Creating a Smooth Transition

While there are a lot of moving parts in any M&A deal, ensuring a smooth transition from you to the new owner of your company is important for a number of reasons that could impact not only your reputation but also the prospects for success of the new ownership and the livelihoods of your loyal employees. That, however, only scratches the surface. How can you work now and during the acquisition process to help make sure the transition goes as smoothly as possible? Brent Freeman, investment banker and M&A advisor at The CBB Group, joins us to talk about the ways that a business owner can work to smooth out the bumps that sometimes occur when a company transitions from one owner to another.

Questions Answered For You


One of the key things that we talk to our clients about or prospective clients is really around starting an exit planning succession plan. And that really, if they do it right we'd like to talk to people two to three years prior to their planned transition.

- Brent Freeman

Key Takeaways

  • It's important to sit down with an M&A professional two to three years in advance of a sale to start the planning process.
  • The majority of buyers in today's environment are looking for what is called a turnkey business.
  • Don't do anything different during the transition period and really keep your eyes on the ball.
  • The average sales time for a privately held business is anywhere from six to nine months.

Read Full Interview


Jeff: Transitioning your business from you to the next owner or group of investors, why it does not have to be a bumpy ride, and how you can work toward a smooth transition. If you're a business owner looking for answers you've come to the right place.

From our studio in Southern California, with guest experts from across the country and around the world this is Deal Talk, brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.

 

Jeff: Welcome to the web's number one content source for small and mid-market business owners committed to building a business for eventual sale. It's our mission to provide information and guidance from our growing list of trusted experts that you and all small business owners could use to help you build your bottom line and improve your company's value. And joining us for our talk today from Milwaukie, Oregon, the other Milwaukie. Brent Freeman, investment banker in M&A Advisor at the CBB Group. Brent Freeman, it's nice to have you on board. Thank you for agreeing to join us on Deal Talk.

Brent: You’re welcome, it's good to be on board.

 

Jeff: When you introduce your company, and I'm from Milwaukie, you kind of have to throw the Oregon in there automatically afterward, don't you just to distinguish the two.

Brent: Absolutely.

 

Jeff: Very good. Brent, I appreciate your time in giving us a slice of your day for a discussion of what I think is really an important topic. Many business owners it would seem to me, Brent, are prepared to have to endure the anxieties that come along with selling their businesses. And quite frankly those of us who are business owners play our cards very close to our vest and we're very emotionally attached to our companies in many cases. There is a way though isn't there, Brent, to kind of work toward a smooth transition from one owner to the next? Why is preparing for a smooth transition so important to the operation of a company and the transaction itself?

Brent: I think it can be pretty well summed up in that most business owners want to not only maximize the purchase price for their company, but the dollars that they're able to actually take and  put in their pocket at the end of the day. One of the key things that we talk to our clients about or prospective clients is really around starting an exit planning succession plan. And that really, if they do it right we'd like to talk to people two to three years prior to their planned transition. That gives us an opportunity to really do four things with them. One, sit down and help them set their exit objectives. Two, determine what their current market value is and what their current next equity would be. Three, build a strategy or plan to help increase their value and saleability. Four, how to protect that value of the business that you built over a lifetime of activity.

I think it can be pretty well summed up in that most business owners want to not only maximize the purchase price for their company, but the dollars that they're able to actually take and  put in their pocket at the end of the day

Jeff: In terms of what it might also mean with respect to the buyer on the other end. This is a show that's really directed toward those business owners who are interested in selling. But as far as the work that you're doing with your clients and some of the things you just talked about there, setting the exit strategy, determining current market value, improving value, protecting value, those types of things also it would seem to me if the seller is more prepared then that is going to make the transition smoother for everybody including the buyer side as well.

Brent: Absolutely. The key factors that buyers are really looking for once you scrape away either the profitability of the company or the industry that it happens to be in is that majority of buyers in today's environment are looking for what is called a turnkey business. And by that, part of the exit strategies that we work on are getting the business set for sale and that can work on things like making sure your intellectual property and proprietary knowledge are documented. That you got the right process and procedures to run the company in place. But not only that, is really evaluating how much of the business is the owner. If they occupy a space where activities in the business that the business just can't run without them, how do you develop those capabilities and skill sets in other people so that when a new buyer steps in, the business doesn't miss a beat. By doing that you not only help the buyer but in actuality you increase the value of the business and you make the business more saleable, thereby giving you a bigger pool of buyers to go out to the market with.

 

Jeff: I think it's really key, Brent Freeman. You just talked about something there I think that is something I want to camp out on for just a moment. You mentioned essentially that by having strong number 2's or 3's in charge, people right below ownership, maybe these are chief operating officers possibly, or GM's, or CFO's in the company, or other strong leadership areas, by having strong people in those key places that know the business inside and out ... You basically just mentioned that you can essentially increase the value of your company by having people like that underneath that when it comes time to move from one owner to the next, that in itself having those strong key players is going to allow for a smoother transition while maintaining a high value or actually improving the value of the company. Has it been your experience that in working with business owner clients that you've talked with over the years that many, many companies don't have that? So much is placed on the owner's shoulders that they're both working in and on their business that they don't have some of those strong people in place. How common is that?

Brent: It's very common. You mentioned in and on, the majority of people that we talk with, with businesses ranging in revenue from a million to up to 10 or 15 million work primarily in the business and really need to take a step back and work on the business. And so some of the things that we sit down with is if they're at the right growth part of their business and have the expertise, is things like building a score card, managing metrics. And then doing the other things to increase that saleability really helps not only sell the business but explain to almost anybody else the key drivers of value inside that business. Some sellers don't take the time to actually think about this ahead of time, and those businesses are typically a little harder to sell than somebody that's taken the time and the thought to sit down and spend a year or two working through this process.

The business doesn't miss a beat. By doing that you not only help the buyer but in actuality you increase the value of the business and you make the business more saleable, thereby giving you a bigger pool of buyers to go out to the market with.

Jeff: Who are the key players involved on the sell side typically? The people that you work with, that you're accustomed to. And you go in and your team is working with the company to sell that business. Who are some of the key players involved in the sale side that you typically will interface with? 

Brent: Obviously we sit down with a potential client and we talk to them about exit strategies and planning. And the key people that are involved are the owners, their spouses. We'll talk to them about their attorney, how well are they versed in mergers and acquisitions, their accounting, their CPA or bookkeepers, their skill set. And then the big key here is for them to sit down and take a look in the mirror as far as setting their own objectives. And part of that comes down to is how much of the sale of the business is going to fund their retirement or what they're going to be doing next. And in that case it's really kind of maybe even bringing in a wealth manager to talk about their current financial position and then what a structured transaction may be able to bring to the table. Really, three key folks here, is their attorney, their accountants or CPA's, and a wealth manager. And it doesn't have to be done in that sequence, it just depends on where they are in their transition planning.

 

Jeff: Brent Freeman is an investment banker and M&A Advisor at CBB Group in Milwaukie, Oregon and you're listening to him right here on Deal Talk, my name is Jeff Allen. We're talking about creating a smooth transition in your business from your ownership to the next owner in line, whoever it is that you want to sell to. Brent, we've talked about some of the key players in the pre-deal planning if you would and having some of those important individuals there at the table. But in terms of who you would deal with at the company, in terms of the actual process itself involving, whereas you've got the due diligence that needs to be done and you need to go back and the people you talk to about the numbers. Is the CFO typically, or someone who holds that kind of designation or the person who fulfills those functions, is that do you think probably the most important person in line next to the CEO of a company?

Brent: The owner/CEO, and again, it depends on the structure of the company,  for companies that have revenues between one and five million it's usually just the owners. Once you get into companies that have revenues from five to 20 million then you're talking about a different structure. The CFO will primarily be the person that we’ll be partnering with. One of the things that we do that is probably a little different than some of the companies is that we do in preparing our offering when we're preparing the business for sale. We basically do a pretty detailed due diligence of the company upfront. And that helps us in a couple of key factors. One, we get all of the pertinent information upfront that allows us to represent the business in its truest and accurate form. And then two, by having that information in a data room, that also allows us to give validity to the operating memorandum that allows a potential buyer to come in very quickly and make a value judgment on the company without interrupting the business, the CFO, and the owner on a go forward basis with a lot of questions and requests for extra detail. For the smaller companies, it's usually the owner who are able to go in and do that type of due diligence; for the larger companies actually in the lower middle market working with the CFO or their accountant to get access to the financial details of the business. They definitely are the number two most important next to the owner.

We basically do a pretty detailed due diligence of the company upfront. And that helps us in a couple of key factors. One, we get all of the pertinent information upfront that allows us to represent the business in its truest and accurate form. 

Jeff: Brent, before we get to our break here I've got one final point I wanted to cover with you. We've all heard that old expression, "Loose lips sink ships." I'm just thinking in terms of trying to coordinate or prepare for a smooth transition. You've got to obviously have all your ducks in a row, people have to be on board and you need to have obviously the right people on board and rely on their confidentiality it would seem to me because ... In terms of keeping things quiet and making sure that only the right key individuals on the sell side company in the loop that confidentiality is got to be a very, very important part of creating that smooth transition, is that right?

Brent: Absolutely. The fewer people know about it the better, nine times out of 10. We've actually had instances where the owner felt compelled just because of the relationship that they have with their employees who want to share the information that they were either thinking of retiring or selling the company. Almost in every instance that has not worked that well. They either have lost key employees and/or business vendors and/or customers by putting that out in the market.

 

Jeff: That becomes a deal breaker doesn't it, I mean really?

Brent: Absolutely.

 

Jeff: You cannot fault a person for wanting to be honest up front and correct in every way in presenting the situation in people that they've trusted and people they consider family and they've treated that way. But my goodness, there is a time and place for that. And if you're looking out for those people you can always include certain language in your meetings with the future buyers, your best intentions for the people to continue on with the company after you've left. But my gosh I just can't imagine what it must be like for people who are well-intentioned folks, they want to sell their companies and then they see the rug pulled out from underneath them because of something that they said only because they thought that they were doing the right thing, Brent. It's almost heartbreaking it seems. Brent, we're going to take just a moment out and we're going to come back in just a couple of minutes. We're going to continue our conversation. 

First of all though, for listeners, if you have any questions about any of the topics you've heard us discuss here on Deal Talk including today's topic for example, all you have to do is ask. After all, this show is committed to bringing you answers and finding solutions. Simply call our Ask Deal Talk info line at 888-693-7834 extension 350. Follow the instructions to leave your question and we'll reach out to one of our guest experts so that we can feature your question and their response on a future edition of Deal Talk. Ask Deal Talk at 888-693-7834 extension 350. I'm Jeff Allen and I'll be back with M&A Professional Brent Freeman of the CBB Group when Deal Talk continues in a moment.


Time savings and cost savings are both essential to running a profitable business.  The same is true when it comes to actually selling your business.  Morgan & Westfield are experts at saving you both time and money. How? By providing a complete valuation report on your business. By providing specialized knowledge and expertise to market, promote and advertise your business for sale. By preparing a detailed selling memorandum to attract buyer interest and inspire action.  By carefully screening individuals to identify only serious, well-qualified buyers. To properly identify sources of financing including alternative options best suited for the buyer and escrow support with appropriate legal documentation.  And Morgan & Westfield works with specialists and advisors to reduce risk. Selling your company? Contact Morgan & Westfield for a free consultation -- 888-693-7834 -- 888-693-7834 or visit morganandwestfield.com.


Jeff: Welcome back to Deal Talk, my name is Jeff Allen. My guest is Brent Freeman, investment banker and M&A Advisor with the CBB Group in Milwaukie, Oregon. What we're talking today is how to create a smooth transition, some guidelines for business owners like you to follow. We've touched on the importance of the timing of the announcement of the sale, and right before we took a break you kind of talked about the fact that many, many times when a well-meaning business owner reveals to his team, to his employees his intentions to sell the company way too early, before really things are ready for the transition to take place that things can end badly, people end up walking off the job that can end up actually causing the sale to be nixed altogether. Let's talk about the timing of the announcement of the sale? When does that really come in and who's responsible for making that announcement?

Brent: That's a great question. You want to sit down at some point in the process and address a couple of key things. One is obviously the timing of the announcement, but more importantly who you're announcing to. There is both an internal and an external announcement. The first one obviously is the internal. And we really encourage the buyer and the seller to do this together, for the buyer really talk to the employees about how excited they are about purchasing the business, the importance of keeping continuity, and then provide a vision for the future, why they buy it. And so that usually gets people pretty much settled down. The second part of this is the external announcement. We really think it's important, customers drive everybody's business, that an owner and the buyer sit down face-to-face if possible with the key customers of the business, both on the customer side and the vendor side, and do a hand-off introduction. Nothing means more to a customer than talking to an owner that they've probably done business with for many years and to get that personal assurance that the new buyer is going to treat them the way they've always been treated. 

Two factors here really, one is both the internal and the external announcement. We strongly suggest that the internal announcement be made when the deal is actually closed. It's done, it's over with, the documents have been signed, the moneys have been transferred, and that way it's a very easy conversation to have. And basically the new owner is showing up to take control of the business.

 

Jeff: Brent, let me ask you a question, you said just a few moments ago, you were talking about the buyer basically talking to his team about why they bought the business. But as far as the company actually being sold, the sell side ownership, will they be typically the ones to make the announcement to their team once the deal is done, or will they sometimes team up with the new ownership?

Brent: We definitely encourage both the seller and the buyer to make that announcement with the employees together.

We really think it's important, customers drive everybody's business, that an owner and the buyer sit down face-to-face if possible with the key customers of the business, both on the customer side and the vendor side, and do a hand-off introduction.

Jeff: Okay, very good. And that makes a lot of sense by the way. And it seems to me that any blows would be softened a little bit particularly when people obviously are concerned about their jobs and the future of their welfare there with the company. Is there any way to ensure, Brent, that the employees of the company being sold would be kept on board after the sale of the company?

Brent: That's always a question that a lot of sellers have. Number one, you can't control that the way that most sellers would like, but they try and do that. If there are key employees and I think this is probably the bigger question. If there are key employees of the company that really help drive the company. As part of that pre-planning process we may suggest that a seller approach key employees about some type of a stay bonus that can be executed. So that in the event of a sale they'll get a bonus to stay on for the company, and this really helps buyers alleviate some of their anxiety about losing some of that key intellectual process or key drivers of the company. Most sellers want to make sure that their employees are well taken care of. And it's a character issue with the buyer. So we try and make sure and vet that that as best as we can. And on the buy side, for the buyer, they want to make sure that those employees stay because they're the folks that are actually driving the value in the business nine times out of 10. 

 

Jeff: Brent Freeman is with us today here on Deal Talk, investment banker and M&A Advisor at the CBB Group in Milwaukie, Oregon. Brent, flipping it over to the buy side for just a minute. We're talking about smooth transitions of course, and smooth transitions goes both ways. Not just involving the seller of course and their peace of mind, and being able to retire and move on to something else that they want to do while their company stays intact and in the hands of another owner now, but also of course the new ownership, they want things to go smoothly as well. I know that a person in your position, you work with both sides and you've had a chance to experience the highs and lows of these transitions. Are there any examples that you can point to, or any examples that you're aware of that you've heard about where post sale challenges ended up presenting themselves. Maybe these were unforeseen circumstances, or things that made the transition after the sale maybe a little bit more difficult. And if one thing had been different maybe this challenge could have been avoided, anything like that that you'd be willing to share?

Brent: Sure. Two things that we tell buyers when they buy a company and the first is, "Don't change anything for at least six months. Sit down and really get to know the employees, the process, your customers before you start to make changes in the company. And that's one of those things where when people ignore that they can without understanding what they're actually doing they can change the success formula of the company fairly quickly. And the second one is really understand who your customers are. We had a situation where we closed a transaction in New York a couple of years ago and the buyer spent his first 45 days really remodeling the office, updating equipment, and working on the internal structure of the business, and didn't spend any time with key customers. And he ended up losing two or three fairly large customers because he just didn't take the time to sit down with them and let them know how important they were, and where he was going to take the business. And as a result the revenue to the company fell 20 percent inside of 30-90 days.

If there are key employees and I think this is probably the bigger question. If there are key employees of the company that really help drive the company. 

Jeff: That is really taking a bite out of the apple right there. And you can see very important indeed and making sure ... Relationships are so important, they're so critical, and that's just kind of an example right there of how important they are. And it's amazing the effect that one can have on those relationships with a simple phone call. Just talk about being able to solidify ... A phone call may be the first of a series of calls that you have to have, but it just goes to show you what an expensive phone call that was not made perhaps there in that particular case or whatever the case may be that led to that breakdown. Very unfortunate indeed. Brent, as we are moving toward the end of our program today, a couple of minutes here, give us maybe a couple of key take aways from today's conversation, or maybe a couple of things that we didn't talk about at all that you would like to leave our business owner listeners with as we go today with regard to remembering how important it is to do what is necessary in order to make for the smoothest transition possible. 

Brent: Sure. To sum it up it's really sitting down with an M&A professional two-three years in advance of a sale to start the planning process. By doing that work upfront you not only understand the value of your company, how you can increase that value, but as you bring in other trusted advisors you'll not only be able to maximize that value but maximize what you're able to keep in the bottom line, and be able to pick and choose as best you can who that buyer may be. The other thing that I probably want to make sure and tell any potential buyer is that if they engage an M&A professional the one thing we sit down and talk to our clients about is to make sure you're running your company like you're going to run it, you're going to keep it for the next five years. Don't do anything different during the transition period and really keep their eyes on the ball. The average sales time for a privately held business is anywhere from six-nine months. And during that period of time you want to make sure that the company continues to grow and continues to prosper for yourself, but also for a new buyer. That planning process is key to making sure that not only you have a smooth transaction, that you have a large buyer pool, but that you get to maximize what you take out of the company.

 

Jeff: Brent, really important, and thanks for the plain English there. You made it very, very easy for us to understand. If there are those individuals out there who would like to talk with you about their particular M&A situation, maybe they have just a question, or maybe they'd like to sit down with you for a more serious one-to-one about their particular situation. They might be interested in chatting with you about selling their business somewhere down the line, how can they reach you?

Brent: Sure. The easiest way is our phone number here at the CBB Group. It's 503-233-8600. Or you can email me at brent@thecbbgroup.com.

 

Jeff: And the website of course, thecbbgroup.com. Brent Freeman, we really do appreciate the time, unfortunately it has run out for this particular edition of the show, but I'd like to think that we can have you back on again in the future.

Brent: Absolutely, it would be my pleasure.

That planning process is key to making sure that not only you have a smooth transaction, that you have a large buyer pool, but that you get to maximize what you take out of the company.

Jeff: We've enjoyed it and thank you so much. That's Brent Freeman, investment banker and M&A advisor at the CBB Group in the other Milwaukie, Oregon. We hope you enjoyed the discussion, let us know won't you?

We're interested to know your thoughts about this program and about Deal Talk in general, what you like, and your suggestions for how we can make this show even better. We wouldn't be here if it weren't for you so make sure that you do take the time to send us an email won't you, dealtalk@morganandwestfield.com. It'll be worth it, trust me.

Deal Talk is presented by Morgan & Westfield, a nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com. My name is Jeff Allen. Thanks so much for listening and we'll talk again.

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