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and Megan, let’s go ahead and get started. Hello and welcome to the Scottsdale Founders Forum. My name is Miguel Raman. I am the administrative manager at Axiom Founders Family Office. It is my pleasure to introduce to you Armando Raman who will be your host for today’s event. Armando is the CEO of Axiom Founders Family Office, the multifamily office and wealth management firm for founders. Armando built and exited two businesses, including a CPA firm, providing tax and accounting services to
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businesses and families. He operated that CPA firm for 14 years and then sold it. Armando founded the Scottsdale Founders Forum and the Founders Guidepost podcast to help founders successfully exit their business. A sought-after speaker and presenter, Armando was invited by the FBI to train 400 special agents, all of whom were CPAs, to train them about their personal financial planning. He was appointed by two bishops of the Roman Catholic Dascese of Phoenix to provide oversight for prudent investment management of the
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Dascese investment portfolio and provided the same oversight for one of Arizona’s largest nonprofit organizations, the Arizona Community Foundation. Armando led the CPA profession in Arizona and nationally, serving as chairman of the board of the Arizona Society of CPAs and serving on the National CPA Financial Literacy Commission and Governing Body of the American Institute of CPAs. Armando and his team help founders and their families protect, preserve, and grow their overall net worth. Please welcome
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Armando Arman. Thank you, Mingle, for the introduction and thank you for joining us for the Scottsdale Founders Forum. We’ve been having this event now for four years. The event is all about exit and it’s for that business owner who is going through the exit for the first time and thinking about that exit and how to go about it. A little housekeeping first. We are recording this Zoom and so afterwards you will receive a link to the record the recording of this event today and the guest I’ll introduce him in just a
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moment here. Uh but the conversation today is all about you that founder and a quick spoiler alert everybody dies. It just just how it works. But you know that great business that you’ve built that does not have to die. And the way you can keep that alive and or transition that to the next person, the next owner is to plan ahead and be thoughtful, methodical, get the right people around you to help you make that transition of that business. And uh I’ll just mention speaking of mortality
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quickly that you know average age for a man mortality is age 74. It’s been dropping to lower numbers. And for women, it’s about age 78. But before you get nervous when you think about your own age, also think about this. You are not average. Nobody’s average. But we need those
measuring sticks so that we can come up with some ways to get some planning together for our ourselves, our businesses, and our family. So again, today is all about you, all about the transition of your business. Here’s what
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you are going to know. You will know when to start planning. You will know what expertise should be on your team, basic anatomy of a sale, and what pitfalls to avoid. Here’s what you’re going to have. You’re going to have an opportunity to hear experts who buy and sell businesses for a living. And the Q&A afterwards, we’ve got 30 minutes set up at the end of this at 4:30. So that it’s just for Q&A for your questions. And here’s what you’re going to feel. You’re going to feel better that you can
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now be better prepared to go through that once-in-a-lifetime sale. You will feel more confident knowing this the steps that you should be taking. Now, um Axiom Founders family office is our wealth advant wealth advisory firm and multif family office. We put this event together because we had a client go through an exit years ago and they were going through a pretty sizable exit and they called me. The client called me the the second week of November. They were trying to get a close by December 31.
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And knowing this couple that owned this business, I knew they were very generous people. So, when I got a call from the client and we got an update on where that sale process was, I asked her, “When are you going to close?” She said, “December 31.” I said, “Great.” I called her tax CPA to say, “Hey, our joint client who’s going through this exit, uh, they’re very generous people. Have you had a chance to talk with them about about charitable giving and how that
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could be so impactful to reduce that tax bill with this once-ina-lifetime transaction?” and his response was, “No, Armando, they’re too busy right now. I’m going to wait till it closes and then we’ll have that conversation.” So, this sale closed on December 30th. The next day was New Year’s Eve, December 31st. They had a very sizable exit from their business without the appropriate tax planning, I felt. So, the decision that we came to was we’re never going to let
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that happen again to one of our clients or anybody else who will listen. And that was how this event came about. the genesis of this event. We’re a multif family office, sometimes called a family CFO. Uh but don’t worry, no one’s going to try to sell you any life insurance or products, but we will reach out to you afterwards to see if a meeting might make sense to see if we might be a good fit for each other. And I think that sounds fair. Uh people often think that we’re an ordinary wealth management firm
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when in fact we’re not. And I say that because we’re focused on the founder and the founder’s family that happens to own a business worth millions. And part of why I say that is when you, the viewer, the listener here, when you think about your own personal balance sheet and you look at the largest asset, the largest wealth, your family wealth that you have, it’s probably in that business. And I can say that because that’s normal. That’s what happens with people who build great companies over time. So
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we think that it’s our responsibility and our obligation to understand that value in the business and help you preserve it, protect it and grow it. Um so we use a comprehensive process to help our clients make smart decisions about their money. uh to help them um plan, to help them mitigate taxes, take care of errors, and make sure assets are not unjustly taken through litigation, help magnify charitable gifts, and to help them navigate this once in a-lifetime exit. We’ve got a team of professionals that we work with to help
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us do that. And two of those people are here. You’ll understand as we talk with with them more about their expertise and why it can be extremely extremely relevant for you as you think about navigating your own exit of your business. So here’s how this is going to work. I’m going to ask questions of both John and Phil. And first I’ll introduce them. I’ll begin by introducing uh begin by introducing John John Farre who you see with the beard there. Hi John, how are you? Hey. Hey.
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So let me introduce you John. John Far has spent his career serving companies in the consumer health and wellness manufacturing industrial technology and aerospace industries. Before Columbia West, he worked with PNC Equity Management, a $1 billion private equity group engaged in growth equity, leverage buyout, and mezzanine loan investing. He began his investment banking career at Deutsch Bank where he worked as an analyst and associate with the private placement team. Mr. far earned a BA in
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economics and business administration from Vanderbilt University and an MBA from uh with concentrations in finance, accounting and strategy from the Kellogg School of Management at Northwestern. John Far, managing director of Columbia West Capital. Welcome, John. How are you? Good, good. So, now let me introduce Phil Gatillaa. Uh Phil, hi there. Hi, Armando. So, let me introduce you. Phil Phil is a deal lawyer who gets transactions closed. Whether navigating a complex
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business acquisition with a compressed timeline or structuring a mission missionritical financing, he delivers practical solutions and creative problem solving that move deals forward. As both a certified public accountant and a chartered financial analyst, Philip brings a rare multidisciplinary perspective that addresses the legal, financial, and tax implications of every transaction. Selling
your business is likely the most significant financial event of your lifetime. Phil understands this deeply. Business owners seek him
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out not just for his 30 years of experience, but for his dedication to achieving the best possible outcome for you. He and his team negotiate relentlessly on your behalf, drawing on his unique tax and accounting background to guide you through every stage of the deal process and position you for maximum value. Phil delivers what he demands from himself and from his team. He demands thought leadership, creative solutions, and superior responsiveness. He builds deep lasting relationships with his clients, many spanning decades,
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because he operates as a trusted adviser who helps minimize tax exposure, maximize enterprise value, and maintain strategic focus on what matters most. So, I’ll introduce to you Phil Gatilla, office managing partner in Phoenix of the Pulsary Law Firm. Thanks. Welcome again, Phil. Thank you. What we’ll do now is I’m going to ask each of you questions and I might ask you some clarifying questions so that you can help our viewers understand why they need your expertise and maybe you
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on their team as they think about exit. And so, Phil, I’ll begin with you. When you think about the basic anatomy of a business sale as the attorney, what comes to mind for you? What is that basic anatomy of a sale? Well, it’s, you know, I think most of us on this call have probably sold a house before and you know what you do. You sell a house, you get all your junk out of it, you get the uh furniture arranged, you, you know, make it look good. You cut the lawn, you might get your landscaping done. It’s similar with
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the business. When you’re looking to go to market, you want to make sure you’re not running excess personal expenses through the business, or if you are, you’re adding those back. John will tell us about normalizing earnings later on. Um, and a big part of that is getting your legal house in order. You know, if you’re selling a business and you’re, you know, a patent or a trademark or trade secret or your workforce are kind of the keys, secret sauce to your business. That’s what makes it work and
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makes you profitable. You’re going to want to make sure that before you go to market and put your company up for sale that you have solid contracts that those have been updated, that they’re compliant with the applicable law. You know, employment laws change, non-compete laws change, intellectual property laws change. You know, all that stuff needs to be reviewed from time to time by good legal counsel. You need to have um very solid, you know, if your intellectual property portfolio is
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something that’s adds value, that should be maintained. And you know it’s important that if you’ve say developed some software and you had a contractor do it that you have certain provisions in that contract that make sure that you your company owns the software. The default rule with a contractor is they own what they create for you unless you include an assignment in your contract where you get to keep that work product and the copyright and all the IP rights. So, I would say getting and making sure
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that you’re ready to flip a switch and go to market and preparing ahead of time is probably the most important thing. There’s a lot in what you just said. Yeah. Excellent. And then John, let me ask you what what does an investment banker do? Uh we essentially run the process for selling that business that uh Phil was alluding to uh as your agent. So that means preparing the materials, positioning your story, uh running a competitive process, uh ideally if
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you’ll let us uh with a number of potential biders that creates leverage for you. Uh so we’re acting as your advocate uh I’ll call it your your project manager uh in running the the process. Uh it’s popular that we’re identifying biders. That’s what a lot of people think of, but I’ll say that we’re also negotiating with those biders. We’re coordinating the team including uh the accountants, the tax advisors and and uh M&A attorneys like Phil. So in short, we’re we’re providing the
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competition uh but we’re also providing the order and and strategy uh to what might otherwise be a one-off negotiation. Okay. Well, there’s a lot of what you just said as well. We we’ll get into more deeply what you just described. You mentioned a process a process of of of going through that actual sale of the business. I know as I talk with business owners, they’re often very very clear that they want to be anonymous. Uh how do you help protect their anonymity as you go through that process with them?
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How do I do that or is that for me or for Phil? Yeah. Well, for you, John, sorry. Yes. Well, from our perspective, we we do provide a a confidentiality agreement up front. We call it a non-disclosure agreement. Uh we’ll write a one-page teaser, and that is a no-names teaser. So, we send that out generally describing the business, but it’s attached to an NDA. Uh and that has a lot of the fundamental protections that uh an organization is going to want to see. Uh we’ll commonly have that
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reviewed by the attorney involved. So, uh we’ll create that letter. We’ll send it over to Phil and say, “Hey, does this look okay?” He says yes. or maybe add this, add that. But, uh, long story short, we send that out to all these potential biders and they do not receive that confidential information memorandum that that longer document that does name names. Uh, they would not receive that until they’ve signed the NDA. So, we make sure that they’re protected. And so the NDA is going to have uh obviously
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things around disclosure but also uh discussions around uh non-solicit of employees uh treatment of IP um you know other protections like that. Uh and frankly it tends to be pretty heavy-handed on our clients behalf. Uh it’s very common for investors to push back because our document is so heavy-handed but uh that’s how we like to start it anyway. So that’s a great way of protecting them. Right. And just to clarify, NDA of course is non-disclosure agreement. Exactly.
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Right. Okay. Or also called confidentiality agreement. Yeah. I’d like to include a nonsolicitation of employees covenant. That means that for a period of time, the bidder who becomes aware this company’s on the market can’t try to hire your employees. You know, if you decide you’re not going to go with them, you don’t want them going and picking off your employees and, you know, saying, “Hey, your company might be for sale.” Or so on.
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So that can add some protection. And I usually like to get two or three years if possible. Wow. Protection for my clients. Excellent. Thank you. And a question that we that we hear is uh is often what’s the biggest question or concern that we help that first-time seller address? And for for that question, the question really is are you ready? You know, is that business owner ready? They spent years and uh many weekends, years of their life building that company. And
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so what what we hear from them often is, you know, are they ready? And the way we help them understand if they’re ready or not is we have a conversation, we guide a conversation with them. So John, you mentioned you have a process you go through. We have a process as well where we meet with the couple that that that that owns that business or if they’re two partners, meet with each couple and have a conversation with with the couple about their values, their goals, the people who matter in their lives, what
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are all the assets they have because that’s what’s going to then generate the cash flow, the the monthly cash flow for them beyond the sale. And we have a conversation about their interest because when someone has spent so many years of their life building a company and they think about it 24/7 literally it’s hard to just turn that switch off and walk away. So we want to make sure that we can help them as much as possible to answer that question. Am I ready to sell my business or not? That’s
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is it a are they mentally ready, emotionally ready, are they financially ready? So that’s the question that we get that we help them address quite often. Question another another John for John another question for you. When you are hired, how do you help the founder optimize their enterprise value? Okay. The the most popular and the most easily understood is is driving up the valuation multiple. Uh obviously they want to get paid more on a relative basis for that cash flow. Uh but it’s
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not really just about that. It’s about structure. It’s about timing. Uh it’s about positioning. Uh we try to help founders position their business uh in a manner that highlights things like growth drivers, um scalability, even defensibility, right? So the business made $10 million last year. How do we know that that will continue? Um how do we know that it’s going to grow? We believe it’s going to grow. So uh positioning is one of those underappreciated things that we do. uh
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we’re we’re trying to uh essentially find the most exciting attributes that a company has and ideally find the investors who most need those attributes. So, uh the goal is to find that buyer who views our client as that missing puzzle piece that that strengthens their standing in the market or that helps them grow through revenue synergies or or what have you. So, um, obviously we’re running an auction ideally, uh, which creates competitive tension, but it also has to do with getting those readers excited about what
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they’re seeing. We see so many operators who are great at running their businesses, uh, but they’re not necessarily good at talking to people who aren’t insiders, who aren’t industry veterans. And so a lot of what we’re doing is just teasing out a lot of those exciting things about the business to make sure that they get uh they get seen and they’re appreciated in the value. U go ahead. You really have to understand that business and you really have to understand what the buyer’s perspective
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might be to make that fit and really make that valueable to the buyer. Exactly. Exactly. Excellent. Excellent. Um John will also go through and add back um expenses that the buyer won’t be saddled with. You know, someone’s running their personal boat or you know, sports car through the company, you know, to for the tax, you know, tax reasons, that gets added back because that’s going to be um you know, for every dollar you can add to your earnings or your cash flow. If John
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finds a buyer that’s going to pay eight or 10 multiple, that’s worth eight or$10 dollars. So you add back, you know, a million dollars, you could have a $8 million higher price if you’re selling on an eight multiple. And companies are valued based on multiples of cash flow. We call it Ebida, which is earnings before depreciation, amortization, interest in taxes. And it’s really a
proxy for cash flow. So if I if I were to buy your company, I want to know how much money I can take
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out of it every year, put in my pocket. That’s what I measures and tells me. And then if you know depending on how as Evida grows the multiple goes up. I don’t know John if you want to talk about how that works. Yeah. Good. And I do want to talk about the multiple in just one second here. But one quick housekeeping housekeeping that I want to add for the the the listener who’s who’s watching this right now as we have this conversation. Up in the upper right hand corner of your
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screen you might want to click on gallery view so you can see all three of us at the same time. I think the default is speaker view. So gallery view might be a good way to see because what I expect is what we’re seeing right now is that John and Phil myself will have a dialogue amongst each other for the benefit of the viewer. Um so John and Phil you both have mentioned the multiple and I do want and then you talked about also the uh the uh the sale value. John, when you talk about
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multiple what you’re talking about is the the cash flow annually that’s produced from that business. Mhm. Or the profit, which is a term that most of us would understand before we hear the term multiple. But it’s somehow the net the net result of that business working all year times number two times number three times number four. But the 234 is the multiple you’re referring to. Correct. Correct. It it it’s the industry shortorthhand to say that cash flow IBIDA adjusted Ebida as Phil pointed out
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times the multiple equals the business enterprise value. It is shorthand I’ll say just like uh in real estate right it’s it’s price per square foot time square footage. Uh but as you know there are more things that go into that but uh simply put um we’re trying to get both sides uh of those numbers up as it relates to cash flow. As Phil pointed out finding adbacks uh are are fantastic for us. Uh we do that a lot where a business making 4 million according to GAP may actually be closer to 5 a half
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when you add back things like excessive compensation. you know, son’s tickets, the company car is a Ferrari, um son’s on the payroll and the son really doesn’t show up to work, things of that nature, uh that business owners do and and you know, uh are encouraged to do from their tax professional. They’re they’re tough as it relates to marketing the business. So, uh as Phil pointed out, you want to start tracking those types of things, making sure that we’re able to bring those up and highlight
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them. And there are some ways we can get creative with that back. So that’s the cash flow part of this. Uh the multiple on the other hand is what multiple they’ll attribute to that cash flow. The product of the two equals your enterprise value. But on the multiple side, we’re sec we’re effectively trying to uh find ways to argue why the business ought to merit a better multiple. Maybe there’s some real estate associated with the business. Maybe you have intellectual property that comes
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along with the business. Maybe you’re in um a faster growing region. So something like municipal services uh that might be a 2% company grower uh in Idaho or you know Kansas uh might ought to get a better multiple here in Arizona where you have so much population growth. Uh we certainly argue that one a lot. So there are number of reasons why we can try to get that multiple up. So, uh, enterprise value from our perspective is us coming up with all the reasons why they should be excited to pay more, uh,
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and making sure that we’re articulating that to the bidder who understands it best and and wants it most as well. Fantastic. Human element, I’ll call it, to that. And and Phil, you mentioned about the the the taxes and normalizing that as John just talked about, but Phil, you brought up an extremely good point when when it’s tax time. Uh when I used to have my tax practice years ago, the number one question people would come in with is or the number one complaint or
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comment is, “I’m paying too much taxes. Help me lower my tax bill.” So sometimes people get extremely aggressive with what they take through as company expenses. And that’s great for that year’s taxes, but you made a point that the viewer needs to really understand if they’re going to be going into a sale in the next couple of years or so, maybe they don’t really want to do that. I’m not sure if they do or don’t, but your point was the buyer is looking at cash flow and a
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multiple of that for the sale value. And you said that if you if John’s can get you another million in in cash flow times a multiple multiple of say eight that’s another $8 million of sale value which could clearly outweigh the tax benefit this year of flushing some of those things through. That that was your point. Correct. Correct. And you don’t have to uh completely, you know, clean up, you know, what you’re running through your your tax return. You just need to have
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John and his team normalize it when you go out to biders and show them if you buy the company, here’s what your financials will look like. You know, the tax returns are what they are. Um, and that’s really that’s that’s my main point. It’s not to, you know, suddenly move everything off the balance sheet and and start paying more in taxes. There’s, you know, a lot of you with bonus depreciation back, a lot of our clients are buying, you know, a lots of equipment and stuff that
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takes up a lot of cash reduces their taxes, but that stuff needs to be looked at. And the other thing that is important, John and his team will do is they’ll prepare proforma financials and show growth. You know, the accountants, um, and Armando, you know this because you were an accountant, they they kind of look in the rearview mirror. They’re looking at the past and that isn’t exciting. If you have a growing company, you need to not only look at the past, but show where it’s going. Show what the
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IBIDA could be in a year or two or three based on the growth that’s assuming you have a growing business that’s happening. So, that’s a key uh kind of marketing, you know, feature that a good banker like John will implement and will go to market with. Great. Thank you, Phil. And Phil, a question for you. Besides sales price, what does the seller need to consider? There was about a million things. Most most business owners are super um protective of their employees, the people that help them build the company
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to where it is, you know, before they sell. So, you know, the number one uh point I hear is they want to make sure that whatever buyer they pick, they’re going to treat the team like they would, like family, and make sure that, you know, the employee base is taken care of. They’re incentivized. and incentives are aligned because a happy workforce will help grow the business and keep keep the training going and the projected growth going. So that would be number one. Number two would be, you know, you already
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mentioned this. Um, it’s a CVY principle. You start with the end in mind. It’s one of the seven habits. Yeah. You know, you get to closing. You know, you you know, I saw companies, you know, 100 million, 200 million. All this money hits a bank account. What are you going to do with it? Where’s it going to be? Most of the time, you’re going to, you know, when I get in early, I’ll take my clients to our wealth planning group and we’ll do asset protection trust. will do
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estate plan, estate tax and gift tax protected trusts so that when that event happens, a good chunk, if not all of the proceeds end up in these dynasty trusts where you can have a family office and have this generational wealth in a vehicle that can’t be picked away at by expouses or creditors or whoever. It’s that’s kind of that’s stepping way back. Ideally, you want to do that planning a year or two before you go to market, but it can be done in a month, you know, a couple months. It’s just it’s you’re
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you’re more compressed in your time. Yep. Yep. Thank you for that. And a question that we get really dovetails of what you just said, Phil. You know, when the founder is ready to transition out of their business, what steps do they need to take with us? And it really centers that overall
planning. So, as an example, Phil, we just brought a client over to you who had some planning done, but had some gaps in in their planning. Uh so we’re looking at the overall financial planning, uh tax reducing
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strategies, uh legacy planning, gifting as well. And when legal structures need to be created for that, then we’ll make sure to bring in the attorney as you mentioned your your team of attorneys who create say the charitable remainder trust or the irrevocable trust or the other vehicles that can be extremely impactful when they’re having this enormous tax. And it’s not just the taxes, but it’s also, as you said, protecting that wealth from potential lawsuits, from potential divorces, from
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things that could certainly take away from that that family net worth. So, the planning that we’re doing is all about that. We often begin with creating a personal balance sheet. And on that personal balance sheet, what what the clients see with that is they see all of the all of the pieces of their net worth. And then we can have a conversation conversation about how do we protect those? How do we make sure that they stay intact? And that’s with titling, that’s with trusts, that’s with
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business entities, it’s with insurance policies, it’s a variety of means that we use to make sure that we can help protect and preserve that overall family net worth. And that’s all part of the planning that we do to help protect, preserve, and grow those assets going forward as they navigate beyond the sale of this of this business that they’ve had and nurtured for so many for so many years. Um, question now again for you, Phil. There’s an expression that the devil is in the details of in the sales
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contract. What should the the seller be cautious of in that contract? Well, first thing you need to do is make sure you hire someone that knows what they’re doing because M&A is an industry in and of itself. And you don’t want to hire a divorce lawyer to handle your M&A deal or a litigation. You know, someone who’s in court. You want to handle it. You want to hire a deal lawyer. That’s, you know, all they do and they know what the market is. So, there’s market standards for M&A deals of all sizes.
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And if you have a buyer who’s off market that, you know, they they you know can be brought back because we can argue and and you know is if John’s gone to them on a in a process and we have multiple biders, we’ll just tell the lead bidder who’s being unreasonable or not, you know, being fair that we’re just going to go to the backup bidder. I like to include when we get to the letter of intent stage, I’ll include a provision that says if you retrade and drop the price you’re offering, your exclusivity
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ends. And that frees us up to go to the second bidder and see if they’ll match a price and get if they want to bite at it. That’s the kind of stuff that, you know, if you’re not doing deals all the time and you haven’t seen that, understand how that works, you might not have, you know, a lawyer who knows how to handle that, right? I’m I’m glad you brought that up. Uh, I I spoke with a business owner a while back who mentioned he received an LOI from a prospective buyer, a letter
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of intent, letter of interest, whatever whatever LOI stands for, but he received this LOI and the the uh prospective seller not thought that there was a standard template, so to speak, for an LOI and didn’t really see the need to go to their attorney to go to you, Phil, for example. to have the attorney look at it before they signed it. And I’d like you to talk about that, Phil, if you could, because I’ i’ve I’ve I’ve I’ve heard talk before that the terms and conditions in an LOI often end up in the
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actual sales uh purchase sales agreement and that the terms and conditions in the LOI can sometimes make somewhat of maybe a binding contract almost. C can you speak to that? Yeah, it so before you sign a letter of intent with your selected buyer, the seller, the business owner has the maximum amount of leverage because the buyer doesn’t have a deal. They don’t have you locked up as a seller into exclusivity, meaning you have to negotiate with that buyer and you can’t talk to anyone else once
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you’ve signed the letter of intent. So, you have the most maximum amount of leverage before you enter into that that document. The reason is um when you sign up for exclusivity if you were to breach that. So let’s say you agree to sell to someone, you sign a letter of intent and then you change your mind and you go negotiate with others and have violated the clause that says you’re going to exclusively deal with that buyer. They can then sue for basically their fees and costs and damages. They can’t force
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you to sell to them, but they can recover expenses and those expenses could be hundreds of thousands of dollars because a buyer will invest in a quality of earnings. They’ll do legal diligence. They’ll do financial diligence. They can they’ll invest a lot of money into making sure the company is what we tell them it is because when you’re on the other side of a deal, it’s a black box. It’s, you know, you’ve got to turn over every rock and make sure that that company is really, you know,
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has the cash flow, revenue, etc. that you’ve been told as a buyer. When you’re in the sell side, before you sign it, we can negotiate in like a walkway deal. Meaning once a deal closes, there is no way except for fraud. There’s no way for the buyer to come back and make claims to co
recover some of the purchase price. That’s called an insured deal. We have repin warranty insurance as a fairly new product in the market. And we can often get buyers to pay for that. John has seen that many times where we
00:33:25
go to the market or John will take the company to the market with expectation that the buyer will pay for the rep and warranty insurance and provide a walkway deal. So once we get to the closing table and the wires hit, unless there’s some huge fraud, then the seller is going to keep every dime. And if there’s a issue like something we told the buyer as a sell seller was wrong, the buyer’s resources to go make claim against the insurance company, not the seller. So you know, it’s super important to get as
00:33:51
much of those protective provisions. I’ve got a checklist about 20 or 30 items long of issues that I’ll make sure are negotiated at the letter of intent stage and it pains me when I have a a client hire me and they’ve already signed a letter of intent because it’s too late to go get get all that in there and we’re now hamstrung and um you know there’s kind of a good faith idea that once you’ve signed a letter of intent you need to stand behind that those terms and the more protective provisions
00:34:20
I can get in there on the front end the smoother and quicker your deal is going to and probably the more money that the seller is going to take home. Yeah, thank you. Yeah, I agree 100%. Uh I I’ve heard naive sellers say, “Well, it’s a non-binding letter, this letter of intent, right? Uh therefore, we’ll we’ll go ahead and sign it and get started and we’ll see how we negotiated from there on.” But but Phil’s right. I mean, think about it
00:34:43
from the buyer’s perspective. Now, that seller is the guy who’s retrading, right? So, imagine the the psychological effect you’re having on the bidder. they they may literally walk away in a scenario where you’re suddenly asking for something uh that isn’t in the letter of intent and wasn’t what that buyer intended. So, uh it it’s a way to really get off on the wrong foot if you’re not taking that LOI seriously uh as it relates to what’s in there. And and another really important point of
00:35:13
Phils is you also have to make sure everything you care about is in there. But the LOI ought ought to be attractive to both sides. meaning you spend time figuring this out up front. It materially keeps uh due diligence fees down for both sides. If you hammer out some of the most important items in that LOI, uh that way you don’t go through a full QB necessarily. Uh you’re not paying uh retainers and you’re not paying, you know, all the other thirdparty advisors, you know, post LOI that you often would. Better to get that
00:35:46
hashed out early in the LOI. Good. And you used a term, John, retrading. Touch on what that means, please. Well, when we all agree that the price is is $10 and uh then the seller decides that it needs to be 14. Uh I mean, that that’s the most obvious one, but but a lot of it comes around the the terms and conditions or uh someone says, “Oh, no. I’m I’m planning to to go off to my lake home uh and I’m I’m not going to work here anymore even though the LOI says
00:36:16
that uh they’re expecting you to stay on board for two years. Um there can be a lot of qualitative things like that that become really important. But um retrading merely means agreeing to one thing and then saying it’s going to be different later, right? Reigging. Yeah. And let’s talk about what buyers want. Um, the buyer wants the management, most buyers want the management team to stay in place. They want a turnkey operation. So, they buy the company, they want everything to
00:36:42
continue, and then they’re going to add capital, maybe they’re going to add their own, you know, management team, their own expertise to try to grow that and get to the next level, multi, you know, increase revenue. Ibida if you as an owner don’t want to continue on for a few years after a sale you need to early on remove yourself and hire quality executives that can run the company and you just act as an absentee or you know overseer without the need to be there daytoday. So I see it over and over
00:37:12
again where people have basically created a a job or handcuffs for themselves and they want to sell but they also want to leave but if they’re so integral to all the customer relationships and they you know vendor relationships and everything else that’s critical that’s super hard for that person to sell and be able to exit. So that you know I know Armando you see that quite a bit with your clients. I see that more often than I’d like to. There’s, you know, there’s ways and and
00:37:39
consultants that will help you remove yourself. There’s Michael Gerber, the myth of the entrepreneur, that he’s kind of the OG when it comes to how to remove yourself from your business and and, you know, push down kind of the responsibility, those ways to get there. Yep. Thank you for that, Phil. And I want to go back to what you said a moment ago when we talked about LOI. You I want to make sure that the that the listener understood what you said. what you said is in in in paraphrasing, don’t
00:38:05
sign an LOI to your lawyer who looks at it and reviews it and make sure that he’s he or she’s built in protections for you, the seller. Right. Correct. A lawyer who knows how to negotiate LOI, not just any lawyer. Right. Right. Right. And that’s a good point as well that as you mentioned the the attorney that that might have been part of the picture for the last 20 years when you started on day one you didn’t have when you didn’t have two nickels drawn together didn’t have 100
00:38:31
employees that might not be the right lawyer. Well that would not be the right lawyer unless he or she has that especially as you said in M&A. M&A being mergers and acquisitions. Correct. Yeah. Yeah. Exactly. People who do deals. You also mentioned, Phil, that what they really what the buyer really wants to buy is a turnkey operation. So, if the owner is integral to the daily operations of the business, it’s harder for him or her to sell when they’re so entwined in the daily operations. But
00:39:02
having people in place for them who run it for them, then that’s a much easier cell and probably leads to higher value. That’s right. Correct. Okay. So, let me ask another question, John, to you. What are some common surprises for that firsttime seller as you’re working with them? Oh gosh. Uh well, we haven’t talked about due diligence too much. Uh but uh the burden of that meaning the time spent as well as the level of uh scrutiny. Um due diligence effectively
00:39:34
means they’re going in and and seeking to prove out what we have stated is true. Right? So, all of those offering memo facts they’re uh going to go through and I I I think you know buyers will ask for every contract uh policy invoice uh that you’ve ever touched. They’re going to want to understand inventory IP. Uh honestly, it is extremely timeconuming, but I’ll also argue to those would be sellers that it’s it’s well worth your your time economically and uh done properly.
00:40:06
um what you would have us do at Columbia West as well as um you know, Phil, your M&A attorney. So, we we try to do a lot of that upfront even before we start the process. Um back to valuation and how do you drive up value? One of the most important things is making sure that you don’t have a due diligence issue that actually erodess value later. Uh because when they find it, they they uh suddenly have less trust in your numbers, less trust in the way you operate. uh and they decide you’re not really a nine
00:40:36
times deal, you’re really closer to a seven times deal. So, uh removing those issues because many of them can be fixed. Uh some of them are inherent in the business, but many of the others such as a a client contract that’s unsigned or uh sales use tax uh was a big issue I had one time where my client had not paid sales use tax for out of out of state uh revenue. Uh things like that. Uh I’ I’ve I’ve had a a client, we we found fraud one time uh that the CFO was perpetrating during uh a preliminary
00:41:10
work. So there are things that you can find in advance and fix so that when you go through finally to that process and you’re actually approaching investors, everything’s been scrutinized and perfected. So it it’s it is timeconuming. I think that’s the probably the number one surprise that that sellers have found uh just how much work it is. But uh I would also say it you get paid quite well uh by the hour doing uh uh when you’re talking about improving your valuation by one or two
00:41:42
turns on on a multiple. Um you already pointed out uh another thing is the emotional component. Um that that’s always very real. Uh even some of the most stoic of sellers that have sat down in our office that first meeting uh we find later to be some of the most emotional when they realize uh they’re not going to be in charge. Sometimes it’s a it’s an identity thing. Uh sometimes it has to do with you I’m afraid they’re going to push me out and I’m not going to have as much to do on a
00:42:10
daily basis anymore. Um, people look at it differently, but I’ve I’ve found that there’s always some pensive behavior at some point during a transaction because it it is a big deal. You are not just getting a a liquidity event, you’re you’re potentially changing your life. Um, what else? I I would say the uh often the feeling with sellers who’ve never done it before is that the deal’s pretty much done once you signed that LOI. Now it’s just up to Phil to crank out a document over the next couple of
00:42:42
weeks. Uh it it’s really not like that. Um when you get into that confirmatory due diligence, there’s a lot more work post LOI. So I I’d say that’s a misconception that I see a lot. I I would argue there’s at least 50% more work, if not 75% of the work that still do uh post LOI. So I I I see that misunderstanding as well. Wow. So then maybe maybe uh John, just to follow up on that, that the normal time frame for a sale, what does that typically last? How many months you get through a sale?
00:43:18
Well, I’ll say I’ I’ve closed deals as quickly as 45 days and as long as 14 months, which was uninterrupted. Uh not including deals which have been put on hold. Uh so it does vary a great deal. What I would suggest to you is uh for a deal that may go to a private equity group that that tends to be a little faster. Uh that could be five or six months uh going at a at a normal clip. Um and a strategic is typically going to be closer to six or nine months. Uh but don’t don’t be surprised if uh you have
00:43:52
some issue that causes that to get knocked off. And and and usually it’s something on the client side. we we have a hiccup in our numbers and we want to get back to it or or maybe there’s some due diligence issue that we have to get over. Uh I I would suggest it’s always safer to plan on adding a couple months to those numbers just in case. Don’t put yourself in a situation where you’re in a cash crunch because you think it’s going to close sooner than it is. Uh plan on it taking longer.
00:44:20
Okay. Thank you. And a question that we get is uh how do we help an owner navigate exit? uh we’re helping them to build that dream team and as you said Phil the attorney what you do as an M&A attorney as a deal maker attorney is a specialty within law and what I found over the years is lawyers all specialize in something and exit selling a business is definitely a specialty so what we’re helping to do is build that team that they they might not know they even need u so do they need that investment banker
00:44:53
well yes and at least have a conversation with one before you decide to use one or not so they really understand John how you can help them and Phil you as well have that conversation so they can understand I’m sure that people who are listening to this conversation today have heard a lot that for many is brand new information and that’s great that’s what we want want them to understand more so they can make more informed decisions but the way we’re helping them navigate exit is to
00:45:19
help them build that dream team after it’s been determined that yes it is the right time for them to start walking down this path that they are actually ready to sell. Phil, a question for you. How does a seller walk away clean from a sale without having to worry or be concerned about what happens to the business afterwards? Yeah. So, that has a lot to do with what you agree to in the purchase and sale agreement. Um the when you’re selling a company, the negotiation and the you
00:45:54
know stock purchase or asset purchase agreement, it’s mainly about allocation of risk. Like who’s going to take the risk for something happening or who’s going to take the risk that something happened before closing that comes up after closing and these days for bigger deals that you know you can offload that to a rep and warranty insurance company. Sometimes that’s not available. There are some deals where it’s too expensive or it’s an industry that that’s just not offered or it’s a small deal and it’s
00:46:21
not cost-ffective. In that case, we we get into negotiating what are called baskets and caps or deductibles. That that basically means that, you know, a buyer is buying a company. They’re not buying the holy grail. They’re buying an operating business. We know every business has warts. They’re going to have to take some losses before they can turn around and make a claim to get some of the purchase price back. So the deductible is that um amount and usually it’s a percentage of the purchase price.
00:46:48
That’s a negotiated amount. When you have repent warranty insurance, that is usually half a percent, one half of 1%. For a a non um repin warranty deal, it’s higher. It can be 2%. It can be anywhere in between above or below 2%. And then the cap is if things go really bad, what’s the maximum amount the buyer can claw back? in those there’s standards for those two for nonrep and warranty insured deal. You know it’s all over the place but you know there’s categories of representations and warranties that you
00:47:20
make in the purchase agreement. You tell the buyer about the company your financials are according to GAP. You don’t have any employment lawsuits stuff like that. Those are non-fundamental and they’re fundamental reps which are we don’t have any debt other than what we’ve told you about. We actually own the company we’re selling you. So, it’s fundamental to the deal that if you’re selling a company, you own it and you’re able to sell it. You’re not trying to sell someone else’s company. So, if that
00:47:43
happened to not be the case, maybe there’s a stockholder that you issued stock to and you forgot and they come back later and say, “Hey, why didn’t you pay me?” That’s fundamental. There’s not going to be a deductible, you’re going to have to pay back to once the buyer fixes that issue, you’re going have to pay back every dollar to make that the buyer whole. So those are, you know, un having a team that understands market, understands how those work and negotiates that to make
00:48:07
sure it’s a fair deal and the seller’s not taking excessive risk, I think is how that, you know, works out in most deals. Yeah. And so you mentioned baskets and caps fill. It it sounds like what that’s doing is putting some uh some guard rails. Yep. and and limiting that risk on the low end and on the the the top end as well. Yep. Absolutely. And one of the and Armando you’ll appreciate this as a accountant one of the most important um steps a business can take is to have
00:48:39
solid reviewed financials maybe even audited financials and to have a good accounting team that will adopt accounting policies review what’s been done because if John gets a company that wants to go to market and they’ve got like a shoe box full of receipts and you know where books without having actual accounting policies and a good chart of accounts it just puts everyone behind the eightball. It takes a lot longer. I I had a deal where it was a cash basis taxpayer. They just basically expensed
00:49:09
everything. They didn’t acrue current liabilities. They didn’t acrue um you know receivables or anything else. And in every deal, you set a working capital target. That just means that when you sell the company, you need to deliver a certain amount of current assets and the buyer takes a certain amount of current liabilities. So that’s usually a net positive number. Not always, but almost all most of the time it’s positive. Well, the buyer proposed a target that did not acrue for any liabilities. They
00:49:34
just base the target on all the current assets. So, we fought and and got them basically to allow us to acrew even though none of the financials reported any acrruel based current liabilities and that was a $300,000 difference. W substantial substantial. Thank you. Yeah. John, a question for you. Um, how how can you structure a deal when you’re trying to keep multiple owners happy? Maybe two partners, three owners of the company, how how does that work? Well, if you’re figuring it out at the
00:50:10
table in the moment, you’ve probably done something wrong, right? Uh, alignment starts early, I would suggest, and the the time to start that is now. on whether you’re a seller in the next 6 months or next 5 years. Uh you should start marching uh all in order clarifying objectives with your team. So that’s that’s your owners. Uh it’s it’s also your you know your your operating team, your managers, your CEO, head of sales, CFO. Um but it’s obviously important uh exclusively to the to the
00:50:43
sellers as well, the actual owners and the issues can come around. I mean obviously how much liquidity, how much is cash versus uh equity or earnout or something like that. Um what kind of equity rollover are you going to contemplate or be willing to do? Uh your future roles are you trying to exit today personally as a manager or uh would you like to stick around forever? So um and then exit timing is is very relevant when you get those surprise offers. um are you all certain when you want to exit? Uh it’s okay for people to
00:51:19
have different objectives, but uh it’s important that if that’s the case, then you need to structure something that I’ll call it balances those. So um you know, part of it relates to just um what one wants to do, right? the operating uh discussion. But what I’ll also say is is the other side of the table may very well weigh in on some of these issues. So uh just to make up an example, say an 80-year-old founder may be allowed to fully liquid liquidate today uh whereas the 40-year-old CEO who is actually
00:51:55
running the business uh is expected to roll some equity. Right? So you you have the the seller’s goals, but you also have the buyer’s goals who are trying to um you know use structure as motivation to uh ensure the right incentives. Yes. So two things about that, John. Excuse me. You mentioned um rolling and explain what rolling means in the context of selling to a buyer. Equity rollover means that if you sell a business for $10, you may actually receive $8 and then $2. All of this
00:52:30
pre-tax, of course, uh then the $2 is rolled into equity. That means uh you sit alongside the new buyer as an equity holder. So, um contrary to what some people might think naturally, I I actually have found many clients to do extremely well with that equity rollover. M if you think about it like this, you’re a a bootstrapped entrepreneur who founded this thing. Uh now you’re at a place you’ve been running for 15 years and you know how to grow it. Uh it’s to invest $5 million into this new machine or this new piece
00:53:04
of equipment or or new facility that could help you take this business to the next level where you know 5 million feels like a lot to someone who might be uh 75 and nearing retirement. Uh there are these these moments of growth and inflection where uh that that owner operator may not actually be as aggressive as a new buyer might be, right? Uh you might find a strategic or a private equity group who’s, you know, might not just do one of those machines but two of them. Uh and you might find
00:53:37
that that equity grows uh quite rapidly. Uh, I’ve certainly seen more than one client make more money on that equity role than they did on their initial sale. Uh, so that certainly happened. Uh, interest of full disclosure, I’ll also say I’ve I’ve had a client lose 100% of their equity role, too. So, you really do want to believe in in that buyer in their ability to grow a business. Uh, but hopefully you see something in them that you like. Otherwise, you may not have chosen them
00:54:07
uh in the first place. So, Right. Right. It sounds like some thoughtful consideration needs to be taken to to determine should you roll some equity into the buyer’s company or not or how much? Yeah. Okay. Thank you, John. And a question one point on that. If you’re going to do that, you’re going to want to do what’s called reverse due diligence. And that’s where you due diligence the the fund, private equity fund or the strategic buyer, right? and look at their financials,
00:54:36
look at other companies they’ve acquired and how they’ve treated their people and make sure that someone you, you know, would want to own equity in, right? Ideally, those line up. You sell to a good company, you sell to someone that’s going to treat your team, right? And that’s going to also acquire additional companies and grow there. You know, I’ I’ve had clients sell to a PE fund as a platform acquisition. That just means the fund stood up. They’ve raised their
00:55:02
capital and now they’re acquiring companies and my client was the first one and that’s done at a certain multiple say seven and then they add additional companies at seven multiple five multiple six multiple as IBIDA goes up the value of the platform of the entire PE private equity fund goes up because higher IBIDA companies sell at a higher multiple. So if the financials didn’t change at all, if you sold at a six multiple and the EVA grows up, so now it’s trading at a 12 multiple,
00:55:30
you’ve doubled the value without changing anything else and the PE, you know, guys and gals will tell you they’re going to increase revenue. They’re going to reduce expenses. So everything goes up and to the right and that’s where you can have a second exit where you roll 20%. It could be bigger than your initial sale. Yeah. Yeah. Thank you for that, Phil. I I I do want to just clarify a point on that. What you’re saying is that when that say private equity firm buys one
00:55:56
little company and just one company, that company valuation is at a certain multiple. But as that footprint gets larger, as that private equity firm now has many companies that’s rolled up, it’s not just worth more because it’s a bigger company with more sales than that. It it’s multiple that determines its value is a is a bigger number. Right. Right. Right. Okay. Good. Good. Thank you. Um, looking at time here. So, a question that we hear is, you know, how do we help folks
00:56:26
after they sell? What we’re doing is helping them map out map out their future that they’re going to have. You know, what is that cash flow going to be for them going forward and we need to make sure that we can map it out so month by month they understand what their what their cash flow is going to be net of taxes going forward. so they can understand what that lifestyle can be that they’re trying to maintain going forward and what they can leave for legacy for the kids and what they can do
00:56:53
in terms of an impact in the community that they might want to have. So, we’re helping them to oversee all the financial matters that matter, helping them to uh issue spot to head off things that might be coming up down the road and making sure that everything stays on track with that one overarching strategy for the rest of their lives and beyond. Um going to go through a couple of quick questions here. John, a question for you. You work with institutional buyers. What does that mean to the seller, to
00:57:23
our audience? Uh yes, 100% of what we’re doing commonly sits across the table from institutional buyers. Uh so just quickly put, that means private equity funds, family offices or strategics. uh and and that commonly means uh businesses who are larger, they do this for a living, uh they tend to be sophisticated, datadriven, and they often have very specific uh return hurdles and investment uh criteria. So, if you’re uh a business that falls within their lens, they’re very excited
00:57:59
about it, but they can fall away very quickly if they’re not. Uh so, they tend to be a little more decisive than individuals. uh they tend to bring professional management and growth capital in that example uh for example that I I mentioned earlier uh they tend to be anxious for growth relative to uh you know aged entrepreneurs um and they’ll also often structurally provide that second bite of the apple we call it you know that that equity rollover opportunity uh through retained equity
00:58:28
so their their process is typically rigorous and um there’s that that joke they they buy businesses every day and and you’re only selling a business once. So, um, with institutional investors, you certainly want to make sure that you’re protected uh with a good banker and an M&A attorney and and CPA to make sure that that you’re doing it properly and uh watching yourself. I don’t mean to say that they’re uh more spurious or ill than others, but uh you you certainly uh have an opportunity to be
00:59:02
taken advantage of if you’re not careful. It sounds almost like a David and Goliath story. They over and over and over again. Very much so. If you’re out there the seller all by yourself without a John Far or without a Phil Gatillaa or without us to help with that navigation going forward, they could put clauses in that benefit them in the LOI clauses in the sales agreement that benefit them and it could leave our audience member who’s listening really in a really bad spot.
00:59:33
Yeah. Yeah. Okay. And obviously we don’t want to we don’t want to see that, of course. Um, a couple of quick questions and then we’re going to need to wrap up here and open for Q&A. Phil, reps and warranties, you’ve talked about that. Anything about reps and warranties that that maybe you can add so that the listener can understand more of what that really is? Yeah. So, you know, there it’s going to be about 20 plus pages of your purchase and sale agreement where basically the
01:00:02
buyer is asking you to make representations about the company and basically tell them what’s true, you can always have an exception. So, if a provision says there have been no employment lawsuits in the last 5 years, but you did get sued by an ex employee that settled or whatever, we would just say except it’s set forth on the schedule and you disclose that and then the representation is true. What um what can happen is if you don’t disclose it and that later comes up and it causes a
01:00:30
loss to the buyer that creates a claim for them or they can go back and make a claim against you against the seller and recover some of the purchase price. So, a lot of time and effort is spent by your legal team going through the reps and warranties with the seller, making sure that they’re accurate, making sure that any exceptions or carveouts are put on a disclosure schedule. That way, when you get to the closing table, you’re comfortable that way where you’re telling the buyer about the company is
01:00:54
accurate and that it’s unlikely that anything is going to come up that you don’t that hasn’t been disclosed or the buyer doesn’t know about. So, it’s part of the risk allocation. It’s part of the getting into the weeds that really isn’t all that exciting, but it’s part of that process. It the length and diligence that the buyer is going to go through will go into the reps and warranties, meaning they’re going to ask about all that stuff through a due diligence request
01:01:18
list. Then they’re going to ask you to back up what they you have disclosed to them what they found in the purchase agreement. I like to have clients of mine that come to me ahead of time, like six months or a year, go through a sellside diligence process. Basically, I’ll run them through that process over a three or four monthth period that a buyer is going to take them through and we do a legal diligence review without a deal on the table when we can uh do a take a project management approach, set,
01:01:46
you know, a couple pages we cover in a week. We wait a week or two and then cover that more and more and then we build out a data room. Part of that process and part of the benefit is you identify a bunch of gaps. Almost always there’s a gap. We don’t have a restrictive covenant with a key employee. we got some software developed and we need to make sure we have that assigned. There’s a trademark that’s owned by an individual owner and not the company itself. All that stuff can get
01:02:10
fixed as part of that process. Okay. Thank you. A question that we get is uh you know once as you said there’s 100 million $200 million in cash now that the business is gone but the question we get is well how do we invest those monies now that I’ve got this big pile of money? How do I how do we invest it? And it really depends on what that family situation is. So if the couple is a 50-year-old couple versus a 70-year-old couple, we’re going to invest those differently really because
01:02:40
of life expectancy. And maybe if they each want to get, you know, $30,000 net a month of cash flow, it will be invested differently based on their risk, based on life expectancy, and based on what they’re trying to accomplish. But each of those uh portfolios are a custom each is a custom portfolio customized to what that situation is in that family and what they’re trying to what they’re trying to get to. And one of the tenants that we use in that is we want to get them what they’re trying to get to help them
01:03:09
achieve their goals while minim taking on as little risk as possible. So let’s let’s not swing for the fences. Let’s instead get them where they want to be with minimal risk in getting there. So, uh, there are studies after studies after studies that will show that the types of retirees who are the happiest have a steady paycheck, a steady income in retirement. So, that’s what we want to build out for them now that the company is gone. How do they then replace that paycheck they’ve they’ve
01:03:41
gotten for their company? Replace it now with income coming from their stocks, their bonds, maybe their rental income, maybe they’ve got some annuities, whatever the source is, but we can get them some recurring income on a steady regular basis to get them that comfort that puts them in that happiest retirey category versus not. All right, a couple of quick uh questions here for you and we’re probably gonna need to wrap this up. Let me instead go to Phil. A question for you. Last 30 seconds. What
01:04:14
advice would you give to that firsttime seller who’s listening to us right now today? What advice would you give them? Well, just taking steps to prepare for a sale. So, you know, making every company is eventually going to sell. It’s either going to transition to employees, it’s going to be sold to a buyer, something’s going to happen. So I I recommend that business owners take steps to set it up so that it can be easily transitioned. You know, adopt systems, get your legal
01:04:44
house in order, just, you know, get the process going. Talk to someone like you, Arando, talk to me, talk to John, you know, we can make introductions. If you have gaps in your team, if you need a good accountant to put together, you know, accounting policy and start doing gap financials or reviewed financials, we can help you with that. Um, get you connected to the right people. So, it’s getting the team together and then you know you have us ready when you decide you want to go to market and the
01:05:10
companies that I see and I I do deals on both sides. When I get a seller coming to me and I’m representing a buyer, a PE fund or a strategic buyer and just to be clear a strategic buyer means a company in the industry that’s buying other companies either vertical or horizontal integrated companies. When I get a seller who’s done all this work, who’s done their diligence, who opens a data room, who everything is organized, you know, that’s the kind of deal where they’re not there is no retrade on the
01:05:35
price. It’s they’re going to get the maximum price when you’ve done that. So, that’s part of the goal is to get as much as possible, keep as much as possible, pay as little in taxes as possible, and all that needs to be planned out ideally well ahead of going to market. Perfect. Thank you, John. Same question. 30 seconds. What advice would you give to that uh to that listener who’s who’s going to sell his or her company for the first time? It it’s practically the same answer. Um
01:06:02
you do not need to wait until you’re tired or ready to exit to start preparing, right? You can build that data room. You can clean up financials, contracts, understand what your normalized EVIDIA is, you know, meaning with adjustments, start tracking those. um particularly estate planning and tax planning. There are things that you can do now to minimize taxes later when you sell there. You literally have to do those now instead of on the eve of sales. Sometimes there are certain strategies that you cannot implement
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that late. So, um just because you’re preparing doesn’t mean you have to say mentally and emotionally, I’m ready to sell right now. You don’t have to yet, but uh you want to be prepared to do that. We call it dressing up your asset every day. uh you only sell your business once. So, um you know, you really want to optimize that. And then, uh what I would say is I’ll tail on what you were saying, Armono. Then, you really want to put your money someplace safe. You, let’s be honest, if you’re an
01:07:00
entrepreneur, you’ve had moments of stress, if not a lot of stress, for your entire career. U put in something safe, diversified. Now, um derisk your life. Uh I imagine it’ll uh you know, change your perspective. you’ll have a little bit more fun and and you you’ve certainly earned it, right? Thank you. In the last 30 seconds, I would say, you know, what advice would I give to the first-time seller, uh, yes, what you’ve said, you know, start start well in advance, of
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course, build that dream team, but I’d also start with, you know, are you ready? What are you really trying to get to? You know, are you mentally ready for it? Are you financially ready for it? Are you emotionally ready to to begin to walk down that path of selling your company? Because there are no doovers. You’ve got one chance to take this company. that you’ve built over the last x number of years, you’ve got one chance to transition that to a new owner and it’s got to be done right because your
01:07:49
family depends on it. So, thank you uh John and Phil. Let me just wrap up here because as you can see, we could clearly clearly go for another half an hour if we wanted to because there’s a whole bunch in this topic. And for the listener, if you’ve liked what you’ve heard, uh, we have a podcast where I’ve had a full hour conversation with John Farre and also a separate conversation with Phil Gatillaa. So, if you like what they’ve you’ve heard from them and want to hear more, happy to give you those
01:08:18
links to each of their conversations, you’ll learn more from those conversations as I did as I spoke with them each those events. And we’re going to have another event like this on January 29th, Thursday, January 29th. This is going to be at Venture Cafe in Phoenix. So again, if this topic is relevant to where you are right now with your business, then you might want to jot that down. Thursday, January 29th, that will be the next event. This same topic coming up. Um, and now I’ll ask
01:08:48
you just to take a deep breath here because you’ve had a whole boatload of information that maybe maybe is a lot of information for for many of you, but I’ll ask you just for a moment just to imagine. Imagine it’s the day after you sold your company. You’re feeling great. You’ve got no payroll, no budgeting, no cash flow issues, no customer complaints, no more employees. You’ve got none of that. And you’re waking up, coffee smells great, the birds are chirping, it’s a
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beautiful sunny day outside, and you just feel fantastic. And you feel that way because you implemented the thoughts and ideas and concepts that you heard here today. That is what’s possible for you. So John, I want to thank you for contributing your expertise to this conversation. Extremely extremely insightful, Phil. You as well. Extremely insightful information. And let’s see uh if there are questions that we might have here. It looks like I see a question here. And the question is, uh,
01:09:58
in your experience, how does the seller quote take care of unquote key non-owner employees who they’d like to reward? Do owners bonus these employees with funds from the sale? Do they negotiate favorable terms for their continued employment? Uh, Phil, I’ll ask you if you have thoughts on that or John. Yeah, I’ll start. I’m sure John has some ideas. So I think all of the above. Usually with key employees, they get a transaction bonus that should be tax efficient for the seller, meaning it it
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should be an ordinary deduction that flows through to the business owners. Um, I like to negotiate in the letter of intent certain terms that, you know, the buyer is going to keep the employees at or above their current comp. They’re going to keep the benefits in place for a year or two years. I mean usually you can’t get two years but at least a year 18 months after closing. You also can require the buyer you know disclose what kind of in management incentive plan my are they going to put in place. How are
01:11:00
you going to keep these people tied in and make sure that you are happy with those terms and you know your employees better than the buyer. Is that something that’s going to resonate? So it’s it’s those kind of things that you can do. um you know including equity potentially giving you know actual equity in the buyer that best over time that that done too. Thank you John. Any thoughts additions? No, I agree. All of the above. And the inputs are uh is it a strategic buyer or
01:11:26
a private equity buyer? And and who are we taking care of? Is by personality is that person uh an aggressive grower of a business who may not do well in a stayed uh you know hundred billion dollar strategic that doesn’t move very quickly. Um that person may have opinions. So, um, if that person helped you get an outside sale, maybe you literally just bonus them some of that. Um, and, uh, in another scenario with a an aggressive grower private equity group that your employee is excited to be a part of, uh, maybe you push to
01:12:02
negotiate some equity for that person. So, it it really does depend, but uh, the answer is absolutely all of the above. And and I think it’s important by the way to communicate that you are going to take care of them before you go go down this road of the process. Make it clear so that they are excited to do this. Uh it’s easy to take care of them when they helped you grow enterprise value from $10 to $15 during a sale. Uh it helps to have a little bit more room there to take care of everyone.
01:12:32
Yep. Yep. And you don’t want to lose those key people when they are part of the enterprise value that the buyer is buying. So they they you want to keep around of course. Um we got another question here about signing a non-disclosure agreement, an LOI. And the question is, let’s say that the prospective seller receives an LOI, and it sounds pretty good. They’re pretty excited about it, but then they don’t know what to do. We we’ve touched on this, Phil. What should they do?
01:13:05
Well, that that’s kind of an inflection point. If they have not talked to an investment banker like John before that, that’s the time to talk to a banker. Talk to your an M&A lawyer because what they definitely shouldn’t do is sign it and send it back. They need to have professionals on their team. Arando, you of course talk to you about, you know, what your view is. you’ve got a financial, you know, background and you can give them your thoughts on the pricing, the value, that stuff like
01:13:31
that. So, um, John, you know, can run a process. You know, you you get an LOI, like having one buyer is like having no buyers because they’ve got all the leverage if they know that you don’t have biders lined up behind him. If you’ve done at least, you don’t even have to do a full process. You’ve gone out and tested the market and you have people interested. Just having that in your back pocket puts you as a seller in a much stronger position. It will permanate your attitude through the
01:13:56
deal. If you can just walk away and go to someone else, it’s going to allow us as your team to help keep the buyer, you know, to their word. Yeah, that last strategy Phil just mentioned is pretty critical. We’ve done that a few times where we did a just a quick go out to market. We didn’t spend a ton of time perfecting the sim. We went out to the most likely biders, keeping that one first bidder warm, but going out to the market in a in a manner of keeping them honest. And and you can
01:14:22
do that. You can play favorites in a process. Um, but you want to make sure and it’s funny in some of those processes we do wind up selling to that single bidder. Uh, we did one in one case where we sold at the same bidder, but they paid 28% more. Um, there have been other times where we realized that first bidder was grossly undervaluing the target and we wound up selling to someone else. So, uh, you you don’t have to accept that. And and one thing I’ll say, they say, “If you don’t
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accept this offer, we’re walking away.” They’re not walking away. They’re in the business of buying this business. They don’t put out offers lightly. Uh don’t buy into that negotiating tactic. U we’ll make sure that they don’t walk away and we’ll make sure that uh you’re optimizing your sale. Yeah. Another question about under what circumstances should the business maybe need to do some restructuring in anticipation of a sale? and and Phil, we
01:15:16
recently talked about this code section 1202, which can be extremely impactful for a Ccorporation that’s going to sell. That’s one thing that’s very specific um that can be pretty impactful. But in terms of restructuring, Phil, what what thoughts come to mind for you? The a lot of small businesses are operated as subchapter S corporations. Almost every time we have an S corporation seller, we need to restructure it to put a holding company above it and make that entity a subsidiary disregarded entity that gets
01:15:50
sold. That’s for tax reasons. It’s for most buyers are not going to want to take the subchapter S risk and buy your stock and make an election to be taxed as an asset purchase. So we do some restructuring where that risk stays behind and the buyer can buy a company get a step up in basis because they get asset purchase treatment which benefits them. You know we can obtain a gross up so it’s still effectively all long-term capital gain to a seller. That’s a common deal term we negotiate in the
01:16:20
letter of intent. If we don’t ask for at the LOI, it’s really hard to get it later, but at the LOI stage, we can say we’ll structure this so you get asset purchase treatment, but you’re going to pay a gross up to the extent we have to pay a higher tax rate. And that long-term capital gain rate, you know, it’s 20% federally, plus you got the, you know, Medicare search charge. So, it ends up being around, you know, 23% or so. Okay. Versus 37. Okay. Yeah. Substantial difference. Yep.
01:16:46
Thank you. Another question about taxes. Uh you mentioned Phil earlier about um about trusts maybe um uh charitable trusts as well. Uh in terms of taxes and mitigating taxes going into a sale, can you touch on some of the the the the strategies that that can be very impactful to help reduce taxes on that sale? Yeah. So if you, let’s say someone’s got a, you know, philanthropic bent and they want to benefit a public charity, you know, a charity or set up their own foundation, you know, a family
01:17:19
foundation, you can have a nonprofit entity that’s tax exempt that your family’s on the board and you have money in there that you then give scholarships out or or help, you know, the needy or whoever. Um, if you transfer part of your ownership of the company ahead of time into that, you know, it could be even a donor adise fund and then that entity receives the proceeds. Not only do you get a deduction for that gift, you have to get it valued. We have to hire a valuation expert to tell us what
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that deduction is worth, but then when it sells, you’re not paying tax on the 10%. So, it’s like a double benefit. You can’t do that right before closing. have to do it before a deal’s on the table, before a contract is signed. You know, ideally before you have an LOI, but if you have a non-binding LOI, we can still do it, but there needs to be some time between when it’s funded, when you make the gift to the charity, and when you actually close the deal or sign a binding transaction.
01:18:12
es, super important. The thing Phil is talking about is is one of the number one reasons why you start early, right? Some of that stuff you just can’t do on the eve of a sale and it’s it’s big dollars potentially, right? Yeah. Thank you. We were we’re talking with the client just very recently about a private his own their own family private foundation versus a donor advised fund and it was it was a a quick conversation because it was very clear that once the business sold, he
01:18:42
said, “I don’t want a part-time job. I don’t want to have a private foundation. I don’t want to manage it. Don’t want to have employees. I want none of that. They want to give and and they’re charitable. Yes. So for them, a donor adi advised fund is such a nice, cleaner, simpler, faster way to get to the same place. And as you mentioned, Phil, giving some of that company away, some of the equity to the 501c3 charity before the sale, like you said, it’s it’s a double bang for the same buck.
01:19:12
Extremely extremely impactful. So, let me see if we have any other questions here. Uh, nope. That’s it for questions and I I think that we are good. So, uh, Phil, thank you so much for your time and expertise. Really really appreciate that. John, you’re appreciate appreciate your expertise as well. And I think the dialogue was extremely extremely excuse me helpful for those people who are on this uh this this conversation with us listening and thinking about their own exit down the road. And whether listener
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whether you’re thinking of exit in five years or in 10 years I think you’ve gotten the message pretty clearly. You want to start early. You want to have a conversation early. And I’d invite you to have a conversation with me or with John or with Phil. Um, and the sooner you get going on those conversations, the better. As I mentioned, we will follow up with each of you afterwards to share with you a white our white paper from our prior Scott founders form events where we’ve had over 200 founders
01:20:17
come to our events. on that one-page white paper are the top questions that founders had, the top uh expert recommendations from say John and from Phil and the tips, the pro tips they gave that can help people to have a more successful exit for themselves and their family. So again, thank you. Appreciate it. And this concludes our fall 2025 Scottsdale Founders Forum event. Thanks, Armanda. Thanks, Armanda. Thanks, John. Bye now. Bye-bye.
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