What does a perspective buyer you haven't even met already know about your business? How much should you know about them? If you've ever wanted to be a fly on the wall at an M&A firm to know how buyers and sellers can do a deal or ruin one, 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. 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.
Whether or not you are kind of making motions toward selling your company or divesting part of it, we do want to go ahead and bring you some of the wisdom and thoughts of a gentleman who has been in the trenches. He has been involved in a number of different M&A activities in the past, and he's going to be able to share some of his viewpoints and perspectives from both sides working with sell side and buy side, kind of from that 30,000-foot level.
And we'll also kind of try to zoom in on some specifics with Ed Murphy, former Senior Vice President of Strategic Transactions at SAIC, and now enjoying retired life in America's finest city of San Diego. Ed Murphy, nice to have you. Welcome to "Deal Talk," sir.Ed:
Thank you, Jeff. Nice to be here.
It's a sensitive process, but we focus a lot on integration. And it's not easy. It's hard to get it right, because you don't know everything that the seller knows.
It's nice to have you, and I really do appreciate your taking time out from some of your hobbies to talk to us, because we have found on the program and in the past that a lot of really interesting observations, perspectives if you will, and thoughts on M&A, and the kinds of thoughts and input that can help business owners right now maybe prepare themselves for selling their company at some point are of particular value because you've been doing this for many years.
So what I'd like to do is kind of start by having you tell us a little bit about yourself, where you've been and just exactly what kind of experience you've had in this area.Ed:
Sure, Jeff. I was with SAIC for about 30 years. I had two jobs before that. But SAIC was an employee-owned company. I was there probably from about 150 million up to when I left there around 10 billion. And it started out as employee-owned. By the time I left it was a public company. And the last 20 years of my time there I did mergers and acquisitions and headed up a department in the last many years.
So I kind of saw a lot. We did small deals, we did deals with smallest, half a million to a million bucks. And we did deals in the hundreds of millions of dollars. And I've done deals, managing the deal directly with the principal. And I've dealt with JP Morgan and Goldman Sachs, so sort of all over the map. I have seen a lot but I have not seen it all, Jeff.Jeff:
That's fair enough, and I appreciate that. From a business owner's standpoint, they think that they have really kind of done everything that they need to do in order to get their company ready for sale. Maybe they need to leave quickly, maybe they've got another 10 years on their horizon to be able to make certain improvements. And we're hoping by some of the information you're able to share with us that it will speak to those folks who down the line know that they're going to be offering their company at some point and try to get the best value for their company that they possibly can.
From your perspective involved in past M&A deals, when a buyer approaches a seller with an interest in his or her company, it could be on a bus, it could be in a meeting, or it could be through an intermediary, what kind of research typically have those buyers already done on the company that they're interested in acquiring?Ed:
It's a very good question, but I'd probably spin it around and say that your owner should probably find the answers for themselves. But ways of doing that would be if somebody does approach them they should go into what I say is a set of general questions which you want to weave into a conversation, because the last thing you want is if they think they're being interviewed they'll be more guarded in their answers.
But if you can make it conversational, start out with, "How did you hear about us? What is it about us that attracted your interest? How much do you know about us? Why would we be a good strategic fit for your company?" And try to get those into a conversation before they ask you those questions so you understand and can kind of frame up, "Well, they seem to know a whole lot about us."
And sometimes the answer would be pablum. It's like that's sort of very motherhood-y stuff. So it may come off as they're giving you an answer that has no substance. In which case they probably know nothing about your company. So I think that's important to kind of go through that early.
And I think the other filter, the other set of qualifying questions you'd want to ask is, again, conversationally, so they don't feel like they're being interviewed. But what kind of deals have you done, how many, what's your process, who's your deal champion along the way, and who actually makes the approval? Is it a board who will see it at the very last minute and have no context? Or is it the CEO who's been working with you the whole way?
So I think those are the things that you probably want to find out. And that'll answer the question, how much research have they done. If they're very crisp in their answers and in describing their process, it sounds like, well, they've done this a lot. You should probably get a pretty good confidence. If it's very weak, you need to start out thinking if you're going to waste your time with them.
And I will tell you, when I talk about acquisitions, people think they're sexy, they think they're cool, everyone wants to be involved in one. But I kind of describe an acquisition as, frankly, it's a process of involuntarily employing a large number of people somewhere where they had not chosen to work. And then asking them, ‘Hey, we're going to change all the policies. We're going to change our processes. And we want you to be comfortable with all this.'
Ed, how important is it to know as a business who is interested in selling his company or her company to know what it is that you want, to know what it is that you're expecting not just to get out of the deal but why you want to sell your company in the first place? Because I think that a lot of people make these quick knee-jerk decisions.
"You know, I'm not interested in doing this anymore. I want to sell my company. I'm going to go contact a broker tomorrow." But I think sometimes those knee-jerk decisions end up being kind of irresponsible. So how important is it that someone take the time to really give selling their business that they worked so hard to build a lot of thought?Ed:
In a perfect world, which not many people reside in, but maybe your listeners will by listening to what you just asked. In a perfect world, if you're going to sell, you have already established... Even if you don't want to sell now you at least put the framework in place so that if someone does approach you out of the blue you can immediately put it in context and say, "I'm not interested in selling right now, but hey, come back and talk in three years." Or, “I'm all ears but I'm not committed to selling.” And even if you are desperate to sell of course you would never say that but you of course still say I'm all ears.
But I think when you've made a decision that at some point selling is probably the exit strategy. I'm not going to give it to my children or other family members or whatever. I don't have partners who will carry on. The best thing to do is do that homework well in advance. And the way I think about it is you probably want to look at your own company. Sometimes it's hard to do, so you may want to bring in a third party or even just a friend maybe.
But bringing somebody in and have them look at the company as if they had never heard of you before, and they're going to ask a lot of questions that you take for granted. So I can run through a few examples if that would be helpful.Jeff:
That would be helpful. Thank you.Ed:
For example, if you're looking at selling your company down the road you probably want to start doing what I call a ‘restatement process’ right away. Because if I come in and look at your company, the first thing I'm probably going to ask you is give me a couple of years of financial statement. That's sort of a typical starting point.
And so I'll look at them and I'll say, "This guy doesn't turn his receivables very quickly and he seems to have a lot inventory, he's not running a very efficient business."
And what's really happening is you're just tax managing. You're telling your customers don't pay me quickly year end, or make sure you put the bills out late. And so you're doing tax management.
That will not be apparent to an unsophisticated buyer and it might not even be apparent if they're only looking at year-end financials to a reasonably sophisticated buyer. Although if they're done a lot of deals they'll probably get there.
So you sort of want a build what I call the restatement process. One would be a cash in accrual if you have tax issues going on. So we do your financials. I'm not saying literally we do them, but just sort of have a little checklist of things that you would adjust.
Another big one is of course compensation of employee owners. Do you pay yourself a lot in a C-corp to avoid double taxation? Did you transition from a C-corp to an S-corp? Is there any risk of built-in gains taxes? Do you have family members on the payroll? Do you have a rental company that you own that rents furniture in the office. All stuff that's fine, but for a buyer they will look at that and go, "We've got a lot to unwind here."
My preparatory step would be do the work for them and develop a series of things that if you're buying your own company you'd say, "We need to address these things or we need to develop summary statements." And that'll help the buyer get to a valuation quickly. Plus, understand that you know your business.Jeff:
Edwin, you were working M&A. Did you ever get in the middle of a situation where maybe the buyer asked the seller to provide some statements, documentations, records, whatever the case may be, and the seller was unwilling or very, very reluctant to do that?Ed:
If there was complete reluctance to the process, that would usually be troubling. I can only think of one deal where we frankly just walked away, and this is a peculiar one. But we actually had a person we thought was... And this is not what we usually run into. We thought there's somebody who is so key to the business, he was a single point of failure that we said we need a key man insurance on you, which is also not something we would typically do.
And so of course to get that you had to get a physical. And this person refused. He said, "I'm not going to do a physical for a key man." It could've been just a principle thing, but frankly we said, "Well, maybe he's got some health issues, or maybe there's something he doesn't want a family member to find out." And that killed the deal for us.
So that was quite unusual. I would say that typically people will withhold information for competitive reasons, but eventually at some point in the process they're going to give it to you. And if they're holding something back that's important to you when I say me, as a buyer, that can be a deal-killer. I am very comfortable with not doing a deal because you don't want to assume the best in transactions. You have to assume the fact in front of your face.Jeff:
Ed Murphy is a former Senior Vice President of Strategic Transactions at SAIC, now enjoying retired life. My name is Jeff Allen. You're listening to "Deal Talk," and we're happy to have you back with us. What about those business owners who really are well meaning but they're so mired in just the day-to-day operations. And they've got a sale pending, or at least there's certainly things in process but they're not able to answer to these requests for information.
Then typically who did you work with if you weren't able to work well with the owner because of a number of different reasons? Maybe they're just not able to provide you with everything that you needed. Typically where would you go in that company in the sell side to get what you needed?Ed:
The deals we looked at they very often did have investment bankers involved. So they would sort of manage the process. So there was a little bit of a governor there. I think that's a good thing and a bad thing. It certainly makes the process probably more efficient. And the bankers generally have a lot of experience, so they would sort of know, they would anticipate what you need in a lot of cases.
The downside of course is the process gets sanitized quite a bit. And a lot of times we want to look at the counter party in the eye and say, "How do you feel about something?" Just watch the body language frankly. That becomes important.
If we couldn't get the CEO or the principal, we'd generally be talking to their senior staff like the CFO, or it could be the key line manager if we're trying to get information on customers, contracts and stuff like that. But in the smaller companies you really do need to get the principal. And that's why I would say if you are not able to give the time, then you're probably not ready to sell. Or if you haven't figured out who's going to be managing the process for you.
I did encourage sellers to try to make the complement of their staff available to us for discussions. But sometimes sellers are not willing to do that. They're like, "You're only talking to me because I don't want anyone to know this is going on." But they became single points of failure.
Your point is spot on. We had to be sensitive to the fact that if we took up all their time, their business is going to start deteriorating. So they're paying too much attention to us and not the customers. So we try to be sensitive to that. And I'd say at the end of the day, if we took up too much of their time and the business deteriorated and we did the deal, we're the ones who suffered, not the seller, so we have to really keep an eye on that.Jeff:
One of the things we've talked about on our program. In fact we've talked about it on a couple of other programs, shows that we've done prior to this one, is we've talked about the actual process that one goes through in the sale of a business and the transaction process could probably, actually, if we talked about it in its entirety, take us a couple of two or three hours here on the program too to really go into detail about it. So we won't necessarily do that here.
But I do want to go into a little bit, I want to talk to you about those types of things that you've seen that have derailed deals that have actually caused them to not go through when maybe you thought that everything was working smoothly. And I'm sure that you've got a story or two on that.
But I also too wanted to talk to you a little bit about that transition process, kind of that period that things come to a close and you've got one ownership group taking over, the other one is exiting. What happens at that point? And we'll go into that a little bit with you.
I'll be back with Ed Murphy, former Senior Vice President of Strategic Transactions at SAIC, when "Deal Talk" resumes in just a moment.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 firstname.lastname@example.org, that's email@example.com.
Selling your business may be the most important business transaction you'll ever undertake, so don't go it alone. Work with an organization that has made it their business to sell businesses and that's all they do. Morgan & Westfield at 888-693-7834. At Morgan & Westfield we know that selling your company is not something you should take lightly. It can be a stressful, difficult, even emotional process. That's why it's important to work with a team whose one and only specialty is selling businesses throughout the United States. And Morgan & Westfield will help you every step of the way, from helping you plan your exit strategy, to preparing a comprehensive appraisal, and locating the right buyers. Without the right team behind you, you could be leaving money on the table. So don't leave your most important business transaction to chance. Call Morgan & Westfield for a free consultation at 888-693-7834, 888-693-7834, or visit morganandwestfield.com.
Are you a professional adviser, accountant, attorney or a wealth manager, or do you provide other professional services? Contact us today to see how our reliance program can help you increase your firm's revenues. Call Morgan & Westfield at 888-693-7834. That's 888-693-7834.Jeff:
If you have any questions about any of the topics you've heard us discuss on "Deal Talk," all you have to do is ask. And I'm talking about anything that we've discussed on this show prior to this particular edition of "Deal Talk" or even about this particular subject we're discussing with Ed Murphy today.
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This is Jeff Allen. My guest is Ed Murphy from San Diego, retired Ed Murphy that is, and he is the former Senior Vice President of Strategic Transactions for SAIC. And, Ed, we appreciate of course your being available once again to join us here on "Deal Talk," and I'm glad you are able to make time in your schedule to join us today for this discussion.
We're having, I think, an interesting talk that really is one that a lot of business owners can learn from. And particularly right now what I'd like to do is talk about those types of issues that come up, preventable types of situations that sometimes present themselves during the transaction process. When everything seems to go smoothly. All of a sudden something turns up and the seller or I should say the buyer, that is, sees something that raises a red flag and can really throw the deal completely off-track, and perhaps nicks the thing altogether.
What did you experience with SAIC and some of the deals that you were participant in that did come up that you thought, "If one thing had changed, or been different, or they've been more tentative to this we wouldn't have lost this deal." Ed:
I think it can be a myriad of things. But something that comes to mind, I remember one in particular, the seller had actually done what I thought was a pretty good job of preparing themselves for the process, but it was sort of in the vacuum of who is the buyer.
And so he had I think prepared his employees for this, which is always a very touchy topic for some buyers and some sellers. But the thing that hung him up is that he had a particular subcontract that was... He was just subcontracted to a very large company. And so he has a very stable revenue source. And he's providing a service that his customer appreciated what he's doing.
So it looked like it was a key part of his business, and as I said it was not an immaterial piece of revenue. Well, when he came to us and we had discussions and negotiations, got the valuation, we're in due diligence, we said we need to talk to some of your customers. And he goes, "I'd like to handle that first round and let them know who's buying us."
It turned out that that major customer of his felt that we were a competitor. And so suddenly the customer said, "I'm not going to assign that contract." And this person had not done the homework on, number one, can I assign contracts without customer consent, and will it go by operation of law or do I need specific assignment permission.
And secondly he had advantages. There are certain buyers who would be unattractive to you as a customer of mine. And so that actually blew up the deal because the revenue was too material. And frankly once he realized he knew the deal was going to go blow. So he had to go down a different path.
And your listeners will say, "That wouldn't happen to me." No, it'll be something else. So I think it's again a key thing that you kind of look at your own business and say what could go wrong, not how well is this going to go. And I had other ones where frankly the then employee revolts against the owner once they found out they're going to sell. Not literally revolt but the employees felt like they were being ignored in the process and then suddenly they heard there was a deal going on and they were pretty upset. And you as a buyer want to step in and start trying to integrate a large, unhappy employee base into yours. And so we had a deal that actually blew up over… Frankly, he couldn't sell the company. Employees basically controlled the process in a peculiar way because he had not been, what I would say is open with his employees. And again, that's sensitive. Some owners will not do that early on, and I understand that, but you do run that risk. In both cases those deals kind of blow up.
And I will tell you, when I talk about acquisitions, people think they're sexy, they think they're cool, everyone wants to be involved in one. But I kind of describe an acquisition as frankly it's a process of involuntarily employing a large number of people somewhere where they had not chosen to work. And then asking them, "Hey, we're going to change all the policies. We're going to change our processes. And we want you to be comfortable with all this."
So acquisitions can be very messy to the largest number of people that are affected by it. Sellers should be cognizant of that. But it's still tough to decide when they're going to open the kimono on that.Jeff:
I was going to say the key really is knowing when to I guess lift that veil of confidentiality with your team. They're going to be certain folks that you're going to want to bring on and let them know about what is going on, obviously, key seconds and thirds, key leadership on your management team. They're going to have to be brought in on all of this.
But going back to that thing you talked about with regard to contracts and working with contractors and clients that rely on you to perform certain types of services and so forth. And then they decide, "No, I'm not going to continue with you because I don't approve of your buyer."
What do you do? How can you effectively reach out to these people to key customers that you do work with to let them know about this potential transaction so that they don't bail. Is that just kind of one of those judgment calls that you have to make, or is it just one of those types of facts of life? Yeah, you lose some business here and it could have an impact on whether or not the deal goes down or not.Ed:
Sure. And there's always some risk. As a buyer you always have to price in something going wrong. I don't think you can always assume everything will go perfect. That would be naive. But I think when you're looking at the customer set and you're preparing for sale, you have to decide at what point are you even thinking of saying, "I'm thinking of selling my company."
Because if you come in too late, I think you may be in a process where you've always done through pricing, due diligence, you've shown a lot to this other party and then your customer blows it up. Unless you know your customer well, that's kind of a risk that I wouldn't suggest you take.
But if you early on just sort of do a soft sale, and it's just something I'm thinking of down the road, sort of part of the preparation for sale that we talked about earlier. If you think it might be coming down the road, you might just say one of these days this might come up. And I want to make sure that you customers are comfortable with this. So I just wanted to let you know early. And see if they have any kind of reactions.
Generally, a lot of the customers are not going to really care. They'll say, "Is so and so still going to be working with me? Is your key guy going to still be working with me?" Those are the things that they're worried about. So you can address it, but I think if you put it off too long it is a risk of being a trigger for a blow up.
And for a buyer, at least for us, that was the key thing. Let's face it, what is a business but its customer? So for us we said we need to understand that these customers are going to be sticking around and we need to get highly comfortable with that if we're going to proceed.Jeff:
And I know that as a retired guy, you didn't necessarily retire from a business that you owned, a privately held company that you personally controlled the whole show on it. But you've been through so many deals. We talked about this a number of times already during our conversation.
And now that we're kind of winding down our discussion here on this edition of "Deal Talk," it's actually kind of a good time I think to talk about one last thing that I wanted to kind of bring up with you and that is integration, or the transition from one ownership group to another, or from one owner to another.
And in this particular case, talking about what happens at that point when you've got owner A who's had this company for 25-30 years, walking away, the deal is essentially done or about to be done, and owner B is taking over. And you've got kind of that window, I guess, where you've got that mixture of one guy leaving, one guy coming in, and business that kind of needs to be done between the two so that you can have a seamless a transition as possible.
What has been your experience with regard to that integration period when the two sides come together, the deal's just about done or has completed, and that company needs to go on to continue to succeed and continue to perform?Ed:
I'll try to gear it more towards smaller deals. But on larger deals where there's an anti-trust review period you have at least 30 days generally between the time you sign a deal and you close it. So you can work a lot of the issues then. The risk to the buyer of course is you pretty much own it unless something huge happens you can't walk away from the deal. You don't control it but you're committed to buying.
But in most deals where it's a sign and close deal where you sign the documents and that day you own it, it's important to do preparatory work leading up to that closing. And again, there is not a common interest here in most cases. The buyer wants to know as much as they can about the employees, about their mindset. They need to compare benefits, they need to figure out how the transition's going to work. That they engaged in generally happy workforce, which, again, in most acquisitions is not the case. You have people freaking out.
When you think about acquisitions, If I'm the principal on our side and I'm buying you, and you're the principal on your side, you and I may have a common interest of getting something done. But the employees often are feeling like, "Hey, what do I tell my family when I go home? Do I still have a job? Am I going to get fired? Is my pay going to get cut?" All their issues and I'll choose what's the strategic fit here? How much is the owner going to get? They don't care about that. They want to know what's going to happen to them.
So there's huge integration risk to a buyer. Again, this is more in a services business where people are not interchangeable, they're very critical to the business. But there's a big integration risk there, and so we used to overlap integration and due diligence so that as we learned about the business we would start teeing up issues about how we're going to compare benefits and match them. Are we going to require anyone to relocate, which generally was not the case. And with customers, are we going to make sure that the key people stay in place? Are we not going to lose anyone to make sure that the customer sees this as fairly seamless.
And the seller is generally saying, "I don't want you to know anything because if you find out a bad fact you're going to try to unwind the deal and renegotiate it." There is a tension there and I think the best way to resolve it is to just say to be a fair buyer and try to give comfort, but at the same time say, "This is what I need to know to make sure that I can take care of your employees who will become mine, and your customers who will become mine.”
It's a sensitive process, but we focus a lot on integration. And it's not easy. It's hard to get it right, because you don't know everything that the seller knows.Jeff:
And I do appreciate very much your taking the time out of your schedule and of your retired life to talk to us a little bit about your observations to give us some key insight into what it is like there during the process, buyer and seller coming together, some things we need to be mindful of. And again, I want to thank you so much for joining us on "Deal Talk" today.Ed:
OK, sure thing. Thanks, Jeff.
And that's why I would say if you are not able to give the time, then you're probably not ready to sell.
Jeff: Ed Murphy has been my guest. He's the former Senior Vice President of Strategic Transactions at SAIC. And again, we thank him very much for joining us. We hope that you enjoyed the discussion. You can find us and all "Deal Talk" podcasts on a host of channels for your convenience, including morganandwestfield.com, iTunes, Stitcher and Libsyn.
"Deal Talk" is brought to you by Morgan & Westfield, a nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com. My name is Jeff Allen, thanks again for tuning in, and 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.Resources (All references mentioned in the show)