Armando (0:00 – 2:01)
Here, you will hear business exit professionals talk about what you should know before exit. Besides hosting the Founder’s 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, Armand Duramama, the Founder’s Guidepost today here with Harold Faig. Harold, I am so excited to have this conversation with you. I’m going to give a few bullet points of your career so that the listener can understand really where you’re coming from in your thought process.
And then they’ll understand how much they will appreciate the conversation that we’re going to have today. So Harold, you mentioned you’ve had about 36 years in public companies. You were in Europe, in Asia, North America, South America.
The last public company that you were part of was a $2 billion cap equipment company. And in those different companies, in those different regions where you were, you bought and sold companies along the way. So in terms of a founder who’s never sold his or her business before, and they’re not quite sure what questions to ask, what to do, what to look for, you’ve been on the other side of that fence as you’ve helped your shareholders increase their value and grow and help those companies grow.
You also mentioned being in turnaround situations as well. So I’m just excited that we can have this conversation because a founder can learn a lot from just hearing you talk about some of the experience that you have. So welcome to the Founder’s Guidepost.
Harold (2:02 – 2:06)
Thank you, Armando. It’s nice to be here with you this afternoon.
Armando (2:06 – 2:58)
Good. So Harold, the person we’re speaking to is that business owners who’s had their company for say 20, 30, 40 years, never sold a company before, built a great business, and the business obviously has value. And when that happens, their phone starts to ring.
They start getting phone calls on a weekly basis from people who want to acquire them. And we want to make sure that they get fair value and get a good deal on that. And sometimes they just don’t know what they don’t know.
So if we can have a conversation just about that, if you’re talking with that founder, helping giving us some guidance and just some assistance and some key points to be aware of, I’m not even sure where to begin.
Harold (2:59 – 11:07)
I think we can begin from the process. And if you get into the mind of the buyer, they would be the seller, the small businessman you’re talking about. Whether they’re small, medium, or large, the processes usually are run the same way.
And in fact, as we speak, I’m involved in a process that’s very similar. And that is, as an example, building a business with a private equity firm, we know clearly where we want to go. We know clearly how we want to get there.
And we know at what range we’re looking for. Now the prospects, there are lots of companies out there. And if you have a strategy in place, meaning a white paper LRP process, you want to follow, then it’s clear that you need to attract the right kind of seller.
And one way we’ve done that, that’s been very successful, is to find a merchant bank. And a merchant bank, by my definition, are those bankers out there. They’re not a buy side or sell side, but they’re bankers out there who will make cold calls, talk to the proprietors, and find out where they are in this process.
So for an example, the last 15 years or so, I’ve been in the medical end of business. And we would look for those that had manufacturing facilities that would fit. But that example of manufacturing could be anything.
And are you interested in a conversation? Where are you in the process? What are you trying to do?
Are you trying to get a little money out of the business? Meaning off the table, stay involved, or sell it all. So once you kind of get to that point, then you may have three or four.
So these individuals are not just, it’s not a conversation just about them, but about them along with maybe the three or four you’re also looking at. And so it’s a sell process for them in order to attract the right kind of buyer, if that’s what they want to do. And that process, whether you get a merchant bank involved, or you have a private equity firm, or there’s just someone you contact that’s in the business-to-business selling aspect of it, it’s the same process that you go through.
So at that point, though, when you do that, and you pick that phone up, I would suggest that you kind of, in your own mind, go through the process. Are you a knowledgeable buyer or seller? If you’re a knowledgeable seller, and I have met so many wonderful people who have said, oh, yes, I’ve got all kinds of experience.
We buy and sell things all day long. And they do. But selling a business is not like your normal going out selling your car or your apartment building or your house.
It’s a whole different world. And it’s a world they probably don’t understand and don’t realize because they’re not doing it every day. And generally, what applies into the day-to-day business of transactions, it’s not what goes on here.
So what would I recommend? I would recommend they do their own soul-searching first and decide that this is what they want to do. But also, be honest with themselves and understand whether they need some help or not.
And that help comes out many different ways. The other kind of a buyer is a buyer who knows he doesn’t really have all that experience. And he generally struggles trying to figure out what to do because he starts worrying about what happens if he makes a mistake.
You know, some of these mistakes can be horrible. They can cost you a lot of money, both in the deal and after the deal. And then there’s the buyer who basically knows they need help.
And those are the ones that I always really like to deal with because at that point, you know, you can have open conversations. Do you have anybody working with you? You know, if they are, you know, we get them involved in the process early.
If you don’t have anybody working for you, you know, you better figure out what you want to do if you want the process to move forward. So, you know, to me, the best approach is to have an open mind and look at it from the angle of I need some help. Now, what do I do?
And that’s where, in my mind, the process should begin with these entrepreneurs who are looking to sell. And I would suggest that it could take a year to two years from that date that, you know, they come to an understanding that they want to do something until they probably wind up with a transaction. And that process begins with some work up front.
You got to run your business and that should not interfere with the transaction process. And that’s where a lot of these entrepreneurs get hung up because going to try to do it all. And when that happens, you know, many times deal fatigue sets in, you know, six months after they’re in a process because the questions become bigger and require more data, more information, and they get short with the transaction, they get short with their own people.
So, having someone helping them through this process, that’s kind of, you know, independent. When a deal’s done, they’re done. They don’t go forward with the process.
And it allows the owner operator to sit back and take a deep breath and really kind of think about it as this thing moves forward. And that’s the piece that I think most of them don’t really deal with is getting someone early in this process. Now, you know, first thing that comes to mind, is it an attorney?
My observation is no. Is it an accountant? No.
They’re early in the process, but not up front. Is it an M&A guy? Probably not.
You know, you can do that. What I’m talking about is an advisor to them on their business and transaction. That’s got a beginning and an end.
[Speaker 3] (11:08 – 11:08)
Okay.
Harold (11:09 – 11:13)
And that’s where I think it should start.
Armando (11:13 – 11:46)
Okay. And so, Harold, the question, you mentioned a few things. You said, you know, one to two years from the time you decide to where it’s actually done.
And you said about some work up front. And I think what you were referring to is the business, the operations of the business itself. Is it in a condition or could it be improved so that when that sale is, when you start walking down that path for the sale, that the business has maybe maximum value or is in better condition to be sold?
Is that what you were thinking of by a work up front?
Harold (11:47 – 14:27)
Exactly. The one, when you come out of public companies, part of the process, and usually, you know, a lot of that’s driven by your board of directors, your own internal control systems in place, you build LRPs, long range plans. They can be three years, they can be five years, they can be a combination of both.
And you certainly know, for sure, what the secret sauce is to your business. But I’ve seen so many entrepreneurs who have good businesses, and the simple process of what’s the secret sauce that you have, that makes this business run, and they have a hard time articulating that. And it’s always not really what’s apparent.
And that, I think, is sometimes what a second set of eyes can help you with. And once you’ve kind of, you know, have a thorough understanding of that, and that’s not a two minute conversation, sitting down and talking, it’s exploring the business inside now and saying, does that make sense? Is that really what it is?
Or is there something else there? You know, I put together myself and my partner, white papers on how to enter a business that we knew peripherally how and what we wanted to do. But once you start flushing out and putting meat on those bones, it starts to take shape of, you know, certain things are needed and certain things aren’t.
So, for instance, the last one we did, we looked at the healthcare part of it, grabbing a business and putting them together inside. What I knew, and there were certain key technologies and capabilities that we had to have, but there was also markets that we didn’t want to be in. So, you know, understanding what was valued and what wasn’t was really important.
So, it’s, and that’s this process within moves into once you can identify what you’re really all about. If, you know, if you can’t articulate that to someone in a deal, across the table, you’re going to have a hard time convincing them that this business has value going forward, you know, because generally it all builds from that.
Armando (14:28 – 15:09)
Yeah. So, you said a few things I want to just touch on. You said, we talked about advisor getting help, said that not your attorney, not your accountant, not a M&A intermediary, but an advisor.
And it sounded like what you were referring to, and you said exploring the business, understanding what is that business? What drives value? What is that buyer going to buy?
Somebody, so it sounds like what you were describing as somebody who’s going to get into the business and really understand it up to his or her elbows to really tweak that out, the things that don’t add value, maybe get rid of them, the things that add value, maybe get more of those or make those more efficient, et cetera. Is that, is that something?
Harold (15:10 – 17:16)
Yeah. And also articulated, you know, it gets back to, you know, if you’re going to sell it to somebody, I, I, I’ve not seen this myself, but maybe there are opportunities where people buy businesses and really don’t want to do anything with them. But I’ve never seen that.
And I’ve been involved with a lot. So, everybody wants to take the business forward. And the question is, how do you do that?
And what makes sense to do that? So, if you don’t know where you’ve been, how do you know where you’re going? And, and it’s, it’s kind of a trite thing to say, but it’s so true.
People get wrapped up in the day-to-day issues in the business and it consumes them and they don’t have time to sit back, take a breath. What I’m talking about is that ability to do that. Now that doesn’t mean, and in my experience and M&A individuals come in, it’s usually they’re coming in and going to pre-position a business for sale, how to, how to lay it out so they can articulate it to someone who’s, who’s got it, but somebody has got to tell them what it is they’re going to articulate and why it makes sense.
I’ve seen so many, I’ve been in so many deals on both sides of the table where the PE firms, if they’re interested in buying it, which you were, we were talking about strategics earlier, and strategics generally would have the same issue. And that is, if, if you want to grow the business, why haven’t you already started doing it? You know, and if you haven’t, you know, then you, you know, what you tell them gets taken with a grain of salt because there’s nothing behind it that says, Hey, this, I just, I just can’t leverage it enough.
I don’t have the horsepower to do it. And those are okay conversations, but it has to make sense.
Armando (17:18 – 17:54)
Wow. Well, you, you, you said a lot. Can you talk a bit about understanding value, but you said understanding what is valued in the company.
And I think as companies are growing up, sometimes they, they, they are intent on pleasing a customer or the client, and they might add a lot of services or products in the mix that maybe don’t add the most value and maybe they need to be weeded out. So when you talk about understanding what is valued to that potential buyer, is that what you’re thinking of looking at that offering and cleaning that up?
Harold (17:56 – 20:19)
That’s part of it. But the, the value is, what is it that, you know, if you say you are a contract manufacturer, the next question is to who, you know, and is that, you know, if, if you’re, if you’re making things for somebody and you’re expecting them to buy a good or service from you, I would hope that the customer base you have is a healthy one, because if they’re not healthy, you’re never going to get pricing or cost covered through your margins.
There’s always going to be a negotiation around price at some point. And that was one of the things early on that I wanted to make sure I was mentioning before, in healthcare, I wanted to build a business around healthcare, because generally, healthcare is a very good industry, you can get price increases through your customer base is very healthy, they may argue with you over certain issues, but in general, you got a reliable base to work with, as opposed to and someone may listen to this and kind of take take issue with it. But I would I never like to deal with automotive, or consumer electronics, or even consumer products, because those are those markets operate on very low leverage, very low profitability, and they’re very hard to get into, I’d rather have a business that has a lot of barriers to entry, then have to go after a business that had low profitability. It’s because that to me is the biggest barrier to all.
So to understand what is you’re trying to to do with the business is kind of what I was referring to before. Meaning to be able to articulate where you are today, what it what is the secret sauce that makes you successful in your marketplace? And how can you expand on that?
Armando (20:19 – 20:32)
Okay. You also mentioned something else a little earlier in this conversation about soul searching. And I think you were referring to before you sell, you know, asking yourself, what are you really trying to get to?
Is that what you’re thinking about?
Harold (20:33 – 21:43)
Yes. And what I’m going what goes through my mind is a number of instances where I’ve known people in the industry for a number of years, a lot of years, as a matter of fact, and eventually they came and said, you know, I think we’d like to sell the business. And I said, Okay, we in this was a deal we did in Europe.
And we went over, we spent almost a week negotiating and only to fly back following weekend. And note on the desk, it changed their mind, we don’t want to sell, we want to keep the business for for the family. You know, I mean, it was really very irritating.
It’s not so much about the cost that, you know, we spent doing that. But it’s the fact that, you know, they didn’t have their the foresight in their own business to determine that simple process. And but that’s not that’s not an unusual situation, especially when that business is your baby.
Armando (21:44 – 21:44)
Yeah.
Harold (21:45 – 21:50)
And that baby is a is a beautiful baby. And I’m not sure I want to share it with anybody.
Armando (21:52 – 22:20)
Right. And it’s not uncommon for business owners to sell and later regret that. So your point is well taken that that’s soul searching, they need to be sure that that this is what they want to do.
And if they want specific outcomes, that they know what those outcomes are. So as they’re talking with a potential buyer, that they’re they’re making it clear to the buyer of what they want to see as an outcome, and then not have any regrets afterwards.
Harold (22:21 – 23:01)
That’s right. And you know, and I would say the majority have no regrets. But those that do probably have regrets because they didn’t spend enough time up front.
And that’s kind of the around the question that you’re asking. You know, and if you want to have a process where there’s no regrets, then, you know, you pay now or pay later, you put the time in up front. Yeah, with your own diligence, and, and make sure that your your own questions are answered.
Because you’re the same questions you’re probably trying to answer someone else is trying to get out of you anyway.
Armando (23:03 – 24:00)
And say, again, you said you said get help. And you said an advisor to help, you know, explore that business and dig into it. And I’m just curious, when you think about, I’ve talked to business owners before different people who’ve started companies created great companies.
And I’ve spoken with several who have told me that, that they don’t need to get help, they know their business, they know what their company is worth. And they can negotiate, they can do all that. And it would be a waste of time and money for them to, to bring somebody from the outside to help them.
And in your experience, having been in on both sides, on both sides of the table and transactions, somebody who is in that mindset about they don’t need that help, what might you help them understand, so they realize they might want to get some help?
Harold (24:03 – 27:39)
It’s a hard, it’s a hard process to really kind of talk about is there one button you can push that kind of clears things up. In my experience is there’s not that, you know, what you hope that you can do is, is you have conversations that their own light bulb goes off. And they find out that, you know, it’s been I found the easiest way to deal with that is when you look at your own business, if you’re going to sell a business, and you’re looking at, you know, the selling process, more than likely is going to be around EBITDA in cash flow, etc.
And if that gets disrupted, because of this process, that can get costly pretty quick. And but the problem is you’re well with you’re well into the process at that point. So you know, having, you know, getting ego out of the way, and it’s generally when ego starts to get the best of the decision process, that one has those thoughts about their own competency levels.
And this is not an indictment on anybody’s competency. It’s an indictment on where we where do we best get the biggest bang for the amount of time we have? Is it in running the business?
Or is it in this other process that’s in all a world all of its own? Because eventually, if you get to the point where you want to take it forward, then you bring in, you know, the attorney, you and the accountant, and you got to make sure that the financials are done and done properly. Because if you if you give somebody financials, and they’re not, it really sheds doubt on on one of the most important pieces of information.
And that’s the earning power of the business. So that has to be right. But that that should come, you know, once you’re already into the process, you get your accountants that that can overlook the business, you know, when it’s in generally, you don’t have to go through a formal process of diligence on on EBITDA.
But you you better have your your financial P&Ls and balance sheets in order. And then and then, you know, once you have that, and you kind of feel that you you’ve got stability underneath, then you can you add the attorney. And, you know, and make sure that you’ve got your own details in place.
Because is it going to be a stock sale? Or is it going to be an asset sale? Or is it going to be something in in between, maybe you want to keep the building and and lease that out and keep a revenue stream coming.
And you have these conversations internally. And then when you think you you’ve got it enough information, then you can go out and get an M&A guy, that that then scours the market for the appropriate buyer. At least at that point, you know what you’re looking for.
And you have some control on what you get.
Armando (27:39 – 28:22)
Yeah. So perfect. So you said keep running the business, keep maintaining value in that.
And if that owner, if that owner is great, has built a great business, and running it and maintaining value is really critical to getting the value once the sale comes about, he or she could be really distracted if they if they themselves tried to take on that, that task of selling and finding the buyer and negotiating doing all that. And you’re saying their value is probably better, better, or their attention is better focused on maintaining the value in that business, because that is what they’re selling. That’s exactly right.
Harold (28:23 – 29:04)
And, you know, and, you know, I have, I’m sure there, there are very good individuals out there who’ve had enough experience, I comes to mind some individuals that were in private equity, they wound up buying a business. And they had that they ran it for several years, and then tried to say, you know, they were interested in selling, I would say that’s a different situation than most small business folks are in, they’ve spent their career building something. And, you know, unless you’ve walked in someone else’s shoes, it’s hard to understand all the ramifications of it.
Armando (29:05 – 29:56)
Yeah. Yes. So Harold, for that founder, who’s never sold a company before had this company now 2030 40 years.
And now they’re thinking it may be time to sell or they’re, they’re realizing that they have mortality, and they need to step out of the business for the business to continue. You’ve been kind of pounding that they’ve got to get some help, get an advisor, get some help, look internally at your company first, to understand what do you have? What can you change?
What can you mix up? Or that to add value? You mentioned also to me in a previous conversation, being in turnaround situations.
Can you talk about what that means? It sounds somewhat similar and or related, but, but how might that apply to this first time seller who now is having somebody take a deep dive into their company?
Harold (29:57 – 34:48)
Yeah. So in the turnaround situations that I’ve been involved in, both in public company and in private companies, they, it all looks the same. And generally, there’s some event that takes place that kind of stresses the organization financially.
Most, most of the time, it’s, it’s the economy, recessions, or something close to that. And they can be industry specific, they don’t have to be, you know, a worldwide or a national kind of recession. Depends on what, what it is that really, the outside influences slow things down.
And along with, and this kind of gets back and they, they go hand in hand with focusing on the business. Most companies that have a balance sheet that has debt on it. And the debt holders have covenants that they, the business has to perform to, if not, they have the right to come in and make changes.
And depending on how bad those covenants are broken, or missed, depends on how deep they want to go. And one particular situation I was involved in, the company had been, you know, was 20-25 years old. And two particular partners had a very good reputation in the industry.
I knew them from an outside standpoint. And they came to me and said, look, we’ve just broke covenants. And our, in the local bank, and it happened to be in Arizona, a big bank here, came in now with a workout.
And, and basically tells them, here’s what you got to do. You know, and he, they had an airplane and, you know, and one of them was a pilot and he enjoyed flying it. And, you know, that has to go.
And he said it didn’t, it dawned on him at that point, when he was told he had to get rid of his airplane, that he was no longer running the business, the bank was. And, and this is the same process. I’ve seen it where the bank that’s actually helping you as an advisor for the transaction, now becomes the workout bank.
And it’s, it’s amazing how it can transpire overnight. You know, and, and those are the tough ones, because at that point, the bank probably knows more than you do. Because as the buyer, as the owner, because they’re into the finances, and they know both short term, long term, what the outcomes probably going to be unless, you know, severe action is, is taken.
So, and it’s not just that, but it’s also managing working capital. You know, you can be very profitable as a business. And I think you and your folks know that, but if your working capital is behind the lines, you’ve got some severe problems.
It doesn’t matter what kind of EBIT value you show, you know, you can’t really afford to do anything. So having a look at all that and a perspective on it can be very helpful up front. Because if you if you miss it, you wind up and I, you know, I had a business and I can speak from personal experience.
Back in 2008, the industry, in general, the economy went, went down quickly. I just bought the business with a private equity firm. And we were, I mean, all the growth plans and strategies all go out the door, because now you’re in an in an into an intermediate turnaround position, where you’ve got to get the profitability back first.
And, and then on top of that, our main banker went belly up. Now you’ve got a situation, you know, you think about that for a moment, neither. What do you do?
That’s something that most companies, I don’t care how big they are, or how small will never run into a situation where their bank is going belly up while they’re in the middle of a recession.
[Speaker 3] (34:49 – 34:49)
Yeah.
Harold (34:50 – 35:14)
So it really forces you to understand the mechanisms that that you’ve got to deal with on a on an ongoing basis. And the last thing you want to do is to create that situation yourself, because you’ve got tied up on on a process when you should be focused on the business.
Armando (35:17 – 36:02)
So you’ve mentioned a lot, a lot about things that that are obviously relevant in that in this once in a lifetime sale for the business owner. So I would, I’m wondering for that business owner who’s talking with that that big multinational company, or you know, the big, just that big corporation that buys and sells and knows how to do this. And this founder, business owner has just never sold before they might not.
Well, they wouldn’t have any experience, of course, they haven’t been through it themselves. And if they don’t have that advisor, helping them walk, you know, walk down that path, it just sounds like it’s a good situation for that founder to end up in a really not so good spot.
Harold (36:02 – 37:36)
When it’s all done, you get smothered. I mean, in that, and I can speak from experience there. You know, especially when you get to the due diligence piece of it, your attorneys can only help you so much.
But you know, there’s information they want. And they can be very vindictive when it comes to that, on how much they get and how fast they get it. Most of the time, now they’re setting up these data rooms in you, and then everything’s got to get put into that.
And that process of just loading data into data rooms is an arduous process in itself. And obviously, that’s some something that the M&A firm if you when you select them can help you with. But there’s only so much they can do when it comes to the amount of information that the buyers can be can request.
And sometimes having a someone sitting with you who can sit there and say, Wait a minute, what are you trying to do with that data? You know, if we don’t have it, we don’t have it. And we’re not going to create it.
And you know, simply by saying that, does that create a potential break in the deal? Or is it just kind of resetting things so that they know they’re being, you know, you’re being overwhelmed and they know it.
Armando (37:38 – 37:57)
And you mentioned a deal fatigue earlier. Yeah, that when you mentioned the data room where all the all the information gets stored. They could keep asking and asking and asking and pushing, maybe even to create deal fatigue to get either new negotiate the price lower or Yes, or what?
Harold (37:58 – 38:40)
Yes, that’s exactly right. You know, if you want to slow a deal down, you you just ask for more information. And that’s and that’s a process that happens as well.
Because you know, you don’t know what you don’t know when you’re dealing with a buyer, they may be looking at one or two, maybe three other opportunities. And they’re going to see which one takes them home first. It’s kind of like what we talked about earlier, sometimes more than one company will fit what you’re trying to do.
So if you want to give yourself some time, just keep throwing more questions at them. And, and that’s a good way to slow it down.
Armando (38:41 – 38:56)
Yeah. So you’re saying the perspective buyer to the seller, the buyer, throwing more questions out there, demanding more information, put more in the data room, so that the buyer has more time to choose which of those several companies that he or she really wants to buy, right.
Harold (38:58 – 39:23)
And that’s the last thing you want to get into is a horse race like that. Because, you know, you’re trying to, if everybody’s got their head screwed on, right, you’re trying to make a good deal out of it a win win for everybody. And that’s not how you do it.
But you know, a lot of times, that’s the way a lot of these M&A deals get done.
[Speaker 3] (39:24 – 39:24)
Hmm.
Armando (39:25 – 39:56)
Okay. Well, that’s interesting. And Harold, what would you say that some of the big surprises are for that founder who’s never sold a company before?
They just don’t know what the process is. So if the prospective buyer says, here’s how it’s going to work. Here’s the expected timeline.
Here’s what we’re going to pay you. And if the buyer doesn’t ask enough questions or know to ask questions, they would just assume that’s how they’re all going to do it.
Harold (39:57 – 42:24)
Yeah. And to me, you’re getting back to your question there. I think there’s a lot of work that needs to be done prior to you even getting in front of a buyer.
Because the scenario you just described, you know, your attorney and your M&A people can help manage that. But the part that I always worry about, and the thing I look for when I go into a business, do these people really understand their own business? Or have they just gotten lucky over the years?
And I’m not being facetious when I say that. You know, if they know their own business, then they ought to be able to articulate it in a way that makes sense. And generally, that’s where the first problem comes in.
And as I was mentioning earlier, in the different businesses I’ve had, there’s not a real understanding. It’s understandable. That’s not what they should be doing on a day-to-day basis is writing three and five-year plans.
But at some point, that becomes a document that’s critical, because it forces you to sit down and think about your business so you can articulate it to somebody. And to me, that’s the first step that has to be done. Because part of that process is to be able to say, what does this business look like five years from now?
Because that’s ultimately what the next buyer is buying. Is this business? One of the reasons I like medical business, because I look at it as an annuity business.
Once you get it, there’s enough of the health care requirements that makes that business very, very sticky. And so once you get the order, that order runs for a period of years. So you don’t have to worry about it anymore.
So the question then is, how do you articulate what that business is going to be three, five, six years out? What’s it going to look like? If you’ve got a business, let’s say it’s doing $20 million today.
And the best thing you can do is project this business to be at $25 million six years from now.
Armando (42:25 – 42:44)
I’m going to question. 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 Founder Stress Test. Even if you’ve already sold your business years ago. For more information, go to axiomcorp.com.
Harold (42:44 – 42:54)
Whether that’s a business anybody would want. I mean, especially if you’re expecting a multiple on what you’re selling.
Armando (42:56 – 43:09)
Yeah. And it gets back to what you said earlier. You said everybody wants to take the business forward.
And it sounds like that long range plan helps them see your vision for what that business can be or should be doing in three to five years.
Harold (43:10 – 43:10)
Exactly.
Armando (43:11 – 43:21)
And if they intend to take it forward, as you said, you’re already giving them a roadmap and some expectations, which adds to the value and helps them have that exit and get that value that they want.
Harold (43:21 – 43:58)
What it does is if they’ve got most of these folks will have some sort of idea what they’d like to get out of the business. And many times, it’s just a gut feeling. And that gut feeling may be right.
And if it is right, then we ought to be able to see it in the planning process. And if it’s not right, maybe it’s not enough. Maybe their expectations are way too great.
You better all find that out now than finding out in the middle of a process when potentially tempers can get a lot higher.
Armando (44:00 – 44:24)
Okay. And Harold, what have we not touched on so far in this conversation? We’ve touched on a lot of areas, obviously, but what have we maybe not touched on that is important in getting that business ready for sale, doing that deep dive into the company, then bringing on the M&A person or company to help sell it?
What have we not touched on?
Harold (44:24 – 45:18)
I think probably the next piece of that, once you start to get the vision of the company articulated in an LRP form, and that’s also financial projections. I don’t want to not mention that because that’s just as important because that’s the scorecard that everyone looks at. So what’s the sales volume going to be?
What’s the earning is going to be? And you’re not so much the balance sheet at that point, but the P&L part of it. And then the piece that becomes next that the buyer is going to look at, and that’s the organization, the structure.
Do you have the manpower in the organization currently to take it to that next step?
[Speaker 3] (45:19 – 45:19)
Okay.
Harold (45:19 – 46:30)
You know, especially if, you know, to use your terminology early on, if you’ve owned a business for 20, 30, 40 years, you probably don’t have a lot of runway in your own efforts to do it. So the question is, who’s going to take it forward? Now, every buyer has probably got somebody in the background that they’d like to take it, but not necessarily.
They will analyze the business and say, hey, you know, this is one, it’s not going to take a lot of effort on our part. They’ve got some strong people there, and we need to maybe have some musical chairs and move some people around, and they move forward. That’s a pretty good situation.
But if, you know, you’re such a strong leader that you kind of do it all, that’s going to create an issue. I think not only in the valuation, but ultimately how the business is viewed by a buyer.
[Speaker 3] (46:31 – 46:31)
Okay.
Harold (46:33 – 46:39)
So people is probably the piece that we haven’t spoken much about.
Armando (46:39 – 47:06)
Okay. And the people, you talked about leadership, which makes me think of the CEO, but there’s also the management team, executive team, or the C-suite that is part of that leadership as well. But then people, there are people from the frontline people up to the CEO.
And as you think about people and this whole process of transitioning this business to a new owner, what comes to mind for you in that whole people picture?
Harold (47:07 – 48:38)
Well, you know, the stability is the big thing. You know, if they’re, you know, I hate sometimes even to get in these conversations because you start to have to grade people. And that’s always a tough thing to do because people can take offense at it, even the owners, because they’re more than likely proud of who they’ve got or, and they’ve been with them a long time.
But it’s somewhere along the line, there has to be an assessment made. And the purpose of that assessment is not so much for your own clarification, but for clarification to somebody else. I don’t know how many occasions I’ve been asked of the organization, who would you think would be a logical managing director or general manager if the head guy was no longer there, decided to take his money and spend more time in Florida, you know, that’s Arizona here.
So it’s a question of, you know, of assessment, who’s got the skill set in the organization currently, or do you need to have someone brought in and that’s not necessarily looked at negatively bringing in people, but you have to have the ability to get the right people. That’s usually the bigger piece of it.
Armando (48:39 – 49:14)
Yeah. So it sounds like when you talked about, you know, taking a deep, deep dive, exploring the business and looking at the value and that, another component is just that you touched on is evaluating, or I should say, assessing the people you have in house today with your company. Are they the right people?
Do they have the right skill set or do they not? And then the other part of what you said is if we need to add some people, how easily or difficult will it be to get the right people on board?
Harold (49:14 – 49:16)
That’s right. That’s exactly right.
Armando (49:16 – 50:14)
And then I’ll get back to what you said about the next, the buyer wants to take this and take the company and keep growing it. That adds value to what they’ve purchased. Okay.
So we talked about people taking a deep dive in the business, talked about some of the M&A process, getting the right advisor on board to help understand what is really there. You mentioned about a one to two year, might take a couple of years, one to two years to actually get to that sale place once the decision’s made to sell. And even before that is doing the proper soul searching so that you are clear on what you’re trying to get to, that you know what you want so that when it does happen, you feel good about it and you’re not backing out midway or wasting your time and other people’s time as well because it is the right decision for that owner at that time.
Harold (50:14 – 51:30)
Yeah. You know, I always look at it. The advisor doesn’t really have a dog in the hunt.
His job or her job is to come in and give you the best advice they can based on what they know and what they’ve learned in the evaluation process. And from that point, even helping in choosing the M&A, choosing the accountants and choosing the attorneys. You know, if you’ve got a $20 million business, the last thing you probably need is an attorney that’s got offices in six different cities.
You know, it would be nice, but more than likely, you couldn’t afford them. So, the question is, how do you get that same value of legal representation on the sell side that the buyer is going to have on the buy side? And that becomes an important consideration down the road.
Armando (51:31 – 52:08)
Yeah. And that speaks to really building that exit team, building the team that you have a successful exit, building that team of people inside your company, getting that right advisor to help you maybe select the correct M&A investment banking firm, help select the correct lawyer so that you have the right horsepower to meet the horsepower of the prospective buyer, but really building out that team of your team so that the exit turns out to be a good exit for that founder and good for meeting the goals the founder wants to have.
Harold (52:08 – 52:41)
Yeah. And, you know, he needs to identify one of the first things and, you know, one of the firms that I was involved with, one of the first things we did day one was I sat down with him and I said, you know, what’s your expectations? And it’s amazing with two owners, they both had such different expectations.
They weren’t really aligned, but they never talked about it before. All they talked about, well, you know, at some point we want to sell.
Armando (52:42 – 56:21)
Yeah. Well, I don’t think it’s that unusual for a husband and wife teams to have some of those conversations as well. Yeah.
So setting expectations, I like what you just said on day one, that was a question you asked and they themselves weren’t really clear. They didn’t really know because they hadn’t had that conversation yet. But the good thing is you brought it to light and probably helped give some guidance and thought to them to help them formulate expectations that could be met or at least working towards those expectations.
Okay. Great. Well, Harold, we’ve talked about a lot in this.
I’m just going to recap just a couple of quick things here. You mentioned the necessity of soul searching before selling, making sure that you know what you want, doing the soul searching and that’s the right time for you. You mentioned how critically important it is for the business to have a long range plan because that helps set the flight plan for the next three to five years.
And what the owner is looking for is taking the company, taking the business forward and that gives them a plan, at least what the owner’s vision is for the future of that business of what they’re buying. You also mentioned bringing somebody on board, an advisor on board who can really take a deep dive into the company to help understand what is there and help make adjustments as needed. You talked about the people that need to be on board with that as well with that company and then building out that exit team.
That’s a role the advisor can help with to help select the M&A firm, help select the right attorney, et cetera, and do that. And you mentioned also being very, very important, making sure that you have good, solid financial numbers along with projections going forward, realistic projections so that as that business owner is showing numbers to the prospective buyer, that they make sense. And the financials make sense along with that long range plan, that it all ties together and it makes sense, does not create confusion.
You mentioned another key thing I’d like to bring up that you mentioned as well is that owner keeping his or her attention on running that business because that is the value that they’re selling. And if they get distracted with maybe getting too hands-on with the sale, that could decrease the value of the company, the value of that asset, and it’ll put them in a position they don’t really want to do. Where instead, if they allow themselves to focus on their strength and bring in people to help them with that sell side of it, that that is probably the best use of their time as well.
And you also mentioned about, do they really understand, does the owner really understand their business and can they articulate it? They’ve got to be able to articulate that to the prospective buyer and it’s got to make sense. We’ve talked about leadership, again, assessing the people and the people lead to stability in the business, building the exit team and having good, clear expectations.
So that was my cliff notes version of what we just touched on. Anything that was in that, that you heard, that you thought, oh, this is missing, or maybe this is missing, or did that capture?
Harold (56:23 – 57:07)
It’s not rocket science we’re talking about. It’s just being methodical, doing your homework and execution. A long time ago, I learned that you have to, you plan the future and if you don’t plan it, the future will take its own course and it may not be the way you want to go.
And that’s all we’ve talked about here, is an organized approach to making sure that you get the best outcome for the kind of a process that we’re talking about.
Armando (57:07 – 57:40)
Good. Well, Harold, thank you so much. I am so glad we had this conversation.
I’m hoping that the right ears out there will hear this and learn from it. Your experience, 36 years in public companies, as well as private companies after that, is just invaluable. So thank you so much for sharing so freely your expertise.
And if anybody has a question they might want to ask you, we’ll ask them to reach out to me. They can email me or call my office with any questions and then we’ll get in touch with you to take it from there.
Harold (57:40 – 57:42)
Very good. Thank you.
Armando (57:42 – 58:21)
Harold, thank you so much. Really appreciate it. It’s been a pleasure.
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.
Leave a Reply