Armando (0:00 – 1:04)
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 with the Founders Guidepost here with Brian Burt, a partner with Snell and Wilmer, and also chair of the Emerging Business Group with Snell. Brian, how are you?
Brian (1:04 – 1:05)
I’m good. How are you doing?
Armando (1:06 – 1:33)
Good, good. Brian, I took some time to look at your background and how you help businesses, and you’ve got so much that you are involved with in that whole business life cycle for a Maybe you can touch on some of that so that we get a real feel for when is Brian engaged with the company and what parts can you really help with in the life cycle of that business?
Brian (1:34 – 2:29)
Sure. No, great to be here. I’ve been practicing for a little over 25 years, and I did spend some time kind of jumping out of the practice to start and run my own entrepreneurial venture, so I bring that perspective to my practice.
And I’ve worked with thousands of different entrepreneurs and their companies over those years, really kind of try to help entrepreneurs in an outside kind of general counsel capacity in a variety of areas. I help them get companies set up. I help them bring on capital, help them do the day-to-day kind of contract preparation and negotiation, employee incentive programs, help them, obviously, when they look to sell the company or proceed with some kind of liquidity event, help them work through that type of event.
So it’s kind of a nice, broad kind of corporate practice on the business side, helping kind of from start to finish.
Armando (2:30 – 3:23)
Fantastic. Fantastic. And Brian, you’ve been here for quite a while here in the Phoenix, Arizona marketplace, and our marketplace, of course, is changing.
And as we were seeing, a lot of those companies that have been here for 30, 40 years are being acquired from people outside of the state as part of those companies expanding their own footprint and growing. So if we can focus our conversation on those Arizona companies that are now going through that once-in- a-lifetime liquidation, succession plan, whatever that might look like, that would probably be very, very helpful. So when you’re first engaged by somebody who’s going through that first-ever sale, what are some of the common questions that you hear, and how do you help the owners navigate that so that they have the outcome they want when it’s all said and done?
Brian (3:23 – 4:40)
Sure. Well, I guess the initial kind of gating question is, what’s the company worth? And folks who’ve been running companies that maybe have done it for 10, 20, 30 years, but really most of them haven’t thought through, how do I get my company to sale, and what does that value look like?
Is it based on my customer base? Is it based on my technology? Is it based on my revenues?
And at the end of the day, it typically comes down to a multiple of profits. And that multiple, people, once they hear that, they may have gotten some insight from friends along the way or others that have kind of been there and done it. And there’s what I call kind of a lot of myths on the street.
Someone will say, well, you know what? I did hear about that multiple concept, and my buddy sold his tech company for 15 times profit. So I’m assuming I can get that or something close to it.
And there’s really not an understanding that multiple or value really is geared based on industry, based on company size within the industry. And the multiples aren’t always intuitive. So you might not get what you think you should get.
And so that gating question is often the first one that people need to work through and ideally work through before they’re ready to kind of get to sell.
Armando (4:40 – 4:57)
Yeah. And let’s say that an owner is thinking that they will sell, and they’re thinking about it now. It’s not just someday, but it’s a, yeah, I need to start thinking about that seriously.
How soon before that sale, Brian, should they really reach out and talk with you?
Brian (4:58 – 5:40)
I mean, ideally, we’re talking a matter of years as opposed to a matter of weeks or months. And the reason is because typically there’s some kind of pre-sale strategy and planning and team building that should go on if you’re going to maximize that price at sale. And a lot of that time, you know, again, folks haven’t been through it.
This is, as you mentioned, a once-in-a-lifetime event. And they assume that, you know, I’ll pick up the phone and reach out and kind of build the team a couple of weeks before I’m ready to do this, or once I receive an unsolicited offer, and it’ll all work out. And oftentimes we see what happens.
And you can do that, but you’re going to typically leave a lot of money on the table.
Armando (5:41 – 6:37)
Yeah, that makes sense. And so, I did speak with a business owner recently who was about to sign the LOI and had not had any legal counsel at all. They got a call out of the blue, as many companies here do, you know, call out of the blue from an investment banker who wanted to sell their company.
They somehow said yes. And next thing they knew, they were actually working towards close, and they were about to sign the LOI. And I referred them to an attorney because they needed to have that counsel, but they didn’t really understand that they needed that.
So, maybe you can talk about that LOI and why they have to talk with you before they sign that document and how you help protect them from that document or potentially locking in things that they shouldn’t really do.
Brian (6:38 – 8:30)
Sure. I mean, if they haven’t gotten connected with kind of good counsel that can guide them through that pre-sale process, which we could talk about, and they’re really just kind of coming in for the first time when they’ve already gotten that offer, they’ve already gotten that LOI put in front of them, that LOI, there’s typically a pretty big tension between the buyers and sellers. You know, the buyer wants to come in and ideally put that company under an LOI, put them under exclusivity, get them to start spending money, and that LOI will contain as little as possible because the buyer wants to say, hey, I’ll buy your company for X.
Oftentimes, the purchase terms aren’t even included. Am I going to pay you cash or close? Am I going to do an earn out?
Sometimes they do, but oftentimes it’s just a number. The goal is to get that party into the process, get them engaged, get them excited about what that means for, you know, when the deal is done, and they can go off and retire or do whatever it is they’re going to do after that transaction closes. And they know once people, and it’s been my experience from the beginning, people will tend to give up a whole lot of things in the negotiation process, 60, 90, 120 days in that they would never give up on the front end if they knew, you know, what they were being asked to do.
And so, and the buyers know that, and that’s kind of tactic 101 is to get them involved, get them invested, get them spending money, and then we’ll negotiate all the hard stuff down the road. And we may even, you know, reduce the purchase price along the way. But once that seller is kind of committed psychologically, it’s tough to turn back.
So getting someone to review it up front to tell you, hey, this is what this means. This is what’s missing. Let’s try to negotiate, you know, kind of those typical showstoppers up front if we can.
So we know once you get in the process, there’s a pretty good chance you get the deal closed as opposed to punting on all those key issues.
Armando (8:32 – 8:44)
And so the LOI, is that something that they should, that the seller should expect to receive from the other side? Or is this something that you should develop for them? Or is a combination of the two?
Brian (8:45 – 10:29)
That’s a great question. I mean, typically, the buyer is going to put out that first offer and say, hey, here’s what we’re thinking. And some buyers, you know, will put more meat on that bone.
So you get the LOI and it does talk about payment terms. It does talk about deal structure. Maybe it talks a little bit about the tax treatment of the deal.
Maybe it talks about expectations for, you know, what they want the owners to do post-closing. You know, they want to come, you know, for a transition period or come work for them for, you know, two or three years. And so there are some, but usually the buyer puts that first sheet out.
You know, the question does come up quite a bit. Hey, should I, you know, tell the buyer what I want? In the, usually I guess the answer, short answer is no.
You know, it’s not like selling a house where you say, hey, I’m asking, you know, 650. And if you can do better, great. Usually it’s, you know, let the buyer come in and make their first offer.
Because in many cases, I guess the good news is in those cases, you know, sometimes the buyer is willing to pay a premium. An example would be, and we’ve seen this recently, you know, buyers gobbling up a bunch of companies in X space. And oftentimes it’s not a real sexy space.
It might be, you know, HVAC companies, or it might be something that, you know, that seller says, my company is nothing fancy. It’s just a small, nice family business, not a big high-tech company, but the buyer is gobbling up, you know, 10 or 20 or 30 of these around the country and is willing to pay a premium to kind of aggregate those companies. And so you might’ve asked for, you know, X times profits and thought that was great.
And the buyer is going to offer, you know, maybe 30% more. So you would have, you know, potentially shot yourself in the foot a little bit and maybe taken a discount if you, if you put that first offer out there.
Armando (10:29 – 10:42)
Yeah. So what you’re saying is the seller shouldn’t say, I want X for my company. Instead, let the buyer offer you a price because it might be quite a bit more than what the seller is really thinking.
Brian (10:42 – 11:58)
Yeah. And I guess the other kind of caveat to that is, and someone used this phrase recently, so I’m going to, I’m going to copy it. And that is, you know, thinking through, you know, what’s your retirement value.
And if you’re not retiring, kind of what’s your, what’s your ask, what do you really want to get out of it? And that may or may not be aligned with what the actual value of the company is. And that’s okay.
But that goes back to figuring out, you know, before you get too far in the process and ideally before you get that unsolicited offer, what do you need to get out? And if you can’t get there and we’ve got two or three of these deals on the plate right now where the, what the company is probably worth. And these, both of these companies had some downturns last year and what the buyer or what the seller wants is two different things.
And so they’ve both, one’s already gone back and we just got a LOI back this week. The other is about to go back next week and say, you know what, regardless of what your math kicks out in terms of value, Mr. Buyer, I need X. And so if you can do X, we have a deal.
And if not, we don’t. And so, you know, when you get that number, it’s not going to make a whole lot of, you know, difference to you and not be real valuable if you don’t know what your number is and kind of, you know, what your ideal sale price is and kind of what your minimum is and whether they fall anywhere, you know, in that range.
Armando (11:59 – 12:46)
And so Brian, as new companies come into Arizona, we’re seeing a different business industry coming to Arizona. We’re seeing different activity coming here. And the easiest way to get a presence in Arizona is to buy an existing company often.
So that’s what is happening. Are there, for that owner here locally who is getting phone calls every week and being approached, what advice would you have for them as they take that initial phone call? And maybe they just have a conversation with this person.
What should they be listening for? What should they be thinking of? And what should they be aware of so they navigate that in a way that’s best for them?
Brian (12:47 – 13:39)
Sure. No, I mean, that does happen quite a bit with increasing frequency, we see. And kind of a few tips.
I mean, one is don’t be disclosing your stuff without a confidentiality agreement in place. It’s real easy to get kind of sucked in, get excited. You feel, you know, it’s kind of a compliment to get this call.
Hey, we’re interested in you. And the, you know, seller gets excited. Oh, that’s great.
And, you know, can you send me over some financials or send me over some information and we’ll get the process started. And they just, they send things they shouldn’t, assuming they can trust the other side. And they also may kind of hamstring the value by sending over, which is the typical first request, send me some raw financials.
Well, the goal of the average business owner on an annual basis, when they have their financials done, their tax returns done is to show as little profit as possible so they can pay as little tax as possible.
[Speaker 4] (13:40 – 13:40)
Right?
Brian (13:41 – 15:46)
So if you send over your raw financials, say, well, you’re not making much money. Well, we really are, but it doesn’t reflect that. And so, you know, usually the advice is take a step back, kind of get your team in place, even if you don’t have one.
And those advisors can kind of walk you through that and say, you know what, let’s come up with some recast financials so that it shows what’s the company really look like in the buyer’s hands. And it doesn’t reflect the minimum tax play. It reflects the real value of the company.
And as we all know, people tend to run all sorts of stuff through companies that the buyer’s not going to pay for, like your uncle Joe’s salary or your, you know, your boat or whatever, all adds back to that profit margin, which increases the, you know, the ultimate value. So before you do any of that, though, build your, you know, kind of get your team that can advise you, get an NDA in place and recognize that, again, the buyers span the spectrum in terms of what they’re looking for. Some are looking for a discount deal.
And so unless you’re willing to sell for a discount, that’s probably not a good buyer for you. Some want the premium. Some are just fishing, right?
They’re competitors who just want to get your stuff. They don’t intend to close the deal, but they want to kind of get under the hood, see some secret sauce and go back and use that as a competitive advantage. And so you really got to be careful because you don’t know when that call comes in, what category do they fall in.
And so you want to kind of have your antenna up and, you know, can have good amicable conversations. But you shouldn’t be kind of disclosing, you know, more than you need to really just the minimum until you know, are they for real? Kind of what’s their approach?
Is it one of the discount folks? Is it someone who’s, you know, a legitimate buyer? Is it a competitor?
Kind of get the diligence on what they’re doing. And again, understand what your value is. If you haven’t done that, you get a push pause.
And we got a company doing that right now, you know, pushing pause for two or three weeks saying, hey, appreciate the offer. That’s great. But let me go figure out kind of what my number is, what we think the value is.
Let’s compare it to what you’ve offered and, you know, see if there’s a discussion there.
Armando (15:48 – 16:49)
Yes, you said a lot. And part of what I got from what you just described is, you know, the nondisclosure agreement that if that information is going to be shared in its raw form, that at least there’s a nondisclosure agreement to keep that information private. But you also made a point that the financials typically are for tax return purposes.
And for those purposes, just you said the profit is intentionally made as low as possible so that the taxes are as low as possible, meaning maybe that family vacation got flushed through the company. Maybe some other personal expenses that are more gray area got flushed through the company, decreasing the profits. And you started by saying that the sales price is often really determined on profits.
So when it comes time to sell, you want to show probably as much profit as possible that is real, obviously, which is the opposite mindset from your year to year to year taxes and financials.
Brian (16:50 – 18:00)
That’s right. And the vast majority of companies, you know, that’s the goal. They’re extracting money, they’re making money, but they’re paying as few taxes as possible when the buyer gets it.
Do you have an opportunity to kind of go back? You know, if you build your team after the fact and say, well, wait a minute, you know, I know I showed you that, but let me redo it. You can.
But once you’re into the process, and certainly once you’ve signed that LOI, assuming you didn’t get assistance before doing that, you know, the buyer tends to want to hold you to that. It’s non-binding in terms of the deal terms, but they’re going to try to hold you to it. And the defense that, hey, I didn’t get good advice or any advice before I did this, let me kind of retrade the deal, often doesn’t go over well.
And again, it’s just kind of another buyer tactic. Hey, you signed it. You said you’d sell to me for 5 million bucks.
And now you’re asking for, you know, seven and a half, kind of what gives. I don’t, you know, even if you demonstrate that that’s a legitimate value, they tend to want to hold you to the smaller value and pressure you to do the deal on the terms that you agreed to. So that’s, you know, one of the reasons why you want to get, you know, good advice before you start putting pen to paper and signing up, even in a non-binding capacity.
Armando (18:01 – 18:46)
Yeah. Yeah. That makes sense.
I’ve often heard local businesses say that they know who their buyer would be. It’s either the competitor across the street or somebody out of state who they know through trade shows or industry annual gatherings, but they think they know who the buyer is. And so then the mindset becomes, I don’t need to bring in the high priced attorney or the investment bank or otherwise, because I know the buyer.
I can work with him. I trust him. And I’m just going to go that route.
So you being the attorney who has been through many of these transactions before, and of course, you counsel businesses all the time. What would, what do you think about an owner going that route? What advice would you give them?
What tips would you give them?
Brian (18:47 – 22:23)
Yeah. I mean, so there’s, you kind of mentioned two pieces, right? The intermediary, whether it’s a bank or a broker who can kind of help facilitate the process, and then the attorney.
So on the first piece, are there successful, good value deals that just come unsolicited? Sure. Or sometimes your competitor, your best source of an exit event?
Sure. But oftentimes that’s the worst value. Oftentimes there are companies that you’ve never heard of.
They may be in your space. They may be financial buyers, private equity groups, et cetera, who, again, you’ve never heard of, but they’re very interested. Again, maybe they’re consolidating companies in your industry and you don’t know that’s going on.
And so you could sell to your buddy who operates a company, you know, in the next state over, but the, you know, the private equity group might pay you twice as much. And so for whatever reason, I think that’s one of those myths on the street that the competitors are quick, easy sale, you know, wouldn’t really need to get too, you know, too legalistic. We can just kind of walk through it.
We certainly don’t need to hire an intermediary because that’s just going to burn some cash and time. The reality is, you know, I usually encourage folks to at least consider going through a more formal process where that intermediary can generate, you know, whether it’s, you know, 50 or a hundred or 200 additional potential buyers and go through a process where, you know, they let them know you’re for sale. Those folks come in, they make bids on the company.
And we’ve seen in many, many, many cases where, you know, because there’s kind of a competitive environment created in large part, you know, you may see, you know, the winning bidder come in, that’s a hundred percent higher than on the low end. And so if you don’t want to leave money on the table, that’s a real, you know, something you should consider because it pays for itself, you know, in many ways. And many multiples if you were able to, you know, get that to happen.
Now, some buyers don’t want it or some sellers don’t want to do that. They say, hey, I’m tired. I don’t want to spend, you know, the time it takes or whatever.
I just want to do X. And again, if they’re meeting your, what I’ll call your retirement value, you know, maybe you go with the, you know, the one or two that approached you and try to get the best deal. So there’s no wrong answer.
It’s just, you know, how much do you want to leave on the table and how much do you really want to push to see if you can get maximum value. Now, on the attorney side, there are, I think the most sellers are surprised when we say, you know what, the agreement that you’re going to probably be asked to sign contains kind of two big parts. The first part is how much are you getting paid and how are you getting paid?
And they said, okay, great. Yeah, we already have that. My, you know, competitor out there, he’s paying me, you know, 5 million bucks.
That’s what I wanted. Terrific. And I say, well, do you know that the other 80% of the document is all about them determining how they can take that money back?
And what are you talking about? Well, no, that, you know, I guess maybe I do need to get some advice there. I didn’t realize that was the case.
And so when you get the 60 page, 70 page, a hundred page document, you know, the purchase price is on page three, looks good. And then there’s all these other components that they have no idea what kind of what they’re getting into, what they’re being asked to represent, what the post-closing risk may be. And when you talk to most sellers, their goal is not to give that money back.
The goal is to take a clean break, walk away, maybe help transition. And, you know, just, if you don’t know that that component exists, you can get yourself in trouble.
Armando (22:25 – 22:43)
Yeah. And if this is really the, the, the once, the one time that this seller is going through this process, you can see how they could easily not understand and see these legal documents and, and just kind of, you know, flip past them quickly without giving them the proper attention they really should.
Brian (22:44 – 25:18)
Well, we had an example just yesterday where two longtime participants in a company, they’re kind of running the company. The owner passed away and the children inherited the stock. And said, we’re not interested in this company.
So if you guys want it, you can pay X and you can do it. Presented them with a three-page agreement, took a quick look at it for him and said, Hey, this doesn’t address literally any of the issues. It just has you paying X.
But you don’t even know if they actually received the stock from their dad. You don’t have, you have done no homework. The document has no protection.
You don’t know whether they’ve been paying taxes or following the employment rules. You just really have nothing. What do you want to do?
And, you know, as you walk through it to them, that it made sense. Hey, we’re getting the stock and we’re paying X and we’re willing to do that. So, all right, let’s do it.
And not realizing there’s all these things that can kind of go with it. Obviously that’s in the inverse, but the same concept applies when you’re getting ready to sell. People assume it’s, for example, 5 million.
I’m happy with that. Well, do you know that part of that is in a note? Oh, okay.
Well, that means they’re going to pay me, you know, a couple of years from now. That’s okay. Well, what happens if they don’t pay you?
Well, of course they’re going to pay me. What happens if they don’t? Is that note secured in any way?
Is it guaranteed by the buyer in some way? Well, there’s this earn out component. What’s the earn out mean?
It looks like a great deal. As long as the company continues to do pretty well, you know, I’m going to get a lot more money. They’re saying that’s a huge win for me, you know, not understanding that most earn outs never pay and are rigged to not do that, but they get sold on the front end.
We’ll pay you an extra, you know, 20% in this earn out if you’re willing to sign up for it. You know, sometimes they ask for the sellers to participate in the buyer. So there’s a rollover, as we call it, and they say, hey, why don’t you take a piece of me?
It’s a second bite at the apple. You know, instead of getting a million bucks out of the five, throw a million bucks into my company and we can turn that into, you know, another three or four million. So it’s a huge windfall.
Again, all those things, not realizing that there’s no seller control of what happens to those dollars. So, you know, those deferred payments are often, I kind of analogize them to a lottery ticket. You know, it may pay off, it may not, but, you know, you’re being told it’s going to yield, you know, great results when in fact it could be zero.
So, you know, not understanding how that works, you know, can impact the purchase price quite a bit.
Armando (25:19 – 25:52)
Right, right. And just what you said, as you’ve talked, it’s made me think that really, you know, part of Brian’s role in all this, your role in all this, is that you’re asking the what ifs. You know, what if that company hasn’t paid taxes in the last five years, now you own the stock?
Well, now who’s on the hook to pay those taxes? Well, the buyer, the new owner, for sure. But you want to make sure that you look under the hood, you kick the tires on you, you do what you can to help protect your clients, you know, the seller in this case, so that they don’t end up in a really bad spot.
Brian (25:53 – 27:39)
Yeah, it’s really, I mean, I use the word process, and a lot of sellers, again, who do it just one time only, think of it as a fairly discrete event. You know, we’ve got a letter of intent, it says they’re going to make pass X, we’re going to do a little bit of documentation, we may or may not need any of those attorneys to look at it or accountants or advisors to be part of that. And as long as the agreement seems to suggest, you know, we’re getting paid, we’re pretty happy.
And it really is, again, there’s two issues that are critical. One is, are you really going to get paid those dollars and get to keep them, not recognizing what those other deferred structures look like? Have you figured out the tax approach?
And this is one place when you’re selling your company where the tax tail maybe should wag the dog, and different deal structures really can yield very different results from a net standpoint. And so they’re thinking, well, 5 million, great. Well, if it’s taxed one way, maybe that’s, you know, 4 million, taxed a different way, maybe it’s just 3 million.
And so not realizing that that’s a pretty hefty difference in what you take home at the end of the deal, and how much do you keep? And there’s I think, you know, probably I’d say 80, 90% of kind of first-time sellers don’t understand that there’s a, unless you negotiate it properly, there’s a huge chance that you’re going to end up giving back some dollars. And they assume once they’re paid, they’re off and running and doing whatever it is they want to do.
And, you know, if you ask them, do you intend to give anything back? Well, of course not. I want to go off and retire and do whatever, see the family, you know, buy that retirement home.
You know, I don’t want to give any money back. Okay, well, you got to structure it that way because the buyer’s not going to do that for you.
Armando (27:42 – 27:43)
Sounds like there’s a lot there.
Brian (27:46 – 28:36)
There’s a lot of meat on the bone. And the more sophisticated the buyer, you know, the more they have their kind of standard playbook. And when, you know, we see, again, companies that have been really successful, and that’s kind of the entrepreneur’s issue.
They’ve run the company for 30 years. They’ve been very successful, got a nice life. They put, you know, a fair bit in the bank.
And they assume because they run the company really well that they know how to sell it and have the same level of expertise. And it’s, you know, it’s the reason most of us who are not accountants don’t prepare and file our own tax returns. I’d probably be in jail by now if I attempted to do that.
So, you know, I’m just an expert and know that I don’t know how to do that. I can give them the information that they need to tell me. It’s no different here.
It’s just a different skill set, different knowledge that usually you’re just not picking up, you know, along the way.
Armando (28:37 – 29:04)
Right. And so, Brian, let’s say that buyer is a private equity firm. How does that change, I guess, when you represent a business owner who is now being purchased by a private equity firm?
Are there different set of concerns that come into your mind, flags, red flags you need to look for, pay attention to? What is different about a private equity company buying the company?
Brian (29:05 – 32:05)
Yeah, I mean, typically, you know, a legitimate private equity firm is going to be playing at a much higher level than maybe a competitor would. You know, the competitor is, again, that guy you know in that company and down the street or in another state and you’ve got to know them. It’s kind of a, you know, owner-led business.
And it’s, you know, there’s a, it’s more of a peer when that happens. The PE folks are kind of at the A-level and they’re going to bring in, you know, top flight accountants and advisors and attorneys and they have a playbook and they know how to negotiate a deal to maximize the purchase price in their favor and maximize the allocation of risk. And so, you know, you’re kind of going into the major leagues with, you know, barely playing on the high school team, if you will, unless you kind of upgrade to the same level of expertise.
And you’re inevitably going to get taken advantage of and that’s just not what the seller should want. Again, this is a one-time event. You got to go into it knowing that, well, two things.
One, they’ve got that expert team around them. But two, there’s a different, typically a different expectation that they come with. And that’s usually that rollover we mentioned, which is, you know, we want you to put at risk a chunk of that purchase price.
And so when we talk about that buyer or that seller saying, hey, I need at least X, you know, let’s say it’s in this deal, it’s, I need 10 million bucks to pay off my debt and pay off my house and do what I want. Okay. Well, if the PE group comes in and says, you know what, pretty standard that they want to have you reinvest, say 20%, it could be less, it could be more, but that’s a pretty standard number.
Well, all of a sudden now, you know, 20% of what you thought you were taking home and that was enough to do your retirement is now at risk. And now you’ll be told that their track record does X, Y, and Z and, you know, that could be a huge windfall. And it could, I’m not saying it can’t, but what the seller does not understand, particularly if the buyer wants them to come over and run the company for a while, which is a whole nother thing we may want to talk about.
But, you know, they say, hey, you’re going to be in charge. We’re not making any changes. You’re running the company, you know, and in reality, they have zero control.
They have zero legal control. And they don’t understand that, you know, when they put that 20% on the line, again, it’s really like a lottery ticket. They may or may not see any of that.
And that’s, we had an example where a client had a fairly substantive piece of the company and they got bought by a big public company. And the assumption was, well, these are, there’s a public company. These are big boys and they know what they’re doing.
And, you know, they’re going to, they’re going to really make this worth a lot. Well, fast forward, I think it was four or five, six years later, they came back to the client, you know, and said, hey, we’ll sell you the company back for 20% of what you paid.
[Speaker 3] (32:06 – 32:06)
Wow.
Brian (32:06 – 33:56)
They had, they had changed some stuff like day three in terms of how the company’s products were marketed and how they, you know, did the distribution, et cetera, to upend what was very successful in our client’s hands and kind of messed it up literally within a span of a week and drove the company into the ground. And, you know, they, I guess they could afford to take the loss, you know, they were a big company. So they just kind of wrote it off and said, hey, we’ll sell it back to you.
And, you know, pretty tragic event because our client ended up, you know, leaving lots of money on the table that they could have maybe got, you know, from a different buyer. So those are kind of the factors to think about. And you mentioned the tax stuff.
Final thing I’ll note on the rollover is it’s like doing a second deal. And you, you suggested that, you know, you’re, you’re doing the homework on the buyer as well because now you’re an owner and they say, well, how can I get in trouble if I only own 10%, you know, what, you know, I know I’m not in control if they finally figure that out. I, I know I’m just along for the ride.
You’ve told me that you’ve told me it probably could, you know, go to zero. So I’m factoring that in. I’m okay with that.
Well, what if they create income for you and don’t pay you a distribution to pay your taxes? What do you mean? They have to do that.
Well, a lot of these companies are in a, a pastor structure, LLC structure, for example, a taxes partnership. And so the, the other side, the buyer is typically not real excited about putting in the documents, any kind of mandatory distributions. And so the company could generate income for you.
You get a K one tax statement that says, Hey, we had a great year. You’re 10% generated, you know, $200,000 worth of income, you know, sellers excited. Great.
It looks like I made the right bet.
Armando (33:56 – 33:57)
Yeah. Sounds good.
Brian (33:57 – 34:34)
Sounds good. And,, they’re hoping for that big payday. And then they go ask the buyer,, you’re going to send me a check, right?
I owe a hundred thousand in taxes now on this 200,000 income you’ve generated for me., no, we’re not going to make a tax distribution. Well, what do you mean?
And it totally catches them off guard. And they assume that the legal requirement,, is that, well, of course you have to give me at least enough to do that. I can’t come out of pocket to pay that a hundred grand.
I didn’t anticipate that. And they said, no, there’s no legal requirement. There’s no state that requires you to do that.
That’s a contractual,, obligation if we negotiated that.
[Speaker 3] (34:34 – 34:34)
Yeah.
Brian (34:35 – 35:14)
And so that, you know, and the other thing, you know, maybe they, they do a capital call and they’ve signed an operating agreement and says, you know, if we need money, you’re going to put in your, you know, a 20% or 10% worth of the capital call, when we come knocking and then wait a minute, I didn’t agree to do that. Well, you signed the document and that was, we all agree that we were going to pony up if, if we needed money, you, you agree to that. So you need to write us a check in addition to the IRS check that you may need to write.
So even as a passive owner, you still have to pay attention to those things. And those are not going to be what they kind of flag for you on the front end. You’ve got to make sure you identify and address those.
Armando (35:15 – 35:37)
Yeah. I’m glad you brought those up because I can see how, how easily a seller would not, they would assume that because in the past, maybe they had a flow through entity that the cash just flows into their personal pocket or rather to whatever percentage they own. Like I can see where they, where they could make that assumption, but if it’s not written in some place, then the cash never has to get into their pocket.
Brian (35:38 – 36:17)
Never comes to them. And it’s a, it’s a pretty unpleasant day when they realize they got to write the check. And, and most, you know, PE groups don’t want to bake that into the document.
That’s typically a pretty hard negotiated thing. And it’s, it’s reasonable to give, you know, that small owner who doesn’t have, you know, $50 billion sitting there, you know, the ability to pay his taxes. But if you don’t pay attention, you know, the default is going to be, we may or may not give you a distribution.
We, we, we may, we may not, you may have to cover it. And so if you don’t have someone on the team that can kind of spot that, can lead to some, some issues. So.
Armando (36:17 – 36:58)
Right. 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. And it sounds just that you said, even though they, the, the seller might be now running the new company and they’re hearing nothing changed, you’re, you’re still in charge, you’re still making decisions.
Well, not necessarily, but without, without you or someone to take a look at those documents and help negotiate those into the, the sale agreements and employment agreement afterwards, they might not be protected.
Brian (36:59 – 39:19)
Well, I mean, that brings up another issue, right? That legally you’re not in control and you should assume that if you ever disagree with the buyer, you’re, you’re overruled. And so that, you know, we always tell folks in the front, just, just assume that.
So even if you’re sitting in the CEO seat, you’re in the office every day and you think you’re kind of guiding the ship. You’re really not again, until you, you guide it until they disagree or they want to do something different. And then, you know, that’s not going to happen.
The other big thing is, and we, we kind of joke about this all the time is that entrepreneurs make horrific employees. And so to the extent that, you know, they say, yeah, you know, I want you to come run the company. There can be no changes.
You and your team come over. We want you to run it. We don’t have a new guy.
You can be here as long as you like. Well, you may be presented with and sign an employment agreement that gives you a, you know, a three-year term or five-year term even. The reality is we see most entrepreneurs who’ve been running their own company for years or decades, they last about six months.
That’s the typical thing we’ve seen in the last few years alone. You know, these, these sour entrepreneurs leave millions of dollars of compensation on the table, not because they got fired, but because they simply said, I can’t work for these guys. I’m my own boss for 25 years and I can’t do it.
We just had an owner come to that realization a couple of days ago when they were looking to sell their company, pretty nice payday. But the expectation is that he’s going to continue to run the company for a while. And he kind of thought about it over the last week and said, you know what, you’re right.
There’s no way I want to work for somebody else. So I’m going to turn that deal down if that’s the requirement. I’ll transition over, you know, I’ll do six months, three months of consulting, and I certainly want to help them succeed.
But if the expectation is I got to be in the seat for two or three or four or five years, I’m not going to do it. And so that’s something that people really don’t think through. And they find out the hard way that, yeah, I just, I’m going to leave a million dollars worth of compensation on the table because I just can’t psychologically kind of sit there and take orders, you know, from these guys that particularly people I didn’t know, you know, ahead of time.
This isn’t a buddy that’s in a competing company. This is just a, you know, a PE group who’s kind of faceless and I don’t know them and they’re just telling me what to do and it’s terrible. So I’m going to, I’m going to go do something else.
So.
Armando (39:20 – 39:31)
Yeah. Yeah. I can see that somebody who’s had their own company and built it and grown it 25, 30 years.
Now they’re being told what to do on a daily basis. That just doesn’t sound like it would work at all.
Brian (39:32 – 40:52)
No, it doesn’t. And like I said, we, we kind of joke about there’s one client we saw who lasted two years, I think he, and we joke with him, he set the record, at least in my world. And it was a pretty unique circumstance, a pretty, pretty sizable stake in the company that he took post-closing.
And so there was some, some incentives to really try to make that, you know, valuable. But again, a very, very exceptional outlier. And in almost every case, people realize they can’t do it.
And sometimes too late. Again, if you’ve already executed the deal or signed up to that in the term sheet, et cetera, all the things we’re talking about, you may have committed yourself unwillingly to, to do that. And that actually happened in a recent example where someone signed up something before we got involved, committed to it, at least in a, you know, kind of moral or psychological approach on the term sheet and kind of said, yeah, I got my word.
I’ll do this. Realized what it entailed. Ended up going back and saying, you know what?
I don’t think I can do that. And the deal fell apart. And so that, you know, it was a nice $10 million potential payday and it’s gone because he finally woke up and then they, they said, well, you told us you would do this.
Well, I don’t think I can do it. Okay. Well, I guess we’re going to have to pull the plug and go elsewhere.
And it, you know, it would have been nice to know that, you know, before they went down the process and before they went down the path. Right.
Armando (40:53 – 42:09)
Right. And so let’s go back to the, you mentioned taxes and really what they keep after it’s all done. You know, then the taxes of course can be significant being the capital gains taxes and goodwill, and you can do different things to, to reduce that tax bill legally, of course.
And you also mentioned that, you know, maybe a few years before they actually want to sell beginning that dialogue with you so that there’s time to make some of those changes that, that can help reduce the tax bill when the sale actually does happen. And that, that makes me think of, you know, obviously them planning ahead, even if they don’t, maybe they don’t, they’re not really thinking they’re going to sell today, but the calls keep coming in and maybe they accept one. But I guess the question I would have for you is when, when people begin to go through that sale process or think about it, often they have not structured things correctly.
They’ve got, maybe the real estate is in with the operating business, maybe the equipment is in with the operating business, and really it should be into a separate LLC or separate entity for liability, but then all liability protection or asset protection, and then also for tax advantages that way. Is that part of what you’re thinking about in terms of restructuring before the sale, those kinds of things?
Brian (42:10 – 45:14)
Absolutely. You, you raised two or three things there. I mean, one is if you’re not planning to sell certain assets, sometimes people, like you said, have real property that they want to hold on to.
And if it’s not pulled out of the company, I mean, that can create tax issues and other things, and at minimum, just complications that make the process harder if you haven’t pulled it out, you know, ahead of time. Sometimes people have two or three lines of business in the company, and they’re not intending to sell all those, those businesses. It’s just under one roof.
There’s different, you know, DBAs. And they say, well, I want to keep, you know, one of those three. Okay.
Well, it’s really hard to pull that out at the last second. And there’s a lot of things that have to happen. There can be some tax impacts.
There can be some regulatory issues. There can be some, you know, consents that you need to get from customers. You have to do all sorts of stuff that, again, doing it at the, at the last minute may, may not work.
So, you know, figuring out what you want to sell, and oftentimes a holding company structure, you know, can be a great tool. One of those kind of pre-sale planning things that we were suggesting, you know, at the beginning of the conversation to do when it’s, you know, a year out or two or three years out and say, you know, what, I may not sell that. Okay, well, let’s pull that out.
Let’s put it in a separate LLC, holding company at top, which allows you to maybe sell everything at once if you decide to, or if not, you can segregate those assets, those businesses into the little, you know, buckets that you think you want to part with. The tax thing is, is equally important. And, you know, you see folks who oftentimes set up the entity, whether it’s a S-corp or it’s a C-corp, and they just, they get, you know, some basic, real short-term advice at the front end from whoever it is they’re talking to.
It might be well-intentioned, and oftentimes you ask them 15 years later, why are you in that structure? I don’t know. Someone told me to do that at the front end, and it sounded pretty good.
Okay. Well, you know, what you see often, people not realizing is, hey, if you, when you sell your company, there’s two main ways to do it, right? There’s the asset sale, where the buyer comes in and buys your assets, and you still hold the corporate entity at the end of the deal.
It’s still in your name. You still own it. They just kind of sucked out the assets they wanted.
They assumed a few liabilities. The company gets paid, and then the company distributes those proceeds up to you as the owner, you know, stockholder, if you’re an LLC, et cetera. The other way to do it is to sell, you know, kind of a turnkey approach, where you sell your ownership, your stock, or your units in your LLC, and they take over the whole thing, and they walk away with that, and you’re just left with a pile of cash, and then you’re, you know, off and running in retirement mode.
Those have very, very different implications, both from a liability side, but also from a tax side, if you are not in a past serenity, and there’s lots of folks who, you know, decide for sometimes reasons that make sense, other times things that don’t make sense, say, I’m going to be a C Corp, and not realizing that the only way to not get double taxed in a C Corp is to sell your shares, and the buyers, on the other hand, typically never want to buy your stock.
[Speaker 3] (45:14 – 45:14)
Why?
Brian (45:14 – 46:59)
Because they’re getting all the unknown liabilities that may have accrued the company over 30 years, and they say, well, yeah, but I’m going to get double taxed. They’re going to have to pay me more, and the buyer says, no, I’m not going to pay you more. You can add, they’re typically going to say no, and say, geez, I just gave up, you know, 10, 15, 20 percent more in taxes, you know, making my retirement value, as we’ve called it, that much higher, and the buyer says, no, we’ll pay you X, but it’s going to be an asset deal, and so what you could have done, and I can give you a number of examples where people didn’t do this, if you’re in a C Corp, which is the, you know, the one structure that really causes trouble from a tax standpoint when you go to sell, is to elect S status, and that’s something you can do, but it doesn’t kind of untaint the value of the company until you’ve let it run for a period of years, and that period of time has changed, you know, it’s been five years at some point, 10 years, but, you know, it’s not, again, something you can’t do three months before you sell the company and say, well, I’m going to limit now, if you’re looking at a 10 or 20 million dollar deal, if you can wait and trigger this, you know, before that time period would elapse, then now you’ve literally put millions of dollars in your pocket by just filing a form and having that value, what would have been double taxed, now that goes away, and again, it’s oversimplifying it, that’s a real small step, doesn’t cost much to do it, but it’s one of those things, if you don’t do it when you’re ready to pull the trigger, you’re stuck, and there’s no way to get around it at that time, assuming the buyer wants to do that typical asset sale, you’re going to pay double tax, no matter whether you like it or not.
Armando (47:00 – 47:23)
Right, right, and back in the day, a long time ago, people would sometimes put real estate into a C Corporation and then build a business in that same entity and have it all in one, which is just a really, really, not the best structure today, but with enough advanced planning, you can do some things and make it better for them, but it has to be done in advance versus right before the sale.
Brian (47:24 – 48:16)
Yeah, and another thing is, once you get a letter of intent, once you get a kind of a indication of value on the table, even if you haven’t signed it, that’s a third party who doesn’t know you, is not affiliated with you, telling you, hey, we’re willing to buy the company at X, now it sets the value, and so what you might have been able to do a year before that, or even before you got the letter of intent, because you’re saying, well, we can argue that the company is maybe not worth as much, and so if we restructured it or pulled things out, maybe we can do that with a minimal tax impact, or at least a lesser tax impact, by, again, legitimately valuing the company a little bit lower, maybe there’s a dip in sales or whatever.
Now, when someone puts a number on the table, you have a lot more restrictions about what you can do, because that’s cynical, and they say, well, wait a minute, you’re saying it’s worth five, the buyer’s offering you 10, how are you saying it’s worth five?
[Speaker 4] (48:16 – 48:17)
Yeah, yeah.
Brian (48:17 – 49:48)
Same thing goes for planning for distributions to kids. There’s a lot of opportunity to give kids, if you’re interested in helping them out, pieces of the business early on, when the company’s only worth X amount, that grows, and then the kids can have that, and there’s lots of ways to make that tax advantageous to them, and then when the company sells, those buckets of dollars are put into their account, as opposed to attempting to, which you can do, taking all the money in and then transferring it to them, it’s going to have a potentially pretty big difference in impact, and so folks come in and say, hey, what can I do, two months out, we’re ready to get the deal done, is there anything I can do to do some trust and estate planning? Not really, at least from a tax standpoint, you can still do things, but it’s not going to be what you want to do, or sometimes people say, I want to do a charity, big sale, we’ve had people say, I want to set up a charitable foundation or some kind of thing. Again, if you don’t do that in advance, you may end up losing a lot of the tax advantages in terms of value by trying to do it right before sale.
You can still do it, but now you’re putting in far fewer dollars perhaps to that charitable purpose than you could have otherwise had you done it five years prior when the company had a lower value, so there’s just a lot of things you can’t do, do as well if you wait till the day before to pull the trigger on them.
Armando (49:48 – 50:19)
Yeah, I’m glad to hear that you just touched on charity, because yes, a lot of people, when they get this big payday, they realize they’re fortunate, they’re blessed, they’re doing better than the average bear, and they want to share it, and different types of charitable vehicles can help you get there, but to get the biggest bang for the buck, plan ahead of time. Before that big payday, plan ahead of time and make some changes structurally within the organization so you can magnify those dollars and really magnify the impact as well.
Brian (50:20 – 50:57)
That’s right. It comes down to most of the things we’re talking about today is how much money do you want to put in your pocket and how much money do you want to, in this case, give to the kids or give to charity. A lot of the things we’ve been talking about, a lot of the pre-planning, the more in advance you start to do those things, the more dollars are going to be available.
It’s really up to the seller to decide, do I want X amount or do I want X times two in my pocket? All these suggestions and tips really go to maximizing that event for them.
Armando (50:58 – 51:20)
Right. It really does. Can you touch on intellectual property a bit as you’re going through this representing your clients?
Intellectual property, of course, many companies own that, have that. I imagine sometimes the owners are surprised when you bring up intellectual property and you help identify that and how that really fits into the sale or doesn’t. Can you just touch on that a bit, please?
Brian (51:20 – 56:10)
Sure. The IP is something that if a company has a patented widget, they typically understand, okay, I’ve got a product I’m selling. It’s got a patent or two or 10.
They have a little more familiarity with it. For those who aren’t in that type of business, maybe they’re in a business where they really just have trademarks and trade secrets and other things. They don’t focus on it as much.
There’s some things in the law, and I’ll give you an example of what happened in the sale process a little while back, where people don’t realize that you’ve got to have certain documentation in place to make sure you own your IP. People say, well, there’s trade secrets created, maybe proprietary product formulas, or we created a bunch of trade names for our individual products. Lots of people are selling the same stuff.
How do they differentiate? Well, we have a little cute name for it, and that’s what’s known in the marketplace. Our brand is what gets people to buy products, even though there’s 50 other choices.
What they don’t realize is, like in many areas of the law, it’s not intuitive. If you were to, for example, hire someone to create those nice little trade names for your products, and they were contractors as opposed to employees, which often happens. We’ll outsource that need.
You pay them for it. The assumption is, well, I just paid them for it. Of course, I own that trade name.
Well, that’s not how the law works. When you go to sell, and a guy like me comes in, and you do the homework and say, wait a minute, you don’t own that software, or at least all of it. You don’t own those trade names.
They look at you funny and say, what do you mean? We paid them for it. There’s a contract here.
You didn’t get the magic language in there. What’s the magic language? Well, it’s two, three sentences.
It’s not a big deal, but you don’t have it, and their form of agreement didn’t give it to you. Now you have to go back to them. We had a situation a few years back where most of its value is tied up in the trade names of the products.
A lot of people use these products, consumer products. Nothing crazy in terms of the formulas, but they just had a great marketing approach to it. They were going to get $30 million for the company.
The buyer found out that they didn’t own any of those trade names because they had never gotten that magic language in their documents. In order to close the deal, they said, we’re not paying you $30 million unless you go get those people to assign those marks to you. This is one of the few situations that actually turned out okay because we chased the folks down.
It was between Christmas and New Year’s of all times. People were traveling literally around the world, and our clients called them up in whatever country they were in and said, hey, you know what? You did all these trade names for us.
Would you be so kind as to sign this document? Fortunately, they were on good terms with them. They signed them over.
They didn’t extort them. You can just see how, A, if they weren’t on good terms or couldn’t find them, that deal wasn’t closing. If it did close, it’s very easy to foresee folks, which has happened in other circumstances, where they say, yeah, I’ll sign it, but you can pay me a million bucks.
I’ll pay you a million bucks. Would you want to close your deal? You owe me a million bucks.
Little things like that, little issues that if you work through those on a presale basis, again, you kind of do what we call your corporate cleanup, can pay huge dividends when you get to the sale process because every company has some issues they haven’t uncovered, and you just won’t know it unless you go through a little bit of a kind of a legal audit process and figure out, hey, what did I not do correctly from a regulatory standpoint or documentation standpoint, and that’s something you want to identify in advance of going to market or talking to a buyer because those issues may take time, and I can give a good example of where that went sideways recently in a deal where the buyer or the seller didn’t do hiring the right way. It was not a big issue.
It wasn’t complicated. Just didn’t do it, and no fallout, and this is what typically happens. There was no fallout historically.
There was no lawsuits. The regulators didn’t come in and do anything, and so they really never dealt with it. They just kind of went along, and things were great, a lot of profits, and the buyer picks that up and says, well, wait a minute.
There’s no way we’re buying the company and taking on all these employees because you didn’t do the hiring process properly. That’s a potential liability for you, for us. Go clean it up, so they went back, and it didn’t take a long time to clean up, but as things tend to happen, the market collapsed in that particular space when they were trying to go clean it up, and the deal went off the table, and that could have been a $50, $60 million deal that’s gone, and does it get re-resurrected down the road?
Maybe.
[Speaker 3] (56:11 – 56:11)
Yeah, maybe.
Brian (56:12 – 56:50)
That little issue, had they looked at it maybe a year ahead of time or even six months ahead of time, could have cleaned it up and could have gone into that sale process and most likely would have closed that deal, and so we hate to see when there’s little issues that either kill deals or really reduce the purchase price, and you say, geez, if you only had cleaned that up six months ahead of time or whatever, it didn’t cost you much. It wasn’t like it cost you a big pile of cash, but you just didn’t do it, and those buyers are going to key on those things and use that to their advantage.
In this case, it was just calling the deal off.
Armando (56:50 – 57:19)
So that corporate cleanup, I imagine if a business owner comes to you and just has that initial conversation, they’re thinking of selling three to five years down the road, I imagine you’re going to dig in a little bit and ask some core questions that you probably always ask. You want to see some documents, and then you’ll probably take a deeper dive, but then you’re beginning that corporate cleanup process when they first have that dialogue with you, it sounds like, to some extent anyway.
Brian (57:20 – 59:01)
I think that’s often a first step when we get engaged by a client who’s either ready to sell, maybe they’re five years out, maybe they’re in the early stages, but it’s always a good thing to do. Typically, it’s not an expensive process. It can be very efficient, cost-effective, but it’s really kicking the tires to say, hey, in these five or 10 categories, what have you done?
Every company that comes in and says, hey, we’re a clean company, you say, well, what does that mean? Oh, we never got sued before. The government never came in and did anything bad to us, so we’re good.
In all my experience, I’ve yet to see one company that is 100% clean. There’s always issues with employment, state taxes that didn’t get paid, some other contractual issues, people not assigning intellectual property. You can go down the checklist of 5, 10, 15, 20 things, and almost a guarantee they’re going to have two or three, if not, sometimes it’s 15 items that they just haven’t done.
Again, because they haven’t gotten called to the mat on it, sued, whatever, they just have ignored it, it hasn’t been an issue, so why address it? The buyer is going to pick it up. Better to clean that up and not have the buyer even know that that existed.
You made it right, you fixed it, buyer comes in, it is clean, and the process goes smoothly, and you get to close. I encourage any company to, again, kick the tires, whatever stage you’re at, just to create a good foundation. That’s all going to add to value.
You don’t know when the company is going to need to be sold, I guess, is a good way to position it.
Armando (59:01 – 59:02)
Exactly, right.
Brian (59:02 – 59:04)
You don’t know. Someone could get sick.
Armando (59:04 – 59:04)
Exactly.
Brian (59:04 – 59:56)
Market could change. We had a client email us the other day and say, hey, it looks like we may be out of business in another country. What happened?
Well, they just passed a regulation that’s probably going to ban our product. Oh, okay. Well, they didn’t see that coming, and so to the extent they were thinking about selling five years from now and weren’t prepared to do something sooner, that now they’re behind the eight ball because they’ve now been taken out of that market at least, and the value has dropped precipitously at least from an overall company standpoint.
So, you don’t know when people are getting sick. Another pandemic hits, regulatory action is taken, new competitor comes on the market, and really, it’s market share. You don’t know, and so you kind of run your company on a daily basis as though that sale event could happen anytime, and you’re able to pull the trigger.
Armando (59:56 – 1:00:44)
Right, and people all have, to your point, people all have an expiration date. We don’t know when that time will be there for us. We don’t know what’s going to happen along the way, so better if you’ve built this company that’s worth a lot and you know it has value, better to be proactive, do a little bit upfront, have some conversation with you, and just begin to get some of those on more solid ground so that if that surprise suddenly appears, then the family’s in a better position to take that company and do whatever is necessary with it. You know, sell it to a son, sell it to a competitor, go to an investment banker, but do something with it because you’ve already helped to plug up some of those holes or rearrange and do whatever has to get done, so it’s in a better position for that purpose.
Brian (1:00:45 – 1:02:51)
Yeah, we talked about at the very beginning that, you know, understanding, I’d say the first step is to understand how your company is going to be valued at sale time, and we’ve seen people run companies for, you know, 30, 40 years, get to, you know, they’re 65, they want to retire, they thought it was a 10-time profit type deal, it’s a two times, and the banker comes in or whoever is advising and says, yeah, that’s a two-times profit company.
Well, that’s barely enough to pay off my debt. That’s what you’re going to get, and then they sell it, and they go right back to work, and that’s a tragic thing that, again, they would have done that homework and audit years before, they would know, you know what, I’ve got to grow the company in the next five years because I need to get to X number, and it is a two times, it’s not a 10 times, and so I need to be able to do that, and selling to the kids, maybe a final note, we see a lot of people want to, you know, transition to the next generation, and that presents all sorts of additional challenges. The big one is, where’s the money coming from?
Because there’s no buyer coming in, the kids aren’t going to have typically any resources to pay you, so how are you going to structure that and work with lots of family businesses that want to do that, which is great, you know, kind of keep it in-house, but you have to be creative in how that transition is going to occur. There’s a lot of, you know, family issues and emotions that go with it and dynamics that don’t exist in a kind of third-party sale, and then how do you, you know, extract the cash? It’s just a very different process which requires, frankly, you know, up to, you know, five, ten years of kind of transition period.
There’s no, you know, good way to just say, hey, we’re giving the kids 100% of the company and walking away, that’s not going to happen unless they can take out a loan and pay for it, which is almost never the case, so that’s even a longer, much longer kind of ramp-up period to be able to make that happen, and so if you’re ready to retire tomorrow and decide to, you know, give it to your kids, that’s probably not going to work too well, so it’s just even more reason to, again, do it earlier in the thought process.
Armando (1:02:51 – 1:03:31)
Right, a whole other set of risks. So, Brian, thank you so much for the conversation, really, really enjoyed having this conversation with you, touching on a lot of areas. You also have different seminars that you do to help educate even startup companies as they begin to launch.
I’m glad to see that you do that because if they can get those things on a solid foot on day one, then it’s a lot cleaner for them going forward and easier for them and you to navigate when they need to engage you for different types of services, so thank you for doing that for the startups who maybe don’t really have any money on day one, but they sure do have a dream and passion to get a company off the ground.
Brian (1:03:32 – 1:03:55)
Well, thanks for having me. It’s been a pleasure, and yeah, we do lots of free seminars, so we encourage folks to check those out. There’s usually three or four or five a month and lots of different topics ranging from how to start a company and raising capital and obviously going through the sale process, so we’d love to see folks check those out and get a little bit of background on what they may need to do.
Armando (1:03:56 – 1:04:09)
Right, great, and we’ll put the link to that in the bottom of this and the show notes on this. Brian, if somebody has a question, like what they heard and want to talk with you, what’s the best way for them to get in touch with you so that they can begin a conversation with you?
Brian (1:04:09 – 1:04:35)
Sure, yeah, email is always the best way. Just shoot me an email, reach out. Always happy to do a free consultation, so it’s not going to cost you anything, and in many cases, if the company, depending on the stage of the company, that legal audit that I mentioned is often something we can do without charging or very minimal charge, so I think it’s a good first step.
Just reach out and happy to chat, no obligation, and see what we might be able to do for you.
Armando (1:04:36 – 1:04:42)
Right, and then if you can just verbally just say your email, we’ll put it in the notes as well, but if you can just say what your email address is.
Brian (1:04:42 – 1:04:51)
Sure, so it’s B as in boy, B as in boy, so two Bs, URT at SWLAW.com.
Armando (1:04:51 – 1:04:54)
Perfect. Brian, thank you so much. Really enjoyed the conversation.
Brian (1:04:55 – 1:04:56)
Thanks for having me. Take care.
Armando (1:04:57 – 1:05:32)
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 480-367-9000 or schedule a call at axiomcorp.com. Here’s to your American success story.
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