[Speaker 1] (0:00 – 2:26)
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.
Hi, I’m Armando Roman, Family CFO at Axiom Founders Family Office, a wealth management firm in Scottsdale for founders’ families. Here at Axiom, we know you want to be financially confident and secure. And the problem is, there’s so much noise and just plain bad information out there to make informed choices for your family, especially when you own a valuable business.
And that can make you feel confused and frustrated, which is why the FBI asked me to train 400 FBI special agents, all of them CPAs, to train them in their own personal financial planning. So call my office today to schedule your 30-minute Founders Strategy Call at 480-367-900. There’s no cost, no obligation.
You have nothing to lose. Enjoy this episode of the Founders Guidepost. Let’s go ahead and introduce the other panelists here.
And we’ll start with Jim Afinowich. Jim Afinowich is an intermediary, a merger and acquisition intermediary. And the intermediary’s role is to help the business owner sell that business.
And they have a whole process they go through. So Jim Afinowich with IBG Fox and Fin. We’ll go ahead and bring Jim on board here.
And it looks like we’ve got John Farr. So let’s see where we are here. So let’s see.
Where’s Jim? There’s Jim. Hi there, Jim.
Hello. So we’ll go from Jim then to… And Jim, again, the M&A intermediary.
So let’s go ahead now and introduce John Farr. So John is an investment banker with Columbia West Capital. And we’re going to keep all the cameras on once we make the introductions here.
So John with Columbia West Capital, an investment banker. What is the investment banker’s role? That person’s role is to come in and help look at that business, take it through a process to help sell that company.
And that’s what John Farr does here in Scottsdale. And welcome, John Farr.
[Speaker 7] (2:27 – 2:27)
Thank you.
[Speaker 1] (2:28 – 4:54)
So let me go ahead now and introduce Mike Patterson. Mike Patterson is an attorney, what’s called a merger and acquisition attorney. And as a merger and acquisition attorney, Mike Patterson’s role is to help protect the seller of the business, write that contract up in a way that will help favor his client as much as possible.
He will often work with the other lawyer on the buyer side. But again, Mike Patterson’s role is the attorney who works for the person who’s hired him. Hi there, Mike.
And to help protect that seller and get the in that contract that can be most beneficial to the seller of the business. And then last but not least, Mitch, let’s go ahead and introduce Mitch Robinaugh. Mitch is a CPA, a tax strategist here locally in Phoenix with a firm called Forsberg Olson.
And Mitch, as a tax partner with the firm, your role, probably the biggest role that I’d say you have is people are always concerned about their taxes. And when they have a big payday, like selling a business, those taxes can just be horrendous. So your role in this whole sales process is to help get that deal in a way to minimize that tax impact while helping that that owner of the business sell and get the result they’re looking for.
And then Dan, let’s go ahead and bring Dan back. Dan Schweiker, obviously you just met. And Dan is the founder, co-founder of China MST Brands, along with his business partner, John Martinson, sold that company about five years ago to a publicly held company.
And Dan is the founder on our panel. So Dan, I’m not sure that we really can see you yet there. I can see you.
There you go. And I think we may need to make him a panelist or something, or is that how he’s going to show up on the screen? I’m not quite sure.
So let me go ahead and start asking some questions. And Jim, I’ll begin a first question with you. As an M&A intermediary, a question that I seem to hear here in the Valley quite a bit is, if my friend has a business like mine and he sold his company for $10 million, isn’t mine worth $10 million?
Or if mine is a little bit better for my own subjective reasons, shouldn’t I get a little bit of a better price than him when he sold his?
[Speaker 5] (4:55 – 5:46)
You know, Armando, that is a normal question. And the person asking it usually states that their business is better than their friends and that they should get more than what their friend got. That’s just automatically assumed.
But I think the key word is similar. There are no two businesses that are exactly alike. It may be the same industry, the same product, they may even have the same earnings.
But when you dig into it, there are definitely aspects that are different. I mean, look at positives and negatives. On a negative side, is there customer concentration in one business?
There isn’t with the other. On the positive side, are there long-term contracts? So you have to take each business on its own.
There are no two exactly alike.
[Speaker 1] (5:47 – 6:02)
Okay, thank you. And John, let me ask you a question here. John, the investment banker.
John, when people ask you what their business is worth, how do you help them understand the value of their company?
[Speaker 2] (6:04 – 7:17)
What are you worth? I’d say a market-based answer is that your business is worth what the highest amount that an acquirer is willing to pay. I don’t mean that to sound like a smart aleck, but that’s the reality of it.
All other things equal. I mean, there’s so much work that we do around spreadsheets, and we do it all here, right? But assessing public comparables, M&A comparables, leveraged buyout models, and sum of parts analysis.
I mean, all of these are spreadsheet-based calculations of theoretical value. But if you don’t have anyone willing to pay that, that doesn’t do you much good, and it’s not particularly helpful. So that’s relevant in any market, but I’d say particularly in this market where some investors have stopped investing.
Not all, of course. Not everyone. This is not 2008.
I keep telling people that. It’s not really 2008, I promise. But we do have some people pulling away from the market, and you are in that situation where it comes down to liquidity as well as theoretical valuation.
But the goal is to get investors excited all at the same time, and frequently it’s for different reasons. But as the maker, we’re ambivalent as long as we’re driving valuation terms and conditions for our client.
[Speaker 1] (7:18 – 8:12)
Okay, fantastic. And you make a good point that people have gotten a little bit leery of the future because of recessions looming and different things that we’re hearing. It’s making people a little bit more cautious.
The layoffs that we’re hearing about make people more cautious as well. So people might be taking a pause before they take that leap because of what they’re hearing in the marketplace here locally. So Mitch, let me ask you a question.
Mitch, of course, you’re a tax CPA, and Mitch, you help your clients navigate the sale process and that. And when you, ideally that business owner will come to you in advance where you have time to plan with them, and assuming that they have come to you with enough time where you can plan, what are some of the opportunities, Mitch, that you would advise them with and help them with so they can really have a more favorable outcome when they sell?
[Speaker 3] (8:14 – 9:34)
Yeah, Armando, thank you for asking that. I think that’s a great question. I think it’s very important to your point that they come to us in advance.
Sometimes we find out about the sale after the contract sign. So there are opportunities to save, there are opportunities to transfer some wealth to the next generation, transfer some of the ownership. So there’s some different legal structures that can be taken advantage of, gifting or a sale that can happen between family members, and you can transfer some wealth to that next generation, which is a nice deal.
You can take advantage of some charitable contributions and not recognize some of the gain on the sale of the business. So those are things that are very important. Even just from structuring your company, whether you’re set up as an LLC or an S corporation or C corporation, those things are very important in the sale.
And how are those ultimately going to be realized? What impacts does that structure have on the sale?
[Speaker 1] (9:35 – 9:55)
And Mitch, a follow-up question on that. You mentioned the structure. Some people have had their company 30, 40 years and the laws and rules 30, 40 years ago were different.
So even if they have an old, say an old C corporation from 40 years ago, are there still opportunities where you may be able to make some adjustments where it can help them before they get through that sale?
[Speaker 3] (9:55 – 10:44)
Yeah, I think so. I think we can work through some structuring and oftentimes most small businesses are structured as S corporations and partnerships anymore. But there’s also some great tax advantages from being a C corp.
So that’s not necessarily a bad thing. And if the entity was actually formed in the right time, there’s actually some really good news and some potential gain exclusion. If they fall within a certain size of the business and have always been a C corporation and this is original stock, there are some rules out there that allow you to exclude a portion of your gain.
So being a C corp may not necessarily be a bad thing. So great question.
[Speaker 1] (10:45 – 11:20)
Fantastic. Thank you for that, Mitch. Mike, let me ask you a question now.
Mike, you’re an attorney and you specialize obviously in mergers and acquisitions. You’re a business lawyer, but I think of you as your expertise is the buying and selling of companies and helping to protect your client, whether you’re on the buy side or the sell side. So Mike, as that attorney, can you talk about just that you use a term, the anatomy of a sale.
Can you just talk about what that looks like for that first time seller who doesn’t know what this really means or what it looks like? Can you just kind of lay that out for them, please?
[Speaker 4] (11:21 – 18:24)
Well, thank you. Great question. I will get to the actual documents and anatomy, but you started at a great point with all these professionals as well.
And I would say the pre-game, if you will, that you talked about with Dan and you talked about each of the professionals here, that pre-game is really important. And I would think someone is really ahead of the game if they are talking to their CPA like Mitch and they’re talking to their broker or the investment banker, the intermediary that’s going to help find or get an auction going and drive up that highest price. And I think they’re also ahead of the game, talking to the lawyer as well, but I think they’re also ahead of the game if they’re talking to someone like you, Axiom, what am I going to do after the sale with my money?
And let’s do some personal planning as well, because it’s not how much, it’s not the big number you sell it for, it’s what do you end up with? And do some planning on the personal side. So you’ve hit on all those burners.
One of the things that I would also do in the pre-game piece is to take a look at your business and ask the hard questions like Dan said he did with his partner of, do we need to clean up some things? Do I have my team locked down? The key people that a buyer is going to want to go with the business, are they locked down?
Are they confidential? Am I careful about the process so that if they’re reading intercompany firm emails, they’re not going to see about this that I’m selling the business and get the resume together and jump? So are you being careful and have a plan on that?
What employees need to stay to keep the key clients happy, to have the relationships that you want that there? Have you taken a look at your contracts to see if they have assignment clauses in them that would require you to go to your biggest client and say, hey, I can’t transfer this with the deal unless I get your consent. And then your client says, oh yeah, well, let’s up that 4% to a 6% that we have between us.
So something negative happens. Maybe you look before there’s a deal on the table and you can clean up some things there. Is the company clean, focused, competitive, attractive?
Are there some non-profitable side businesses and products that you’re so scattered, maybe you should clean up a few things in your offerings? Your non-productive staff workers, are there some things you could do to get your EBITDA, your revenue numbers up? Are there assets that are non-performing you could sell off or move to another entity, real estate not related to the business, document loans and transactions that are undocumented?
As Dan said, his documents were clean. And so you want to be like Dan. You want to be the one that has the clean, even you can create ahead of time a data room that has everything organized.
Wow, wouldn’t multiple buyers be excited about that? And your investment banker or intermediary thrilled that they have an organized set of your documents. Do you need to clean up your board of directors and the problem people that will tube a deal?
Is there a problem person on the board? Do you need to take some cash out and resolve some sticky messes that will be unattractive to a buyer? Do you have any lingering litigation or claims?
Is there accounts receivable that looks messy? Do you need to just write off some of that or go out with the people that are way old and just cut some deals and get that fixed? Okay, now to what you would more consider the anatomy of a deal.
If there’s a broker involved, and I hope there is, I hope you’re using one of these two on here. They will have an engagement letter talking about their compensation, exclusivity time period and a tail period. If someone they brought then does something even after you’re done, a due diligence, do they know your industry?
Hopefully all positive questions on that. I hope you wouldn’t run this bear, but then I would hope you have not only your broker and the accountant and your lawyer involved as the offers start coming in to evaluate what’s really in your best interest. Okay, then at some point there will be a letter of intent or a memorandum of understanding.
Let’s call it the LOI. It’s the first document with that potential buyer. That is a critical document.
Even though it often says it’s non-binding, I can assure you that there are things in that document that you will not be able to get far from that tree down in the definitive documents in the deal later on. It sets expectations. Invest some time in that original letter of intent.
Make sure it’s on the right track. How are they planning to pay you? How much upfront cash can you get and how much will the buyer be wanting to push to what we call earnouts or deferred type of payments that require you to hit milestones or other things in the to keep a due diligence period limited.
Let’s get to the point. Let’s get in due diligence. You don’t want nine months from now because you signed something without using a lawyer and your intermediaries.
You don’t want to say, oh, gee, we don’t have a good document that’s allowing us and they’re just going on and on with due diligence. Now, they’re just telling me, oh, we were going to do 17 million. Now, we’re going to do 15 because of all these great negative things we found in the process.
Then you’ll get to what we call definitive documents, which is the actual asset purchase agreement or purchase and sale agreement. I can talk in a minute about how we protect you in both of these documents on a document side. It’s just not worth a heart attack.
Get some help and get this done. I think the value that that whole team of the CPA, the broker, the lawyer and your wealth manager bring to the table pays for itself in spades.
[Speaker 1] (18:26 – 19:12)
Thank you, Mike. That’s perfect. Jim, let’s go back to you.
Mike, the attorney, just threw a fire hose of information out there. Jim, as you’re working with your seller, your business owner who’s never sold a company before, they don’t know any of that. You’ve got to help them understand, of course, how do you help that seller navigate?
Mike, the attorney on the one hand, but then you’re on the front side trying to find that buyer and go through your process. Maybe you can talk about your, you mentioned an auction process before. Maybe you can talk about that and just how that rolls out.
But I do want you to touch on, if you could, some of what Mike just mentioned because he threw so much out there in what he just mentioned.
[Speaker 5] (19:13 – 20:35)
The first starts with education. You’re right. Most of our clients haven’t been through this before.
They come to somebody like us and we’re teaching them what is involved in the process. That process is going to market, trying to get multiple buyers. We typically do that without a price.
I feel if you put a price on something, all you’re doing is putting a cap on how much money you’re going to get. Different value to different folks, as John mentioned. If you go to market without a price, you set a schedule, you set a process, deadlines for it.
You get multiple people competing with each other. The market will tell you what the business is worth. And that’s really, there’s all kinds of value.
People talk about value. I’m going to get an appraisal. Well, there’s a dozen different appraisals.
What is the appraisal for? In the end, in this case, we don’t hear what Mitch might have as a textbook appraisal for the IRS. We want to get as much money out of the market as we can.
So that process of marketing the business ultimately tells you what that value really is at that day and time for that particular business.
[Speaker 1] (20:35 – 20:40)
Yeah, that’s what the buyer is willing to spend to acquire that company.
[Speaker 7] (20:41 – 20:42)
Good.
[Speaker 1] (20:43 – 21:30)
So thank you. So John, let me go to you then. So John, the investment banker here, when you’re going through your work and going through that process to find that buyer, again, Mike, the attorney talked about, he threw a lot out there.
And you’re on the front side trying to help find that buyer, go through a process to maximize value and help the seller understand what this process is all about. And also navigating time. A moment ago, we talked about the economy and what it looks like going forward.
As you’re giving advice to that first time seller today, who might come to you today, how would you even start that conversation with them about going to market and what that could look like for them?
[Speaker 2] (21:33 – 22:22)
I mean, we can walk through all the process steps that might take longer than this panel. But I think most of it has to do with a step-by-step assessment of what comes next and notifying them ahead of time. No surprises.
And as Dan started to suggest, a lot of that has to do with learning things up front, being honest with each other up front and getting it out of the way. Have all the challenges and the tough discussions on your end, on your side of the table. They don’t need to see all of that.
And that means getting two owners on the same page or realizing you’re going to have a partial sale. We’ll do that a lot because sometimes owners may just not be on the same page. Figuring out what the hot buttons are and being ready to position them.
[Speaker 1] (22:23 – 22:37)
John, could you touch on that auction process? I didn’t mean to interrupt you here, but I do want to make sure that you can talk about the auction process. What does that really mean?
So the seller’s going to hear auction process and say, what do you mean auction process?
[Speaker 2] (22:37 – 25:28)
Sure. Well, an auction process means going to a larger number of potential buyers at the same time. Its primary intent is to create a competitive environment on behalf of the client and to communicate with those buyers that they know they’re in an auction, that they know that other buyers are also being approached.
And this places pressure upon them to be potentially, we hope, less negotiative. It creates leverage for our client when we have multiple bidders. So we’re able to push more on valuation terms and conditions.
So the nature of it is to move away from a one-on-one negotiation into a five-on-one negotiation or more. You see, it’s not necessarily the result of some clever negotiation. It has to do with putting that work in upfront that leads to those.
It’s like the results of a marathon. Your results are driven by the work you put in before, as opposed to what happens on race day. So a lot of it has to do with communicating with your seller what happens next.
You’re dealing with pretty tenured, typically really tenured buyers on the other side of the table. They’re not wondering what’s going to happen next. The only person that is often surprised on a transaction is the seller who’s never done it before.
So I think it’s the intermediary’s job to avoid that entirely. Here’s what they’re going to say next. They’re not going to want to keep your brother on the payroll because your brother hasn’t been in the office in three and a half years.
They’re not going to like that you’ve already started a new company and you’re going to tell them that you’re throwing them the keys the minute you close the deal. There are things that every company has that you’re wanting to communicate and have discussion with so that you all understand what you’re going to talk about with those buyers and make sure you understand how to position. Some things you can’t help.
Sometimes it is what it is and you always have to be honest. But there are other problems you see and you find that you can fix. Many of those problems result in us putting the deal off for six months or nine months.
Sometimes you realize if you’ve got a $50 million company and they have a challenge that’s worth $10 million, it’s well worth it to push a deal a year to get another $10 million. Sellers never like to hear that. But I think it’s worth the discussion and you just have to communicate the pros and cons.
Sometimes the intermediary has to be bushy and have those conversations that the seller really doesn’t want to have. But they’re better off for it. I joke that we’re often like personal trainers, but that’s the reality of it.
[Speaker 1] (25:29 – 26:34)
Yeah. No, that makes sense. So Mitch, let me ask you a question and then I want to go to Dan and get some thoughts from Dan here.
So Mitch, you mentioned a lot in terms of tax flexibility and planning and what you can do. We’ve heard from the attorney, the intermediary, investment banker and that. So a lot of different thoughts, a lot of really great perspectives on this once in a lifetime sale for the business owner.
You as the tax CPA, you might see this client year to year to year to year, but sometimes they’re not as engaged with you, with everything. They just want to get taxes done and then they go away for 12 months, which is not ideal, obviously. But when you’re working with them and going through this whole sales process, John mentioned about timing.
If you wait a year, might be able to get a better price for it. And how do you help that seller navigate this when you’ve got so many different tax views and family views that the seller has? And how do you help them navigate this from your perspective?
[Speaker 3] (26:35 – 28:46)
Yeah, that’s a great question. I think it’s helping them understand, from our perspective, our job is to help them understand the tax consequences of a transaction. You know, really helping them set this stuff up, helping them understand.
I think one of the things that we don’t think about is starting with the end in mind, right? When you’re opening this business, that’s maybe a little early to be thinking about it, but perhaps not. Thinking about the exit when they form the entity.
How are we set up? Are we structured? Are we filing tax returns everywhere we should be?
We’ve got a sale going on right now in our firm and the buyer brought in an international accounting firm due diligence team. And they’re going through and one of my partners is dealing with going through this checklist of information that the due diligence team wants to go through. Have we filed all the returns in places we should be?
Have we made all the elections that we’re supposed to have made? Provide copies of everything. You really need to operate the business, I think, as if you’re going to eventually sell it.
And I think others on the panel have mentioned that. I think they’re looking at that as cleaning things up. I think that was mentioned.
Do we need to clean some things up? If you operate that business as if you’re going to sell it and you’re doing everything that you’re supposed to, you’re working with us throughout the whole process. I think it helps because I think then we can get into discussions of how much you’re going to get on there.
It’s helping you decide structures on payment terms and give you different scenarios on what this is going to look like to help you understand what the tax ramifications are.
[Speaker 1] (28:47 – 29:11)
Thank you. Very, very helpful. Dan, I’m interested in hearing your thoughts, hearing the investment banker, M&A intermediary, the M&A attorney, the tax CPA.
Dan, you’ve gone through this. This is all history for you, but what thoughts might you like to share to that first-time seller who’s hearing these experts chime in on their thoughts?
[Speaker 6] (29:12 – 31:11)
They were all making excellent points. I learn things every time I listen to it. One of the things that we did was when we first decided to do it and we hired the investment banker, we literally had a meeting where we had the investment banker, our attorney who’d been our attorney since we started the company, and our CPA firm all in the same room together.
It was expensive to bring them all together, but it was well worthwhile because everybody’s got their role to play. Rather than going back and forth with phone calls and emails, and John, I see you shaking your head on that. It’s so valuable, isn’t it, to have them all of them in the room together so you can ask questions, get them answered, figure out who’s doing what.
That was very important. One of the other things that one of your people mentioned a little while ago was that figuring out how much you’re going to get up front and how much you’re going to get in an earn out. All my business advisors all the years that I had my company said, you need to be prepared to be happy with whatever you get as a down payment because chances are that’s all you’re going to get.
If there’s an earn out, and the buyers love to give you these lofty earn outs, but the reality of the situation is you have no control about whether or not you’re going to make those earn outs because once you sell the business, you’re not making the decisions and you can’t allocate the resources to hit those sales figures. The only part of our sale we didn’t get was, and for us it was a tiny, I think it was maybe 2%, was an earn out. We didn’t get that because we didn’t have the resources to do it.
Those are the things that your attorneys and your CPAs and your investment bankers can educate you on.
[Speaker 1] (31:13 – 31:50)
Wow, fantastic. Thank you. Jim, let’s go back to you.
I’d like to ask you, Arizona, you’ve said to me several times over the last year or so that Arizona is just really white hot with the activity. People love Arizona. People are coming more and more to Arizona.
Jim, as you think about your role in helping these local mom and pop businesses that are now worth millions, helping them exit, what are you seeing? You see more activity, less activity? Where are the buyers coming from?
Jim, what do you think?
[Speaker 5] (31:51 – 33:36)
We get buyers from all over the country. We get buyers internationally. How a particular business is doing, whether it’s white hot, red hot, or ice cold, depends on the individual company.
I often have people say, well, I understand widget companies are really good. Well, there’s good widget companies and there are bad widget companies. We do a lot of construction-related sales in this market because we’re a construction-driven market.
I look at a contractor here and he said, business is terrible. We only grew 10% last year. That’s horrible.
If you were in Detroit and you only lost 10% in sales, that would be pretty good. It’s business and industry specific. What I can tell you is that we are a growth market, so we’re more attractive than some businesses where people are trying to leave that foreign country to the west of us called California.
We’ve got people that want to live in an environment more like ours and operate businesses here. We have a very desirable market from a growth standpoint compared to others. Still, the things that affect the national economy and businesses affect us here.
We have rising interest rates. We have inflation. Those things are going to affect sales.
Some businesses are affected. Some aren’t. Still, a lot of activity here.
[Speaker 1] (33:36 – 34:07)
People love Arizona. We all live here, obviously, for a reason. Our housing prices have gone up because more people are coming into the state from other surrounding states and otherwise.
For a company that wants to start a presence in Arizona, it seems like buying a company would be one way to get a client base, a customer base, and develop a presence in an easier way than from scratch.
[Speaker 5] (34:09 – 34:15)
Completely agree. I’ve started companies, and I’ve bought companies, and I would rather buy one.
[Speaker 1] (34:18 – 34:43)
Good. Thank you, Jim. John, let me ask you, you’re a investment banker here.
When you think about the private equity money that’s out there that’s in cash waiting to buy companies, how are you seeing that impact companies here in Arizona and maybe your activity as a result of all that private equity money that is out there looking for companies to buy?
[Speaker 2] (34:45 – 36:14)
It’s nothing but a benefit. Our unofficial role as intermediaries is to bring that outside capital in to fuel business growth in a market that has atypical growth characteristics. They know that they’re looking for greater yield, and so this is a fantastic place to put your money as a financial investor.
Arizona has historically cycled, but I’ll also say we get better with each cycle, and we’re a bit more diversified. You’re seeing a lot more tech-enabled services and advances in healthcare tech. It’s not just construction and real estate-related businesses anymore.
Any host of manufacturing firms here, consumer and business services. From our perspective, we like having that outside capital. We’re happy to play the hometown favorite with local capital, but a lot of the local capital guys, they work back by some family office from a real estate entrepreneur, and many of those are pretty cheap to be frank.
I work for the company owners typically, and so our job is to help them optimize transactions. A lot of those people who understand how much these businesses are going to grow, they look at it and say, I am willing to pay a premium relative to some of the other local people, but we’re ambivalent to where the capital is from.
[Speaker 1] (36:15 – 36:34)
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[Speaker 2] (36:34 – 37:21)
I definitely think being an export economy is nice, so to speak. We have tourist dollars coming in, and we’re making a lot of products that are going out. All of this is fantastic for the local economy.
Obviously, you have a demographic shift coming in. Will it stall in the next year? Maybe.
I don’t know, but certainly over the next 20 years, it’s going to continue. I think we’re all happy to stake the claim here. I grew up in Tennessee, spent time in Manhattan and Chicago.
This is hands down the most exciting environment as it relates to being in a growing community that is diversified and has incredible resources and opportunities. We’re glad we made that call.
[Speaker 1] (37:21 – 38:07)
Wow, fantastic. Fantastic. Sounds like an opportunity for pretty much anyone who owns a business in Arizona that the opportunity is here and will probably remain here because of our robust economy.
Good, good. Mitch, let me ask you, I remember not too long ago, Mitch is a tax EPA here. I remember hearing not too long ago that because of potential capital gains rates changing, people were trying to get some sales done before the end of the year.
Are you seeing any of that right now with potential tax changes or changing the estate tax thresholds? Is any of that driving more activity to you right now?
[Speaker 3] (38:09 – 38:57)
I wouldn’t say that there’s possibility that some of those things can obviously happen. Right now, we’ve got a pretty divided Congress. I don’t see where there’s going to be a lot of changes this next year.
I don’t have a magic ball or anything to look into the future. I think that we’re looking at a pretty divided Congress going into the next two years as well. They’re not talking to each other.
There was some discussions about some increased rates. I think the Democrats were pushing for a higher capital gains rate.
[Speaker 1] (38:58 – 39:02)
Right now, that’s probably not motivating people right now, most likely?
[Speaker 3] (39:03 – 39:16)
I’m not seeing that as far as the end of this year. I think clients that we’re seeing that are selling and they just got incredible offers and they’re taking advantage of that.
[Speaker 1] (39:17 – 39:51)
Mitch, a question for you with those incredible offers that you mentioned that some people are getting out there for their companies. There’s a term that people will use sometimes called dynastic wealth. They get a big payday and they want to help the family for maybe seven generations, maybe three generations.
They choose what they want to do with those monies, obviously. When they’re looking to establish some kind of a family dynasty that way, are there ways from your perspective that you can help them accomplish that?
[Speaker 3] (39:52 – 41:53)
Yeah. I think in the first question you put out there, I think we can do a lot of wealth transfer before the sale. Even transferring some of the ownership interest, doing some transfers either through gifting or there’s some fancy terms out there called things like intentionally defective grant to our trust.
Terms that are way over most people’s heads. There’s a lot of things that we can set up to really set up a transfer. We can be doing this years before you’re actually getting into this exit.
If you’re seeing a big increase, these things work really well when the value is going to be climbing. Not so well if it’s not going to be. If you’re seeing a big increase and you want to take care of your family, there’s some great ways to do that.
There’s some great ways to keep the taxes that you’re still paying the taxes but you’ve transferred ownership for a period of time. There’s some great planning strategies. We can do gifting.
We can do some substantial discounts that are still out there at least for now. Congress wants to do away with those too. There’s some discounts that you can take on the gifting.
If you’re looking at the gifting, we can take a discount on a gift to a family member because it’s not a publicly traded company. You’re only transferring a small percentage. You don’t have control of the company.
There’s a lot of reasons you can give a larger amount of the company based on value to your family and create that wealth.
[Speaker 1] (41:54 – 42:34)
Fantastic. It exists. It sounds like when you’re talking with that business owner, you really have to understand what they’re trying to get to and really have to understand the business and see what tools might be available to you to help them accomplish those goals.
Mitch, for planning purposes, you’ve mentioned a lot of different tax areas that are available to them. But for planning, I’m wondering ideally when they’re planning, when should they come see you?
[Speaker 3] (42:35 – 42:36)
Planning the sale?
[Speaker 1] (42:37 – 42:37)
Yeah.
[Speaker 3] (42:38 – 43:23)
Yeah. I think the planning they should… I think John Farr may have mentioned that sitting around the table and all the investment bankers and everybody all getting together.
When we start having this conversation, I think it’s really important that everybody’s involved, that we’re all at the table and that we’re all involved in the process. I think if you’ve already gone down the road and everything’s constructed and then you come to us, we may not be able to help you on the tax situation. I think that’s really important.
[Speaker 1] (43:24 – 43:35)
Yeah. So the planning, is it too soon to have that conversation with you? If they’re thinking of selling in five or 10 years, is that too soon to have a conversation with you?
[Speaker 3] (43:35 – 44:44)
Maybe not from a structuring or a transfer standpoint, but from a tax planning and what it’s going to cost? Yeah, probably is a little soon because you don’t know what the structure’s going to look like. I mean, we can have a brief discussion about this is the way your entity is set up.
This is the way most buyers want to do an asset sale instead of a stock sale and kind of give you an idea of how that works based on the way your company is set up, the way you’re filing your tax returns. I think you can have a brief conversation, but until you really get into numbers, it’s pretty tough to say, this is what your projected net after-tax cash flow will be. And that’s a lot of what we do when these sales come up is really provide them that net after-tax cash flow.
This is what you’re selling the company for $40 million, but at the end of the day, you’re only going to have five because of taxes or because of debt payoffs or whatever is going in there. And so it’s really important to kind of have a little bit of a structure, a little bit of understanding where we’re going in order to really do the planning.
[Speaker 1] (44:45 – 45:06)
Okay, great. Thank you, Mitch. And then Jim, let’s come back to you.
Jim, there’s been a lot of good conversation from different perspectives, obviously, but Jim, as you think about that sale, if they wanted to sell their business, say Jim, in five years, when should they come see you?
[Speaker 5] (45:07 – 46:11)
Ideally, we like to see people at least two or three years ahead of time, but I’m happy to meet someone with five years out. Maybe they’re planning on it, but I can tell you a sale we had last year, the owners had no plans to sell whatsoever until the husband was killed in a car accident. And the wife had no ability to take over and run the business, and she had to sell the business.
It was not planned. So we tell people, run your business like you’re never going to sell it and run it like you’re going to sell it tomorrow. And I think having all of the advisors look at the business ahead of time, you know, what do you want to do if you were going to sell it tomorrow?
Are you going to give money to charity? Where is it going to go? You may do some of those, you know, setting up a charitable remainder trust to be something done many, many years in advance.
So I don’t think you can be too far in advance.
[Speaker 1] (46:13 – 46:56)
Excellent. Good advice. Good advice.
Thank you for that. So let’s see where we are on time. Got a little bit of time left before we go to Q&A.
And let me go around and get some, you know, final thoughts here, just parting thoughts. So Jon, you know, investment banker Jon here, when you’re counseling that business seller for the first time, and if you’ve got somebody in front of you right now today who says, I want to sell in five years, it’s really too soon to come see you. But what advice would you give them today so that when they come see you in five years, or whenever you say they should come see you, that they’re in a better position so that you can really help them even more for a better outcome for them?
[Speaker 2] (46:57 – 49:08)
Okay. In terms of that, which they can help, Dan pointed out how good their financial reporting was and how helpful that was. I couldn’t agree with that enough.
It’s just vital. Creating KPIs, you know, metrics that allow you to summarize the monthly results of your business, a proper dashboard, so to speak. It helps a manager see what they should be focused on.
So maybe it’s not just for selling, right? It helps you in this moment to be able to track that better, to understand it better, you know, what’s changed, what went wrong last month or the last six months. I’m in the middle of a sale process right now, like a lot of businesses are, where their mix is changing, their mix of revenue is changing.
They have some high beta products and some inverse goods, I’ll call it, right? A fancy way of saying some products do well in a good economy, some do well in a bad economy. So we’re telling investors, well, no, our business is doing great.
You know, volume stayed the same despite what’s going on because of these other products. And they’re saying, okay, show me that. And they’re saying, well, we don’t really track it like that, but it’s happening, right?
And it’s not particularly compelling, right? To be able to go and email a spreadsheet to them that proves it by tracking margin on a product by product basis, for instance, in this case, is really helpful. It also suggests to investors that you really know what you’re doing, that you really follow your business in a measured way.
A lot of the things that help you sell a business and help you optimize value are also things that might just fall under that category of good corporate hygiene, right? Just doing the right thing as a good manager, but also being able to prove that to outsiders looking in is very, very important. So that’s one of the things that it helps to be in those discussions in advance with bankers and advisors and tax professionals.
So there are things like that, that they can communicate to you and be helpful to that allow you to make some of those changes early because sometimes it’s too late, right? If we’re trying to close a deal in two months, it’s too late for some of that stuff, but earlier is always better.
[Speaker 1] (49:08 – 49:35)
Fantastic. Thank you, John. And then Mitch, let me come over to you or actually let me go to Mike Patterson first.
Mike, when you’re sitting with that seller the first time and they’re going through this process with you, you’re educating them, you’re doing the best you can obviously for them, maybe they’re not ready to come, maybe they’re going to sell in five years, but you want them some advice or thoughts today. What would those advice or thoughts today be?
[Speaker 4] (49:36 – 52:05)
Well, one is the leverage that we’ve talked about all over. Doing the auction and the leverage that these intermediaries can help with is not just to get the highest price. It also helps having control on getting a good set of documents, keeping a non-compete short, keeping the the caps and the baskets within reason, cutting their liability.
If you have competition and multiple offers that they bring to the table, it helps on the legal side. Even the legal documents can be done. You may save a lot of legal fees on that.
Another thing is, as Dan mentioned, on the earn out piece, I may not have control, but we need to negotiate that control if that becomes a part of, if that’s going to be a significant part of a buy. Also confidentiality, all of these professionals on this call, they know how to go out and run a process and get feelers out of the industry without them initially knowing who you are. These guys work with NDAs and they’re very careful about that.
But then also internally in your own company, thinking if you’re not ready and you’re starting to gear up for this, you need to be careful about your communications so that in the case that was mentioned, the guy died. But sometimes key employees jump ship when they think, oh, he died, this company’s going down, I’m going to go to the competitor or whatever. You may need to have thought ahead of time about keeping the key people that you need for the value, lock down, stay put type agreements with them so that they have some interest.
And a bad LOI, I would just say, I’ve seen two deals in the last three years where a client just came to me and said, here’s our LOI, we just signed with someone, you didn’t know we were planning to sell our business. And that LOI, if it doesn’t have the right things in it, I’m fortunate to have seen due diligence periods go on without any control and actually deals don’t close. And they not only don’t get the best price, but someone tries to negotiate them down and the deal didn’t close and they’re worn out and now they don’t want to do it.
Now they don’t want to even try again for a while. And that’s a shame because we’d really like to see them be a Dan Schweikert who goes away with a smile on his face.
[Speaker 1] (52:07 – 52:35)
That’s right, four hours later. So Mitch, let me ask you, closing thoughts as you’re talking with, you’re the tax EP, obviously Mitch, and as you’re talking with that first time seller, hasn’t sold it yet, but they’re thinking about it, it’s on their mind, it’s going to happen. It’s just a matter of when.
If you were giving this advice right now today, in advance of them actually taking steps to sell, what advice would you give them that’d be helpful for them now?
[Speaker 3] (52:36 – 54:21)
Yeah, I think the big thing is to be thinking about the structure, the structure is the way they’re set up, structure of the sale. To think about, to several points brought up, how much control do I have on their note? How much of their note is a percentage?
And really, I think the bottom line is to talk to your professionals, put the right team together, and be willing to talk to us. I’ve gone through situations where we had a client come to us and said, hey, I sold my business, this is great, we’ve got a signed deal, and can you tell me, can we do some tax planning? Well, I can tell you what your tax ramifications are.
I can tell you what your net after tax cash is, but you’ve already done the deal. We have a signed contract, so make sure you’re communicating. Sometimes I think business owners are concerned about contacting their accounts or their attorneys or brokers or whoever, because they’re afraid that they’re going to have to pay fees.
Don’t trip over dollars or save pennies, whatever. I think I got that one backwards. But you know what I’m saying, spend the money, put the right team together, have the right people, because it’s going to pay dividends to you when you ultimately sell.
[Speaker 1] (54:22 – 54:36)
Absolutely. So, Jim, let me go to you and ask you for some guidance that you might give to that seller who’s going to come in and see you for the first time. Just a quick, maybe 30 seconds or less.
I don’t want to get to Dan. I don’t want to get to Q&A. So, Jim?
[Speaker 5] (54:37 – 56:44)
How about if I tell a very short story that will tie all of this together? Dan talked about having people call, saying I want to buy your business, dealing with that. You need more than one buyer.
We’ve talked about the process. So, my story very quickly, a gentleman came to me, said my lawyer said I should talk to you. I’ve negotiated for the last eight months.
I’ve now got a letter of intent I’m about to sign for six million dollars. We brought him in-house. We ran it through a process.
That was an unsolicited offer. He thought it was a decent offer. We ran it, went back to that buyer and said no, we’re not accepting your letter of intent.
You’re going to be put in a process. We’re back and said please don’t bring an intermediary in. They just screw things up.
They take forever to do it. If you sign that letter of intent, you can change it to eight million dollars from six million dollars. We hadn’t even gone to market yet.
We ended up selling that company for 10 million dollars to somebody else because we are running a process. So, one buyer is no buyer. That process does work.
Now, in this 10 million dollar sale, we started out and said do you have a good tax account? Do I got a great guy who’s filed my tax returns? We said is he the right guy for this deal?
Told him what his taxes were. We got him to an accountant who understood deal accounting like Mitch and ended up saving him a million dollars in taxes over what the wrong accountant had told him. So, I would say selling a business is the Super Bowl of an owner’s business life.
You know, when you’re going to the Super Bowl, you want to make sure you have the right players on the team. You want to make sure that your coaches all huddle before two minutes before the end of the game.
[Speaker 1] (56:45 – 56:46)
That’s right.
[Speaker 5] (56:46 – 56:51)
That’s longer than 30 seconds but hopefully ties a lot of the pieces together.
[Speaker 1] (56:51 – 57:08)
That absolutely did. Thank you so much for that, Jim. It emphasizes the importance of the different people at the table and going through that process.
So, Dan, a couple of thoughts from you then I want to get to Q&A before we get too much time going past here. So, Dan, any thoughts from you hearing the different perspectives here?
[Speaker 6] (57:09 – 57:49)
Yeah, my advice would be to hire all these guys. Every one of them is important and bring them in early. Get them together.
Yeah, you’re going to spend a little money up front. It is worth it. All of these people, in fact, I’m listening to each one of them.
I picked up on things that I would use in the future. So, it’s so important to have those people and pay attention to them because they’re working for you. Even when they’re beating you up and asking you hard questions, they’re doing it for your best interest.
So, I’d hire all of them and get a pitcher of beer or something and get them all together and start talking.
[Speaker 1] (57:50 – 58:36)
Yeah, thank you, Dan. That’s very, very helpful. So, let’s see if there’s, we’ve got a few minutes left here for some Q&A and let’s see if there are questions that might be coming in for really anybody here on the panel.
We’ve got a lot of expertise here that is on the panel and I’m looking at some questions here that I might want to just talk. I’m going to throw this question out there, actually. The question is, I’ve been talking with the business broker.
Will he do all that the panel has talked about? So, a business broker versus the intermediary and investment banker that we’re talking about. Is the business broker going to do the same work?
[Speaker 5] (58:38 – 59:09)
Armando, I’ll jump into that. There are lots of different people that sell businesses. Main street brokers are what we call a main street broker.
A business broker is generally selling smaller companies, things that are under a couple million dollars in transaction value. The people here are dealing with much larger firms. So, no, the process is entirely different of what a main street business broker does and what someone like any of the people on this call do.
[Speaker 1] (59:09 – 59:09)
Okay.
[Speaker 5] (59:09 – 59:11)
That’s the wrong person.
[Speaker 1] (59:11 – 59:13)
Great. Thank you. John, thoughts on that?
[Speaker 2] (59:16 – 1:00:17)
I just think it depends on who you’re bringing in. Quality does vary, unfortunately. And unfortunately, there’s no such thing as malpractice within investment banking or business brokerage.
But you hope they’re going through all those steps. They don’t always. And I mean that on the investment banking side, where we are, as well as on the smaller stuff with business brokers.
So, it’s not necessarily true. Whether or not you ultimately work with an investment bank or a business broker may very well just be dictated on your company size. And wherever you fit along that continuum of a size, your goal is to pick someone who you think would be optimal for that business.
And I think maybe that’s where references come in. And I’m happy to make some references for some business brokers. And you always want to talk to someone who’s worked with them.
Let me say that.
[Speaker 1] (1:00:17 – 1:00:43)
Yeah. Okay. Fantastic.
Thank you. Thank you. And some of this we’ve touched on already.
But if someone’s going to sell, say, in two years, but they think there’s a recession coming, should they wait two years? What should they be doing if they think there’s a recession here or on the way? Anyone want to take that question?
[Speaker 2] (1:00:46 – 1:02:24)
Well, it’s highly subjective, right? Are you healthy? Are you young?
Are you energized at work or bored? There are a lot of qualitative considerations that come in. So, I don’t know if there’s a catch-all answer, but someone young, hungry, and wanting to knock it out of the park, selling a product that is a high beta product, greatly affected by the economy, of course, that person ought to wait.
We deal with a number of people who might also be 75 and have just worked and toiled their whole lives. And it doesn’t really matter what their valuation is. It’s time for them to retire and have fun finally.
And we see both of those camps. It really does depend. And what’s interesting now is because we’re really doing this kind of stutter step down economy that’s really come into pieces.
We have a lot of people on our desk who just got crushed during COVID because of their particular product entail, you know, physical touch points or proximity, who struggled a few years ago, and now their P&Ls look great. So, many of those are considering going to market soon, whereas someone who’s just now starting to see that dip probably does not. It’s a very unusual market in that way.
Historically, we all move in the same direction. It’s just a matter of magnitude, right? It’s a matter of beta and how correlated you are to that market.
But usually, more businesses flow in the same direction. Right now, it’s just all over the place.
[Speaker 1] (1:02:25 – 1:03:05)
Okay. It sounds like it really depends on the business and the industry, the ownership, where they are, you know, physically, mentally, and emotionally in that business. There’s no one size fits all answer to that question, sounds like.
Okay. Okay. We didn’t touch on strategic and financial buyers.
And I’d like to, for the audience, just touch on strategic versus financial buyers, because you hear that out there, but it might not really be clear what the heck that is. And I’m not sure who would like to maybe take that question or touch on that.
[Speaker 5] (1:03:08 – 1:03:15)
How about if I talk about financial buyers, and John can talk about strategic buyers? Sounds great.
[Speaker 1] (1:03:15 – 1:03:16)
That’s a good plan.
[Speaker 5] (1:03:17 – 1:04:04)
I’ve got 3,500 private equity groups in my database. Private equity groups, for the most part, not always, but for the most part, are financial buyers. They get money from investors, they invest that money by buying businesses, they need a certain rate of return.
So they’re going to look at a business and say, well, this is the return I have to get, so this is how much I can pay. I’m going to pay, you know, a multiple of five, I won’t pay 5.1, I won’t pay 5.2, multiple of five is the maximum you get. They’re driven entirely by return on investment and numbers.
That, to me, is a financial buyer. John, disagree with me or add to that?
[Speaker 2] (1:04:04 – 1:06:56)
No, it sounds good. It may be a market-based response. To grossly overgeneralize, financial buyers are more likely going to be stepping away a bit now because they don’t have strategic value in these potential investments.
They’re beholden to debt capital markets, which is substantially more expensive and less readily available. With strategic buyers, you’re hopefully finding some synergy value, and it’s the maker’s job to try to seek to find that unrealized value. Fancy word for saying it, it’s something that a buyer would want to have, but maybe not obvious.
And the perception of that value may vary from bidder to bidder, so you’re trying to discriminate. In one instance recently, we realized that a business that was potentially going to buy one of our clients, some of their guys realized that our technology could be utilized for some of their existing products. We actually did a pause and we brought in their white lab coats, I’ll call them, to talk to our white lab coats, had some meetings and some calls to assess which of their products could utilize this technology.
By the time we brought the finance folks back in, you had internally their product people telling their own finance people that they really wanted to own this business. So that buyer was getting pressure not only from the banker, and who cares what the banker says when they’re negotiating with you, but when guys internally are also pushing you to buy that target, it removes a lot of that resistance and allows them to pay up a little bit more. But going further with that one, we had a couple of bidders, and in one case they were interested in the technology because they processed fish oil just like my product, my client did, in a manner where they’re helping to convert fat-soluble products into water-soluble.
It was very valuable to them, but they wanted to do the same thing just with this better technology. In another situation, a bidder wanted to take that same technology and apply it to different products that had nothing to do with fish oil but related to other fat-soluble ingredients. So maybe more detail than you wanted to hear, but the point is you figure out in these discussions how to highlight value based on what you think they care about the most.
That’s a game you can really play more with strategics than financial buyers. Strategics, in my experience, have shown up pretty well in down markets. If we’re going to call this a down market, I think we can now safely.
A $4 billion company that’s now only worth $3 billion can still buy most of my clients. So they’re willing to transact in a way that financial buyers don’t tend to.
[Speaker 1] (1:06:56 – 1:11:07)
Perfect. Thank you so much. So let me just go through a really quick summary, and then we’re going to have to wrap it up here.
So we’ve heard from Jon Farr, who just spoke, an investment banker, talk about what matters and what he’s trying to get to for that business seller. Some of the points that he shared is he talked about the auction process, having multiple buyers. Jim Affinowich with IBT Fox 10, in a similar role as an M&A intermediary, talked about having a database of thousands of potential buyers in there, going to the auction process, and negotiating on behalf of the seller to get a better price.
They both talked about starting the planning early, well in advance, so that things can be adjusted to have a better outcome for the seller, for the owner of that business. Mike Patterson, it’s like a firehose talking with you every time because you have so much you want to share, and it all matters. And I’m sure all of that goes into the making of that contract in that letter of intent as you’re representing your seller to help them.
So I’m so grateful that you have that firehose of data in you for the benefit of the sellers. But you talked about, again, planning in advance before signing the LOI, get the attorney involved so he or she can protect you. Because even though LOI is not binding, often not binding, what gets in the LOI ends up getting into the contract very often.
And then Mitch Arobina with Toll Forgeberg Olson, tax CPA, tax strategist, you mentioned a lot of things that can be really beneficial from a tax savings perspective. And you put a capstone on that by saying, if you’ve already done the deal, it’s too late. Because it is what it is.
Now you can just say what the tax liability is. So to really get ahead of that, you’ve got to plan ahead of that and look at the entity, look at the structure, look at the assets, and then talk about what that family, that seller is trying to get to, to help them get there and get there in the most tax advantaged way. And then Dan Schweiker, founder of China Mist Tea that sold that about five or so years ago.
You had a lot of good wisdom to share as well, that you’d engage all these people and get all those people in the same room, meaning the investment banker, the intermediary, the MNA attorney, the tax CPA, getting all those folks in the room together so that they can share in one table and hear each other’s perspective. And I think Mike, you said, add in there to the financial advisor, the wealth manager, because from our perspective, we’re looking at that family that right now generates some kind of an income and lifestyle from that business. And once that business is gone, that family does not want to step back in terms of lifestyle.
They want to maintain that lifestyle or ramp it up. And so from our perspective, as the wealth managers, what we’re looking at is how do we help that family maintain that lifestyle for the rest of their lives and beyond? And often we hear seven generations and charitable gifting, et cetera.
How do we help them reach all of those goals they want to achieve with this once in a lifetime sale of this business that’s taken them 30 years to build? So we have what’s called a stress test that we often go through clients with to help identify what are they really trying to get to and help them understand as they go to that exit, what are their goals with that exit? So panelists, thank you so much for all of the information that you’ve shared so freely with the participants today.
Hope you enjoyed this episode of the Founder’s Guidepost. When you think about exiting your business, that’s often a once in a lifetime event with no do-overs and the stakes can be very high for your family. Before making that leap, ask for your free copy of our Scottsdale Founders Forum white paper packed full with information that first-time sellers should know before exit.
And schedule your 30-minute Founders Strategy Call at axiomcorp.com. Your exit can be amazing. Everything you dreamed of.
When you plan ahead and take all the appropriate and necessary steps, that’s what’s possible. Until next time, I’m your host, Armando Román.
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