BiggerPockets Business Podcast 91: How Businesses Get Sold for Millions with Chris Younger

BiggerPockets Business Podcast 91: How Businesses Get Sold for Millions with Chris Younger

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If you’re a new entrepreneur, it may seem like a dream to sell a business for millions of dollars. People like Chris Younger, make that dream a reality. Chris founded Class VI Partners, an investment bank that helps entrepreneurs plan and prepare businesses for sale. Chris will be the first to admit that selling isn’t an easy process, it takes time, patience, and a lot of documentation.

Chris compares selling your business to running a marathon: you need to be in it for the long haul to finish strong. He helps owners reach a price point that works for their future, and helps create the processes around selling that enable a new owner to carry the business to new heights. For many owners, success in selling comes from doing the hard work upfront, not putting it off for your future self (and employees) to deal with.

So why would an entrepreneur want to sell? Maybe it’s personal timing and they feel like they’ve given the business as much as they possibly can. It also could be business timing, the business may be seeking a new change in direction. Or it could be buying timing, a buyer comes in with the right offer, the right ability, and makes the sale.

Whatever a reason for selling a business, a business owner needs to be prepared for their business to sell at some point. So even if you’re just starting out, hearing words of wisdom from Chris may net you a few more million dollars!

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Read the Transcript Here

J:
Welcome to the BiggerPockets Business Podcast Show number 91.

Chris:
When you tell your company story, you want to give them the full story. Meaning, if you’ve got Achilles’ heels, if you’ve got issues in your business, tell the story around those.

J:
Welcome to a real world MBA from the school of hard knocks, where entrepreneurs reveal what it really takes to make it. Whether you’re already in business or you’re on your way there, this show is for you. This is BiggerPockets Business. How’s it going, everybody? I am J Scott, your co-host for the BiggerPockets Business Podcast coming to you again this week with my lovely, lovely, lovely, lovely co-host, wife and partner in crime, Ms. Carol Scott. How’s it going today, Carol Scott?

Carol:
Going a little bit crazy already. Got to be honest with you, right? I cannot even believe we’re only three weeks into the new year with the amount of stuff that we’ve been doing with the new businesses people are starting, so much activity out there, everywhere. It’s absolutely unbelievable what an amazing trajectory people are on. And it makes me so happy and so excited for so many other great things ahead. So loving every minute of it.

J:
Yeah, absolutely. We’ve had a bunch of people who … Apparently, a lot of people in our community have started their businesses, they’re running their businesses well and are thinking about selling. I’ve had a number of people reach out to me and say, “Hey, can you do another show on what I need to do to prepare to sell my business?” And so after getting several of those requests, we went and we found the perfect person, and his name is Chris Younger. And he is the founder of a company called Class VI Partners, which is an investment bank that focuses on helping entrepreneurs and business owners, both raise money and then ultimately sell their business when the time comes to sell their business. And he’s here with us today to talk all about everything we need to know to sell our business, but more importantly, to talk about all those things we need to know to get ready to sell our business before we do.
And this applies to investors who are running a successful business right now, it applies to business owners who are just starting their businesses, business owners who may be just thinking about starting their businesses. And we even have a discussion about what if you’re running a business right now and things aren’t going too well because of COVID or for whatever other reason and you’re looking to get out through a sale. Can you do that? So, we have a great discussion. So, whether you’re thinking of starting a business, you’re starting a business, or you’re thinking of selling your business, you’re going to love this episode. Now, here’s a little quiz for anybody out there listening, and maybe thinking about selling their business at some point in the near future or the long future, how long do you think it takes, how much time and effort do you think goes into getting your business ready for sale? Well, we have a great discussion about this and that number might surprise you.
So, stay tuned and listen for that. Also, we talk about the three things you need to consider when trying to decide when’s the right time to sell your business. We talk about how to value your business. So, how to figure out what your business might be worth. If you want to go sell it today or tomorrow or next year, and make sure you listen for a great discussion we have around why selling your business at its peak is not only a difficult thing to do, but it’s also something you probably don’t want to do even if you could. I know that goes against all conventional wisdom. We always think, “Hey, we need to sell our business when it’s worth the most.” But Chris gives us several reasons why that may not be the case. Now, if you want to learn anything more about Chris, if you want to learn about his business, Class VI Partners or anything we talk about on this program, check out our show notes at biggerpockets.com/bizshow91. Again, that’s biggerpockets.com/bizshow91. Okay, without any further ado, let’s welcome Chris Younger to the show.

Carol:
Chris, thank you for being here today on the BiggerPockets Business Podcast. You have so much expertise in an area that is going to serve our community so well. So, we’re so looking forward to chatting with you today.

Chris:
Happy to be here and thanks for doing what you guys do for entrepreneurs.

J:
Thank you, I appreciate it. And again, last, Carol said, thank you so much for being here and providing your expertise. For our listeners in our community who may not be familiar with you and your company, Class VI Partners, can you give us some backstory on who you are, where you came from, what you’ve done in the past and what you and your company are currently doing now?

Chris:
You bet. So, Class VI Partners is really a … It’s a financial services firm that serves entrepreneurs. And so the core of our business is an investment bank. And so that helps businesses either sell or raise capital, but we have a family office where we manage money for entrepreneurs that we have sold businesses for. And then we also have a planning division, which is really designed to help entrepreneurs before they ever try to go down the path of doing a capital transaction or selling their company. It’s how do we help them get ready for that event? It’s a big event and we know that preparation is going to lead to success and so that’s really our exit or transition planning piece of the business.
My background, I’m a recovered attorney. I’ve been through all 12 steps. So, don’t have to worry. I practiced for a couple of years out in Silicon Valley and then managed … I was one of the founders and helped. I was the acquisition lead for a roll-up in the communication sector. And through that, I was the lead acquisitions person, we acquired 27 companies over a couple year period. And so I like to say I learned quite a bit and I used to be a lot taller than I am now, having kind of gone through the acquisitions and then after we completed the 27th acquisition, which was a division of loosened, I moved into the COO or the chief operating officer and president role. And so my reward for doing all those deals was I had to integrate them all. So anyway, we did that.
And then we sold that business to Avaya, which was one of our main vendors. That business was evaluated resell, or the one that we built. And then tried to retire for a year or two. My wife decided I needed a hobby. And so we started our investment bank and it was my partner and I, and then today we have about 20 people in the business and it’s been a lot of fun. Our mission is to enable the entrepreneurial spirit. We believe so strongly in what entrepreneurs do for this country and for our communities. They’re the biggest hirers of talent. They’re the biggest drivers of our economy. And so we view our role as, “Hey, if we can help them get a better outcome or realize a nice gain from all the blood, sweat and tears, then we’ve done our jobs. And it’s been a lot of fun. Like I said, we love working with entrepreneurs.

Carol:
Super, love this. And Chris, you’ve clearly been on both sides, the buy side and the sell side of entrepreneurial ventures of large enterprises and ever in-between. Today, we’re really going to focus on the selling side of it. Not necessarily the buy, the sell side, the exit side. So, I’ve heard you make this analogy that to be successful in exiting your business, you truly need to be preparing for it like a marathon. So, can you talk to us some more about that please?

Chris:
Yeah. If you’re deciding to run a marathon, the last thing you want to do is … the day of, put on your running shoes for the first time and go out and try to run 26.2 miles. And transactions are similar. They are arduous processes. The level of due diligence that buyers do today is significant. And if you’re not prepared, it’s going to be a really unpleasant experience for you. Even if you get your deal closed, the odds that that was the best deal you could have done are really low. And the pain of that process will be significant. They’re going to ask hundreds and hundreds of questions over and over again. And they’re going to ask for pretty much every document that you’ve ever created as a business. They’re going to dig into your financials.
And so like training for a marathon, you need to start well before the race, in terms of what’s your training regimen, what’s your diet regimen? Do you have somebody that can help you through it and identify, “Hey, this is how much you should be running this day and this day, and this day, and next week.” If you don’t do those things ahead of time, just like on our end, if you haven’t prepared yourself, if you haven’t prepared your business and you simply are reacting, when it comes time to sell your business, you’re really going to sell yourself short. It’s not going to be a great experience. And like I said, you’re going to leave money on the table.

J:
And yet that’s really what it’s all about. It’s about not leaving money on the table at the end of the day. And so I know that a lot of entrepreneurs think that, and especially those who are doing this for the first time, they think, “Okay, when the time’s right, when it’s time to sell my business, I know I’m going to have a lot of work to do, but that’s a tomorrow problem or a next year problem, or a 10 years from now problem.” Instead of thinking, “Okay, I can start doing this work upfront. I can prepare so that when the time comes, everything’s basically done and wrapped up and then I can focus on the sale.” So, can you talk to us a little bit about what are those specific things, or maybe start with the big areas that entrepreneurs should be thinking about when it comes to doing the right things now to preparing their business for sale later?

Chris:
You bet. A big chunk of it has to do with thinking about, “Hey, what condition does my business need to be in to maximize value? What is it that I need to be doing today that will give me quite frankly the best return on my time and money that I’ve invested in my business.” And when you think about business value, it really is the opposite of perceived risk. Meaning, the higher the perceived risk from an investor in your business, the lower they’re going to value the business. And so one of the things we focus on heavily with clients that are two or three, four years away from selling is trying to diagnose, “Hey, what are the specific risks in your business and are the things that we could be doing today that would allow us to be in a different position two or three or four years down the road and make that business more valuable?”
I’ll give you an example. We have a tool that we use that helps us assess businesses, and about 90% of businesses that we have assessed, the business is too dependent on the owner. Meaning, if that owner left, the business would be in worse shape. And if you think about it from a buyer’s perspective, when that owner cashes the check after the sale, their motivations change, right? I mean, as much as you would love to rely on them to have the same level of drive and energy to build value in that business, it’s probably going to be a little bit different. And as a result, and if you haven’t built your team, that business is going to be a lot less valuable than if, for example, you were more of an absentee owner and you had a team that was running that business, that was going to be the same team running the business after the deal was done.
It’s just a lot less risky business, and that business will trade for one or two or three more turns on EBITDA, increase in value for that business. So, the first thing we look at is understanding, “Hey, what are the risks in the business that we could do something about?” The second thing you want to be very intentional around is what is my growth plan? Not only for the next two or three years, but for the period of time after the acquisition happens, because you’re going to be asked to describe in decent detail and be able to support, “Hey, why is this business going to continue to grow?” And so that combination of understanding the risks in your business, and then how you’re going to be able to grow that business with a credible growth plan are both really, really important elements to start to prepare for.
We estimate that to take a business to market, to prepare your story, to put all your diligence materials together, to put your growth plan together, to identify your buyers, to kind of get the package ready, it’s about 1,500 hours of work. So, when you think about that, if you’re a business owner and as you said, J, if you’re going to try to do that only when it’s time to sell, think about trying to cram your time and your team’s time into two or three months, versus if you can spread that out over two or three years, much more manageable. In our experience, those businesses that start two or three years ahead of time and are disciplined and are methodical and thoughtful, they’re going to get way better results. They’re going to get more money, the transaction is going to be easier. It’s going to be faster. They’re going to have fewer headaches.

Carol:
That makes perfect sense. So, can you talk to us a little bit more, Chris, about, you mentioned this process that should be started maybe two or three years, or maybe even four or five at some point ahead of time from when you’re thinking about selling. So, how do we as business owners really know when it is the right time to sell? How do you know if you’re a year out or a decade out, or how do you even begin to plan around that?

Chris:
Yeah, it’s tricky, right? Because this decision around when you sell your business is … There’s kind of three facets to it. One is just personal timing, and that could be created by a health crisis, which is not predictable. It could be created by a desire to start another business. It could be created by, “Hey, I’m ready to retire and do something different.” So, there’s personal timing, which again, while it’s probably the easiest for somebody to evaluate, it’s still a really, really important element. I think related to personal timing is if this is going to be your retirement, right? If you’re going to sell this business and rely on that capital to fund the rest of your life, you really need to be doing some planning personally, to know what’s that number. And how does my current business value compared to that?
Because what you wouldn’t want to do is go through this arduous process, sell your company, and then end up with less money than you needed, where you had to go back to work. That would be a horrible answer. So, understanding what you need. That’s the personal timing. And again, for every individual, that’s going to be different. And it’s one of the questions that we always ask entrepreneurs is, “Hey, what is the sale of the business going to make possible that’s not possible today?” And be very, very clear about that. That’s personal timing. The second element is what I call business timing. And a lot of entrepreneurs feel like, “I want to sell my business at the very peak, before maybe growth stalls or earnings start to dissipate.” And I would tell you, that’s a mistake.
Number one, the ability to actually time when your business is peaking is really difficult. As most business owners know, there’s a lot of unpredictability and operating and owning a business. And number two, let’s say you executed that strategy perfectly. You sold your business at its peak. The new buyer comes in and you’ve transitioned over your team. You’ve transitioned over your customers. You’ve transitioned over your brand. And right after closing the business performance starts to deteriorate. Everybody’s going to be unhappy. The buyer’s going to be unhappy, your team. They had to downsize because the business performance lagged, your team’s going to be unhappy. And we’ve had enough experience with business owners to know that, you may have left some marginal dollars on the table, which is not great, but it’s not catastrophic, but the psychic value of delivering your company to a great new owner with a great plan that’s going to continue to do well is worth way more than the incremental dollars would be.
So, there’s business timing. And what we would say is, “Hey, really get your business performing well and sell on the way up so that the buyer is also going to have success with that business.” That’s a good answer for everybody. The final piece, I would add to that if a buyer is unhappy after the purchase of the business because it’s performance deteriorates, you’re more likely to be involved in litigation, which is not a good answer for anybody. And then the final piece is market timing, which is probably the hardest to gauge, which is, “Hey, when is the market or the buying market going to be most conducive to getting the best deal that I can?” And the reason this is difficult is you could pick today as an example, you could say, “Hey, it’s a relatively good market,” not withstanding what we’ve gone through with the pandemic.
We’re seeing a lot of deals get done and valuations are pretty reasonable. The challenge is when you decide to go through this process, it’s not the market today that matters. It’s the market in six to nine to 12 months when you actually close your deal that matters. That’s relatively unpredictable. So, we end up focusing on more personal timing, business timing, and then we’ll evaluate the market. Obviously, if the market is today, it’s probably not a great time to enter into this process, but if you see it start to recover, pay that, that could be helpful for you.

J:
You talked a couple times about the value of the business, and obviously for most entrepreneurs and business owners selling their business, the goal is to make as much money as possible. If I’m thinking about selling my business today, and I have no idea what my business is worth, obviously, I know how much revenue it’s generating. Maybe I know how much net income it’s generating. I know what my margins are. How do I take that information and kind of figure out what my business might be able to sell for on the market today?

Chris:
Yeah, it’s a great question. And there’s hundreds of tools on the internet, where you could put your numbers in, put your industry code in, and they’ll tell you, “Hey, this is the range that your business is and your industry would typically sell for.” Unfortunately, I do think those give an entrepreneur of kind of a false sense of certainty and clarity, because if you think about, let’s take a software businesses for example, the range in value for a software business could be six or seven times EBITDA or earnings all the way up to … We’ve had deals in the 18 to 20 times, but what makes the difference between this business that sells at six times and the business that sells at 18 or 20 times, and that comes down to a kind of a qualitative assessment like we were talking before of, “Hey, what’s the risk level in that earning stream of that company?
How risky is that earning stream? Do I have customer concentration? Do I have a weak management team? Are my lead sources too concentrated? Do I have environmental issues?” We look at about 90 different risks that a business could have, and that helps you start to dial in, “Hey, is this business a six X? Is this an 18 X type business?” And going into that calculation, particularly for software businesses, you look at the revenue streams, are they recurring? Are they contracted? Are they long-term contracts or are these one-off sales that I’ve got to go generate new ones next week to be able to make my numbers? So, I wouldn’t rely too heavily on just taking your financials and putting them into a tool online and getting that.
I do think you can talk to brokers or investment banks and get a sense for, “Hey, what’s the range of multiples in a particular industry.” And you could do that math for yourself. The one thing that I would suggest though, is really get some objective assessment of your business, get some sense from somebody else as to, “Hey, here’s how I would look at your business.” You could go to a peer, you could go to a consultant or an advisor, you could go to a banker, however you want, but get somebody else to look at your business and give you an objective sense for, “Yeah, here are the things that I see that would do great value that you really ought to be working on.”

J:
Okay. And just to clarify, because a lot of our, our community may not be at that point where maybe they haven’t even started a business, they’re thinking about starting a business and they want to do it right from the beginning. When you say selling for a multiple EBITDA, what you’re saying is basically at the end of the year, the owner’s going to have some benefit to him. He’s going to make some amount of profit, maybe with some benefits there, maybe the company paid for his health insurance, maybe they paid for his car, but basically you take all the benefit to the owner, the net income generated to the owner. And some multiple of that, whether it’s two or three or five or 20 is going to be the value of the business and a lot of that’s going to be directly related to the type of business and the industry that it’s in. Is that about right?

Chris:
That’s exactly right. For example, a construction business is going to sell for a lower multiple on earnings than a software business, or even a consulting type business. So, different industries have different profiles.

J:
Got it. And so safe to say that businesses that have the ability or the potential for massive growth, and you mentioned software industry, I mean, we all know about the Silicon Valley companies that essentially are generating no income today, but sell for ridiculous multiples because there’s quote unquote potential there versus industries that are more boring, I guess, is a good word. Typically, those more boring industries are going to sell for lower multiples?

Chris:
Exactly. No, you’ve put your finger on it, which it goes back to … I’ve got a certain level of risk in my business, but I also need to have a growth plan. And those businesses that have a credible, believable, aggressive growth plan are going to sell for more money because they’re going to generate more cashflow in the future.

J:
Got it.

Carol:
Great. So, what about businesses, Chris, for example, clearly, we’re at the beginning of 2021, everybody is very hopeful and optimistic, but let’s also be realist. 2020 may not have necessarily been the most amazing year for a lot of business owners. So, what if the business is really just not in the greatest situation right now. What if there’s not a lot of growth happening, it’s not real successful lately, maybe it was destroyed by COVID or something else. And maybe these businesses have a lot of assets or maybe intellectual property, customer lists, good employees. Can those types of businesses still sell? And if yes, what should they be thinking about or doing differently from the other where they are in a great growth mode?

Chris:
Yeah, that’s a great question. And we have seen it quite a bit. If your business … It’s interesting, we sold a couple of companies late last year where the opposite phenomenon happened, meaning they benefited from COVID. We had an online learning platform that exploded because people were doing that. And interestingly, for those buyers, we had to explain, “Hey, why is it that the earnings that they got during COVID were not just a bump.” That they were going to be sustained over time. And so you have to spend a lot of time. And likewise for a business whose earnings have suffered during COVID. My first piece of advice would be, I probably would wait some time to see the business come back so that you have a credible argument for why COVID was simply a unique event that we’re all knocking on wood, it doesn’t happen again, at least in the near term.
And so therefore, “Hey, let’s not look at 2020s earnings. Let’s look at 2019 and look at 2021 as more indicative of the earning power of the business.” And so unfortunately, if you’re going to sell a business like that, you’re going to have to come up with your story, right? You’re going to have to come up with, “Hey, why is this business going to be different going forward?” And again, the more evidence you have for that story, the easier it is to tell, and the more persuasive you’ll be.

J:
Perfect. So, let’s say somebody does have a business, they’re in growth mode, and they’re thinking, “I’m two or three years out from being ready to sell. Maybe I’m a year out from being ready to sell. I’m an overachiever, and I think I can get that 1500 hours worth of work done in the next six months.” What is the process? What’s the first step and the second step and the third step that a business owner should be thinking about if they feel like there’s this impending event coming up in the near future.

Chris:
Yeah, I would look at it in … We kind of go through a six step process on our end kind of from start to finish. And the first one is really understanding how is my business situated today, right? How’s my business performing financially, have I done a thorough assessment of a level of risk in my business and addressed that? So, really understanding how is my business positioned today? The second piece that we would recommend is not just analyzing the business, but analyzing yourself personally. And by this, I mean, not psychoanalysis, but understanding financially, what do I need to get out of this transaction and make sure that marries up with where the business is today. And hopefully there’s some cushion there, right? Meaning that the business is more valuable than what you need to actually retire.
So first step, understand your business, kind of get a sense for where you’re positioned. Second step, know where you are personally, what’s your number? But I would also encourage you to really, again, think through that question, “Hey, what’s going to be possible after I close this deal that’s not possible today.” And I would tell you that if the answer to that is, “I’ve got a fatter bank account,” I would spend some more time thinking through that. You want as a business owner to be very clear about what your kind of post-closing plan is. Otherwise, it leads to unhappiness because you may get something that you don’t want. Then the third step is, “All right, I know where the business is. I know where I am. What’s the work that I can do?”
If it’s two or three years out, you have more time to execute. If it’s a year out, a little bit less time, but hopefully plenty of time. But as I go through those top risks in my business, are there things that I can be doing today that will eliminate or mitigate those risks? And if I can eliminate those risks from my business, can I start to build a story around them? I’ll give you a good example. We had a client that had big customer concentration problem. Customer concentration, meaning about 80% of its revenues came from one big customer. And we took them out to market twice. The first time we took them out, the fact that 80% of their revenues came from one customer was what we called dispositive negative, meaning no one was interested in buying the company, even though the business was a nice business and earned really nice profits.
So what they did, obviously, one solution to a customer concentration is I got to sell more customers, but they were in the utility services business, so that makes it really challenging, right? That you’d have to expand geographically. And that’s an expensive, time consuming exercise. What they did though, was I thought really clever, instead of having one contract with this large utility, they split that contract up into four contracts. Meaning, Hey, if the customer canceled one of those contracts they still had three left. Then they extended the contracts from being two year with one-year renewals to seven year contracts, meaning they start to reduce that risk of that customer disappearing and then they deepen the relationship throughout the organization, meaning it wasn’t just CEO to CEO. It was the COO, the manager of operations and the people on the field building tighter connections with the folks at that customer.
And that allowed us to take that business back out and be very, very successful with the transaction. So, you understand where your business is, you know where you are personally, get to work on the risks in your business and develop your plan around that. Then it’s okay. Now, let’s start preparing. We got to gather all of our materials for diligence. We need to start to prepare our story, but what is the story that we’re going to tell the market about our business? When you are talking to buyers, you need to understand that they see thousands of businesses every day or every year and as a result, you have to figure out, how do I make my business stand out? And I’m a firm believer, every business is unique and they’re uniquely successful in their own way. And so what you want to do is think through, how am I going to tell that story so that somebody gets it and they get it quickly so that we can stand out and be attractive to them.
In addition to preparing diligence and getting your story ready, you need to start to prepare all of the kind of materials that you’re going to want to present to a buyer and start to source those buyers, right? Identify, “Hey, who are the most likely buyers for my business? And what’s the best strategy to reach out to them and get them informed?” And then you go to market, you start dialing for dollars, talking to bidders and then go through due diligence and execute the purchase agreement and hopefully get done a great deal.

J:
Yeah. And so now it’s pretty clear why this can be a 1,500 hour process. I assume that a process like this requires some core competencies that probably a lot of us entrepreneurs and business owners don’t have. And so I know you run a business that helps entrepreneurs and business owners through this process, I assume from beginning to end. I guess you can tell us more about that, but let’s say our listeners, our community, somebody out there is ready to sell their business, certainly they can reach out to you or maybe they want to reach out to somebody else, how do they find somebody to help them? Let’s say they want to reach out to you, but maybe they want to reach out to two or three others, to talk to a couple of other people, what should they be Googling? Who should they be looking for? What is the type of person that helps somebody with this? Is it a business broker? Or is it something else?

Chris:
Yeah, there are really two kind of classes of folks in our industry that help business owners. There’s business brokers, which typically handle smaller deals, maybe less than five or 10 million. And then what we do as an investment bank, so our deals are going to be a little bit larger than that. But what I would recommend is, I mean, the decision for which advisor you’re going to hire is a really, really important one. This process is emotional, it’s kind of a roller coaster. You want to be with somebody who’s not only competent, but that you’re quite frankly going to enjoy working with and be able to get along well with, because you don’t want to be at odds and you certainly don’t want a poor relationship. But I would leverage my contacts, the lawyers that I know, the accountants that I know, folks that have seen the universe of advisors that may be appropriate for you and then make some recommendations.
I don’t know that Googling, “Hey, if I Google an investment bank in Denver, our name may come up,” but that would be a hard … I don’t know that I could tell anybody with a straight face, “Yeah, that’s how you should pick your investment bank.” I would rely heavily on advice. A lot of people, particularly entrepreneurs, if they’re members of peer groups of some sort talk to other people that have been through the process, they probably have folks that they would recommend. But I will say, it’s kind of we recommend, “People don’t do their own dentistry or even plumbing these days, this process is complicated. There are lots and lots of ways to misstep and having somebody who’s been through it a bunch of times will definitely help you kind of avoid those catastrophic mistakes.”

J:
Yeah. And when you’re talking about a 10 or 50 or 100 million dollar sale, being able to get an extra 1 or 2 or 3 or 5% will not only easily pay for the advisor and the help, but it’ll put a whole lot more money into your pocket?

Chris:
Yeah. It’s funny. We always interview our clients after the deal’s done, and I think one of the reasons why people hire an investment bank or a broker is, “Hey, I think they’re going to get me more money.” And believe me, we obviously make a living doing this so I believe that’s true. But the comment that we get from clients after the deal is done is, “Yeah, you guys did a great job getting us more money,” or whatever, but they said, “I had no idea just how challenging this was, and there’s no way I could have done this on my own. I would’ve gotten killed.”

Carol:
Love that, not that someone would have gotten killed. Clearly, that you are able to provide that much more service and value and that much of an excellent experience and something that can otherwise be extraordinarily daunting. Can we follow back up on one additional tactical piece that you mentioned a bit ago that I think our community might be really interested in on a day to day basis. You had mentioned, and I think this is probably something that people could be working on as well, that they would have to present not only ultimately to a buyer, but also to the broker, to the advisor, whomever is helping them with the sale of their business. You had mentioned materials, kind of a package to be presented. And that sounds like something that we in our businesses should be starting on from the very beginning. Can you give us some more insight into some just tactical tips on what specifically those types of materials are so we’re not scrambling at the end to create them?

Chris:
You bet. So, first and foremost is having a set of financials that is well put together, ideally, that those financials are audited by a third party outside the business and where you have support for each one of those line items. Most entrepreneurs don’t believe me and I wish that I could record some of these calls that we have with buyers, but they will literally go month by month, line item by line item looking for discrepancies. “Hey, I saw that your rent expense went up in this particular month and then came back down, tell me what happened.” And so knowing your financials cold, really, really important in understanding, “Hey, where do I get that information?” So, when we put materials together, part of that is just this financial package. We have the financials, we’ve got the projection model, it all ties together and it’s very tight.
The second thing is for diligence materials, they’re going to need to see every contract you have as a business, with the exception, if you have a business where you’re serving hundreds of thousands of customers, and it’s all on the same contract, maybe the terms of service on a webpage, they just need to see that single version. But if you’re in a business, where you have big customers or big projects, they’re going to need to see every contract. They’re going to need to see your insurance policies. If you own a building, they’re going to want to see environmental studies. They’re going to want to see pay histories for every one of your people, have conversations about all of that. They’re going to want to see … Again, in addition to contracts and the people, they’re going to want to understand, if you rely on a supply chain, how secure is that supply chain?
This became really relevant in 2020 when a lot of companies relied on manufacturing in China that for a lot of them got shut down. And so, they’re going to literally dive into every piece of your business. We call it a lead to cash review, right? When do I get my lead for new business and when do I turn that into cash? And everything in between. They’re going to examine every element of that. We wrote a book a while back called Harvest: The Definitive Guide to Selling Your Company. In the back of that there is a due diligence checklist. And certainly if anybody wanted one, I’m happy to email it to them. But it lists all the documents that buyers typically want to see.

Carol:
Awesome. Talk to us more about your book, Chris.

Chris:
Oh, Harvest. I think I mentioned, our mission is to enable the entrepreneurial spirit and we wrote the book, my partner and I, because we felt like this is such an important leg of an entrepreneur’s journey. And we’ve seen it where a lot of times it’s just not managed that well. And so we wrote the book to really educate entrepreneurs, “Hey, here’s the process. Here’s how businesses are valued. Here’s what can go wrong in a transaction.” And I think it’s a fairly quick read. If ever having trouble sleeping, I think it’s a pretty good antidote. Whether it’s Harvest or another book, I think it’s really, really important for an entrepreneur to get educated on what they’re about to embark on, because it’ll be surprising to them otherwise. And I think if they’re not prepared, it felt definitely money on the table and it’ll be painful.

Carol:
So, speaking of the experience potentially being painful or leaving money on the table, or not going as well as we had hoped by not becoming as educated as we potentially could upfront, everybody loves a good story, so we would love, Chris, if you could share any types of stories you may have, whether it’s a great story, a great example of going through the process with an outstanding outcome. Or maybe a not so good story that could have probably been avoided if the upfront work were done differently. Do you have anything like that you might be to share?

Chris:
Sure thing. Well, we call them bad movies. We’ve seen most of the bad movies that can occur in a transaction, but I’ll tell you a good one that happened. And this is really the prototype of how to do an exit really, really well. It was a business owner, he ran a consumer products company in the pet industry. And at the time, the business … It probably wasn’t worth two or $3 million. It was a very small business. It was a lifestyle business for him and his wife and they had great products, but it was relatively small and he came and he said, “I want to sell my business for X dollars.” And it was a fairly sizable leap from where he was to where he wanted to go. And he said, let’s put a plan together where we could go do that.
And so we worked with him, he needed a management team. So, we kind of thought through, “All right, what’s that management team need to look like? Let’s start to build your bench.” His business was highly concentrated in the big pet retailers, Petco, PetSmart. So, “Hey, let’s diversify that among more independent, get more of your business across more stores. Let’s work on your product innovation pipeline.” And so, cut long story short, that was a five-year plan. After three years, he had executed so well that he had already met his valuation objectives. And so we took him out to market and he executed, did phenomenally well with his transaction. He ended up staying on with the business, it was a private equity company that bought his firm and they did the same thing and he made more money on the second sale than he did on the first sale.
But the thing that I really appreciated about it was and I would put this as the prototype of the owner personality that’s going to work really well with this planning process, and he’s a lifelong learner, he’s very intentional, he’s goal oriented, he’s a planner and when it came down to it, he was willing to do what was necessary to execute. So, it was such a fun process to be a part of, and to watch him do that. And the business today it’s on its … So, they sold it and then they sold it again. I mean, he’s still the chair of that business and they’re continuing to grow. I think they’re probably … I don’t know, they may be a hundred times as big as when we started with him back 10 years ago, which is pretty cool.

Carol:
That’s so cool.

Chris:
Now, flip side, this is a typical scenario and my guess is that a lot of your listeners are going to identify with this. So, you’re a business owner, you get this call, “Hey, I’m really interested in buying your business, Carol.” And you say, “Well, that’s interesting. I wasn’t really interested in selling my business, but tell me more.” And I’m a really good salesperson. So, I’m going to convince you, Carol, “Hey, why don’t you send me your financials and maybe I can put a deal together.” And maybe that month was really stressful for you. And you’re thinking, “Oh, maybe it’s time for me to get out.”
You’ve done no planning, but you’ve got this phone call, this incoming call and boy, “Chris just sounds nice. I feel like he could be a really good buyer for my company.” So I’ll ask you a question when you’re presenting your business to me as this buyer on the telephone, do you think are you positioning your business the very best that it could be? I mean, are you going to tell me the things that are wrong with the company, or are you going to basically position your business in the best light you can?”

Carol:
I’m going to tell you the very best possible things and paint a big old rosy picture.

Chris:
Yeah. And I’m going to say, “That’s terrific, Carol. I love hearing that about your business. And I’m going to come up with a valuation based on what you’ve told me.” That valuation is going to be, we’ll call it 10 million. And, “Carol, this has been a really stressful year for you, so 10 million sounds like a great number for you.” So, the next thing I’m going to ask is I’m going to sign you up to exclusivity. Meaning you’re not allowed to talk to any other buyers while we’re going through diligence and negotiating this purchase agreement. And this actually happened a year ago, this exact scenario, we got a call and the woman that ultimately became our client, she had signed us exclusivity in May and the deal was supposed to close in July. We got the call in December and the deal still hadn’t closed. Why do you think that was?

J:
The buyer was negotiating them down, trying to nickel and down them?

Chris:
Well, that’s the perspective of the seller. I’m going to give you the counter perspective of the buyer. Meaning, “So, Carol, you told me all the great things about your business. We came up with a valuation and a set of terms based on what you’ve told me about your business.” As we get into due diligence, we figure out that, “Hey, like every business, we’ve got some warts here and the first couple as a buyer, I might absorb.” Meaning, “Hey, I’m not going to adjust the terms of the deal. I’m not going to adjust valuation, but as those start to accumulate, as we go through due diligence, I’m going to get a little bit more nervous about the value that we agreed to.” And I’m probably going to come back to you, Carol, and I’m going to say, “Hey, we need to adjust this price.”
And of course, you’re going to be upset. You’re going to think I’m re-trading the deal. And that’s why we got the call from this woman in December, saying, “I need help. I don’t know what to do. They’ve renegotiated.” That deal started, I think it was a $70 million deal, when we got brought in, it was all the way down to 50. But by the time you get to me asking, the buyer asking you, Carol, “Hey, we need to renegotiate this,” the level of trust between us is rock bottom.

Carol:
There is none at that point, right?

Chris:
Exactly. And that’s why a lot of times those deals fail. But, Carol, if you had prepared and you actually told your story and we’re big believers, when you tell your company’s story, you want to give them the full story. Meaning if you’ve got Achilles’ heels, if you’ve got issues in your business, tell the story around those. Now, I would tell you that having been through probably almost any particular issue that a company could have, that’s bad to present to a buyer, there’s always ways that you can explain it and make it less meaningful. The other thing that I would tell you is if you have bad news about your business, if there’s something that is problematic, get that out early. It’s like you tell your kids, “Just be honest with me, tell me exactly what happened and we’ll deal with it.” And for buyers, it’s the same way you, you earn credibility when you are honest with them and those issues won’t surprise you down the road when, “Hey, this deal is going to blow up and you’ll just have wasted nine months of time and a bunch of money. Does that make sense?

Carol:
Absolutely. Well, it sounds like there’s so much of that that really just boils down to the expectation around it. Like you said, if all the preparation had been done up front before that surprise phone call came in the middle of a not so good bunce, then the expectation would have been set from the get go that there are these issues and then the buying side of the transaction wouldn’t have been negatively affected by that. That would have been out on the table from the beginning. That makes absolute perfect sense.

Chris:
I think, again, you compare and contrast those two stories, right? One of them business owners, very intentional, gave himself enough runway to plan, executed on the plan and got just fantastic results. The other one reacted to an incoming call, wasn’t prepared, suffered through nine months of just horrible diligence and renegotiations. And that deal, we ultimately got to close, but, I mean, she definitely left money on the table. I mean, tens of millions probably.

Carol:
Yeah.

J:
Yeah. And it’s probably worth pointing out that the same thing can happen with a bad advisor, not just a business owner that doesn’t know better. We had a situation, Carol and I, with our partner were looking to buy a company last summer. And we spent, it was a publicly listed … Well, not publicly, but it was a listed company that we got off market, but through a broker and we negotiated for six months, we spent a little over $12,000 on legal fees. And at the end of the day, six months into it, we started to see cracks of the story as we were doing our diligence, as we were looking at the financial documents, as we were looking at the customer records.
And like you said, one or two of those is like, “Okay, can be explained away. It’s not a big deal. We’ll absorb that.” But as they pile up, you start to think, “What else are they hiding?” And even if there’s nothing big that they’re hiding, you find that hard to believe because if somebody will lie or something small, well, you have to wonder if they’re misrepresenting something big. So, the same thing can happen, not just with an overoptimistic or a naive seller, but you also have to be careful about dealing with unscrupulous or just not good advisers as well.

Chris:
Oh, I totally agree. And I think, again, it’s if you’re on the sell side again, back to the “Hey, how do you find a good advisor?” Talk to your friends, talk to your references, talk to advisors that can help steer you towards that. And on the buy side, it’s tricky, because you went into that deal not necessarily knowing that, “Hey, there’s a bunch of stuff hidden.” You spend a bunch of time and a bunch of money. And that’s where, if you’re the seller, you now think this buyer is an unscrupulous buyer, “Well, they’re just trying to nickel and dime me and negotiate this price down because they feel like they have me over a barrel.” And the buyer on the flip side is saying, “Well, they didn’t really tell me all this stuff.” As you said, “Hey, what else aren’t they telling me? And then am I getting a big into poker?” That’s not going to work very well.

Carol:
Absolutely. I think just a big old takeaway from this whole part of the discussion is the absolute critiality, is critiality a word? How critical it is in this whole process? Like you’ve been telling us during this entire discussion is rather than being reactive to just be proactive in making sure that you are doing all the right steps that you achieve those results you want to. Don’t react, be proactive.

Chris:
Yeah. I call it, do you want to be responsible for setting the table, or do you want somebody else to set the table for you? And we’re big, big, big believers that you want to control the agenda in all of these conversations, right? And so if somebody calls you and then starts to ask for information, you haven’t prepared, so you’re scrambling to get all this information together, you’re not in control at that point. They’re controlling the agenda. They’re controlling the timeline. They’re controlling the process. Versus if you do the preparation on your own, come up with a good game plan, you talk to multiple buyers to keep everybody honest, you’re going to get much, much better results.

J:
Fantastic. Chris, this has been an amazing conversation. We really appreciate it. I do want to ask you before we kind of wrap up here, if you had to give one piece of advice that you haven’t already given to our listeners who may be running a business, thinking about selling, whether it’s short term or further down the line, what does that great piece of advice that you want to wrap up with here?

Chris:
I tend to think of … I always ask business owners, “Tell me about the biggest sales pitch you’ve ever done. And tell me how much preparation you did and how much studying you did beforehand and how much energy you put into that pitch.” And then I’ll have them quantify the dollar amount for me. What was that pitch worth to you? Not in revenues, but in margin, right? “What was that worth to you?” And then I’ll help them understand, “Take that, multiply it by 10 or 100, and that’s how much this pitch is going to be worth to you.” So, it’s definitely worth the extra investment of time and energy. And quite frankly, the work that we advocate, even if you never sold your business, you’re going to have a much better business to operate because it’s going to be less risky and it’s going to be more sustainable.

J:
I love that.

Carol:
That’s super.

J:
That is fantastic. Okay, Chris, for any of our listeners out there that want to connect with you, want to find out more about Capital VI Partners, that want to find out more about your book, what’s the best way to connect with you and what else would you like to tell us?

Chris:
Email works great. It’s Chris, [email protected], class, V-I, partners.com. [email protected] And I mentioned to you earlier, we’re happy to make … We use an assessment we call CoPilot, you’ll see that on our website, and we’re happy to make that available to any listener that would love to understand their business a little bit better from the perspective of an investor. And we’re happy to make that assessment available. It’s about 120 questions. So, it sounds way worse than it is, takes maybe 20 or 30 minutes, but they’ll get a 35 or 40 page report back, and we’re happy to make that available. It’s just part of our effort to help more entrepreneurs.

J:
We appreciate that. And for all of our listeners that are listening to this right now, check out our show notes because we will link to that assessment. Chris, this is fantastic. Thank you so much for being here. Thank you for sharing your expertise. And we look forward to talking to you again soon.

Chris:
Well, thank you guys. And again, thank you for what you’re doing for entrepreneurs. It’s meaningful.

J:
We appreciate.

Carol:
Thank you so much, Chris.

Chris:
Bye.

Carol:
See you soon.

J:
Bye.

Chris:
Take care.

Carol:
Oh my goodness, how insanely awesome was it? That Chris was able to full on quantify the number of hours it typically takes to prepare to sell your business, 1,500. I knew, suspected, I guess, that it would be a lot, but the fact that Chris and his team have put together a solid quantifiable number that is achievable with a lot of productivity and planning was really awesome.

J:
Yeah, absolutely. I thought that was just a great episode. The thing that interested me the most in that discussion was the reasoning for not wanting necessarily to sell your business at its peak. And it makes perfect sense. I mean, you don’t want to sell something to a buyer that a year or two years down the road, they’re like, “What did I buy?” Because it’s not going as well as it was. And that’s a huge risk. And I imagine that being able to still make a reasonable amount of money, but not have to take on that risk, it just makes perfect sense. Something I hadn’t thought about, but we’ll definitely keep in mind in the future when I’m thinking about the timing of selling a business.

Carol:
I agree. Pretty awesome.

J:
Yeah. Everybody, thank you so much for tuning in this week. And we look forward to talking to you again next week.

Carol:
That’s right. We do, let’s wrap this one up.

J:
All right. She’s Carol, I’m J.

Carol:
Now, make sure you’re preparing to sell your business every single day.

J:
It’s a little different, I like it.

Carol:
Pretty good, a little bit of a twist. Got to shake things up. Thank you for tuning in, community. We appreciate you, and can’t wait to see you again next week.

J:
See you, everybody.

 

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In This Episode We Cover:

  • Why businesses need advisors when selling their companies
  • What type of prep work business owners can do before they sell their businesses
  • What business value your company provides for prospective buyers
  • How to develop a growth plan so buyers feel confident
  • Which documents to prepare for diligence
  • Who you should choose as an advisor when selling
  • How to establish a great relationship between the buyer and seller
  • And So Much More!

Links from the Show

Books Mentioned in this Show:

Connect with Chris: