be four to five times for a certain size company.
If you get cash flow up to a certain level, the multiples now might be five or six. So it may be a much bigger value if you can break through some thresholds there. But at the same time, that growth can’t come at the cost of other aspects of the company.
If your customer service starts to fail because you’re growing too quickly, if you’re getting beyond the means of your current team, buyers can sense that. But on the surface, most buyers like to see a company that’s growing because then they can come in and continue the momentum. But at the same time, if you’ve had a company that’s been somewhat stable, just as long as you show them some ways that they could grow the company, you just haven’t wanted to invest in that, you’re not wanting to do that.
And that’s not uncommon. Somebody at the end of their career is comfortable, but if you can show them some easy ways to grow the company, then they’re all in for figure out ways to grow a company. And if they can get somebody’s ideas to do that, then they’re going to probably be more interested in paying less because it’s a and but we always say that’s something we say is you can either have the buyers pay you for your investment, or you can pay them for their investment, meaning not get as much for the company.
Armando (40:41 – 40:52)
Well, it sounds like there’s a lot that you take into consideration when you’re having those conversations with the seller and helping them to go through that and navigate that sale process.
Mark (40:52 – 40:59)
Yeah. And again, it depends on the company and the industry and really what the seller’s goals are.
Armando (40:59 – 41:31)
So when there are partners, multiple owners in the business, say 50-50 partners, I’m wondering how you get them if they’re not 100% in agreement, then it’s going to make everyone’s job more difficult going through the process. Are there ways that you can help the partners get into agreement or either decide to do this or not? Because nobody wants to waste time when at the end, you find them a great buyer and they can’t agree and then they don’t finish it.
They just don’t sell after all.
Mark (41:32 – 42:04)
Yeah. I think the best way to do that is to get them in agreement going into it. You can’t go into a sale process with disagreement.
There’s too many pitfalls. So it might be best served for everybody just not to go into a process because if they’re having differences now and you get into a process and you’ve got one that wanting to go forward with somebody and somebody is not, the differences are just going to exacerbate themselves.
Armando (42:05 – 42:06)
Yeah. That makes sense.
Mark (42:07 – 42:14)
Yeah. Some of the best decisions are no decision when your gut tells you that it’s not the right time.
Armando (42:15 – 42:44)
Okay. Mark, what have we not touched on in this conversation? And I’m really thinking about those first couple of conversations you might have with a first-time seller when they’re asking you questions because they just don’t know.
They just don’t understand what this looks like, what it’s going to take. They don’t know how much due diligence or how many records you’re going to ask for or the buyer is going to ask for when they’re going through this process. They just don’t know.
What have we not touched on yet in this conversation?
Mark (42:44 – 45:27)
Sure. One of the concerns that a lot of our clients have when you first start talking with them is how do we keep this confidential? And it’s not that they don’t want to involve their employees, but they don’t want to involve them at the right time.
And so they say, how do we do that? And we say, that’s common in all of our client relationships, but it’s relatively easy to get through a lot of the process before you have to involve somebody if you do it the right way. For example, maybe you don’t use the company email.
You use personal emails. Maybe you meet offsite. You meet at our office.
You meet after hours, those sorts of things. You don’t call into the company number. You call into somebody’s cell phone.
There’s certain ways to communicate, but at some time you do have to bring certain people in and maybe you phase that. But in most cases, the majority of employees don’t learn about it until it’s happened. But then you put together a nice presentation to them to say why this is going to be good for them, why it’s good for the company, those sorts of things.
But that’s a question that is always on our client’s mind is how do we keep it confidential? The same thing with the market. Again, we don’t share the name in the marketing documents.
We don’t share customer names until the very end. And so those are different safeguards that you put into the process. So those things don’t happen.
We had an example a couple of years ago. We sold two businesses, same industry. They knew each other, both here in the Phoenix market.
We sold them to the same buyer. They closed within two weeks of each other. About two weeks later, the buyer had an all-hands meeting in their offices, brought people in from outside of town where they own other businesses.
Our two clients walked into the meeting and looked at each other and said, what are you doing here? What are you doing here? Did you sell your company to these guys?
Yeah. Did you? Yeah.
Who did it for you? CKS. When did they do it?
A week ago. When did they do it? Two weeks ago.
I think we lost some hair during that process and some years on our lives, but we were able to keep it confidential. The buyer almost blew it once. The client didn’t hear what they said, but the buyer almost blew it.
Armando (45:27 – 45:43)
Oh, no. Oh, no. Well, that’s a good testament of how good you are at keeping information confidential and anonymous, but that sounds like it could easily have gone a different way.
Mark (45:43 – 45:51)
Yeah. From the very beginning, we said, oh, man, this could go off the rails so easily and so innocently, right?
Armando (45:51 – 45:56)
Right. Yeah. Simple as an email to the wrong person or a fax to the wrong person.
Mark (45:56 – 45:58)
Or the wrong comment to somebody.
Armando (46:01 – 47:01)
Oh, that’s a funny example. Well, I can see how the company, you said, when I asked you about what we hadn’t talked about, you said anonymity. They don’t want their employees to know anything until the time is right.
And one thing I’ve heard before is in terms of employees and helping them feel comfortable that the jobs are still there and that the company is going to continue, what you’re doing is transitioning you, Mark. You’re taking that company. You’re transitioning that into the next person’s hands who is going to continue operating and running that business.
Yeah. Yeah. Their seller, the owner of that company, they’re going to leave, but you’re really part of the continuity of that business.
And that business continuity is where all those employees work. That’s where they generate their livelihood. And if they view that as an ongoing business versus my owner selling, then it’s a lot less of a, seems like a lot less of a threat to them.
Mark (47:01 – 48:00)
It is. And in most cases, the buyer is larger, in some cases, much larger than the existing company. So the employees potentially will enjoy a better benefits package.
They’ll have more opportunity within that company and create some more stability for them as well. So when they step back from the initial shock of the businesses being sold and people have the horror stories of the 80s and 90s where buyers would come in, slash and burn, sell off assets. Today’s world is a lot different.
People are buying the company because it’s a good company. They want it to continue so that if the employee’s a valuable employee to the current owner, they’ll be valuable to the buyers and just continue to do your job and you’ll have, and it will work out well for you.
Armando (48:00 – 48:24)
I’m glad you said that. And Mark, in the Metro Phoenix marketplace where we are, we’re a large city and it seems like our city is really getting a lot more sophisticated and more industries, more companies. We have a lot of attention from outside of Arizona, looking at Arizona companies to buy.
Is that what you’re seeing as you’re in your space there?
Mark (48:25 – 49:16)
Yeah. In the last 10 years of all the businesses that we’ve sold, only one buyer has been headquartered here. We’ve sold to buyers in New York, Atlanta, Chicago, Detroit, Los Angeles, Dallas.
I’m trying to think. Atlanta, Charlotte. So most of our buyers come from out of state.
They may have a company here that they own, but they’re located somewhere else. So it’s a national and it’s an international market for businesses today.
Armando (49:17 – 49:33)
Yeah. And when you’re seeing those out of state buyers purchase companies here in Arizona, is it typically them going into a new industry or they’re just expanding what they’re already doing by acquiring a local company to keep doing what they’re already doing?
Mark (49:34 – 50:50)
It’s probably, if I were to put some percentages on, it’s probably 70% are already in the industry or have some experience with it. And 30% are wanting to get into the industry today. And that was less before years ago was really had your strategic buyers and you had your financial buyers and strategic buyers are large companies within an industry that are looking to get into a market like Phoenix or into a niche that maybe this company provides within that industry.
Where the financial buyers typically or historically were people with a checkbook that wanted to buy a company, run it for a few years and sell it for a better return. Whereas a lot of those financial buyers now own companies within an industry. And so they’re looking to acquire more companies and basically becoming a strategic, but a strategic owned by a financing source versus a strategic that’s owned by a corporate entity that’s an existing business.
Armando (50:50 – 51:10)
So when they’re building that out, I think they could expect what you said earlier that the multiple might be higher if you have a bigger footprint. So maybe a private equity firm owns one or two companies in a certain industry and they buy more so they have a bigger footprint in that industry and that might get them into a higher multiple and a higher value overall.
Mark (51:11 – 51:36)
Yes. So when we sit down with the buyers, they not only ask us questions, but we ask them questions about why is our client a fit for you? Where do you see the value add to bring this company into your portfolio?
Those sorts of things. And then we use that information when we’re coaching them on what they should be thinking about for the value of the company.
Armando (51:38 – 51:43)
Are you seeing many private equity buyers here in Arizona?
Mark (51:44 – 52:10)
Oh, yeah. If I look back over the last five years, I’d say a good portion of our buyers have been private equity, but most of them with what they call platform companies. So they already own a company in the industry.
They’re not buying somebody to get into the industry, but they already own a company and they’re adding to that company with our client.
Armando (52:11 – 53:57)
Good. Well, Mark, this has been very, very helpful. I’m glad that we’re able to have this conversation.
And just in a nutshell, you’re helping that seller, the person who owns that company, helping them take that company, get it ready for, maybe not get it ready for sale, but certainly help them be in a position where they can sell. You’re taking that then to the market. You said the way the process works, you’re having a lot of dialogue with that owner first to understand and ask questions, understand the industry and the company itself.
You’re putting together a one-page teaser that does not have their name on it and just describes them on one page. What is this business to send that out to maybe 50 or a hundred or somewhere in that range of prospective buyers? You’ll get some saying, yes, Mark, I want more information at that point.
Then that potential buyer will sell a sign a non-disclosure agreement. And then you’ll give them another document that’s maybe 25, 30 pages, a lot more detail about what that business is. And you’re trying to get multiple buyers to then bid on it.
When you’re doing that process, you don’t have a price tag like this is for sale for X. You’re not doing that. You’re instead saying, here’s the information about this company.
What are you willing to offer to purchase this company? And then for your seller, again, that owner of the business, you’re helping to really negotiate that, bid up that price when you’re talking with those prospective buyers for the of your seller and your client is the seller. So you’re not beholden to those buyers.
If X or Y or Z buys the company to you, that’s not important because your client is the owner of that business, the one who’s selling that company.
Mark (53:58 – 54:02)
You should be in our business. You went through our process very well.
Armando (54:02 – 54:43)
No, I like that. You just explained it in a way that was easy to visualize. And you said six to nine months, maybe in that range of time, you can even get reviewed financials.
If they haven’t had those before, bring in a CPA firm to do the reviewed financials or something similar that follows a gap so that you have a couple of years that you reviewed financials that you can then show to that prospective buyer, which gives them more confidence that these numbers that they’re seeing, those are good numbers. They’ve been looked at by an independent third party. You also mentioned a earnings report really for the same purpose, just to validate numbers and help that prospective buyer feel more confident in what they’re seeing.
Correct.
Mark (54:44 – 55:07)
Yeah. Yeah. It’s all the processes kind of take their own path.
But if somebody’s ready to go to market, meaning they have good financials and that if they have to get the reviews, there’s nothing, there’s no surprises. Yeah. Typically, if we’re going to get new financials, it might be the eight to nine months, but if they’re ready to go, the six to seven months might be the process.
Armando (55:08 – 55:17)
Okay. And then the way you get paid as a percentage of the actual sales price, is that how your firm gets paid?
Mark (55:17 – 56:01)
Yeah. We call it a success fee. So, when our client is successful, we’re successful.
So, the way we structure our engagements is we have a small nominal upfront fee. We call it the engagement fee. We want to have the client committed to the process.
And so, what we typically do is we net that amount against the success fee. And the success fee is a percentage of the value that the business is sold for. And that percentage varies on the size of the business, the complexity of the business, and the amount of involvement that it’s going to take to get the deal done.
Armando (56:02 – 56:13)
Okay. Good. And so, Mark, if someone heard this and heard you and wants to have a question with you or just have a conversation with you, what’s the best way that you’d like them to reach out to you?
Mark (56:13 – 56:27)
Sure. They can certainly call me. My number is 2501-4414.
That’s my cell. Or they can send me an email at myoung at cksadvisors.com.
Armando (56:27 – 56:28)
Okay. Perfect.
Mark (56:28 – 56:36)
And if they want to learn more about the firm, we’re cksadvisors.com. That’s our website.
Armando (56:37 – 57:04)
Okay. Great. Mark, thank you so much for the conversation.
Really appreciate it. And I hope that we’re able to share your information and what you do so that people can learn and feel a little more equipped to go through that first-time sale of their business so that at the end of it, they get the outcome they want, they feel good about it, they got the right price, and it’s really the outcome they want for their family so they can live out the rest of their time and feel good about this once-in-a-lifetime transaction.
Mark (57:04 – 57:38)
Yes. Yes. Thanks for having me today.
I tell folks we get a chance to see our clients really fulfill their dream that they had when they started their business. And so it’s really exciting to see that happen and see their families be in a position to go forward with the life that they’ve sacrificed to have while they’ve been building their business. So it’s fulfilling for us to see.
Armando (57:38 – 57:52)
Yeah. Yeah. Same here.
The blood, sweat, and tears, a lot of commitment, time, anxiety, stress, all those to build a company with value. And then you’re helping them realize that reward at the end of their part of that business.
Mark (57:53 – 57:53)
Right. Right.
Armando (57:53 – 57:53)
Good.
Mark (57:54 – 57:55)
Okay, Mark. Thanks for having me.
Armando (57:56 – 58:33)
Yep. Thank you so much. Nice talking with you.
Hope you enjoyed this episode of the Founder’s Guidepost. 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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