Investors – Angels, VC’s, PEGs

Key Takeaways

  • Many business owners have misconceptions about the length of time it takes to sell a business. Often owners are surprised to learn that it generally takes approximately nine months to a year.
  • The price of a business is just a component of the whole package. Price is important, of course, but structure is also important. 
  • Because selling a business is a long process, it is important to meet with an investment banker several times before committing. A business owner wants to be sure their interests are aligned with the investment banker’s, and that they’re both comfortable working together.
  • Letters of intent are non-binding but very detailed. It is important that every major detail of the deal is included in this letter, because definitive agreements will be drafted off of these letters of intent.

Read Full Interview

 

Jeff: Considering working with an investment banker to help you sell all or a portion of your company? What can you expect? How do they work? And how can they help you get what you want? If you're looking for answers to these and other questions about investment bankers and working with them, 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: Hello and welcome to the web's number one content source for small business owners committed to building a business for eventual sale. Here on “Deal Talk” 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.

Using an investment bank to help you sell your company is a popular option. And today to talk a little about the process and the role the investment bank plays in the M&A process overall is Ann Hanna, managing director of Schenck M&A Solutions. Ann Hanna welcome to “Deal Talk,” good to have you.

Ann: Thank you for having me.

And then as the company goes into diligence, that CFO is really the quarterback of the process from the seller's side in providing information to the buyer.

Jeff: Tell us a little bit, first of all, really quick, about Schenck M&A Solutions. It doesn't necessarily say investment bank on the front of it, but there's a lot more going on over at Schenck than kind of meets the eye.

Ann: Yes, there is, Jeff. Schenck M&A Solutions, we are a group of seven investment bankers. We operate very much like an investment bank but we're within a large accounting firm. Schenck is a top 50 accounting firm in the country. We have over 500 employees, nine offices in the state of Wisconsin. Our group operates as a practice within Schenck. And so we bring the expertise of a boutique investment banking practice utilizing the resources of a large accounting firm. So we utilize the checks and accounting services, and professionalism that we find here. 

 

Jeff: So really an extensive line of services that you can provide and that really is of tremendous convenience to business owners today and particularly during that M&A process. And I wanted to ask you first of all, one of the things we talk about here on “Deal Talk,” and it really is kind of right at the heart of what this show is all about. We try to help business owners improve the value of their companies. And oftentimes, as we know business owners who have been at it for a while have a pretty good idea, or at least they think they do, of the value of their company. What do you tell those business owners who come to you with the objective of selling their company at a premium price or premium value?

Ann: Well, hopefully, everyone who comes to us is coming here because they want a premium price and value, and that's really what's our objective here. For an owner who's looking for that, our interests are perfectly aligned. At the beginning, once you have an owner who's made a decision to sell their business, at the very beginning of the process we do an evaluation of that business. We never price a business. We go to market in a different fashion than a business broker, so we never price the business in the market. But what we do is an evaluation. And based on our experience, we have a conversation with the owner about the value of the business and what we believe this business will bring in the marketplace plus or minus 10%. And we do that, Jeff because we want that business owner to know that we believe their business is worth X, and so they can make the decision, do they want to go to market, are they a seller at that price? So if we do evaluations, say, and we have a business that we believe is worth around $20 million, and that business owner needs $30 million for an exit to make sense to him, then we need to re-evaluate and reconsider. 

And he might not be ready to go to market at this time. Now, of course, we always try to bring a price greater than our valuation, but we like to bring reality to the process because it's a long and arduous process, and you don't want to go through it unless you feel like you're going to be successful.

We have the buyers bringing a variety of questions to us, and they're bringing the questions to us, the investment banker, not the client, because we want the client to really focus on running his business. So what we try to do throughout the process is take as much off his/her shoulders as possible.

Jeff: Are you able to then account for maybe some added time that it will take a business owner to bring the value up of his company but do it in a way that makes sense? Do you have those types of conversations? Do you talk about value drivers and how they might be able to improve the value or price that they'll potentially get for the company?

Ann: Yes, we do. And we oftentimes will talk with a business owner for years before they're ready for market. And we will talk to them about what we are seeing in the business. We'll talk about the positives. And we'll also talk about the negatives, areas where I think the value is being brought down because of different factors in the business. And if they can be resolved and cured in a period of time, then we'll work with the business owner to do that.

 

Jeff: You kind of pointed out that you're not really an investment bank per se, but you provide those types of services. With the understanding that investment banks can pick and choose their clients, what are the most important criteria that you look at to help determine which companies that you'll work with?

Ann: Actually, Jeff, I'll just make a correction. We actually do operate exactly like a boutique investment and we're licensed through FINRA and FTC, exactly like a boutique investment bank. The only way we're unique is that we sit and we're affiliated with a large accounting firm.

 

Jeff: Very good.

Ann: So really that's the only difference. 

 

Jeff: The host stands corrected, and I appreciate that, Ann. Thank you so much.

Ann: And your question was about picking and choosing clients and what we're looking for. Specifically, we're looking for people who are true sellers, who have a motivation to sell and aren't just wanting to go out and test the market.

We're also looking for sellers who are realistic in regard to value and the effort that it requires selling such a major asset. So we look at all those factors because we're very much aligned with the business owner as far as the success. And our fees are aligned with their receipt of funds. So we're very much having an investment in the entire process. And it is a very long process.

 

Jeff: What are some common misconceptions that business owners may have? You sometimes have to kind of set the record straight with regard to working with investment banks?

Ann: When owners come to see us, I think maybe the first misconception they have is the length of time it takes to sell a business. Generally, it takes approximately nine months to a year. And oftentimes owners, they are surprised that it would take that length of time. But truly that is what it takes to go through a full marketing, a full vetting, bringing in buyers, bringing in site visits. And then working through all the due diligence in the legal documents and that sort of thing. 

The next thing they're surprised at is really the number of different areas, and different facets with a business sale where they really can lose purchase price, and they can lose value. There's a variety of steps along the way. And often time business owners think, "Well, if I get my price that's all that matters.” But really price is just a component of the whole package. Because the price is important, of course, but structure is also important. How much of that is cash at close? How much of it is, is it a seller out? Is it an earn out? What are the terms of it? All areas that can be a little bit of a slippery slope for a seller if they're not aware of all the intricacies and options of the various items of the structure. 

Then there's also networking capital calculations. Those are important and those can be big dollar variances in actual net proceeds. There's purchase price allocation if it's an asset sale, that can have a significant impact on you after tax proceeds. So there are just a variety of ways that you can increase the purchase price, increase the proceeds that you take home or decrease if you're not aware of all the nuances.

The only thing binding in a letter of intent is the exclusivity period that's required of the seller. Which means when a letter of intent is offered, the terms of it are not binding on either party legally, but the seller is required to take the company off the market, and to not talk to any other buyers while our chosen buyer is doing their due diligence.

Jeff: When you're meeting someone for the first time and there is an interest there and a mutual interest in working together, is that kind of a one meeting decision where they learn about you, you learn a little bit about them and wham bam, you have a contract, an agreement to start pursuing the process? Is this something that can take a while just to kind of establish a relationship with this perspective client, a business owner coming to you with the interest in selling their company?

Ann: It does take a while generally, although I like your idea of just one meeting and assigned engagement, that's all great. But no, for a seller it's very important that they talk to a number of people, they talk to a number of intermediaries and sources, and have a real comfort level with who they're working with. It's generally a very large decision, and for many business owners in the lower middle market, this is the largest transaction of their life. And they've got one shot. This is the business that they bought and grew for 30 years, or maybe it was a startup or a second generation. But they've got one shot to get it right and they need to get it right. Generally, we can work with clients for years before they make this decision to sell. As you referred to before, Jeff, we'll work on value drivers, on increasing value, on market timing, on timing for them personally before they come to market. And at the very minimum it generally is several meetings so that we can really vet out what we're trying to do, make sure their interests are aligned, make sure that we're both comfortable working together, because as I refer to earlier, it's a long process. We'll probably going to be together for a year working on this project, so it's important that we have a good understanding of what's involved and how well we work together.

 

Jeff: Who are the people on the sell-side team you are in contact with most often during the process of the transaction?

Ann: We have probably the most contact with the owners, whether it's one or several. We also work much of the time with the company president if that is separate than the owners, or sometimes it's the same person. Oftentimes we'll work with sales manager, operations manager, the key management team as we put together marketing materials, and as we do site visits with buyers it's very important to have those key members involved. And then of course the CFO. The CFO plays a tremendous role at the beginning of the process and at the end of the process. Initially at the beginning as we put together marketing materials, because of course there's a great deal of financial information in the marketing materials. And then as the company goes into diligence, that CFO is really the quarterback of the process from the seller's side in providing information to the buyer.

 

Jeff: Very good. Anne Hanna is our guest here in “Deal Talk” today, and she is managing director of Schenck M&A Solutions. We're talking a little bit about working with investment banks when we want to sell or divest ourselves maybe a portion of our companies, and we're going to talk a little bit about the process, kind of how it works from day one, from first contact all the way through the process of actually assigning and closing the deal. As you heard Ann talk about that could take nine months or as much as up to a year perhaps, but we're going to try to talk about that in just a couple of minutes when we return with Ann Hanna on “Deal Talk” right 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, the area of specialty and contact information, and send it to jeff@morganandwestfield.com, that's jeff@morganandwestfield.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.


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I'm Jeff Allen with my guest Ann Hanna, managing director of Schenck M&A Solutions in Milwaukee. Ann, welcome back. I appreciate you're being with us on the show. I'd like to talk a little bit now about the process. I'm a business owner. I've just kind of come in. I've talked to all the M&A intermediaries that you've suggested that maybe I visit. And I'm settled on maybe doing business with you. So let's talk about what happens next and walk us through all of the stages in the process.

Ann: OK. Our first stage is a preparation stage. This is the point at which we talk about the value of the company and we come to a decision on that, and provided the client is comfortable with the valuation that we believe the company will draw in the market. Then we start putting together marketing materials. And marketing materials include the confidential information memorandum, which is about a 50-page document. It would tell a prospective buyer really everything about the business from marketing to sales personnel, and sales channels, to a history of the company, to growth ideas, and key investment considerations all the way through financials. 

We put together confidentially a teaser sheet, which is a one-page company profile that does not disclose who the company is but will give a perspective buyer an idea of, "OK, we have a company in this industry in this part of the country." And this is a very broad overview of their financial performance if this perhaps some you might be interested in. And, of course, we'll put together the non-disclosure agreements, which are approved by the client's attorney and we’ll start to develop a buyer's list. This process takes one to two months, and once we're done with this preparation phase, then we move into phase two and we're ready to go to market, we hit the ground running. Of course, the client will have approved all the documents prior to us moving forward and we'll approve the buyer's list. Then we go to market. And when we contact all these potential buyers and we send out a teaser sheet and they'll come back to us and say, "Wow, this looks like a wonderful company. I want to see more." Or they'll say, "You know what, I'm not familiar with this industry. I'm really not interested. Thank you so much." And again, Jeff, this is just a basic process. It can change very much from company to company, but I'm just going through kind of a basic overview. Again, we're in phase two, we're in marketing, we have the buyers bringing a variety of questions to us and they're bringing the questions to us, the investment banker, not the client because we want the client to really focus on running his business. So what we try to do throughout the process is take as much off his/her shoulders as possible. 

So this is one area where the seller is not involved. We're doing all this behind the scenes, all the interactions with the potential buyers. We're doing follow-up interviews, and gathering information, and getting information to the buyers. The marketing phase also lasts maybe one to two months. And then we have a deadline where we call for an indication of interest. And we basically say to all the buyers who have the information, we say, "Could you give us an idea, a one-page letter, give us an idea of what you see is the value for this business?” And they'll do that. And we'll receive letters. And then we'll sit down with the seller at that point and we'll review these indications. So that's really, and this is phase three, this is really our first indication of what the market is saying about the company and about the value of the company. And we sit and we look at these buyers, we look at the offers and review it with the client, make a decision on who we would like to bring in for site visits. Again, these initial offers are simply indications of interests. There's nothing binding about them on either part. It's just a little bit of a disclosure to say, “Are we on the same wavelength as far as value?”

 

Jeff: Hey, let me ask you, jump in here really quick … has there ever been a situation where you have just had a tremendous response from prospective buyers in a company that was almost overwhelming? What's the largest number that you can remember of offers coming in from buyers out there from a business that you represent?

Ann: Largest number it close to 30. And that's a tremendous response. It was a very nice business. It's a good, solid manufacturer, a pretty good size.

 

Jeff: Does that often result in any kind of a bidding war kind of situation when you kind of whittle it down to the final three or four, or maybe even two?

Ann: It does, but at this point we're not really whittling down that narrowly because we're just trying to make a decision of who's going to come in and see the company.

And there are so many circumstances out there that could in fact happen, because, again, all deals are different, all companies are different. But a lot of this stuff isn't really discovered until the digging actually starts to commence, and there's a lot of digging to be done.

Jeff: Very, very good. 

Ann: But that is tough when you get that many indications of interest. It is difficult to make a decision because you can't bring 30 parties in to see the business. And in fairness to the buyers, it's really hard to say what you think the value's going to be without getting a chance to meet management, without getting a chance to tour the plant and really understand the business. So oftentimes, and sometimes we have to do follow-up phone calls with the perspective buyers. But what we do eventually is get down with the seller and we make some decisions. And we decide how many site visits we're going to have and who we're going to bring in. 

And yes, you're right, the price can be a bit up during that process, because if I have a buyer who I say, "Thank you very much for your offer but the value that you see in the business is not enough that it would make sense for you to come to a site visit,” often times they'll increase they're offer in order to be included in the site visit stage.

 

Jeff: I may be asking you to jump around a little bit because I think we're still here at phase three of the process. But at what point does the financial due diligence come in with respect to the sell side?

Ann: We do an evaluation at the very start of phase one. And that is my valuation, our methods of what we believe the market will bear.

 

Jeff: Got it.

Ann: Now, as far as a formal valuation, and then the buyers are generally doing their own valuation and what they believe the company is worth. As far a formal valuation, unless you're an ESOP or perhaps you need a fairness opinion into your public company or some other parameters, there never really needs to be a formal valuation done.

 

Jeff: Interesting. OK.

Ann: Of course there's a tremendous amount of financial work done around this. And we're running valuation models as the investment bankers, and the buyers are running valuation models for them to see what the value is to them. And really, buyers see value differently. And if you're a strategic buyer, which means maybe you own a company in the same industry, you're going to have a lot of benefits to perhaps acquiring my client. And so there's going to be synergies where this company might be worth more to someone in my industry than to a pure financial investment buyer.

Well, hopefully everyone who comes to us is coming here because they want a premium price and value, and that's really what's our objective here. For an owner who's looking for that, our interests are perfectly aligned.

Jeff: Got it. OK

Ann: So at the end of phase three then, we ask for final offers, which is the letter of intent. Then I skipped a step here, actually phase three then, once we receive the indications of interest and we select who is going to come first, then we bring everyone in to meet management and see the company. And then we ask for letters of intent, which is stage four. Letters of intent are much more detailed. This is generally both sides, both buyer and seller are using their attorneys to make sure language is proper and correct because definitive agreements will be drafted off of these letters of intent. So it's very important that we have every major detail of the deal in this letter. And again, these are non-binding, either to the seller or the buyer. The only thing binding in a letter of intent is the exclusivity period that's required of the seller. Which means when a letter of intent is offered, the terms of it are not binding on either party legally, but the seller is required to take the company off the market, and to not talk to any other buyers while our chosen buyer is doing their due diligence. 

 

Jeff: And how long does that due diligence process take?

Ann: That process, and that's stage five. So when we choose the LOI, then we move into stage five and we sign it. We've got our one buyer who's won the process. It can take anywhere from 60 days to 120 days, with the most typical being about 90 days. And during that time, and we had talked about this earlier, that's when the CFO is really in demand as far as providing information not only for all the financial diligence but for the legal diligence, and customer diligence, and vendor diligence, and HR diligence. Really that buyer is examining every area of this company to make sure that they're getting what they think they're getting, and that earnings are what we've stated they are and that the company is in a good position in all these various operational facets.

 

Jeff: And hopefully everything during the process throughout goes smoothly. And you've got a transaction that finishes, and both sides are happy with it, and then the transition takes place. But let me ask you this, and I know that you've been doing this a while and your company has a lot of experience in regard to helping business owners move into a different phase of their life transitioning their companies into new ownership. Do you have any stories, I'm wondering, and where maybe things didn't always go quite well, or they didn't go quite smoothly enough in order for the deal to consummate, that things kind of had to break down that you could relate to us that might serve as kind of a lesson to all of us about how important it is to be well prepared in order to sell your company?

Ann: Unfortunately, Jeff, I have all kinds of stories in that regard.

 

Jeff: I'd be asking you then, it's probably a tough job to come up with one of them but just share one of them.

Ann: Of course. I'll choose one that has a lesson behind it. 

 

Jeff: OK.

Ann: And it was especially painful for myself and for the seller. We had a company that we took to market and a wonderful, beautiful company, very well-received, a lot of IOI's. I think we had 23 or 24 indications of interest. So the market loved this company and it really was a beautiful company, site visits went beautifully, strong management team, just everything. It was just all sunshine and roses through the whole thing. But what happened is, as we went through the process from beginning through site visits and we got to the LOI stage. And we were at about month nine now and the company's earnings started decreasing. And one thing that all buyers, and what we will do as your intermediary is we'll be constantly tracking your trailing 12-month performance, so what is your sales, what is your gross margin, what is your EBITDA on a month by month basis? 

So by the time we get to LOI stage, we're tracking that trailing 12-month statistics for nine months. What happened to this company is that their sales fell off, their margins fell off, and consequently their earnings fell off for a variety of reasons which are not really relevant to the story. But they're trailing 12 months EBITDA, it turned out to be about 50% of what it had been when we started the process. And so the strong downward trend caused the buyers by the time they got to the LOI stage to significantly reduce their prices. The IOI stage, they were still using financials from the beginning of the process. And by the time we got to LOI, of course before any buyer submits an LOI they want current financial information. Offers came down about 30%. So it was very discouraging because remember these sellers had seen offers at a much higher value. And now the offers are coming in about 30% less, which actually was not bad given the fact that we had fallen off 50%. So it wasn't a dollar for dollar decrease. And what the sellers ended up doing, it was such a blow psychologically, is they decided to take the company off the market at that point, and to work on getting their EBITDA back up and then go back to the market. And what's happened is there's not been a full recovery of that EBITDA, so the transaction has never occurred, and that was years ago.

 

Jeff: Oh my gosh.

Ann: Yes. That was grueling and it was a difficult situation for everyone involved. And the buyers still had an interest in buying this company because it was a beautiful company, but the sellers just did not have an interest in selling at that price. And that was not the price we had discussed at the beginning of the process going back to what we talked about earlier. But no one could foresee the fall off in EBITDA and sales. It was just kind of an anomaly that no one saw coming.

Now, of course, we always try to bring a price greater than our valuation, but we like to bring reality to the process, because it's a long and arduous process, and you don't want to go through it unless you feel like you're going to be successful.

Jeff: Wow. And have you seen anything like this since or anything near this in terms of just how surprising everything kind of came to a grinding halt like this?

Ann: Well, every deal has surprises. And I haven't seen a situation exactly like this, but I did have a situation where I had a deal, again, it went beautifully and our buyer was a large international corporation which I won't state the name, but if I stated it everyone would say, "Of course I know who they are." We got to the LOI stage and we were working with the president of the U.S. companies, and after a very long process we reached an agreement and we were in agreement on the LOI. And the letter of intent was sent over to Europe, to the corporate headquarters, to be signed at the board level, and found out when it got over there that the head corporate attorney realized that this company had a non-compete in place, and they actually legally could not buy my client because they were under a non-compete agreement on a deal that had happened in a different country years earlier. So that deal was stopped when it was almost at LOI stage. It was stopped because of a legal situation that no one was aware of until it got to a very high corporate level. So that was another surprise. It had nothing to do with the company or the buyer, it was just a set of circumstances. And it was a matter of the buyer not understanding his restriction.

 

Jeff: And there are so many circumstances out there that could, in fact, happen because, again, all deals are different, all companies are different. But a lot of this stuff isn't really discovered until the digging actually starts to commence, and there's a lot of digging to be done. You've got attorneys on both sides and you got so many different people advising and consulting. It's hard to imagine. Sometimes though I would think, and as you're getting down to the nitty-gritty and getting down to what you think are the final stages, that all of a sudden the wheels come off. But these are lessons to be learned by everyone. The importance is to be well prepared. And we could go on and talk about how all of that is done and maybe have you back on another show to talk a little bit about that. 

But, Ann, what I'd like to do is kind of give you a little time right now to provide your contact information. No doubt we've got people in the mid-West and particularly in Wisconsin, maybe your part of the country who might be interested in coming by or calling you on the phone, talking a little bit about their particular situation. How can they reach you?

Ann: My telephone number is 414-465-5537. Again, that's my direct line, 414-465-5537, or they could email me at ann.hanna@schencksc.com.

 

Jeff: Well, when we were in touch with Anna about doing our show she got back to us and basically said via email that she could talk about this stuff for hours. So we'll probably hold her to that, but we'll do it over a series of shows.

Ann: Thank you, Jeff. It's been great being here.

 

Jeff: Ann, it's been a pleasure for us. Ann Hanna, managing director of Schenck M&A Solutions, has been my guest, and we hope that you enjoyed the discussion today.

You can find this and all “Deal Talk” podcasts on a host of channels for your convenience, including morganandwestfield.com, Stitcher, Libsyn, and of course iTunes.

“Deal Talk” has been brought to you by Morgan & Westfield, a nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com. My name is Jeff Allen, looking forward already to joining you again next time. Thanks so much for listening.

While we take reasonable care to select recognized experts for our podcasts please note that each podcast presents the independent opinions of such experts only and not of Morgan & Westfield. We make no warranty, guarantee or representation as to the accuracy or sufficiency of the information provided. Any reliance on the podcast information is at your own risk. The podcast is for general information only and cannot be considered professional advice.

Key Takeaways

  • When thinking of exiting your business, you need to determine what your end game is and ultimately what you want to do.
  • The process of selling a business generally takes one year. When there's a note or an out component to the business, that usually adds another one to two years. So you want your business to be strong and healthy for three years, from the beginning of the process.
  • Do not place more importance on value over a structure, because they are equally important.
  • When looking for an investment banker, you need to talk to a few over a period of time. And then decide who you would enjoy working with most and who you feel most comfortable with.

Read Full Interview

 

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." 

 

Jeff: Exactly.

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 jeff@morganandwestfield.com, that's jeff@morganandwestfield.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 todd@potomacbusinesscapital.com. 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 dealtalk@morganandwestfield.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.

While we take reasonable care to select recognized experts for our podcasts please note that each podcast presents the independent opinions of such experts only and not of Morgan & Westfield. We make no warranty, guarantee, or representation as to the accuracy or sufficiency of the information provided. Any reliance on the podcast information is at your own risk. The podcast is for general information only and cannot be considered professional advice.

Key Takeaways

  • When considering barriers to growth, there are general themes that occur across a range of businesses.
  • Selling a business or bringing in a partner is not something that one should jump into lightly.
  • A strategic buyer will pay the highest initial price for a business, but may not offer the best long-term solution for the owner.
  • A private equity firm may take either a controlling interest or a minority stake and will do what they need to do to help a business grow.

Read Full Interview

Jeff: Private Equity, why and when you should consider calling a PE firm to grow or recapitalize your business. 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 business owners committed to building a business for eventual sale. To that end 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 Detroit is Mr. Chris Sheeren. He is partner at Huron Capital Partners. Chris it's nice to have you on board. Thanks so much for taking time out of your day to join us.

Chris: Thanks, Jeff.
 

Jeff: Chris let's start with a quick look at you and Huron Capital Partners, the types of transactions that you guys do and specialize in, and types of businesses that you like to help.

Chris: Sure. Huron Capital Partners is based in downtown Detroit. We've been around since 1999, which in the middle market private equity world makes us I guess one of the older firms around. But we invest in companies really all over the U.S. and Canada in four industry categories which are consumer, health care, specialty manufacturing, and business services. Companies generally in the size range from 20-200 million in revenue. So these are solidly lower-middle market businesses scattered throughout the U.S. and Canada.

 

Jeff: Chris, if you could rank them in any order, when you consider really the top three barriers, not drivers but barriers to growth in terms of value in a company, what would those three barriers be? Again, they don't have to be necessarily in any order.

Chris: Sure. We look at over a thousand different companies a year and we'll end up investing anywhere between five and ten. We see a pretty broad variety of companies but you certainly do see some general themes that occur throughout. And many of these are actually very fixable. Sometimes these things can be attractive to us if we see a company that's otherwise has a nice product or service that's important to the customer but yet they haven't been able to grow because of somebody's limiting factors. Number one I think is just kind of a weak financial systems or weak internal systems, which is usually driven by the lack of a strong CFO. Very often you'll see an entrepreneur run a company. Maybe they're making $50 million a year in revenue and you ask the owner how he or she did last year and the answer is they look at their bank account at the end of the year and they know how much cash they've made. Which is fine and for them that's good because at the end of the day that's what matters for them. But from an investor's perspective it's really important that the company and management can be able to tell you kind of on a daily basis how the performance of the business is. Are there key performance indicators in place that can tell you how sales were yesterday, this week, this month to date, is the company closing their books on a monthly basis, on an accrual basis? So you really can on an ongoing basis and on an interim basis know exactly what the performance of the company is and importantly to be able to spot trends. And companies that don't have that eventually are going to limit themselves pretty significantly. And certainly that's something we see a lot. 

Another thing that we see is what we would call key person risk or over-reliance on one person at a company. Again, not uncommon in kind of entrepreneur, founder-run businesses where the patriarch or the founder has built this business from the ground up and done a great job of creating a nice business that has a product or service that's important to their customer. But very often that founder will have all or most of the key, important customer relationships. Or may the founder have the key knowledge of the technology of the business, or very often we'll see that the founder is really the idea generator and the creative driver of growth and new product development, new service development within the company. And again, that's fine and that works for the founder/CEO as long as he/she is there. But it’s the old “What happens if the CEO gets hit by a bus?” question, how will the business perform tomorrow? And so if the knowledge and the relationships are not scattered throughout multiple levels and multiple people within the company, that's a real risk factor. And that's a real limiting factor to a company's growth and the ability for a company to have a real franchiser or institutional value.

The third thing I would say, and this one is maybe a little bit less controllable to a degree, but it certainly act as a barrier to growth and certainly a barrier to attracting investment is customer concentration or over-reliance on one particular customer. Very often a company's growth will be driven by one big anchor client. That's great and no one ever wants to say no to new business, particularly if it's profitable business. But very often a company can be growing for a number of years and look up, and all of a sudden one customer, General Electric, or Ford Motor Company, or Verizon, or someone is 50 percent of their business or even more. Again, that's great for a time but what happens if something happens to that customer relationship or the financial health of that customer? That can put the entire company at risk. Any investor is going to be pretty cautious about investing in a company that is overly reliant on one particular customer, or maybe even two or sometimes three customers. If the entire business is composed of three customers that's a challenge as well.

We look at over a thousand different companies a year and we'll end up investing anywhere between five and ten.

Jeff: Chris Sheeren, partner at Huron Capital Partners is joining us today on Deal Talk. And we're talking about private equity and really how it can work with businesses to help them improve their values and to help them grow. Really, at the end of the day that's what it's all about. Chris, do you find that in your industry there is more of a movement by private equity firms to tailor their services if you would to companies to appeal more to them on a personal business leadership level? Because as a business owner for example, what I'm trying to drive at, when I think of a private equity firm I think of a company that is going to come in, is going to provide me with some capital. They may take over either a controlling interest or a minority stake and they're going to do what they need to do to help me grow. And then in five, seven, ten years, whatever the case may be they're going to either go or if they have controlling interest, they may have an interest in shopping my company and selling it off. But it sounds to me that there is actually kind of a human connection that you kind of take at your firm. How important is it that you participate in a hands-on kind of way to truly help these companies kind of overcome these barriers and move forward? Tell me about how important that is.

Chris: Frankly there's a little bit of a balance in terms of how hands-on we are or we think we need to be, and that's driven by a number of factors. Number one, it's just kind of the depth and strength of the management team. If it's a team that has proven their ability and we think we've got all the right people in place at the company, we're perhaps not as likely to be effectively involved in that situation. Whereas if it's a company that's more in transition, the type of company I described earlier that maybe they really need to be investing in their systems, and upgrading systems, and upgrading the talent, we'll certainly get involved if the company needs to bring in a strong CFO, that's not uncommon. I can give you one example. We had invested in a company in Wisconsin, a plastic film manufacture, which was operationally a very well-managed business but had been frankly a little bit sleepy on the revenue growth side and had been a family owned business, and we were one of a handful of prospective investors that were looking at the business, and the company... Again, a family-run business, it was actually the widow of the patriarch who had passed away. The widow was selling the business on behalf of the family. It was very important to her who the new partners and who the new investors were going to be. She didn't want to sell to a strategic buyer. She wanted to go with someone who knew that was going to keep the business. This was kind of the largest employer in town and it was very important to her that the nature of the people that would be partnering with. And so we were able to bring to the table a very strong, a very business development-oriented CEO that we had been working with to look at making investments in the plastic film space. And so it really was a nice marriage. Our CEO came in day one after our investment and took the reins of the business, and really installed a very strong sales and marketing oriented culture to take this company operationally. And from a production standpoint it was very well run but to really kind of turn on the jets from a growth perspective. 

And so we were able to lean pretty heavily on our CEO and we stay involved at the board level, not looking to take an operating role but one of our CEO partner of ours did step in and run the company, and did a phenomenal job. And actually we just exited our investment in that business a couple of weeks ago, and it was a great success. We completed an add-on acquisition along the way. But importantly we're able to keep the jobs in this town in Wisconsin and grow the jobs in the town of Wisconsin and grow that business. And show to the sellers that we are the type of people that they wanted to do business with and they wanted as a partner.

 

Jeff: Ultimately, maybe it's a silly question. You'll call me on it. That's okay. We'll keep your comments in. I won't edit them out. But shouldn't that be the job of a private equity firm who's in a marketplace to help the businesses there while at the same time providing their investors with value? Shouldn't that be kind of the ultimate goal, is to keep the business up and running, but grow it, in other words grow it, make it become successful, try to keep those jobs in the local economy whenever possible?

Chris: Yeah, for sure, that's certainly always the goal. To be honest there are different firms, mostly some of the larger firms you might hear about may have a little bit more of a model that may be more focused on relocating, or downsizing, or that sort of thing. But really broadly speaking private equity firms are as you said earlier very accurately all about growth. And so we're always trying to figure out what is the best way to grow this business. Inevitably and invariably the best investments we do are the ones where we grew the business, we grew sales, we added jobs, we expanded, those are always going to be the big winners. It's tough to make a living slashing and burning. And I think unfortunately often private equity will kind of get tagged with that sort of image. And I think it's a bit unfair because at the end of the day our goal is to grow these businesses.

From an investor's perspective it's really important that the company and management can be able to tell you on a daily basis how the performance of the business is.

Jeff: We're talking with Chris Sheeren. He's a partner at Huron Capital Partners. And when we come back a really important part of our conversation, we're going to talk about the pros and cons of selling to a strategic buyer versus private equity. I'm Jeff Allen. I'll be back with Chris Sheeren, once again, partner at Huron Capital Partners in Detroit when Deal Talk continues in a moment.


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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, area of specialty, and contact information, and send it to jeff@morganandwestfield.com, that's jeff@morganandwestfield.com.

Jeff: I'm Jeff Allen with my guest Chris Sheeren, partner at Huron Capital Partners in Detroit. Chris, let's talk a little bit about it. Pros and cons of selling to a strategic buyer versus private equity, what say you about that?

Chris: I think there are pros and cons of both. Maybe we can consider a strategic buyer first.

There's a little bit of a balance in terms of how hands-on we are or we think we need to be, and that's driven by a number of factors.

Jeff: Sure.

Chris: Strategic buyer being defined as, if you're a business owner running a company, it would be competitor or perhaps a customer or supplier, someone in your supply chain who is potentially a competitor looking to buy you. And on the plus side very often a strategic buyer will pay the highest price for your business. If you have a product they may be able to take that product and take it into their channels, or their retailers, or whatever, and really be able to grow quickly. That very often is the fastest route to growth, with the strategic buyer. And if you're someone looking to exit the business, it really can be your number option. But there are downsides to that and trade-offs that go along with that. The reason that a strategic buyer can pay the higher prices usually because they see some sort of synergies. And synergy is kind of an overused term. Sometimes it means yes, they can sell your product in their channels, but more likely it means that there are cost synergies which is another way of saying that they're going to lay people off and quite possibly close an office or facility. Those are real hard cost synergies that any strategic buyer is going to look at. Those are certainly things to be concerned about if you are thinking about selling to a strategic. You will lose control over the future of the business and frankly your legacy. So if you want to stay more actively involved in the business then have more control over the future of your business and frankly the legacy of your business, the private equity option can be a very good one for you. You might not get as high a price as you would going with a strategic, at least initially. But what is also available to you is what is often referred to as the second bite of the apple. 

You may sell 60 percent of your business to a private equity firm and be able to put some money in your pocket and maybe take care of some of your estate planning needs, but you'll continue to have this, in my example a 40 percent ownership stake in this business which hopefully you will be able to continue to grow that business and that business will increase in value if things go well and if you're working with a quality private equity partner. And so five years down the road you may be able to sell all of your equity ownership or even just a portion of it and retain it. And then you'll have a second liquidity event again, four, five, six years down the road. Very often we'll see that folks can actually make more money going the private equity route and continued to stay involved than they would've if they had sold out altogether at the time of their initial exit.

I'll give you an example. We invested in a company in Michigan, an education business where the president of the company owned a chunk of the equity. When we recapitalized the business he could've taken some money off the table. He instead chose to put it all back into the company and the company grew from about $3.5 million of EBITDA to around $30 million of EBITDA over the next five years. 

There's a little bit of a balance in terms of how hands-on we are or we think we need to be, and that's driven by a number of factors.

Jeff: Oh, that's stunning.

Chris: Yeah, he was pretty happy. And don't get me wrong, that's an unusual result and unusually good, and they don't all go that way. But for his case he believed in the business, he believed in himself, and he believed in us as a partner. And he was much, much, much better off because the value of his shares were much higher five years down the road than they were initially. Again, it doesn't always work perfectly like that but that opportunity and that upside is there.

The one trade-off I will say in all candor working with a private equity firm, and this is something that a seller needs to think about, while yes there's the opportunity to stay actively involved in management and participate in the future growth of your business the flip-side is you will as a seller, especially if you're selling a majority equity stake, you will for better or for worse have a "boss" or someone that you'll be reporting to. And that may be new to you as an entrepreneur or a business owner. So that's something folks need to think about. "Do I want to have a board of directors and some investors that I need to be working with and reporting to? Or would I rather just take my football and go home?" That's fine. Everyone has their own specific situation, their own specific needs, but these are things that folks need to think about.

 

Jeff: Chris, and this is just real briefly, maybe a 15, 20 second answer. Have you ever been in a situation where you were involved in an acquisition and the boss had to report to you, and there was some push back, there were some difficult personality issues?

Chris: That happens, there's no question. Especially for folks who have been the founder, owners, and CEOs of businesses, very often it's a difficult transition for folks to change the paradigm and say, "Okay, I need to be making sure I'm keeping my investors on the loop on things” rather than just having previously have the freedom to, if we need to spend half a million dollars on this new production line, I used to be able to do that because I owned and ran 100 percent of the business. Now with a partner we need to make sure we're keeping everybody in the loop, and there is a transition period there for sure.

 

Jeff: By the way, Chris Sheeren, partner at Huron Capital Partners in Detroit is joining us today on Deal Talk. What advice do you have for business owners who may be trying to come to a decision between recapitalizing or simply selling outright? If someone was in this position that they were trying to make a decision here, what would you say to them?

Chris: I guess there's some things to think about in the process. Number one, if you have a valuable business, and valuable is certainly a relative term. But let's say you've dealt a successful business and are thinking about an exit. One of the things to think about quite frankly is how much money do you need to be set personally. Some folks they have a number in their head, or they want to make sure all their kids are taken care of, and they want to set aside money to give to charity, and they want money to live off of. Sometimes you're only going to get that number if you sell to a strategic buyer or you sell it and get out. Some folks say, "I've done this. I've busted my butt for 60 years and here I am. Someone's going to give me $20 million for my business. I'm done." That's great. 

Again, folks should start with figuring out how much they need. And if they can get it and then the next question becomes, "Will I be happy working with a partner? Am I the type of person who is willing to give up some control in order to bring out a partner that hopefully can help me grow the business?" And then also, as I alluded to it earlier, just this notion of a legacy. This company that I built, what do I think will happen to it if I sell the company and retire, versus if I stay on, am I concerned about what happens to the business? Is it... Of course folks are concerned but is there a risk that the business will be damaged in some way or the plant will shut down if a strategic buyer comes in? Is there a risk to that? Or if I stay involved do I think there's additional growth? There's a whole host of factors, but I think the important thing is that the entrepreneur really just be honest with himself or herself and figure out, "What do I need? Do I want to work with a partner? Do I still have the fire in the belly to continue to work to grow this business?" And also, “Do I think is there a future growth here that I'm excited about participating in?”

 

Jeff: Chris, any truth to the theory that acquisitions are more common in mature industries because maybe organic growth is simply more difficult to achieve in those industries when companies just seem to kind of be in a state where they're not stunted but just where they’re stagnant and they just don't seem to grow anymore?

Chris: I think there probably is some merit to that. I've never really seen any sort of industry data or research that has addressed that, it may be out there, I haven't seen it and I think it would be interesting to see. But I think no, I think there's certainly something to be said for that. Just from our perspective as a private equity investor when we invest in the company we effectively, and then we start looking for add-on acquisitions, we effectively become a quasi-strategic buyer. But at the end of the day as I said earlier, we're all about growth. And if growth is going to be difficult to come by organically then certainly it makes sense to think about growth through acquisitions. I think the theory that you propose is probably a good one. Again, I haven't seen the data there to analyze that but I think that makes a lot of sense.

 

Jeff: Chris, as we start to near the end of our program today and given everything that we've talked about what advice do you have for business owners? Maybe some final thoughts or key take-aways from our discussion? Maybe they're out there and they're making considerations for the future of their company? Maybe about continuing to grow their company before they decide to go ahead and get out and sell altogether, what advice do you have for them?

Chris: I would certainly advise folks to give themselves plenty of time to plan. It's not something that one should jump into lightly, in selling a business or bringing in a partner. And so having the right team of professionals and advisors around you is important. Certainly a good accountant to help you understand your financials inside and out and your trends, and be able to explain questions that folks may have. Certainly a good experienced M&A attorney, because when you get to the point of negotiating transaction documents you don't want to waste time. If you have an inexperienced attorney, or an attorney who's not an expert in transactions you don't want to waste time on things that really aren't as relevant and aren't as important. Having the right attorney is important. Some folks will choose to hire an investment banker, and an investment banker can certainly help you prep for sale and could certainly bring you a number of prospective buyers. That's just the decision that folks need to decide, do they want to go through that process. There's going to be a lot of time, and what we call brain damage involved in parading a whole number of prospective buyers and investors through your company that can create some confusion among the employee base. Folks need to think about that for sure. 

Finally, I would say as you're honing on a potential prospective investor do your diligence on them because they're certainly going to be doing diligence on you and frankly it's only fair. But if you're thinking about a five plus year relationship with this company, this firm, these people it's really important that you know who you're partnering up with.

Having the right team of professionals and advisors around you is important.

Jeff: Chris, anyone who might be listening out there is welcome obviously to get in touch with you directly should they have any questions. How can they reach you?

Chris: Easiest way is probably by email which is csheeren@huroncapital.com. You can certainly go to our website at huroncapital.com and learn more about Huron. Or I can also be reached directly at 313-962-5805.

Jeff: Chris, it's been a pleasure having you on board today. Thank you so much for joining us and I do hope that we can have you back on again in the near future.

Chris: Thanks Jeff, the pleasure is mine.

 

Jeff: Chris Sheeren, partner at Huron Capital Partners has been my guest. We hope that you enjoyed the discussion and we hope also that you'll take a moment to let us know.

We're interested in knowing your thoughts about this program and about Deal Talk in general, what you like, what you don't, and what we can do to make this show even better because it is for you. Send us an email to dealtalk@morganandwestfield.com. 

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

While we take reasonable care to select recognized experts for our podcasts please note that each podcast presents the independent opinions of such experts only and not of Morgan & Westfield. We make no warranty, guarantee, or representation as to the accuracy or sufficiency of the information provided. Any reliance on the podcast information is at your own risk. The podcast is for general information only and cannot be considered professional advice.

Key Takeaways

  • The concept itself in most businesses that are having trouble is you got to have focus; usually businesses get in trouble when they start doing too many things.
  • In venture capital, you are betting on that quick change, the quick product cycle.
  • When you have a growing market, the money should be spent growing the market.
  • PNL mapping: You take the things that you are spending the most money on and those are the things you want the diligence and understand why and how they impact the business.
  • The biggest challenge with the resources is not only having the right people in the right place but is also removing blockages that may be around processes or that maybe around your politree of people and then finally all that kind of comes down having clear expectations.

Read Full Interview


Jeff: Welcome to Deal Talk brought to by Morgan and Westfield, I am Jeff Allen. If you are selling or buying a business or just interested in this subject, then this is the place to be. Our mission is to educate and inform you with the help of some of the most credible, highly regarded experts in the industry of transacting businesses so you will be better equipped to make some very important decisions when the time comes to sell your business or to buy one.
 
On this edition of Deal Talk, we are going to make a slight departure from the norm. What is it like, do you think, to be one of those fortunate few who have had the opportunity to be involved with multiple businesses, both as an owner and investor? You, as a listener, might very well be in that situation yourself. Maybe you are on your second, third or fourth business, or maybe you are a part of an investor group and you have minority holdings in a several investment opportunities out there, in terms of businesses, that you are maybe a part owner in or maybe you are an absent manager, where you do not really have much to say about things other than just being able to front the money and help afford necessary improvements for that business to operate in the manner that your board seems fit. We are going to find out today what it is like to be a successful multiple business owner who has had a lot of opportunities to come through investing businesses and turn them around. We are going to talk to him right now. His name is Dan Tamkin. Two-time successful turn-around leader, entrepreneur, CEO, venture capitalist and you are Chief Technical Officer of company called Trans Dev, is that right?
 
Dan: Yes. Yes, I am.
 
 
Jeff: Dan, welcome, first of all to Deal Talk. It is good to have you on.
 
Dan: It is good to have you. Thanks Jeff.
 
 
Jeff: Tell us a little bit about Trans Dev. and what you do there.
 
Dan: Sure. So, Trans Dev. really has two functions, the Chief Technology Officer, so that is really kind of helping the organization respond to Uber and Lyft with all the disruptions and change we have had in our market. The second function is corporate development, which is really getting out of this start up world, helping find interesting investments for Trans Dev., but also beyond the investment it is learning what is beyond the market place, making sure we are able to see things earlier in the pipeline before they get so big that it will not give us the chance to react or think about how those things might impact our future market.
 
 
Jeff: You know Dan, there is always a lot on anyone's plate as a business owner, it does not really matter what size business have, whether it is 1 to 50 million dollars, a small business owner in town some place, or if you are part of a larger organization or even a publicly traded organization as far as maybe CEO is concerned; business is always on your mind but it is something you really have to have a passion for. When was it for you that you started to think "I am not just interested in running a business but I enjoy the world -- the world of being in the business and making a difference"? When did it all start for you, in terms of wanting to get involved in investing in businesses?
 
Dan: That is a fantastic question. Maybe it is a little cheesy when I answer but what I do is -- remember the movie Field of Dreams, when the guy as a doctor gets to be a ballplayer finally, but he has to step across the field and walk out and save the daughter from choking and Kevin Costner said: "I am so sorry I cost you your dream," and the guy basically says: "Hey look, it really would have been a shame if I never have gotten to be a doctor.” I was involved in music and doing tons of things, and I love music but I always knew that I would come back to business. I have always found business working with people, growing things and changing things to be very exciting. I have always hoped that analogy played well for me. I always felt at home in business.

I have always found business working with people, growing things and changing things to be very exciting. 

Jeff: You know most of our listeners are small business owners who manage their own company and you have had a tremendous amount of success as an executive officer and turnaround specialist for different companies, how would you describe your management philosophy? I mean, everyone's business is run a bit differently and they have different expectations and different philosophies, have you found it necessary to kind of mold your own philosophy a little in order to bring about the positive changes that you have been responsible for each of the organizations you have led or helped lead? 
 
Dan: I think the concepts are generally the same anywhere you go. What happens is the implementation of them, maybe a little bit different and you might have various speeds in that implementation. The concept itself in most businesses that are having trouble is you got to have focus; usually businesses get in trouble when they start doing too many things. That is a real risk for small business owners because typically you will find that they rush in their own nature and after can lead 2,3,4 years they will start dabbling in another product line that really does not fit with that business and that is when the business get upside down. So the first thing to talk about is focus; the second thing to talk about is the resources and if you have the right resources to execute what you need. The biggest challenge with the resources is not only having the right people in the right place but is also removing blockages that may be around processes or that maybe around your politree of people and then finally all that kind of comes down having clear expectations. 
 
I should say one more thing on the focus, the best words I have ever heard about focus in the small business was when I was a VC the words were: "You are more defined by what you say no to than what you say yes to" in a startup or in small business. There is a lot of wisdom in that because if you are banging around the market and you are talking to people, you are going to see lots of opportunities and it takes a lot of discipline to go: “You know what, I am not going to chase that specific opportunity because that is not scalable and that is one offer that is going to take me to a direction where I do not want to go.” That is why I think it is really important that small business owners come back to that notion of focus and start there.
 
 
Jeff: And sometimes it is hard for people to do because your head is just filled with a bunch of ideas and you see some success in the early going with your original plan and then you say: "Why don't we expand our product line to do this?" Then you do not have enough time to kind of test your outputs and your outcome may reflect poor strategy and somewhat short-sided about really the very possibility that your ideas, despite them sounding good on paper are not tested early enough. We just do not have enough time to put these ideas together and make them grow with your business. So scalability is very important there, take away from your remarks. By the way what is it about tech that you enjoy so much? I mean it seems to be a really growing passion for so many young executives and investors today.
 
Dan: Well, I think there are a couple of things. First, I do not think tech is anymore a receptor, I think every business is being infiltrated by technology and the rising, the next generation of leaders are going to be all technology and abled. So I do not think it is a choice to like technology or software if you are thinking about the next 20 or 30 years. You are correct, you have to. To tell you exactly why I love it, the reason I love it is there is an aspect of it that feels like magic and you bring something to life. I just think that is extremely cool. On times you are automating a business process that is really cumbersome or difficult for somebody to do and you make it happen and you go: "My life is so much better." I just personally get a real take out of that. I think it is good to stay around your passion as much as you can.

I do not think tech is anymore a receptor, I think every business is being infiltrated by technology and the rising, the next generation of leaders are going to be all technology and abled.

Jeff: And it is always advancing. Technology is not just when you think that we have seen something that is just amazing, it is going to be life changing The next life changing thing comes along about 6 to 7 months making that thing that you think is so cool practically obsolete by 7 months from now and that really, is quite fascinating.
 
Dan: That is a great point. I think that is where you are going to be careful about, at least for me I am on different sides of the table I like to play at. In venture capital, you are betting on that quick change, the quick product cycle. Most of the stuff I am interested in, from a turnaround perspective, is businesses that are not doing software but they could be in lower turnover industries in the sense that the rate of change in that industry is much slower.
 
 
Jeff: Dan Tamkin is our guest and you are listening to Deal Talk. We are talking to Dan; he is an entrepreneur, a multiple business owner and venture capitalist. We are getting some sense of what makes of venture capitalist and certainly Dan himself taken things that he looks for and that are important to him when considering a new business to look at in terms of ownership and investing. Dan, when you have learned of an opportunity to invest in or acquire promising young company, what is your vending process? I mean where does your research start and how long might the entire process take you to decide whether this is something you are going to get serious about? 
 
Dan: Sure. From the investment side, a lot of times you are putting money into and or around so you might be in multi-million dollar round. You are not writing the whole check. So those are kind of easier deals. Those are, for maybe a week, and if it is a sector you really know and you really understand, and you know the guy doing it, it might be a phone call, it might be that simple. If you are going to acquire something that is a much longer process, if it is a travel investment that can be a month but a lot of times some of the travel investments I see get 72 hours. So that is when you have to have knowledge of the market and you have to be able to walk in and grab something, and that is kind of when I see it as a turn around on a venture investment.

Most of the stuff I am interested in, from a turnaround perspective, is businesses that are not doing software but they could be in lower turnover industries in the sense that the rate of change in that industry is much slower.

Jeff: What are the greatest challenges Dan that you have faced or typically faced with a new or fledgling company?
 
Dan: Yeah, I think the biggest challenge for any venture capital is that typically you are investing in something and you have an unknown market size. You do not really know how big the market is for what you are building. You got to really bet on the management team.
 
 
Jeff: With that said Dan, have you been involved in any businesses that had young startups? I mean, we understand you are a turn-around specialist and you have certainly had tremendous success in that area. Do you spend much time with older businesses where you come in and you are expected to come in and fix things up? How many older businesses have you gone into or have you been a part of?
 
Dan: Older for me would be probably something that is already been around for 5 years or so; that tends to be a little bit less of what I am spending my time on. Usually what you are looking for is an opportunity that has pretty good growth potential and a lot more mature, there is not as much of the revenue growth potential and usually if that case has execution challenges or some kind of problem with their capitalization, whether they have too much data or what have you, that kind of creates those opportunities, those will send you PLS to less to meet because I am more operationally oriented as opposed to thinking about restructuring from a capitalization perspective. 

I think the biggest challenge for any venture capital is that typically you are investing in something and you have an unknown market size.

Jeff: Dan, we are going to take a quick break but when we come back, we want to talk to you a little bit about your vision, when you go in and you are sitting in there and maybe you are talking to your board, you are walking through and you are doing an inspection there of a facility or something or an office, I would like to kind of get inside your head to find out what are you thinking when you go for your first tour inside your business that you just invested in, no matter what that might be and what is the dot process that goes through your head? We will talk about that here in just a second, my name is Jeff Allen, and we will continue our visit with entrepreneur, venture capitalist and business turn-around specialist Dan Tamkin when Deal Talk returns after this.

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Jeff: Welcome back to Deal Talk, my guest is Dan Tamkin, he is the Chief Technology Officer at a company called Trans Dev but he has also owned multiple businesses as a CEO, CFO, COO and just about other leadership capacity you can imagine. We are talking to him today on Deal Talk about his experiences as a venture capitalist and going in to these businesses that he just helped acquire. Dan, when you go into acme for the first time and this might be one of your first visit and you are getting a lay of the land, you are having a chance to assess things, and how soon do you know that your investment is going to actually succeed?

 
Dan: That is a great question. I think generally, I feel good about my investment anytime I make it. It would be really hard for me to kind of feel bad about something before I do it because usually, what I find, is if bad is going in, it only gets worse. Everything comes from a mark of positivity. Once you are in the investment, how do I know about how it is going? Well, I think some of it is  kind of coming back to what we talked about at the outside, it is having clear expectations, focusing on what people can be doing with the outcomes we expect are, making sure they have the resources to acquire and execute all those expectations.
 
 
Jeff: Tell us about the most interesting acquisition that you could remember having been involved in? Whether you wade in and you saw something that you really thought: “Well, we are getting some value here”, “this is going to be a lot more fun that I thought it was”, and something that is just kind of worth telling a story about?
 
Dan: Yeah, I think I have a good story from the beginning of my career. When I first came out of school, I was fortunate enough to unwittingly join a turn-around of the world's first medical robotics company called Computer Motion. We were battling our competitor into the surgical pretty hard. Between the two companies, I think we cumulatively spent about 6 million or 7 million a quarter paying attorneys to fight each other in the path in suit. So we spent a lot of time slugging it out, a lot of time and money. Both of us were unprofitable, as we had to raise money to pay the lawyers in this lawsuit. Eventually, reason gave way and we merged and then what happened is the resourcing company we came to number 2, growth company in that aspect. I think there are some interesting lessons from that. One is that too much focus on your competitor won’t help, you should know what your competitors are doing but you should not worry too much about them because they may not be any better, any sharper than you are and it could steal your moment or a particular strategy. Two, especially when you have a growing market, the money should be spent growing the market. When you have a competitor, you actually have a common problem, and that is the market that you are trying to create does not exist and paying attorneys 7 million to argue over a market that does not exist does not make sense. Paying 7 million to join or to grow that market together which is certainly an odd and difficult to execute concept is really what is valuable because both companies end up being more valuable, it works out better for everybody. So to me that is one of the most interesting lessons I have learned. Another one I will share with you was when we worked with fellow of large conglomerate that required a bunch of assets that could be considered in serial assets that we were in real accord with the business. They were looking at packaging those assets together and getting a piece of a startup, a good significant piece of it. I thought that it was a very interesting deal because we are allowed -- at a large company what we do is find a way that take non-useful assets, put it into something that had a high growth potential and really could take something that was not strategic, put it into a engine that was strategic and realize and unlock a lot of value. To me I find those deals really cheap because it is all about 101 is equal 3. So both laws of examples are 101 is equal 3.

Too much focus on your competitor won’t help, you should know what your competitors are doing but you should not worry too much about them because they may not be any better, any sharper than you are and it could steal your moment or a particular strategy.

Jeff: When you go into a business, Dan Tamkin, is there something that you focus on immediately? Maybe there is a weakness there, there is something involved in the operation, maybe it is a people thing, maybe the culture is wrong, something is broken, you cannot put your finger on it necessarily when you are looking at it from maybe a bird's eye's perspective but when you go in, do things just really start to immediately become visible to you like " I can change that", "we need to change this", "this is not working", what has been your experience there?
 
Dan: Yeah, I think during some of the diligence phase, I had this concept called PNL mapping and it is really pretty simple. You take the things that you are spending the most money on and those are the things you want the diligence and understand why and how they impact the business. And you accept to understand in the context of -- you take the PNL of the business you are looking to acquire and you also have to look the PNL of the customer that they are selling to and any work back was to understand how those two inter-relate. So, there are just two things there: One, understanding the market by looking at the customer's PNL and two, understanding how you are spending your money by looking at your PNL. That gives you kind of an idea of what is important in a customer and what is important to you in business. That should give you an idea where to start and what to figure out. Now, when it comes to culture, culture is driven by people. So it is really hard to change culture, if you want to change culture you are going to have to change people. Usually, there is going to be some change in people. In turn around investments, you are not usually buying into the people that are there; usually you are going to have to make some changes. Some private equity which is more restructuring around capitalization, maybe the existing management team stays. 
 
 
Jeff: You know Dan, as a business owner myself, I am sole proprietor and I have my book of clients and I have other clients that I am always out trying to market to. I am trying to expand my book of business and grow while at the same time trying to pay real strict attention to the clients I have had for many years. I do not want them going down the street. What is it today that separates the really good businesses from the bad ones? We are talking a little bit about customer service, which you obviously just touched on with regard to culture you talked about people. Do you think that there is enough attention being paid by business owners today and by those who operate businesses maybe at the higher level, C-level executives to really that relationship that is so important between that company and their customers? It is not just simply enough to sell something at the lowest pricing you give the best value to the customers, is it? I mean, there is something deeper than that, right?
 
Dan: I think so. There are businesses that are transactional. Certainly, toilet paper is where you are not really going to get a lot of chance to create an impression to the customer but when you are selling high end software or something very personal, you are going to get a lot of hot seat. First, I got to know how much attention from the customer you are going to get in a purchasing process but relationships are always important business. People want to work with people they trust. People want to work with people that you know that when they say "this is what is going to happen" and that they are going to actually make it happen.

In turn around investments, you are not usually buying into the people that are there; usually you are going to have to make some changes.

Jeff: Do you think that more business owners today need to give a lot more thought to preparing their business for sale, packaging it in such a way so that they can continue running this and it is part of their life, they are generating revenue, they are generating income for themselves, their family, to support their lifestyles, the household, the people that work for them but it seems to me, the reason I am asking this, is it seems to me that if you get ahead of the typical small business owner today and you were to ask them, “What are you going to do when it is time to sell your business?” Most of them probably would not have an answer. Do you think that more business owners need to give a lot more thought to preparing their business for sale, when the eventuality comes at it that it is time to move on, it is time to retire, when it is time to let someone else just take the reins?
 
Dan: I think that is interesting but even if you do not think you are preparing for a sale, I think the rigor of preparing for a sale could sometimes be a really good exercise. I will give you a couple of examples. One, I like this exercise that I call fire the CEO, I like to do it every year where basically you fire yourself and you write down if you were to come in fresh and know a little bit, what are the top 5 things you do? That is one thing, I think if you are thinking about preparing for sale you kind of need to have a fresh perspective of the business. It could be healthy exercise for you every year. People talk about the difference in working and in working on the business. That to me is kind of a major perspective. Second thing is that having financials reviewed I think are very important, making sure that you are looking at the business right, setting up KPIs and setting up metrics to measure the business, and the big sum of that is really important for scaling a business but that is also important for anybody coming in. If you are selling a business and you want a top dollar, you have to show good numbers but if you are also showing that it is a business that somebody else can run it, then that is even more valuable. If somebody has to be you to run the business, the business is lot less valuable. So the ability to scale yourself and that whole process as you grow is really important because otherwise it is almost impossible for somebody to come in to your business.
 
 
Jeff: Venture capitalist, entrepreneur Dan Tamkin is our guest today on Deal Talk. Dan, we have just got a couple of minutes left in the program. What if a business owner, instead of going to regular bank route to get a loan, is giving some thought to expanding their business, they have a lot of success over the first 5 years and they are ready to kind of expand and maybe go into some other areas but they do not want to go the regular route of getting a bank loan but instead they want to approach investors, what are the steps that they need to take in order to prepare themselves and their business for getting out in front of some investors for the purpose of expanding or growing their business whether that be in their own region or maybe across borders or across the country at minimum? 
 
Dan: I think the number one thing is you have to understand the size of the opportunity you have and match it to the capitalization you are willing to see. I will tell you why is that important: If you are approaching mature capital, they are looking for 40% IRR manual or return of the investment, part of that equity they target 25 to 30%, infrastructure funds they are 8%, now if you go off and  find an  angel investor someone who could write you a check someone who has got a net worth over million dollars and just write you a check for  25, 50 thousand dollars or 5 thousand dollars, there were termed parameters maybe whatever they feel like that day. It is really important to understand what are the outcome and the business that you can realistically achieve because if you take money from somebody that is expecting a much higher outcome and you do not achieve that outcome, you are going to be upside down with that investor and you probably going to have some challenges going forward. The first thing is be realistic about what you are going to do and how are you going to execute your business, understand the plan to get there and then figure out who are the types of people that meet the invested type of opportunities. It is often more about your business fitting into VC or PD’s portfolio or investments. First is the uniqueness of your investment, the ‘uniquer’ you go the more you have to look at family offices or angel investors or different sources of money that are not pulled and focus capital. 

I think the number one thing is you have to understand the size of the opportunity you have and match it to the capitalization you are willing to see.

Jeff: What advise do you have Dan for small business owners who are just getting started with their businesses? Maybe they are entrepreneurs just like you are and they are just kind of getting their feet wet, they have been in the corporate world and they have stepped aside from that, and they want to kind of go ahead and take the world and the reins by the horns if you will and kind of seek their own path with their own business, what should they do? What do you think?
 
Dan: I think the number one thing is spend as much time as you can with your customers, make sure you are delivering to the customers, make sure you have the customers’ buying from you, figuring out your sales process, figuring why you are selling them. What I like to think of in the early stage of business is that there is only room for two people in terms of - two types I should say, one is people that either sell things or people that make things. So do not spend money on attorneys and other things that are kind of ancillary things that people think about. It is about focus and that focus to me is selling and delivering product. 

There is only room for two types of people; one is people that either sell things or people that make things.

Jeff: Dan Tamkin, we are out of time. We have had a good time with you and it has been a lot of fun. Thanks so much for sharing some of your time and your thoughts with us today on Deal Talk. 
 
Dan: Oh, thanks as well. I appreciate it. 
 
 
Jeff: Dan Tamkin, Chief Technology Officer of TransDev., successful entrepreneur, business owner and venture capitalist. He has been our guest on this edition of Deal Talk presented by Morgan and Westfield, a nationwide leader in business sales and appraisals.
 
If you would like more information about buying or selling a business call Morgan and Westfield at 888-693-7834 or visit morganandwestfield.com. Make it a point to check in with us again and soon for valuable information and insight from our growing list of small business experts on Deal Talk. Until next time, my name is Jeff Allen. Thanks again.

Key Takeaways

  • Dealing with different languages, different cultures and mindsets often makes the post-acquisition integration process even more complicated.
  • The Chinese are extremely eager to invest in North American targets. Economic growth is still robust enough over there, and funds are available.
  • Asian purchasers are looking at acquiring brands and intangible assets and technologies. In evaluating these, they're often very much top line revenue oriented.
  • Synergies are achieved by combining the acquired business or intangible assets or technologies with existing operations. If you're doing that, most certainly you're going to be achieving a lot of cost savings.

Read Full Interview


Jeff: Welcome to Deal Talk brought to you by Morgan & Westfield, I'm Jeff Allen. If you're looking to sell your company now or at some point in the future it's our mission to provide information and advice 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. 

In this growing global economy many small businesses are taking advantage of the international market. You probably have, and it works both ways with many businesses overseas are also taking an interest in what's going on here in America, and that includes an interest in acquiring American businesses. If you're an American-based business and you were approached by a foreign company with an offer that seemed too good to pass up, you had to consider it, would you be prepared to move forward with the deal? What's involved? My guest on this segment is an expert in this area. His name is Drew Dorweiler and he's managing partner at Dartmouth Partners Ltd. Drew Dorweiler welcome to Deal Talk, it's good to have you sir.

Drew: I very much appreciate your invitation Jeff, thank you.

 

Jeff: Drew, you are somebody that we kind of sought out because you have extensive depth of experience. Tell us a little bit about yourself, where you've been, and how you've gotten to where you are now.

Drew: Certainly, Jeff. Actually I graduated Bachelor's Economics from Dartmouth College, NYU, Pace University MBAs, I have two MBAs. And then I moved in 1989 to Montreal and I've been practicing ever since in business valuation, litigation support, mergers and acquisitions, and corporate finance. Founded my own firm, Dartmouth Partners, Ltd. and we're based in Montreal with an office in Chicago, Illinois as well. And soon to be, and I know we're going to be getting into this, opening an office by the end of 2015 in Hong Kong.

 

Jeff: Very exciting indeed, and you obviously have a lot on your plate and are very busy so we just appreciate the fact that you're sharing a slice of your day. What I kind of be interested in knowing first and foremost, the process for a cross border M&A deal, let's say involving Canada and the United States. Is it really much different from an all-domestic transaction - and you've been involved in domestic transactions both in Canada and then here in the United States. Tell me how those types of deals are different? Are they pretty much the same, simpler, more difficult, more involved?

Drew: There are differences. Starting from initially, again, in any sort of cross border transaction, whether or not you're working buy side, sell side, the fact distance, possibly a very different culture. There might be additional complexities in terms of one party identifying another in a potential transaction. And in fact this is one area that myself and my team we have in the past I think successfully attempted to benefit from or exploit is the fact that because we do have knowledge and networks in the US and Canada and we've developed in Asia. Basically parties in each of these countries acting on their own who would like to transact in terms of buying and selling businesses and business interests across borders, they generally don't know who to turn to, where to look. Again, because we have really three geographic networks we're able to draw on all three networks and that really broadens. Again, if you’re in buy side, sell side you're a population of potential interested counter parties.

 There are differences. Starting from initially, again, in any sort of cross border transaction, whether or not you're working buy side, sell side, the fact distance, possibly a very different culture. 

Jeff: And so that's fantastic and that you've got a number of prospective buyers out there that you haven't even really tapped into. If you're a business owner and you're giving it some thought, and obviously you're maybe entertaining offers that are domestic as well. What about deals involving companies overseas much farther away, thousands of miles. You touched on Asia a little bit there and we'll be talking more about that later on in the program here. But when you're talking about dealing with for example companies based in Europe that are looking at acquiring an American-based company, are there some real complications perhaps that could come up, or things that could actually create ... I'm not going to say complications but just a lot more work on everybody's part to kind of pull this deal together. 

Drew: There are certain complications when crossing any border. Even in North America between Canada and the US, because all of a sudden now you have to deal with two sets of, let's say legal regulatory environments, certainly the taxation regimes are bound to be very different. It's certainly, and again, there could be linguistic, cultural differences that may be very surprising. And this is also posed during the transaction process and then even afterward. We all know that in deals even if it's a purely domestic deal there often are difficulties in integrating the two businesses that may have joined together and merged. Again, if we're dealing with different languages, different cultures and mindsets, it often makes the post-acquisition integration process even more complicated.

 

Jeff: You've got about 30 years of financial and transactional experience. Is there anything in particular that you look for, Drew, in preparing your valuation of the company for sale that you might not otherwise focus on for domestic deal valuation? And if you could just kind of elaborate on that.

Drew: If you're working sell side, it's identifying potential buyers who ... We call that valuation special purchasers or special interest purchasers, really those that can benefit from synergies, from economies of scale, strategic advantages. And often we're seeing these ... We talked about control premiums or transaction premiums, and again in businesses with respect to M&A. But special interest purchasers they typically won't pay merely a control premium. They can pay even significantly higher prices because they want to benefit from these, again, strategic benefits.

 if we're dealing with different languages, different cultures and mindsets, it often makes the post-acquisition integration process even more complicated.

Jeff: If a business owner has received interest from a company overseas. Let's say it's a European company, maybe a company based in Germany for example interested in acquiring an American-based company, Drew. What should he or she do first? I'm talking about the sell side.

Drew: If it's a North American business interested in selling to a German purchaser?

 

Jeff: Yes.

Drew: Well, again, they would have to consult someone such as myself or one of my competitors who has familiarity with the German market to try to identify a range of potentially interested purchasers again with particular emphasis on identifying those that would be able to achieve the strategic benefits and synergies that I mentioned. But then once you've identified these purchasers, again, it's really important to get someone with particular experience in that, say in this case, Germany, that speak the language that understands how Germans do business. I had nothing to do with this transaction but I know the whole Daimler-Chrysler merger from several years ago. I think that's about a decade or so ago. I've heard quite a bit reported that that really didn't integrate so well largely because of differences in how Germans do business versus Americans.

 

Jeff: But you bring up an interesting point though. And that point is that I'm taking away is that if you are interested in doing business overseas and that is when I say doing business, selling your company prospectively to a European based buyer, and it doesn't even matter whether you're based in Europe, or Asia, or South America, cross borders that you want to do business with, a consultant, a business broker who has some international transactional experience. And if you can find one who deals specifically with those countries of interest, you're going to want to deal with people who speak essentially the language and knows how business overseas works. I think that's the key consideration here. Let me ask you this, what is the M&A market like right now in terms of the climate and the interest level from potential overseas buyers of North American companies, and US based businesses specifically? Where is most of the interest coming from?

Drew: Well again, I think Jeff that's from what I've observed, continental Europe, it's really dried up. Just the financial conditions are such over there that they need everything they can ... Of course generally speaking but they need all the resources they get just keeping things moving along back home. That's why again, during the last four years I've turned my focus to Asia which is that's a fascinating dynamic market. We've all seen the headlines in the last 12 months or so, seeing how China's cooling off, China’s cooling off. But when you look in a comparative basis they had a good 15-20 years of double digit annual growth and now they're cooling off depending on what you read or whom you believe five percent to seven percent which is still far above North American and European growth. So their cooling off is still quite dynamic and it's a very exciting place to do business. And specific to M&A, Asian buyers looking at North American targets, they're very keen. They remain extremely keen to purchase North American companies. That's a number of reasons. Again, branding is extremely important again to Asian investors and US and Canadian companies are perceived by them as having some of the top brands in the world and reputations. There are also immigration programs, certainly the possibility of obtaining a green card through the US, you know, business investment programs, that's very, very attractive. And also as well based on the recent, again, the last six months or so conditions in the Chinese financial markets with respect to their currency being devalued and volatile, the stock market volatility more than ever, we've witnessed trends. They want to get their money and their funds and liquidity out of China, and again invest in somewhere comparatively robust and stable which is the US and Canada.

Again, branding is extremely important again to Asian investors and US and Canadian companies are perceived by them as having some of the top brands in the world and reputations.

Jeff: Let me ask you a question, Drew, that came up. I was kind of listening to I think a business report on NPR recently and they talked about - and this is something that isn't necessarily new but it's something that they brought up and I thought I’d just kind of mention this to you on the program here. They said you cannot exactly always trust the information that comes out of China with respect to their business growth because the assumption is that their GDP growth is probably actually more like half of what they actually state, and then there are others who believe that, no, it's probably actually true in fact with they're reporting. Where do you stand on that? Obviously you're relocating or locating into a new office in Hong Kong. Again, we can go into that in a minute. But where do you stand on that? Is growth still, is attractive to you in terms of GDP growth over there and the future of business, and business in general, the economic climate?

Drew: I'm glad you brought that up, Jeff, that's a great question. First of all whether or not ... I don't know the answer and I'm not being facetious. I feel the only people know the answer to that are the Chinese Communist Party. I certainly don't know. But it’s actually all quite irrelevant, because again, whether it's five percent or seven percent or three, the fact remains that it's still robust enough, the growth is still robust enough over there, and funds are certainly available. The Chinese are extremely eager to invest in North American targets. So that's really all I care about. It certainly isn't gloom and doom there. Life is changing quite a bit and we're happy to detail the reasons why but for me it remains an extremely attractive environment to do business. And in terms of mistrust it's funny I've heard countless times ... In North America people are saying, "I don't want to do business with the Chinese" and so on and so forth. I think a lot of lessons have been learned. Sure, you might not want to joint venture in terms of license and technology because there's a high chance that's going to be stolen. But if you're sell side, you want to sell your business or your technology, go right ahead, you're going to be receiving cash for it as long as you properly structure your transaction so that you're basically getting cash up front and the full price, and everyone's happy. So that works very well. I also might add that, again, having done business with the other side, they are to be fair, the Chinese are just as mistrustful of us because they don't know ... Again, there's the language barriers, culture barriers. They don't know and certainly in North America and particular in the US when they perceive rightly or wrongly is many Americans are hostile to China, who do we trust? Are the Americans going to rip us off? They think we're ignorant, recent peasants that have come in to all this money and we're just going to spend it blindly. They have a real reluctance to deal with us so it's a very much of a two-sided issue.

 

Jeff: It's an interesting point, an interesting study of cultural biases and differences, but those types of differences exist all over the world and we know too that the economy has always got these cycles and every country is the same way. They're going to be economic cycles that show extreme, rapid growth, and then you see those down swings. And either way as long as the economy and the way that capitalism works, is given the chance to work, things are always going to even out and always produce what looks like really positive incomes, or outcomes I should say, in the long run. Drew Dorweiler is my guest and he is an expert in M&A transactions across borders, overseas, domestically. And he is the managing partner of Dartmouth Partners Ltd., and I'm going to continue my conversation with Drew when Deal Talk resumes after this.


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Jeff: Welcome back to Deal Talk, I'm Jeff Allen with my guest Drew Dorweiler, managing partner at Dartmouth Partners Ltd. and we're discussing business acquisitions that involve American based companies and those based overseas. If you're an American based small business owner and you're considering maybe doing business with an overseas suitor. You're looking to get out, you're getting ready to use that exit strategy that you have in place, and you've got some people that are taking a look at your organization and you're thinking about moving forward with a prospective buyer from overseas. You're listening to the right program. We're giving you some food for thought today, and Drew we're pleased again that you've taken time out of your schedule to join us. What is the most important thing to overseas buyers, investors, Drew, when evaluating a company to buy? Is it EBDTA, is it cash flow, is it a combination of things, is it something else? Just kind of let us know based on your expertise.

Drew: Certainly Jeff, and again, as with valuing any business, even in the US the answer to this varies depending on the type of business, the precise metric. I think it's fairly global by now, sophisticated purchasers are focused on cash flow for most businesses. I'll say that's the most commonly focused on valuation metric. However, again, I'm seeing in particular, because Asian purchasers they're largely what are they looking at now, they're looking at acquiring brands and intangible assets and technologies. In evaluating these they're often very much top line revenue oriented. So I'd say this is a metric I deal with quite a bit and in particular because given my previous comments as to the importance of special interest purchasers who are looking for those synergies, and so on and so forth. Some of the synergies are achieved by combining the acquired business or intangible assets or technologies with your own existing operations. So if you're doing that most certainly you're going to be achieving a lot of cost savings, expense reductions on your P&L. Again, you're focusing most directly on is that additional incremental revenues. Again, I would say revenues are also very, very important. 

Again, there's the language barriers, culture barriers.

Jeff: Is there any way that a business owner can make his company even more attractive or ... I guess put another way, how can a business owner really prepare for his company's ultimate sale to a foreign investor, buyer? You work alongside so many business owners in the past and I don't know both public and private but let's stick with the low to mid-level, million dollars to 50 million in revenue businesses. What can they do best prepare their company for sale to a foreign buyer?

 

Drew: A few points come to mind here, Jeff. One of the things is unlike ... I see a lot in North America. We have quite a few, let's say hurried sales. For whatever reason a decision might be made. "Hey, we need to get rid of our business in the next quarter or two” and very rash decisions are made, which I think are often unfortunate. In seeking a potential foreign purchaser, it's all the more important to really have a longer horizon in making this decision, again, largely because you need to be identifying who these foreign purchasers are. And again, to successfully do that you need to hire a transaction advisor, business broker, valuation expert, and that's going to take time to find that expert with the appropriate expertise in the foreign market. And secondly, for this expert to perform their work, to locate and identify those potential purchasers that would make sense. And again, given some of the additional considerations that you don't see with a purely domestic transaction such as obtaining advice on both sides of the borders from your appropriate professionals, lawyers, and tax experts, and so on and so forth. And then even the negotiation process which may, again, take a little longer and be that much more detailed due to differences in cultural awareness or just the different cultures. Again, this can all really take additional months or quarters in order to ensure that a successful transaction occurs. 

And in fact, one thing I'll add with respect to Asia, Asians are renowned for, and I can tell you first hand they will take much longer to transact than a European or a North American business or business owner will. Because they just move incrementally slow because they first want to ... Because it's a whole different way of doing business. They want to make sure that they can actually trust the individual, and that you develop a personal relationship ... It's kind of funny, even if you're selling your business and you won’t any ongoing relationship whatsoever. That's how they work. There are going to be a series of meetings. It could be four, five, six meetings, and you cover the same distance as you will in one or two meetings with a more, let's say, efficient North American or European purchaser. But any attempts to push it and hurry things, and do it, let's say our way, you'll be met with resistance and almost a guaranteed fail in terms of concluding a transaction.

 

Jeff: Talking about doing business in Asia and with Asian business buyers, investors, and you're going to take your company and you're going to expand it. You're opening an office I think you said in Hong Kong. Tell us about this move and why you're doing it. Obviously, you're very optimistic, you’re bullish on China but why now, why at this time are you going over?

Drew: Because I think that, certainly I'd say the past 20, 25 years we've envisioned many Americans and Canadians crossing the ocean. Now that China has opened up considerably they're present there, they're doing business. But I find that really outbound from China, from Asia I should say because it's not all about China, into North America, that direction is only just beginning. And again, because I think that we're seeing just a combination of factors. The market is still comparatively ... The economy is still comparatively active in Asia versus North America. And the fact that there is the will, the funds certainly exist and there's a keen interest on behalf of the many, many wonderful Chinese business people who do want to invest over in the US and Canada, the time is right. Why Hong Kong? Again, especially those that have never done business in Asia, Hong Kong is the perfect portal to do business, especially in China. And this is a very, very well-traveled road. Hong Kong being a former British colony, everyone speaks English so there's no linguistic ... or much of a cultural issue versus if you go to China, that's extremely different. There's a rule, the financial system in Hong Kong is extremely well-developed, banks, investment banks, stock markets, they all thrive there. And also there's a rule of law, so a lot of companies, you'll get a lot of Hong Kong companies acting as intermediaries in transactions just because it's a common law basis whereas the Chinese legal system, fortunately I’ve not encountered it, I hope not to, but I’ve just heard massive warnings about that in terms of corruption and unreliability ... If you're a foreigner and something goes wrong, and you're trying to sue a Chinese business person especially with contacts ... Let's face it, to be successful in China, operating a business, you must have contacts with the government. If you're going up against them, just forget it. Again, you're bound to fail.

 And then even the negotiation process which may, again, take a little longer and be that much more detailed due to differences in cultural awareness or just the different cultures. Again, this can all really take additional months or quarters in order to ensure that a successful transaction occurs. 

Jeff: Obviously, Hong Kong of course, very Western-oriented, westernized, so it's much easier to do business there. And really, a great location to be in just to kind of be in that proximity to that region of the world where right now it seems that growth just continues to be ripe and the timing is really perfect. Drew Dorweiler, I really appreciate your being here today and thank you so much for your time. If someone is interested in getting in touch with you because you have some experience and the level of expertise that many people might be looking for in terms of helping them to understand and evaluate their business, and provide valuation services and also brokerage types of services and other types of arrangements to work with those overseas investors and potential overseas buyers for businesses here, how can they reach you?

Drew: The best way, I invite all contacts to reach me by personal email or my mobile phone. Personal email, it's my name drewdorweiler@gmail.com. And my phone is 514-962-6896. And again, I'm always available, often travelling overseas so that's why I prefer contacting me in person as you're bound to get me.

 

Jeff: Drew, again, I really do appreciate the time. Great having you on board and hopefully we'll have you back on again on Deal Talk in the future.

Drew: Okay. It was my distinct pleasure, Jeff, thank you very much.

 

Jeff: Drew Dorweiler, managing partner of Dartmouth Partners Ltd. has been my guest today. 

Deal Talk has been presented by Morgan & Westfield, a nationwide leader in business sales and appraisals. If you're thinking about selling a business or buying one call Morgan & Westfield today at 888-693-7834 or visit morganandwestfield.com. And for more valuable information and insight from our growing list of small business experts like Drew Dorweiler, make sure to join us again here on Deal Talk. I'm Jeff Allen, thanks again for listening and we'll talk to you again soon.

Key Takeaways

  • There are five steps to growing a business: marketing, converting leads to walk-in customers, converting walk-in customers to sales, increasing number and amounts of transactions, and reducing margins.
  • To be successful, a business needs a plan, a good management team, and a marketing strategy.
  • If you receive an offer for your business, listen and consider it carefully. Don’t become emotionally attached.
  • Investors will expect to have input into how a business is run.

Read Full Interview


Jeff: Welcome to Deal Talk brought to you by Morgan & Westfield, I'm Jeff Allen. If you're looking to sell your company now or at some point in the future, it's our mission to provide information and advice 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.

It's okay to make some mistakes. We're all human. As business owners however, it's best to learn from our mistakes so that we don't make them again, particularly when those mistakes often result in lost revenue, lost profits, or lost opportunities which can result in lost revenue, lost profits, and other lost opportunities, you see where I'm going with this. Now those are the things that can have a tremendous impact on the value of your business. My guest on this edition of Deal Talk is someone with a tremendous wealth of experience in guiding and selling successful businesses. His name is Robert Ritch and he's the CEO of Secured Equity Group in Franklin, Tennessee. Robert Ritch, thanks so much for being with us on Deal Talk, it's good to have you, sir.

Robert: It's my pleasure.

 

Jeff: Let's kind of get an idea about your roots, your background, Robert. You have so much experience to pass along to our Deal Talk listeners. If you have only 30 seconds to summarize your background and everything you've accomplished, what would you tell people?

Robert: Basically, that is an interesting question because quite honestly people ask me all the time what do you do. And that's kind of hard to sum up in a simple sentence. I'm basically a puzzle master. I take little businesses and make them into big businesses and I take unprofitable businesses and make them profitable. Whether that means I buy them, or whether that means I invest in them, either way the process is always the same.

 

Jeff: What are the first steps that you might advise a business owner to take in order to increase the value of an established business that has seen little or no growth over the last several years? Maybe I'm a guy who's just bought a business and this business has been stagnant. What would you advise that I do in order to get things running well again in order to build revenue and so forth?

Robert: It really comes down to five basic steps. Every business needs to address these five categories on a regular basis. And regular to me is at least bare minimum quarterly and probably monthly, if not weekly. Early on I think you have to address them weekly. The first is everybody needs leads – we’re more familiar with the word marketing. How do you even let people know you exist? Business is not the movie “The Field of Dreams”. “If you build it they will come.” You could have a cure for cancer but if they don't know you're there, they're not going to buy. Second, you have to figure out how you're going to get -- so they have an ad in front of them, they hear about your company. How do you get that ad to convert them to customers, to get them to come into your store, to get them to call you and ask for your product or service, or go to your website? And then once you get them there, how do you convert that into a sale? And it needs to be a step-by-step process and everybody within the team needs to learn the same process. That will equal your customer base. Then, once you have the customer how many transactions did that person do with you on an annual basis? And then how much is the average sale of that transaction? And you need to address how you get more transactions as well as the average sale, how you get it to the maximum amount. That will equal your gross sales, and then the last step is of course margins. What's your overhead cost, cost of goods, all the other things that it takes to operate the business that don't necessarily produce income. Because it's not, let's face it, it's not what we make, it's what we keep.

Business is not the movie “The Field of Dreams”. “If you build it they will come

Jeff: You successfully built businesses, Robert, for sale or carried them to the next level. We've talked about that, touched on it a little bit. When building a business for sale, is it necessary to focus 100 percent on marketing efforts for the purpose of driving revenue first and foremost, or does it really simply depend on the individual business?

Robert: As you well know and just so the audience will know, I've built four. Sold them all and they were multi-million dollar businesses when I sold them. And these were businesses I founded and built myself. That's while I was invested with and helped build multiple others. The biggest thing is you have to have a plan. The old saying that goes, “Fail to plan, plan to fail” is very true. You never build one without having an exit already in mind. That doesn't necessarily mean that it's a defined exit. "I'm going to sell it to this company when it gets this size”. It’s, “I want to reach this goal, and then I want to evaluate and then set a new goal". It's really not a destination, it's a journey. But you have to have milestones in that journey. And you have to reach those milestones and then reevaluate: “Do I want to stay? Has my team taken it as far as it can take it? Or is it time to go? Or are a bunch of other players getting into the market that are bigger than us that are going to squash us so we need to sell now?” There's a million reasons and it's really hard to in a general discussion talk about every industry because they're all very unique. But the principle's the same. You have to have a set goal, “We're going to reach this amount in this date and time, and then we're going to reevaluate and figure out where we go from there”.

 

Jeff: But I think your point is well taken, to have that exit strategy in place, and that the exit plan in place does not have to be fixed, in fact it shouldn't necessarily be fixed, you should reevaluate it. It should be living, on-going and organic, and evaluate where you're at from time to time, maybe once a year or more frequently if necessary depending on your personal needs and where you're at in your life, what your time horizon looks like so that you can make changes as necessary to that exit plan and you're able to accommodate those changes rather quickly as long as you know that you have a plan. And any changes that may take place that alters that plan, you're able to make quick decisions on the fly in order to put that plan into action when necessary.

Robert: Part of that is if you have that plan, you're spending, everything you're doing in growth is geared toward reaching that milestone. One problem businesses have is, they reach out and they try to expand into multiple areas. They all have a plan. They just say, "Oh, there’s an opportunity, let's go chase it." Never figuring the financials and the different things that go into reaching that goal. And sometimes it's just bandwidth, because we only have two things to invest in life, time and money, and we have a limited amount of those. And our team has a limited amount of time. Do you even have the right people in place to take over the additional market or do you need to wait until those right people come along?

sometimes it's just bandwidth, because we only have two things to invest in life, time and money, and we have a limited amount of those

Jeff: There you go, absolutely correct. I think it's a really good question we're pondering. What I would like to know, Robert, in your background as a venture capitalist, you're searching for your next opportunity. You're looking for ways to help other business owners reach the next level. What do you look for in a company before investing in that business? What's important to you, as a business owner and someone who steered your own successful businesses? Talk to us about some of the tangibles and intangibles that are really, really important to you as an investor.

Robert: First of all it's the plan, do they have a plan. Secondly, it's the management team. Hopefully, Microsoft won’t sue me for saying this. For those of us who that are old enough to remember the 80's and 90's, Microsoft is not the best operating system on the market but they had the best plan and the best team. And until the iPhone came out Apple was almost gone and a lot of the other operating systems disappeared because Microsoft took over the market, to the point that I believe the government sued them for becoming a monopoly. That's probably the biggest thing. Investors tend to use the old acronym, “We back the jockey, not the horse.” The team is very key. So plan a team, then is there a market for the product or service? And then even more important than is there a market, can you take it to the market at a profit margin? Because you could take something out that the people need but if they can't afford it they're still not going to buy it. And then part of that also is not just is there a market but can you afford to break into the market? Because there may be big players that already hold a large majority of that market. People come to me and say “It's a billion dollar market so we only need one percent of it.” That's great, but how are you going to get that one percent? A lot of people come with a plan of how they're going to operate, how they're going to distribute, how they're going to do all that but they don’t have a solid marketing plan. And that to me is the most important part of the business other than the margins and financials on the backend is, how are you going to let people know you're there? And not “We're going to use SEO” or ... you know. I need specifics not generics.

 

Jeff: Excellent point. Robert Ritch, he is the CEO of Secured Equity Group in Franklin, Tennessee and we're learning a little bit today from Robert Ritch about what he believes are some of the keys to developing your business, and not just developing your business but really improving the value of your business. And also too he's giving us an idea of what's important to him as an investor in looking at new businesses that he can help to fund, capitalize, and that he himself can invest in, look at and say, "I'm part of something here and these guys, these women, this business has what it takes to move forward." My name is Jeff Allen, you're listening to Deal Talk. I'm going to be back with my guest Robert Ritch, CEO of Secured Equity Group in Franklin Tennessee, when Deal Talk returns after this.


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, I'm Jeff Allen with Robert Ritch, CEO of Secured Equity Group, and we're talking about not only how you can improve the value of your business but now what we want to talk about is Robert's own personal experience having sold his businesses and he’s led, and owned, and sold several successful companies. Robert, the first time that you sold a company, I'd like you to walk us through what you were feeling at the time, the emotions involved, and any anxiety that you went through, the process, how long it took, and whether or not it was something that kind of met your expectation or was a different experience for you altogether that really caused you to learn a great many things and allowed you to grow as a business owner and do things differently later. Let's just talk about it. Walk us through how that all went for you, and what business it was that you sold, that first one.

Robert: The first one I ever sold was a logistics company. And basically we started out doing simple courier work for banks, we were picking up the proof of deposits. Understand we're back in the 90's at this point and you didn't have electronic deposits and everything. Everything was still paper. It still had to be gathered at each branch and then it was run by computer processing center and then ran to the set. Times have changed, and technology has definitely changed that industry. Then we started doing delivering supplies for the banks. Then they wanted us to warehouse the supplies. So it kind of developed into its own. And then as we were running out to their different vendors to pick up supplies we found that we had empty trucks, and so we started filling them with other freight, and then a circle started developing, and relationships. That's kind of what it was. We were rolling along, we were doing fine, we were doing over 30 million a year so life was good. Then I was approached, and  it's a public company who basically they said, "I just want to come by, buy you dinner, and let's chat." And I thought, okay. I’d never really thought about selling but I thought, "Well, let’s at least see what the man has to say." He actually sat down and said, “This is going to be a simple discussion. We're either going to buy you or we're going to put a terminal down the road, start undercutting all the prices until we put you out of business, and then we'll just pick up everything." 

At first I was very offended and obviously scared because these people, they were a big publicly traded company, they were nationwide. I was a little regional carrier. And I wasn't sure whether to be offended or whether to get up and walk out, or exactly how to react. And at this point ... I wasn't a kid but I was in my mid 30's, so I just kind of thought, “Okay, I'm going to do what my mentor said. I'm going to shut up and listen.” And he said, "I don't mean to be offensive” as we kept talking. He said, "I want you look at the offer before you react." Because I realized that is a threat, he said, “But it is what we do. It's our business model.” So I thought, okay. He sent me the offer and he actually offered me 15 percent more than I would have asked for the business. With some options and all, they offered me a position to stay on which at that point honestly I'm just not a corporate America employee kind of guy so I had no desire. 

But the biggest lesson I got out of that was don't overreact. Sometimes the old saying that my grandmother used to say, "You have two ears and one mouth for a reason." Listen to the whole offer before you overreact to their statements. Because a lot of times they’re just laying groundwork ahead of time so that there are no misunderstandings, and that there was no negotiation room. A lot of buyers, if they know they have the advantage, they're not going to give you a lot of negotiation room. And I actually asked the man because he came back later ... I didn't really ask him, I was just kind of shocked and I think he knew it, he said, “The reason we gave you 15 …”  He didn't say 15 percent because he didn't know what the number was. But he said the reason they made that offer at the rate they did. "It was cheaper to buy you than it was to compete with you."

"You have two ears and one mouth for a reason." Listen to the whole offer before you overreact to their statements

Jeff: How about that. How did that make you feel? Do you remember how you felt when you heard him say that?

Robert: Yeah. Partly, it made me realize that if I was really going to be in this, and I had ideas of moving on because I was already a part of what was a private equity firm more so at that point. And this was just one of my holdings as well as being a part of the group. It made me realize that if you're going to play this game and be in this, there's a lot of money in small businesses but you really need to know how to play at both levels. So it encouraged me to start learning the markets, and learning the value of public companies, and how to use those two as a conduit for both raising capital and various other things. So it was probably one of the best lessons I've ever had as far as giving me that inspiration of which direction to go to start building my career. And this transaction took place in 2001. So it's been 14 years I guess at this point. And I have been able to build my net worth a lot more than I would've ever if I had just kept that company.

 

Jeff: There you go. And of course you've had other businesses since then that you've sold. Robert, that's a great story, and one that's a little bit different than may play out for many of our listeners because you were approached by a large company and you had no real ideas or plans of selling your company at that moment. This is just something that happened. You were successful with your business at that time. What kind of advice though Robert from where you sit now as kind of the head of this venture capital firm that you preside over and as an investor and a serial entrepreneur, someone who's owned multiple businesses. What kind of advice would you give to those companies who may go about selling their business on their terms, who are going to ... maybe they're not approached by a competitor or a larger corporation but they have a plan to sell their business eventually. What kind of advice would you give them based on everything that you've learned in selling your own businesses that could help them that you think most business owners probably don't give much thought to or probably don't consider because they're so busy running their businesses at this moment?

Robert: The biggest thing is don't take it personal. Because if you’ve built it from scratch or you’ve built it from a seedling to a mature business it's almost like raising a child and you’ve got to take the emotional attachment out of it. Because the biggest part of it is you're not selling your child. You kind of are but at the same time the average business owner only owns a business five to seven years. At that point they either burnout or it’s going to the point they can't personally take it to the next level. Or they're interested in doing something else. So be realistic and in your acting price, also in, are you willing to carry a note? And the first answer I have when I’m ever meeting with people and to have a discussion is, “Oh no, I'm not going to carry a note.” And I said, “Okay, that's great that you realize that if they don't have perfect credit, and even if they do they can only get a loan for ...” They're going to end up getting a personal loan from the bank. There is not a whole lot of financing out there. So if you're trying to sell a business for 30,000. Okay, they can probably get that financed but you're not going to carry a note. But if you get into 250,000 and more dollar business you got to have options of it, and you got to have your checks and balances already in mind. Don’t wait for them to come to you, already go to different hedge funds and venture capital people. 

Because I love business brokers, I do a lot of business with them, but one of the biggest mistakes I see that in the M&A industry is they want to market to people that ... You didn't go to the lenders first and get it kind of pre-approved, and I don't mean SBA pre-approved because the SBA is a wonderful thing when it's operated properly but right now they're not doing what I call, they won’t turn you down. They're doing what I call the compliance turn down. If they turn you down you end up on their statistics and they have to report that they turned you down, which if you're a minority, your different things can get them in trouble. If they keep telling you they need more documents and put you off until you just go off out on your own, that's not a turn down. So they're never saying no, they're just stringing people out until they go away. 

The reality is the financing is the key part. So I have been encouraging and even in my own firm, reaching out to help that industry and say, “Look, give me a business ahead of time, let me tell you what I think it's worth. Let me help you with, we would carry this amount or we would do a note for this amount and then go find a buyer that fits that.” So you're not wasting the owner's time showing a business that they can't buy, if that was clear.

Because if you’ve built it from scratch or you’ve built it from a seedling to a mature business it's almost like raising a child and you’ve got to take the emotional attachment out of it. Because the biggest part of it is you're not selling your child

Jeff: Absolutely clear. Let's take the SBA and let's take the banks out of the equation for a moment, Robert. What do you think are the biggest reasons, and I could be asking you directly, what are the biggest reasons for you that you would turn down a start-up so that it has to go elsewhere or start-ups have to fend for themselves? Why do companies have to tell a start-up, “We can't help you”?

Robert: The biggest thing is honestly the team, they're not flexible. I'm going to use this example so nobody be offended here because I'm exaggerating. But they want their brother-in-law who's been a plumber all his life, which is an honorable profession, all of a sudden be the CFO of the company. As an investor I'm not looking to run the company. I could, but I'm not looking for employees, I'm looking for people to invest in. If I was going to have to step in and make sure all these things are done right then I don't need them, I'll just go do it myself. It's the team. Do they have the right team? And are they flexible? Because they may not know somebody who's qualified to be that CFO and I may. And some of them get offended thinking that I want to load the board, or load the management team with my people, and in some cases I may be. It's the golden rule, he who has checks makes the rules. You got to be realistic. 

The next thing is again, I'm not saying term, I guess flexibility is probably a good word to use. You go into a investor group -- or even the loans anymore because hard money -- are basically investors are just doing it as notes instead of taking equity or like we do in most cases do a combination of both. And they're not hoping to -- it becomes a negotiation all the way down to the business plan. You’ve got to be willing to accept input because if these people have the money to do it, I'm not going to say they're always right, they may have inherited the money, they may have never run a business. They're all going to expect to have input, at least in the early stages as to how things are run. Shark Tank the TV show's a prime example of that. The board that sits up there and then decides who's the best, believe me, they have a pretty strong say-so in how things are done, moving forward.

 

Jeff: Very, very good point. Robert, we are running out of time here on this edition of Deal Talk and I'd like to just end by asking you a question here about character, and leadership, and what really helps a business owner become successful. You are a veteran of the United States Navy. You have a lot of business experience. You're an attorney, serial entrepreneur, tell me just a little bit and as quickly as possible in about 60 seconds how important it is to combine business smarts, intelligence, character, and just the whole package in order to be successful in leading a company and growing a successful business, whether a man, woman, no matter what kind of walk of life you come from. Just give me your thoughts on that.

Robert: The first thing I would say to anybody is control is an illusion. The first thing you have to learn is how to delegate and you have to learn how to select the right people that you know can do their job so when you delegate it to them. Don't micromanage them, you know it's going to get done. Yes, you do need to verify, have your checks and balances in place because everybody makes mistakes. But at the same time, don’t try to run everything because you can't do it. But again, you only have two things, time and money, and you have a limited amount of both. The fact it would be that now that you've got your team in place you have to have a set goal in mind, and everybody on your team ... you're selecting your team I'll even add this is part of that. 

Pick people that are not like you. You need a diverse team that have different backgrounds, different experiences. If everybody thinks the same way, they're always going to agree, that's not necessarily what you need. And then when you pick that team pick people that you're not automatically going to have personality conflicts, whether it be over religion, politics, whatever. Because it's easy for everybody to get along when things are going well, but nothing ever always goes well. So you need people that you can work through the issues with without outside influences and emotions getting involved. You don't need crybabies. And a true leader knows how to pick the right people, put them in the right spot. Because so many businesses get good employee, and because they're good at one thing they keep dumping responsibilities on them, that are probably beyond that person's bandwidth. Or they overload one employee and then they wonder why they quit. Again, puzzle master would probably a good word there. Picking the right people, assigning the right task, making sure you have the right people in the right task. And sometimes it's not always hiring. Sometimes it's finding an outside firm and outsourcing some of the work where it's their responsibility to get it done, and you have one person to call if it doesn't get done. Again, it's not trying to hold everything so tight in control that you squeeze the life blood out of the business.

The first thing you have to learn is how to delegate and you have to learn how to select the right people that you know can do their job so when you delegate it to them

Jeff: If someone out there would like to get in touch with you, and if several people would like to get in touch with you, people would like to speak to you about your experience, or maybe they're interested in looking for advice or even perhaps capital. They're looking to grow their business, they'd like to talk to you about that. Where can they reach you?

Robert: My website, it's robertritch.com, and I have a contact form on there. You can feel free to reach me on LinkedIn. Look up and connect with me, I'll be happy to. And then securedequitygroup.com is the venture capital firm. If you're looking for capital that's the place to go.

 

Jeff: That's Robert Ritch, R-I-T-C-H, the spelling on that. Robert Ritch thank you so much for spending time with us today, we really enjoyed the conversation.

Robert: It was my pleasure.

 

Jeff: That is Mr. Robert Ritch, and Robert Ritch is the CEO of Secured Equity Group in Franklin, Tennessee. We want to thank him once again for joining us today on Deal Talk.

Deal Talk is presented by Morgan & Westfield, the nationwide leader in business sales and appraisals. If you're thinking about selling a business or buying one call Morgan & Westfield at 888-693-7834 or visit morganandwestfield.com. And for more valuable information and insight from our growing list of small business experts do make it a point to join us here again on Deal Talk. I'm Jeff Allen. Thanks again for listening. We'll talk to you again soon.