Selling Strategically: Unleashing Maximum Value in your Business Exit

Hi Welcome to ValuationPodcast.com - A podcast and video series about all things related to business and valuation.  My name is Melissa Gragg, and I’m a financial mediator and business valuation expert in St. Louis Missouri. 

Today we are speaking with Channing Hamlet located in San Diego, CA. He’s a managing director of Objective Capital Partners, a leading investment banking and valuation firm serving the lower middle market, specifically companies with an enterprise value of $20-$75 million. Hamlet leads the transaction execution of the investment banking practice, and concurrently operates as the head of the business valuation practice. 

Questions discussed:
1. What key elements should business owners consider when strategically planning their exit for maximum value?
2. How far in advance should one start planning for a business exit?
3. How important is market analysis in determining the optimal time to sell a business?
4. What strategies can business owners employ to enhance the value of their business before putting it on the market?
5. Are there specific areas or aspects of a business that buyers typically find most valuable?


Melissa Gragg CVA, MAFF
Expert testimony for financial and valuation issues  
Bridge Valuation Partners, LLC  
melissa@bridgevaluation.com  
http://www.BridgeValuation.com  
http://www.ValuationPodcast.com  
http://www.MediatorPodcast.com  
https://www.valuationmediation.com  
Cell: (314) 541-8163  

Channing Hamlet
www.objectivecp.com
https://www.linkedin.com/in/channinghamlet/
channing.hamlet@objectiveibv.com

Transcript

Speaker 1: 0:00

Hi, welcome to valuation podcast.com, a podcast and video series about all things related to business and valuation. My name is Melissa Greg , and I'm a financial mediator and business valuation expert in St. Louis, Missouri. Today we're gonna be speaking about selling strategically, unleashing maximum value in your business exit with Channing Hamlet. He's located in San Diego, California, and he's the managing director of Objective Capital Partners, which is a leading investment banking firm and valuation firm. Sur serving the lower middle market. Specifically, this covers companies with a value between 20 and 75 million. Um, and he's actually in charge of both of these sectors. So we are fortunate to have you here on the podcast. Welcome, Channing. How are you?

Speaker 2: 0:49

Great. Thanks for having me. Really, really excited to be here.

Speaker 1: 0:52

Awesome. So we're gonna talk about all things kind of related to selling your business, and one of them is sometimes a business valuation, which of course we'll talk about some of, you know, value drivers and things that kind of create value when you go to sell. But in general, you know , is that something that the business owners should be hyper concerned about at the very beginning, like getting a valuation and knowing the value? Or are there other key elements that they should consider when they're planning to sell and they're planning to try to get maximum value?

Speaker 2: 1:32

What there , there's a, there's a lot to that. There's a lot to that question. And, you know, I think , um, deciding most business owners, you know, and most of the companies I've worked with are closely held, are , you know, are closely held companies, but most business owners have a lot of personal elements that they, that they can and should be thinking about. And I think the , the biggest one is , um, instead of, you know, running a business and generating income from running a business, when you sell a company, now you become an investor and you generate an income and support your lifestyle from being an investor. And so spending time understanding what your company is worth and if you sold it, how much would land in your bank account after tax, and then making sure that if you're gonna sell it, you know, you're getting enough money to support your lifestyle the way you want , um, is really important. So we always encourage business owners to do some level of valuation work , um, so that they can do some personal financial planning. Um, a lot of times you have a business owner where it's like, Hey, I'm really frustrated with my company, I don't wanna work anymore. And they've already hit a value point where they could support themselves with their investments. And it's like, why are you still working? You should sell your business Now, other times you see a business owner where it's like, you know, I'm not quite there yet. I need to keep building my value for a couple years. And so I think this personal planning in terms of what you want to do and how much money you need to do it, and to kind of make sure you're there before you start a sale process or start seriously thinking about selling the business is really important. And so that's one element on the personal side. On the business side , um, one of the things that I think is really interesting is early in my career, I worked at a private equity firm and when we invested in a company, you know, we, we had a plan to help the company, you know, grow and build value. And we were really focused on helping our partners build great businesses. But one of the things we did is we, right after we made the investment, we would often sit down with the executive team and the CEO and it's like, Hey, you know, we're gonna be partners in this for three to seven years, which is a typical kind of investment horizon. You know, what are the things we wanna accomplish together to improve the value of this business and make it a good investment for all of us? And so we would sit down and identify sort of key value drivers, and then we would often structure board meetings and a financial reporting package and things like that around the key value drivers. And it goes back to , um, you know, my professor in business school, what gets measured gets done. Um, but private equity firms often work with their investments, their portfolio companies on value drivers, and what, what are the things we need to do to, you know, grow and build a good business and then grow and build a good investment? And so private equity firms in general do that. And, you know, during my stint in private equity, I saw that very successful. I have yet to meet a closely held business that when I ask, Hey, what are your value drivers? I have yet to meet a company that has a report that says, I , I know what they are, I track them and here's the progress I'm making. Um, it's a huge lost opportunity for private companies. And so I think to , I know you, I've kind of rambled a little bit, but just to summarize , um, two things. One is the personal planning to understand, you know, what the company's worth and how much you need. And there's all kinds of estate planning, tax, financial planning, et cetera that goes into that. And then the second thing is , um, understand the value of the business and understand things that you can do to either improve the value or make it more saleable. And so those are sort of the two things that come to mind with the, the big elements that business owners should consider strategically.

Speaker 1: 5:39

Well, and I think that you, you dealt with something that I think is, is not known when you're going to sell your business. So a lot of times people will come and do a business valuation or some consulting, right, with somebody to kind of understand, even if it's the, the investment banker, business broker kind of facilitator of the transaction, they're gonna have those conversations about value or market. Um, and, and, and then even if you did a valuation that's not your after tax cash flow personally from the business. And I think that, you know, that's an important note to have that, you know, even if you're doing this business valuation, you might still need to talk to your personal accountant and personal financial planner to say, what is the after tax ? 'cause sometimes even that's not really the responsibility of the investment banker to give you that knowledge, like your accountant would have that knowledge. But that's a big piece, understanding the after tax cash flow , right?

Speaker 2: 6:48

E yeah, exactly. I mean, I think as an investment banker, I think my goal is to make the number, the top line number as large as possible. There's a lot of other advisors that are way smarter than I am at , um, tax planning, estate planning, structuring companies, et cetera, et cetera, et cetera, to optimize and manage taxes. And so, you know, if if your goal in building your business and selling is to maximize your after tax cash, there's a lot of people that can help, that can help you improve your bottom line without having to improve your top line. Um, and that can be, you know , um, doing tax planning can be way easier than growing the value of the business. Um, 'cause there's a lot of techniques and tools and tips that, you know, I'm sure you've gotten into with other, you know, with other experts on your podcast. But , um, really having that personal plan dialed in can be really important.

Speaker 1: 7:47

Yeah, absolutely. And I think it leads into kind of, you know, not only creating your team understanding who is involved in your team, but it starts to get to a concept of like, how far in advance should someone start planning for a business exit? You know, and this sometimes seems like propaganda because people say to plan in advance, but you know, we can give some examples of why, but what do you see as like a reasonable timeframe as opposed to, I'm done and I wanna sell tomorrow. Right?

Speaker 2: 8:25

Yeah. Um, it's a, it's a great question and I, y you know, I think my experience is that , um, of all the transactions, the hundreds of transactions I've worked on in my career, there's like one or more ways that business owners when they sold have left money on the table by not planning ahead. Um, so there's always , like, there's always more you can do, but I really think it takes two to three years to do the, to do a lot of, of the basics. I mean, coming up with, you know, the , and again, like I , there's no typical client, but the typical person that's selling a company is typically in their late fifties or sixties. They've built and grown their business for a long period of time. And so , um, for someone that's spent 20 to 30 years growing, or even 10 years growing and building a business, coming into grips with the fact that what they've like, ate, slept, and breathed and blood, sweat and tears for a long period of time, that suddenly they're not gonna be doing that anymore and they're gonna be doing something else, figuring out that something else isn't like a Sunday morning activity that just in and of itself can take a lot of time and thought. And then there's the financial planning element with how much money do I need? What's my tax structure? Um, family taking care of employees, other key stakeholders, trusts, state planning, et cetera, et cetera, et cetera, can all get , um, fairly complex. And it , and there can be a lot of taxes that are either avoided or deferred by planning correctly. And doing that stuff and understanding it and having your strategy in place well before you sell the company can make a big difference. 'cause once you, once you have an asset that's valuable, and once you have buyers starting to give you offers , um, on the personal planning side, it's very limited. And so I think the personal planning is something that business owners should be working on for a long period of time to really tailor it to their unique situation. I don't do any personal planning, but I've observed that that's really important on the business planning side. You know, I think different companies are in sort of different , um, situations, but I think really , um, years in advance understanding like, Hey, what are the value drivers here? Who are the buyers? What are the buyers looking for? And what are the big risks or obstacles like identifying all of those things, prioritizing them and chipping away at them can make a really big difference in terms of the ultimate value you receive when you sell your company, the terms you get. 'cause when you sell a company, there's way more to the transaction than just getting a check. There's a lot of retained liabilities and strings attached. And by being prepared and having a good business, you can minimize that. And then there's also , um, a lot of issues that businesses have that prevent them from being sold. And so really understanding what those are and working with them. For example, right now , um, I'm working with a client that's trying to acquire a business and the, the business that we're trying to acquire is a perfect fit for our client, but o one customer represents 60% of that business is revenue. And so , um, that's very risky to acquire. And so I guess the question becomes, you know, had this seller done things over the last 20 years and building his business to, to mitigate that risk in terms of building a sales team , um, purposely diversifying his revenue base or doing long-term contracts with this customer or doing this or doing that. You know, he wouldn't be in a situation where he's at the stage where he is facing retirement and he has this, you know, big, big issue with the, with the company. Um, and again, the like, I'm not suggesting that you should say no when a customer wants to give you money, but just understand that, you know, all things being equal money from a different customer is worth way more from more money from that same customer when you go to sell the company. And so, you know, thinking about those things and being really strategic about them well in advance can make a difference , uh, in terms of whether you're able to do a cash deal or you have to do some kind of earnout or whether the business is even saleable. And so that's just one example.

Speaker 1: 13:07

Yeah. And I, I think we've seen some examples of clients where, you know, sometimes the business valuation is, or any analysis of your historical financials, it starts to uncover some things that you are not clearly aware of. And that is part of the due diligence. Like a buyer comes in and starts to look at your historical financials. So a lot of times we've also seen clients that kind of need to clean up their financial situation or diversify their client base or do some of these factors, you know, are you seeing some of that happening as well where it's not just no , you know, the numbers or what it could sell for, but it's also like, you know, like getting your house ready for sale. You can't just put it on the market, the fir the , the day one. Like everybody's gonna see everything, you know, it's, it , you gotta kind of think of that as the concept as well for selling the company, right?

Speaker 2: 14:09

Yeah, I mean, I think a buyer, a buyer typically , um, and again, like I'm, most of the transactions I work on are kind of 10 to 15 million in value, up to a couple hundred million in value. And so on a recent transaction that I closed the , it was a $75 million transaction, the buyer spent two and a half million dollars on outside service providers doing due diligence. I , they know more about that company that they're buying than the seller does. I mean, they, they uncover everything. And so , um, understanding that due diligence process and , and being ready for it and being prepared can make , can make a huge difference. And so, you know, one of the, one of the really, there's two really big things that I think most companies fall short on. A lot of companies don't really invest in their sort of finance and accounting team and their financial reporting. Um, and so, and again, like as a business owner, I think you can run a business without a lot of those numbers, particularly if you've been in that business a long time. Um, like things come intuitively, you know, you know what decisions have worked in the past. And so you make those decisions and it guides you well in the future. But when it comes time to communicate what's actually happening in your company and why it's valuable and you don't have access to good data, it becomes very, very difficult. So part of it, part of this is having like, you know, gap based accrual accounting , um, 'cause any buyer that's gonna pay a premium for your business is gonna be a public company that has to do audited financial statements, or it's gonna be private equity backed that has a lender that's gonna require clean accounting. And if you don't have clean accounting, whoever's buying you is gonna go to their stakeholders. Their stakeholders are gonna say, are these financials audited? Are they accurate? And if the buyer is saying no , um, that's a huge risk and it's gonna come out in the price. And so it's not that expensive or difficult to do accounting properly. It just takes some time and effort to set it up. But it can make a big, you know, it can make a big difference. And then there's a whole series of other, you know, there's employment practices, legal practices with respect to intellectual property , um, it, security tax paying taxes correctly. You know, a lot of companies don't, for whatever reason, most of the companies that I've worked with in the last couple of years haven't properly remitted sales tax. And so there's like a whole like, liability left behind on that. And, you know, there's all sorts of questions that come up. None of those things individually are hard to do if you have the time and effort and are aware of them. So, you know, I think if a business owner is listening to this thinking like, Hey, I wanna sell my business in the next couple of years, I , I would invest the time and effort to understand the due diligence process and , and be ready for it and under and , and look at yourself and look at your company and figure out where you have gaps and key risk factors that can make a huge difference in terms of getting your transaction actually completed. And it can make a huge difference in terms of what liabilities you retain after the deal. And, you know, retaining liabilities after a deal is a pretty tough situation to be in. 'cause you're handing the keys to your company to someone else, and then you're hoping they don't screw something up in the future that comes back to bite , comes back to bite you. And so it can be very dicey. So, you know, engineering these, those things out of your business in advance. Makes sense. Um, and you know, to bring that back to what Melissa said, I think it's at some level, like selling a house, you might as well make the house nice while you're living in it. 'cause you're gonna have to make the house nice before you sell it or you're not gonna get the value you wanted. I think it's the same thing, the same concept can apply with a business.

Speaker 1: 18:16

Mm-Hmm, <affirmative> . Well, and I think that it kind of is an interesting thing because, you know, like we've talked about the importance of looking at your own company analysis and we're gonna come back to that, you know, 'cause I think that there are some aspects that we really wanna talk about. Like what are these drivers that really do move the needle, right? But I think that a lot of times , um, a seller or a business owner also believes that there's like a perfect time to enter the market, right? They're like, oh my gosh, now's the time to sell if I miss this window, blah, blah, blah. So how, how important do you think, you know, is a market analysis or looking at your industry and the roll-ups or the, you know, the, the purchases and the, and the market, and is that the way to look at the right time to sell? Or are, is it also looking at company factors? Like what, what do you think is the most important and or is any of it irrelevant? Right? Y

Speaker 2: 19:18

You know, I think , uh, unfortunately the answer is like, it depends and both are important. Um , which isn't the answer you want, but the, the market analysis and market timing , um, I think is, is a , it's a really interesting and difficult question. And I think one of the most complicated questions that I work with is when a business owner is like, Hey, do I sell my company this year? Or do I keep building it and do I wait for the future? And it's a multifaceted question. There's, you know, there's, there's personal implications like we've talked about before of, you know , how do you spend your time and how much do you enjoy doing what you're doing? You know, is it worth enough that you could retire, et cetera, et cetera, et cetera. But, you know, the , the market timing and being aware of what's going on in your particular industry , um, can be really important. I, I sold, just as an example, I sold a , uh, really nice commercial printing business in the mid 1990s. Um, and at that point in time, it was sort of before email took off and before the internet and a lot of the modern communication mechanisms that we're used to today , um, so glossy brochures and glossy annual reports and really nice quality printing were still a thing. And so what was going on in the printing industry at that point in time, technology was changing rapidly, but there were seven companies in the market that were doing a consolidation. And so if you had a , a good printing business , um, and you wanted to sell, you could get seven offers. And we did. And we got seven , the seven companies competing against each other. And we sold this particular company for like a really a premium valuation , um, call it like north of seven times ebitda , um, which in the mid nineties for printing companies was at the high , very high end of market. Um, 10 years later I got hired by a printing company that was arguably a better company, modern technology. The a who's who of Silicon Valley were their clients, you know, Cisco, Microsoft, Google, et cetera, were all their clients. They had this like very slick kind of mass customization, printing technology. But what had happened in that industry is the seven companies that did the consolidation were already, you know, billion dollar companies. They weren't making acquisitions anymore. There was a lot of fear about , um, changing technology and printing becoming more and more commoditized. And so the valuations in that industry had dropped from, call it six and a half to seven and a half times EBITDA to four times ebitda. And so this consolidation window happened, there was a lot of enthusiasm, then technology changed, and consolidation stopped and the market valuations were down . And so I think in most industries there's a, a cycle of, you know, growth, consolidation, et cetera. And I think understanding where you are in the economy, what the technology risks are and what's changing , um, there can be an opportunity to take advantage of opportune. You know, opportune times, we've had a number of clients that have been approached over the years. I've had a number of clients that have been approached by a strategic acquirer that needs whatever they have as part of their bigger vision and they pay a premium. And so if you manage your business in a way that you're ready and you can react to something like that, you know, there can be some like really interesting and neat opportunities, but it requires a business owner to think to, to think about their business that they're wor working in as an asset that they've invested in, not as their life. And if they're thinking of it as an asset they invested in, and they're making that asset as liquid as possible when that, when that exit opportunity comes up, you know, they're ready and they can jump on it and they don't need to take a year to get all their stuff together and fix their accounting and do this and do that and get their estate plan together, et cetera, et cetera, et cetera. And then the opportunity's gone. Um, and so I've seen that over and over and over again where, you know, one or two buyers show up 'cause something's happening in the, the industry or they, they wanna get into a particular market segment or a particular market geography and they're willing to pay a premium. Um, and you know, when we've had clients that are ready for that, it can work out really well. The, the market timing it , you know, the market timing can be important. It's also probably one of the most difficult things to predict. 'cause you know, none of all of us have a cloudy cracked and broken crystal ball that, you know, sometimes is right and sometimes isn't.

Speaker 1: 24:14

Yeah. And I think that, you know, in, in what you said is exactly right, I have seen a lot more clients who have worked with us over the years to just kind of, you know, gradually estate planning or understanding their value to clean up things that eventually get approached by a buyer. And it was interesting because I was talking to a client yesterday and they're like, you know, I'm just kind of done. I I just, I'm ready to go. I'm ready to sell this. I'm ready to transition. And I said, great. Do, do they need you to continue, you know, the business? 'cause there were multiple owners and of course, and I said, great. So what you're gonna do for the next six months is replace yourself. And they're like, what? And I was like, yeah, because if you don't really wanna be there, then you need to find who could be there to kind of transition with the company. You also then remove yourself out of it. You know, that's still kind of a, a strategy of, you know, increasing your value from a business owner perspective or removing some of the reliance upon that value onto your own personal. But what other things can somebody do to kind of enhance their value before putting in the market, you know, like, and, and maybe in a, in a different way than they nor, you know, like everybody's like, okay, increase for revenue. Well, if it doesn't increase profitability, that might be okay. But is that effective? You know, what do you see as some of those bigger places to focus on that maybe we haven't discussed yet?

Speaker 2: 25:56

Yeah, you know, it's , it's interesting that, that, that you bring that up and , um, a like a lot of times , um, our clients have had this kind of thought that a big company is gonna buy them. And this big company has a bunch of people in management sitting around doing nothing, waiting to buy a company so they can start managing some new division or new thing. You know, the , the reality is most big companies when they buy, when they make an acquisition, you know, they're, they're as much , they're acquiring the product, the geography, the technology, all that stuff. Yes. But really what they're wanting is a team . They're wanting to acquire continuity. Like , um, and the best way to have continuity is to have the team that's running the business stay in place. And so, as an owner, if you're integral to the business , um, it's unlikely someone's gonna write you a , you know, seven or eight figure , nine figure check , um, if they have to rely on you in the future. And so it's gonna have strings attached. So the, the best thing you can do is to build a team that is running the day-to-day in the business, so that when it does come kind , first of all, it makes it easier for you in running the business. 'cause you have a team that's running it for you so there's less stress and you're carrying less of the load. And then second, you can point when a buyer asks like, Hey, how's this gonna work when I own it? You can point to the team and it's like, Hey, they've, they've got it. They're running this business. It runs smooth. You're gonna be just fine without me. You can, you know, call me on my private island or whatever later , um, if you need something. And so that's like a really , uh, a really important distinction. And you know, I think when we've, when we've had, I've had deals fall apart 'cause a buyer comes in and does due diligence and they get nervous that there's too much reliance on an owner and they're not certain that, or confident that they can run the business, you know, without that person. And I literally have multiple stories where deals have fallen apart , um, because of that issue. Um, so that's like a just one thing. But the question that you actually asked was like, what strategies can business owners employ to enhance the value? Um, I think it's really understanding , um, like what are the thing , what are the value drivers in my industry for my business? And putting a plan in place to work on those and getting the , the whole company, the whole team, all the employees aligned around, you know, building the value and accomplishing these things that will build value. And then the second thing is understanding all the big risks in the business and engineering them out. Um, and you know , Melissa, I have some checklists on value drivers and risk factors that I'd be happy to kind of email you for the, you know, for the notes of this episode that Yeah . You know, might be helpful to go through. I don't know that it would be super interesting or valuable for me to read through like a significant checklist, but I can, I can email that out and we can put 'em in the notes.

Speaker 1: 29:10

Well, and I think that even, you know, like maybe a perspective to look at it is from the reverse. So like, where are buyers looking at areas that like really need , you know, like we know the, the owner team, you know , um, 'cause we could also talk about a lot of, you know, big family held businesses have a lot of levels of family members, you know, so it it , if you almost have to look at your business from an outside perspective, but it's very hard for people to do that. So when a buyer's looking at something, are there any like red flags that they see in a business or green flags that would make them super happy or, you know, kind of big picture items? What do you think ?

Speaker 2: 30:00

Yeah, I mean, I think that , and again, like, you know, different industries and different businesses are different. And so it's definitely, that's my disclaimer. Like definitely you have to think about your particular situation. But you know, in, in general , um, value , uh, value and asset is more valuable if there's lower risk. And so one of the things that I believe makes companies most valuable is companies that have built kind of predictability into their business. So , um, recurring revenue, predictable revenue streams, you know, standard sales processes with clear client acquisition metrics. Um, a lot . There's a lot of times, like we've done some work in the kinda residential or commercial services , um, companies that are doing like HVAC installation. Um, if, if they've built maintenance contract, like predictable maintenance contracts, that makes them more valuable than if they haven't. And so really putting some thought into being able to sit down with a buyer and it's like, Hey, my revenue this year was X and next year it's gonna be y and the year after that it's gonna be z. And I know that because I've built processes and systems into, if I spend a dollar on marketing , um, I get this many leads and when I have this many leads, I convert this many at this rate , um, et cetera, et cetera, et cetera. And really like understanding the formula of your particular company and, and how it, and how it works so that you can sit down with a buyer and talk about how predictable and stable it is and just looking for ways to build in predictability and stability and standard processes , um, are , um, very important. And then I think the other thing is , um, a lot of times the , a lot of times with these lower middle market companies that we both work with, the owners are the key salespeople. And so companies that have like a proven sales process with employees that are not looking to retire, that are generating the revenue and owning the customer relationships. So there's true continuity, there's continuity on the revenue, and you can actually implement and believe a strategy for growth. Those are the, like most significant things to work on is like the sales process and building and reliability.

Speaker 1: 32:28

Mm-Hmm. <affirmative> . Well, and I think that, you know , uh, it makes me realize that, you know, a lot of companies that may have been successful for 20, 30, 40 years , um, you know, some of the technology of now and social media and, you know, the ways that you can easily get business that may not involve a person is not always employed at some of these businesses. Yeah. Um , you know, and that might be, and it , it might be an opportunity for somebody, but like a business owner, if they're just doing a great job, they kind of get to the point of like, well, if I continue for five more years, I can make cashflow or I can sell it today for five times. You know, and I don't know if that's worth it kind of situation. Um, I , you know, what do you say to somebody like that? Should they just sit back and, and hope that a buyer comes to them? Or, you know, is it a planned auction style process for them to go and sell in an organized fashion? You know, 'cause that person's kind of weighing the options of, I'm making enough money if I'm not gonna get a home run right. Then if I'm not gonna get 10 times, then maybe I should just continue to, you know, like, what do you talk to? Yeah .

Speaker 2: 33:50

You know, that that's super , um, that's a very difficult , um, question. And I, I think , um, our firm is called Objective 'cause we believe business owners should make decisions based on their objectives. And so I think that a lot of times people wrestle with the neck , like in almost every business owner, when you sit down and talk to them, like their business is growing next year is gonna be better than this year, so the business is gonna be worth more next year than it's worth this year. So you can always sit there and say, well, I'm gonna wait one more year and I'll sell next year. And then, you know, at some point we'll both be in the nursing home and our walkers talk , you know, hunched over talking about how, hey, we're gonna sell it again next year. You know? Um, so, so I think it comes down to the question of like, you know, how much is enough and what do I want to do with my life? And that's a, that's a very personal and individual answer , um, for each person. A lot of times we see business owners have some kind of issue or event happen that causes them to realize that like, Hey, this is enough. I'm, it's time could be a health issue, it could be something with their family. You know, we've, we've had companies that have gone through like, you know, very difficult customer issues or a flood or, you know, this or some catastrophic issue where like one minute they've got a great business, the next minute they're fighting, fighting for survival. And then once they get through that it's like, Hey, enough is enough. Like, I want to take some chips off the table and diversify myself. Um, so it, it really, it really, really varies. Um, and I, I think the, the, one of the things we've learned in the investment banking business is like running a formal pro auction process to sell the company. Um, it does a couple things. One is it is designed to get you the best price. And you know, obviously if you want to , if you wanna sell your company, you obviously you'd like to sell it for more. Um, the second thing it does is it, it gives you the peace of mind to make a really good decision. You know, a proper auction process. There's multiple buyers, often there's different types of buyers. There's strategic buyers you talk to, there's private equity firms, there's portfolio companies of private equity firms. And so now, now you get to interview like, Hey, I've put my blood, sweat and tears into building this company. Like, who's gonna manage it through its next iteration? Is it gonna be the strategic buyer that maybe is gonna pay me a little bit more, but my company's gonna dissolve into this behemoth? Or is it gonna be this private equity firm that's gonna keep my company independent, but I've gotta work for them? Like, there's all these different choices that are available. And so running a process to understand like the real world market choices so that when it comes time to sign on the dotted line, you're not sitting there like wondering, Hey , um, is there another buyer out there? Is this a possibility? Is that a possibility? If your team that's helping you sell the process has done their job, right, you have a really good understanding of the market and you can make a good decision. I had a client like 10 years ago , um, who was in kind of a difficult situation. He was an absentee owner and the general manager of the company was like mid sixties and wanted to retire, and there were some other kind of issues with the business. And so we ran this full market process and we wound up with like four offers. And my client , um, I'll call him, Steve calls me one day and he is like, Hey, Channing, I've decided not to sell my company. The offers just aren't good. And I was like, hang on a second, I have just put like 12 months into this process, like, I'm gonna come get a coffee with you. And so the next morning I sat with him and I'm like, look, I agree the offers aren't where we wanted 'em to be. Here's what we've learned about your company. And I went through like, you know, a couple of the issues and then I , I, and then I said, look, I went, I went and I just wanna remind you why you decided to sell the company. You wanted to take care of the general manager. You wanted your customers to be well taken care of. You wanted this, you wanted that. And by the way , um, if you don't sell the company, you're probably gonna have to fire the general manager, replace him with someone else who's gonna put in modern systems and processes. And , um, then you're gonna have to be involved and maybe it'll work and maybe it won't. And you said you want to spend time with your family starting another company. And so near as I can tell, aside from the fact that these offers aren't exactly what you wanted, they check every other box you said were important. And so , um, really like under , the reason I bring that up is we ran a full market process. We understood what all the options were, and one of the options was definitely not selling the business and like not being an absentee owner anymore and jumping in and fixing a lot of the issues. And it turned out in his mind when he really evaluated all the options together, that the jumping back in and fixing it, selling it for more in the future wasn't better than, you know, selling it today and letting someone else do that. But one of the things we did is we decided , um, it was a private equity firm that bought the business. And , um, as part of this process, I helped Steve decide to retain like 40% of the company. And his 40% is now worth like 10 times what he sold it for, you know, 10, 10 years ago. And it's, it's worked out fabulously. And he got to do everything that he said he wanted to do, took care of his general manager who retired, spent time with his family, and , um, he's invested the money that he got from that sale exceptionally well. Um, so anyway, the , the market process can work and work really well.

Speaker 1: 40:15

Well, and I think that the , you know, this conversation really has been about is there a perfect time to sell? No. Um, are there better times to sell? Maybe. I think that there's one area that I think , um, that is a great time to sell is that when you have a three year trajectory that's continuing to go up or you're trailing, you know, like how important is your trailing 12 months and, and results. Because I think that those are the times that I will see a business owner maybe be like, you know , um, because business owners don't see risk, you know, entrepreneurs don't always see risk like normal people, right? So they're, they're more willing to take on that risk to get that great reward. But, you know, seeing some business owners in that position, I think that if you're, if you're more watching your financials, you can probably see that there's a good time when the planets align kind of that it might be better than other times, but the auction style process is still a process. So you're getting into it and still gonna have a, you know, a runway that you're gonna have to continue operating your business, keeping your margins up, you know, satisfying your clients. You can't go have the cocktail yet. So, you know, kind of as , uh, maybe a final question or suggestion or whatever is, is there any times where you see absolutely it's time to sell? And maybe any other examples of successful strategic exits that were kind of like, I don't know if I'm ready yet, but it's, the timing is right. You know, or is it really just when you are ready and , and willing? Because I like what you said, like when you establish what you're willing to walk away from, 'cause that it can't just be as much as I can possibly get. Right. So yeah,

Speaker 2: 42:23

You know, it's, it's an interesting, the , the, I think the, the hardest thing we do is help people decide when to do a transaction. There's, it's, it's just a very difficult and personal decision. But I think one thing you said , um, is if you do have a couple years of kind of good numbers, good results, a stable, steady story, you know, earlier in the conversation we talked about how predictability is valuable. Like if you put a couple years of good, stable predictability together and, and you can let the numbers speak for themselves and you don't have to , um, sit there and tell some story around the numbers , um, that's a better time to sell than if you've had like a lot of volatility and ups and downs and twists and turns and there's a whole story that someone has to buy into to, to value the company. Well, you know, definitely one is , um, better than the other. But at the end of the day, I think I really do think it's, it's a very , um, personal decision that, you know, it comes down to an individual or a group of individuals that are owners of a business. And, you know, the , the situation and circumstances of the business and the, the situation and circumstances of the individual, the , the one thing that, that I have seen is a lot of companies wind up in a situation where they're growing rapidly and the owners don't have the capital to maximize the opportunity. And at that point, the sort of expected value of , um, for the owners of bringing in , uh, like a strategic partner or a financial partner that would buy the business and provide the capital to, to really accomplish an objective that they couldn't accomplish on their own. You know , when , when that circumstance happens, you know, that can be like an obvious time to sell , um, and, and really like capitalize on a bigger, bigger business opportunity. Um , so that's one thing that we've seen. You know, that's one thing that we've seen and that's kind of a , uh, an interesting time , um, to sell. 'cause a a buyer can feel like they're get , they're a, getting a good deal and b um, sitting an opportunity to help create massive value and they can afford to overpay for a company in that circumstance. You know, more often than not,

Speaker 1: 44:55

The only I'll , I'll ask one more final question, <laugh> , and then , uh, uh, we'll talk more about like how you work with people and everything. Um, you know, a a a business owner gets approached, and I see this a lot, a business owner gets approached by another business owner, right? Maybe a company that's twice the three times their size, but they're still kind of being run by these major figureheads, right? So they kind of talk and they're like, oh, this would be a great way to bring this companies together. And what I see though is that those conversations, they try to push those conversations forward without necessarily, you know, and , and even maybe at the buyers urging of like, let's not get attorneys involved, let , yet let's not get business brokers, let's not get investment bankers involved. Let's just talk about this . Do you see any benefit in having those initial conversations or, you know, how do you introduce somebody into those conversations without kind of, you know , um, rocking the waters? Or does it matter? Does that just mean that there's interest and maybe it's a good time to run an actual process?

Speaker 2: 46:17

Yeah, again, it's, again, I think it's like really situations specific. We get brought into situations like this all the time. And so a lot of times, you know, our, our client has a buyer that has expressed interest and it's hard to tell, you know, is, is this buyer, is this buyer real? Are they, are they, are they really , do they have the money and the wherewithal and the interest to pay a premium? Are they just kicking the tires? Are they just here 'cause they're trying to get a deal? You know? Um, and so , um, if, if they freak out that the seller is gonna bring in good quality advisors, more often than not, that's a signal that their tire kickers and they were just trying to get like a really good deal and they don't wanna pay a fair price. Um , mm-hmm . <affirmative> and , you know, we've had, we've, I mean I've kind of seen it . I've, I've kind of seen it all. A lot of times we'll get involved in that situation and like, you know, a bird , a bird in the hand is worth two in the bush, or yeah , if you have a fish on the hook, don't let it wiggle off. And so a lot of times we'll get involved and just work with that one buyer and figure out whether there's a deal there or not. And at the same time, we might quietly go have conversations with other buyers, or we might be putting the pieces in place to go run a process. And, you know, I, I could probably spend another hour telling you all my stories of how it's worked out. We've had a lot of success selling to the first buyer, had a lot of success negotiating with the first buyer and moving the price up. We've had a lot, we've, I've seen it where the first buyer is often like not the highest bidder by a long shot . And some, we , we wind up finding another buyer that is a better fit and willing to pay more. Um, and so I think really going in eyes wide open , um, to those situations and just understanding what you're looking to accomplish makes sense. I think it's really smart for the, for the business owner to work hard to establish a good relationship. Um, and I think it's also the biggest mistake I've seen is people share information that's not polished and professional and doesn't tell the story well, and they don't position themselves , um, for success. Like, we had a company that had three or four buyers that were interested and had shared some information and actually got an offer. And I looked at the information our client had shared, and I consider myself like somewhat of an expert with financial statements. I didn't really understand the financials, I didn't understand the proposed adjustments. It was hard to figure out what the actual cashflow or profitability was based on the information. Um, long story short, we got involved and spent a month working on, you know, a better financial presentation including financial projections coming up with a proforma ebitda , um, et cetera, et cetera, et cetera. And that business sold for more than two times what the initial offer was. And part of it, part of it was because we created a competitive process Mm-Hmm . <affirmative> and kept that buyer honest. And part of it was because we presented the information in a really compelling way. So the CEO of that buyer could go to his investors and argue that it was worth twice what their original offer was and get them to approve it. And so I think bringing , um, bringing some professionals in to make sure that when you do start to share real information , um, you put your absolute best for forward the first time, there's only one chance to make a first impression. So I think that's like absolutely critical.

Speaker 1: 50:05

Well, and, and I think this is a good segue into your company and how you work, because you said something really important that I think that, you know, people wouldn't understand unless you're in this space. Like even if you're an owner working with another owner to negotiate a deal, you know, bringing in an investment banker is go , like, there could be private phone calls that are made to other competitors that, that investment banker knows is purchasing those types of companies. You know, there could be other , um, bringing in even close competitors that you wouldn't bring in until the last moment anyway. So there are definitely a lot of strategies that I think are around creating that comp competition for the price that a business owner would not be able to do. But in any space of their planning, they can come and work with you. And I really like what you're talking about is that it's catered towards the business owner and like what they're, you know, being objective. But tell us a little bit more about kind of how you guys do things, maybe how you're a little bit different and how somebody could reach out to you.

Speaker 2: 51:21

Yeah , I mean, we've, we've sort of built and set up our firm to work with lower middle market companies. Most of the transactions we work on are, you know, between 25 and a couple hundred million in value. Um, and so we're good at working with closely held businesses, you know, family and entrepreneur founded businesses and , and really like the, we do the typical investment banker process where we would start at the beginning and help put the materials together and tell the, tell the story really well and not necessarily like, Hey, the company does this, but this is why the company's valuable. And really try to tell the value story. And then we would go and market the company to a group of buyers and ask for offers and then narrow it down to a handful and get them to negotiate against each other. And, you know, you wind up getting a really good understanding of the market. Um, the competition drives a higher price and it gives the client a chance to , um, you know, pick interview buyers so they can pick what's right for their company and their situation. Um, so that's like, that's what we do as an investment bank. Um, that said, like something like half of our clients come to us where they're already at some level of engagement with one or more buyers. And so, you know, we'll modify and tailor the process and what we do to, to meet, you know, to meet their circumstances. You know, we've definitely had examples where a business owner is like, look, I don't have the interest or bandwidth to run a process. This buyer that's at the table, I've known them, my family's known them for 30 years. I want to sell to them, help me get the best deal possible. Um, you know, other clients are a little bit more coin operated where they're like, run the process however you want to get me the most money. And then, you know, there's everything , um, everything in between. And so , you know, really kind of tailoring the approach and the process to the circumstances of the company and the circumstances of the owners is like super important to us. And we spend a lot of time , um, you know, setting the process up for success, whether it's negotiating with one buyer or running a full process or something in between.

Speaker 1: 53:46

Well, I think it's been very helpful information. I think that it, it really is parallel to a lot of information and, you know, knowledge that I have about the industry. I think you've given an amazing amount of depth and , um, you know, a lot of things for business owners to think of. It's not about just selling at the highest price, it's also about, you know, a hundred other factors that have to do with your life. And if it's that big of a decision, then it's important to have the right people in the room. Um, and if it's not that important of a decision, you know, these transactions can get done a lot of different ways and, you know, like you'll still be successful. You just won't know if you could have eked it up a little bit higher. And the reason why I usually recommend people to get others involved in general is that if you are negotiating with the buyer, you're gonna be working with them <laugh> , you know, if those negotiations go sour or you get some hurt feelings or things like that, I think that you'd really need like an investment banker to be the buffer in those conversations.

Speaker 2: 55:00

Yeah. Um , and I think there's, I mean, just like anything else, there's, there's issues that come up that, you know, I've dealt with a hundred times where a business owner selling their business for the first time isn't aware of, you know, what's typical and what the solutions are. The last thing I would say is like, most investment bankers will spend time helping. You know, it's like our, the way we charge for our services is we charge mostly based on a success fee. So, you know, most investment banks are very careful about the clients they take on. And we put a lot of time and effort into cultivating a relationship with clients before we take them on. And so , um, as a business owner, you can get a lot of free advice by, you know, spending time with an investment banker upfront and educating them on your business and having them tell you what, what you, what they think you're worth and what things you should work on, et cetera. And so, you know, if you are thinking about selling your company at some point in the future, you know, investment bankers will spend time with you, you know, well in advance to create a relationship. And so we're always happy, you know, we're always happy to do that. And we've had a lot of scenarios where we meet someone who owns a business and it's like, Hey, for these reasons we've decided you're not ready. Um, let's touch base quarterly or annually and, you know, three years, five years, 10 years later when they're ready, you know, we're, we're there and they're a better client for us 'cause they're, they've followed the advice and you know, we're a better fit for them 'cause we know them and we can help really tailor our services to exactly what they're looking for. And so creating relationships early with your service providers can make a big difference.

Speaker 1: 56:45

Oh , that's awesome. Well, and I will, I will tell people to connect with you and reach out to you 'cause you did talk about a couple checklists and maybe they should reach out to you and get those checklists and talk to you a little bit about their business. Um, we'll also, you know, figure out how to provide them as a link or something in the notes. But we really appreciate your information, Shannon. And , um, you know, if you have more questions, I think that he has shown that he's willing to offer up advice and I think it's a very different way of operating than most investment bankers. And so I appreciate your advice and your time today, and maybe we'll see you again soon.

Speaker 2: 57:25

Yep . Thanks for having me.

Speaker 1: 57:27

All right . Thank you.

Speaker 3: 57:32

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