Whether your company is in growth mode or you’re positioning your business for sale, you may want to consult the services of an investment banker. For low- and mid-market level companies with revenues of $50 million or less, the decision of which bank to use may seem daunting, but not all investment banks are the same. Todd Taskey is an M&A advisor with Potomac Business Capital. We had a chance to catch up with him to discuss his perspective on the importance of working shoulder to shoulder with business owners in order to determine the best ways forward for strategic growth, whether through partnerships, joint ventures or acquisition.
At the root of what we do is that we help clients sell a completely illiquid asset into a largely illiquid market. And so that becomes challenging number one, and there are many different elements that will impact the overall valuation for the business.
- Todd Taskey
Jeff: If you need to grow, should you call an investment banker to help you? What if you might want to get out altogether? Investment bankers, the who, what, how’s and why's are coming up. So 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, a 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 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 can use to help you build your bottom line and improve your company's value.
Joining me today from Bethesda, Maryland, is Mr. Todd Taskey, investment banker and M&A advisor at Potomac Business Capital. Todd, welcome to the program. Nice to have you on “Deal Talk,” sir.
Todd: Jeffrey, happy to be here. Thank you.
Why are you working so hard in your business, and two, to what end point?
Jeff: Thank you so much. At first glance, Todd, anyone who kind of goes by and checks out either your LinkedIn profile or they go to the Potomac Business Capital website, it's easy to see that your organization performs many of the same functions that an M&A intermediary, or a broker, or even a private equity firm might provide. But what exactly do you do that sets your company apart maybe from the rest as an investment banker might?
Todd: It's an excellent question. First of all, I guess I would answer that with a question, which is for entrepreneurs that fall into that category. The question is, why are you working so hard in your business, and two, to what end point? And I think everybody needs to consider the bigger picture of what they're trying to accomplish with their business. If it's going to be an exit, if it's going to be wind down, if it's going to transition to the next generation family, whatever the case may be, you want to determine how best to maximize the value of that business. So that would really be the first questions I would ask to anyone listening. And then what it is that we do... We focus on helping clients in that lower middle market, which most people define as $50 million of revenue and below. And so we help them really think through what the future holds for their business, how to maximize the value of that business, and the timing around when they may want to do a transaction.
Jeff: How does an investment bank such as Potomac Capital, for example, based on your experience, Todd … How does a bank work with its client to help elevate the value of their company on the path to selling?
Todd: That is a great question. At the root of what we do is that we help clients sell a completely illiquid asset into a largely illiquid market. And so that becomes challenging number one, and there are many different elements that will impact the overall valuation for the business. And there's really two things that we strive to help our clients with. And one of them is to get maximum value with best possible terms for a transaction. But the other one is to get what we call “true price discovery” for their business. But what is the business really worth? And the best way to do that is to create a market and then to ask that market for what the value of a business is. So that is the best way to get the answer to your question. And the best way, we've got many clients and a couple that we're working with right now, but many clients over the years where a process of eventually transacting their business could be a couple of years. And I've got two clients now that are beyond two years, and the agreement that we had when we started working together was that we would go to the market, we would put together a list of prospects, see who is interested, talk to those who are interested, and see if there's a real value of the business that it would make sense for the client to exit. In most cases it is the most valuable kind of consulting that a company can get because they hear from very intelligent private equity groups and others perhaps in the space or other strategic buyers that will say, "Jeff, I don't like this about your business. Your customer concentration is too much for us. You don't have enough recurring revenue," on and on and on and on.
And so now since you're going to work really hard for the next two or three years anyways, now you really know the way that not the market in some imaginary sense but in a real specific sense, what the market has said specifically about your business, and specifically about the areas that are going to impact its valuation. And with that, it becomes really transparent and very helpful for the owner to understand how they're going to maximize the value of their business as they progress through the next year or two until they've got their business exactly where they wanted to maximize value.
I think everybody needs to consider the bigger picture of what they're trying to accomplish with their business.
Jeff: OK. Let me as you this. So you talk about true prize discovery by creating a market and asking that market what the value of the business is. So you've got a business owner in front of you and you've talked to them. And then you come back and whatever space of time you might require to kind of do this discovery, this research, what happens if you come back to the owner and the answer you give them is not necessarily what they want to hear? For example, there's no market right now currently in demand of a company like yours, or we don't think that we can give you quite the value that you want. What happens at that point in time?
Todd: First of all, it doesn't come as a surprise.
Jeff: Oh, it doesn't?
Todd: No, because as a participant in the process they're in on those phone calls and those meetings, and they're the ones answering those questions, not I. So from that standpoint, they're learning along the way. And it could be a little bit grueling from that standpoint. But anything that you go through to improve the value of your business is going to be somewhat grueling anyways. I'll give you an example. If I were to come back ... A lot of work that we do is in the services space, IT services companies. So if you look at a service business, it's going to probably have a transaction value somewhere between four times your EBITDA and maybe as high as nine times, depending on your space, and how much revenue is recurring, and if there's any IT. And let's just make it simple and say we've got a business with a million dollars of EBITDA. So that means the value somebody would place on that business would be somewhere between $4 and $9 million dollars. And based on the criteria of the business I could probably shorten that range in terms of what expectation should be. But if the market is probably going to be, in this example, somewhere between $5 million and $8 million, let's say, and the client tells me that they want to get $10 million or $12 million for their business, that's not an assignment that we would take on.
So there's not often a great surprise from that perspective. We can provide some guidance if somebody's way outside the range of what is reasonable to expect. If they're in the range of reasonable, then hopefully by pulling together two, or three, or four offers for the business, it becomes pretty easy for the client to understand what the best deal for their company is. And that's what I mean by true price of discovery. And so two comments there that might be interesting … The first is, for example, on that business that's doing, let's just say it's an $8-million-dollar business and it's doing a million dollars of EBITDA. And I come back to you and say, "Hey, I got an offer for the business, and it's $6 million dollars. What do you think?" Your response should be, "I have no idea what to think because I've got nothing to compare it to." But if the three other offers that I brought you before were all between $4 and a half and $5 million dollars, maybe your response is, "Wow, that's terrific." If the other offers were between $7 and $8 million dollars, you would say, "Tell that guy no thanks."
Todd: So you may, if we're doing it right now, you may pull together, let's say three, four, or five offers for the business, and let's say they're between $6 and $8 million dollars, then I would feel very confident saying to that client as of Q1 and 2016, the value of your business is right around $8 million dollars. Whether you'd like that number or not, the market has spoken, and here's what it is. And maybe your accountant says it's more. Maybe your attorney says, "Wow, it should be higher than that," but it's not. This is what the market will bear for a business like yours in your condition, with these dynamics right now.
Jeff: That guy who's talking with us right now is Todd Taskey. He's at Potomac Business Capital in Bethesda, Maryland, M&A advisor there, investment banker. We're proud to have him on the program. You're listening to Jeff Allen on “Deal Talk.”
Todd, when you get ready to sit down with a client, who do you typically work with in terms of the other types of professionals in the deal, in part of the deal in the business of M&A? In order to pursue a deal for that client, whether it's financial or a strategic transaction?
Todd: There's always lawyers on both sides. Our client, the seller will have their attorney, the buyer will have their attorney. Oftentimes there will be a banker or an M&A professional whether it's somebody in-house if it's a larger company or an independent firm. And there're people that provide data, whether that's the CFO of the company or an outside accounting firm or something of that nature. But there's usually a good collection of folks that will support a transaction like this.
The second mistake I find that people make oftentimes is confusing the importance of structure in a transaction as it relates to value.
Jeff: Time to take a quick break. When I come back I'll continue my conversation with Todd Taskey at Potomac Business Capital. You're listening to “Deal Talk.” My name is Jeff Allen and I'll be back after this.
If you'd like to share your knowledge and expertise on any subject related to selling businesses or helping business owners improve the value of their companies, we'd like to talk with you about joining us as a guest on a future edition of “Deal Talk.” Interested? Contact our host Jeff Allen directly. Just send a brief email with "I'd like to be a guest" in the subject line. In a brief message include your name, title, an area of specialty and contact information, and send it to firstname.lastname@example.org, that's email@example.com.
Selling your business may be the most important business transaction you'll ever undertake, so don't go it alone. Work with an organization that has made it their business to sell businesses and that's all they do. Morgan & Westfield at 888-693-7834. At Morgan & Westfield we know that selling your company is not something you should take lightly. It can be a stressful, difficult, even emotional process. That's why it's important to work with a team whose one and only specialty is selling businesses throughout the United States. And Morgan & Westfield will help you every step of the way. From helping you plan your exit strategy, to preparing a comprehensive appraisal, and locating the right buyers. Without the right team behind you, you could be leaving money on the table. So don't leave your most important business transaction to chance. Call Morgan & Westfield for a free consultation at 888-693-7834, 888-693-7834, or visit morganandwestfield.com.
Jeff: Welcome back to “Deal Talk.” My name is Jeff Allen. It's good to have you back on the program with us, and it's good also to have my guest Todd Taskey, investment banker and M&A business advisor at Potomac Business Capital, joining us. We're talking investment banking but we're also talking investment banking from Todd's perspective, why you need to call one, how his company works a little bit differently from others, and really what you as a business owner need to remember trying to provide you with some general information, some things to think about when you're looking at growing your business on your way to eventually selling it.
Todd, I'd like to kind of get your idea on what you believe might be two or maybe three of the biggest mistakes that business owners tend to make when it comes to working with someone to help them sell their company. Let's face it, there's a huge industry, it's not a cottage industry, there's a huge industry out there of companies that are looking to help business owners, at least they say that they're trying to help business owners sell their companies. But when you put so much blood, sweat and tears into your business, you've been at it maybe 20 or 30 years, you're going to want to talk to people who are going to want to genuinely take their time and help you achieve your objectives. But then there are those companies out there that for whatever reason seem to fall short on the educational end, and you've got business owners, maybe even people like me perhaps, one day down the line, who end up making some real critical errors that end up potentially leaving money on the table. Let's talk about some of those errors that business owners can make and those types of things they need to avoid.
Todd: Yeah. I think there's a couple of thoughts that are running through my head and the first one kind of goes back to your point about the point of distinction for us. I think if there is a mistake that business owners make it's not looking forward long enough to begin a process. And as I've said, there's a couple of things on that first point, the first thing that a sale process is going to take, consider it a year, but it might be nine months from when you begin the process to when it actually closes. But you should give yourself a year. In the services business and in most transactions there's either a note or another component to the business, it's usually another year or two years. So really, you want your business to be strong and healthy for three years, from the beginning of your process.
So you don't want to wait until, as many business owners that may consider doing a transaction when the future is not as bright for them. That's the wrong time to consider doing a transaction. Given that coupled with the notion of how much you learn through the process, we encourage clients all the time to learn while they're going through the process to keep an open mind that this is a learning process and whether there's an immediate transaction now, or we take a break after this kind of the first phase. Improve on what we've learned and then go out again is a longer process from our perspective with more work. But oftentimes it results in a better outcome. That would be the first thought I have.
The second mistake I find that people make oftentimes is confusing the importance of structure in a transaction as it relates to value. And a simple example that I would give you because we always tell clients that structure is oftentimes particularly in smaller deals, a structure is often much more important than value. The example I would use to illustrate, going back to that $1 million dollar EBITDA company. If I give you two options, Jeff, option number one, to sell your business for $7 million dollars with $6.5 million of cash at close and another 500 paid out at the end of 1 year; or a $9-million-dollar deal that pays you $3 million dollars of cash at close and then a million a year for six years. If you had those two options, the $7-million-dollar value and the $9-million-dollar value, which one do you think you would choose?
And the reality is, cash in hand or structure is oftentimes more beneficial.
Jeff: The way I'm thinking about it now I'd probably go with B.
Todd: B would depend on how strong you feel about the future of your business, but six years is an awfully long time.
Jeff: And with economic issues coming up that you can't necessarily stave off or that you don't see, nobody has a crystal ball, nobody knows what happens, your business could be hurting inside that six-year period. So I see what you're driving at. That first option would probably be the best.
Todd: Yeah. The present value of that million income stream versus $7 million dollars all in cash up front. But your reaction is the one that people oftentimes have as a knee-jerk reaction. "Nine million's more than $7 million, I should take the $9 million." And the reality is, cash in hand or structure is oftentimes more beneficial. And that being said, I'm working on a transaction right now where a longer backend to the deal will create much greater value for the seller because the buyer will create a platform upon which they can leverage the strengths of their business. So it really depends on, as we said right at the beginning of our conversation, what is the intent of the business owner. Oftentimes people see transactions as the end of a 20- or 30-year career like you mentioned. And many times it could really be the next step in the evolution of a company. Because being oftentimes as an entrepreneur you could be a smaller part of a large company and be entrepreneurial inside that set-up with a lot less risk, a lot more zeroes in your bank account, and the infrastructure to support more rapid growth. And the end analysis of that might be a much better environment and being "on your own" right from that perspective.
So as it relates to mistakes, maybe being close-minded to some very interesting, potential strategic opportunities. Secondly, would be placing value over structure, because I would say that they're equally important. And then there's a third one. It's just almost every business owner has, I think to some degree, a biased view on the value of their business. And so we always ask clients to keep an open mind around the value of the business until we start to get multiple data points that will support what the value of the business really is.
Jeff: And, Todd, this just speaks to the importance of working with the team and working with an advisor who has a 30,000-foot elevated view who is not so close to any one business that they can't come up with a number of strategies or options that are based on so many different tangible and intangible factors, because as you pointed out, everybody is different. Everybody has kind of a different time horizon. And really when you're talking about a lot of factors that could impact the performance of a business over time, such as what you had kind of pointed out there, it's so important and so critical that you get in touch with people who are in the business and have been in the business of working with companies over a long period of time, and to have the forethought, who have all of these ideas and these options that are available to you instead of pigeonholing you with so many other business owners and giving you only two or three different routes you can go. I think what you were just talking about is very important.
Todd: That's really well articulated, and I've got a client right now who, again, we've been consulting with I would say for probably a year or so. And it's year-end, so we did some review. She would like to lessen her risk because she's so invested in the business. She's got debt on the business that makes her a little bit nervous. She's early 50s, so she's thinking about wanting to work for the next five years. She's got a lot of opportunity in front of her, but she's concerned about raising money or the capital required to really accelerate into those opportunities that would eventually make her business more valuable. So she's really stuck there. Long story short, we have in my network a company that loves to buy businesses like that. They typically will pay between 65% and 85% cash upfront for the business, apply the infrastructure and the resources from a financial on the human resources perspective, give it the capital it needs to grow, and then buy out the last 15%-35% in two, or three, or five years, whatever is negotiated upfront on a pre-determined formula that would in this case allow her to deliver, eliminate the stress that she's got from the business and from the debt, have the capital she needs to grow the business without suffering delusion from a private equity group. It's a great fit for her. And she said, "Wow, I never knew that there was an opportunity like that." And there's plenty of opportunities like that. There's a really good cultural fit between this buyer who we've known for years and this client who we've known for a year or so. So back to the notion of folks that spend their time developing networks of people and companies is valuable in terms of finding that right fit.
It's just almost every business owner has, I think to some degree, a biased view on the value of their business. And so we always ask clients to keep an open mind around the value of the business until we start to get multiple data points that will support what the value of the business really is.
Jeff: And the investment banker, in this particular case, advisor, such as you, Todd, brings these two parties together. And they create these opportunities and these options that previously were undiscovered or even thought of. When working with an investment banker, Todd, how do the fees work? I want the best return on investment that I can get. How do I get you paid?
Todd: Typically, with any investment banker there's typically an engagement fee upfront. Some bankers will do that on a monthly basis over whatever period of time. We don't do that. We prefer to stand shoulder to shoulder with our client. So the fee that we typically get upfront, gosh, winds up paying, is probably less than minimum wage during the process, during that year, or 9 months, or maybe a couple of years. And then we get a success fee at the time of a transaction.
Jeff: As we kind of step aside and we wrap this edition of “Deal Talk,” Todd, because I've gone down my list here and I looked at all of these things that we've talked about, it's just been so much information, and we could probably talk to you for an entire half hour again. We'd love to have you back on again, as a matter of fact, to talk with you once more. Some key takeaways from our discussion today, Todd. If there is a business owner among our big audience today listening to this program and maybe they've got a horizon of two to five years looking forward, they're not ready to exit yet, they're certainly not ready to give up control of something that they truly do continue to enjoy doing. They're part of the process. They like to watch their business grow but they know that it can be so much more than it is, and they're looking at maybe consulting with an investment banker for options, ways to help them improve the value of their companies. What would you say? What are two or three things that you could leave our audience with today that you think would be of some value to them in making future considerations going ahead?
Todd: That's a great question. I think like anything you need to talk to a few. And I think it's a lot easier to talk to a few over a period of time as opposed to, "I want to sell my business this summer. I got to start interviewing bankers now." I'm sure most of your listeners are on LinkedIn, we can be found on LinkedIn. They can search investment banker, M&A, or whatever the case may be in LinkedIn and find people probably in their network that they would know. Certainly we'd be happy to talk to folks. They should talk to a few people and get ... My sense is the success fees or retainer fees are all going to be in the same kind of general ballpark. A competitive market usually drives that or requires that. I think the key is who would I enjoy working with? Who do I feel comfortable with? Who do I feel confident has my best interest at hand that can really help me drive transaction that would give me maximum value for my business with the best possible structure?
So I would say that just in terms of interviewing people, I would think, also be open-minded to the notion of what you will learn through the process. And if you do not have a two to four or two to five-year window that you want to sell your business, what is the time frame for you to want to sell your business? Why is that your time frame? And what would you do after you sell your business? Because there's a lot of folks, particularly the folks that we work with, that this is not the final hoorah for them. They've built a business. They've grown it to the extent of their capability set. And now they're either going to repeat that or they want to take some chips off the table, or they want to explore other opportunities. And those are all really good questions for folks to ask themselves to make sure that they're maximizing the value of what's probably one of the largest assets if not the largest asset that they own.
So back to the notion of folks that spend their time developing networks of people and companies is valuable in terms of finding that right fit.
Jeff: And it'll probably be the biggest business deals certainly that they ever do, Todd. And I love it. It's better than a cliffhanger. You've left us with some really thought-provoking points to ponder and some questions to ask ourselves. And that's really important. And we talk about this in “Deal Talk” often and it always bears repeating, what is the end game? What do you want to do? Think about it. Give it some real thought. Todd, if anyone would like to get in touch with you directly at Potomac Business Capital, how can they reach you?
Todd: Yeah, Potomac Business Capital is the website. They can find us right there. And I'm firstname.lastname@example.org. And also, my cellphone number is a great way to reach me. I usually have that with me all the time. And that's 301-529-1100.
Jeff: Todd Taskey, tremendous pleasure having you join us today on “Deal Talk.” Hopefully, we can have you back on the program again real soon.
Todd Taskey, an investment banker and M&A business advisor at Potomac Business Capital, has been my guest. We hope that you enjoyed the discussion, I know that I did. Let us know what you think. We're interested to know your thoughts about this program and about “Deal Talk” in general, what you like, your suggestions for how we can make this show even better. We wouldn't be here if it weren't for you, after all, so send us an email to email@example.com with your thoughts.
“Deal Talk” is presented by Morgan & Westfield, the nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com. My name is Jeff Allen. Thank so much for listening. We'll talk to you again soon.
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