EP 56: SaaS Exit Strategies: Secrets to Selling your SaaS Business with Kirk Michie

0:06
welcome back to another episode of SAS Buyers Club I’m your host Omid and I’m managing partner of Optimus legal
0:13
Optimus legal is a fullservice corporate Boutique Law Firm where we help SAS founders with all things contracts from
0:19
incorporation to exit anything that has to do with contracts we help SAS founders with I’m also the host of the
0:26
saspes club podcast which you’re watching right now and the mission of the SAS Buyers Club podcast is to help
0:33
Founders get better exits because I believe anyone that can give value to SAS Founders that help them increase the
0:41
value of their business will help them get a better exit with that being said I’m super excited to introduce Kirk
Introducing Kirk Michie
0:49
Mishi did I pronounce your last name correctly close enough man cool uh Kirk
0:55
uh is the managing partner of cander advisors and he has three decades worth of
1:03
experience collaborating with Founders to achieve their strategic objectives helping them get better outcomes which
1:08
is exactly the mission of this podcast so I’m super excited to to welcome you
1:13
to the show Kirk thanks for joining thanks for me I’m really happy to be here awesome so what’s your hot take
1:19
Kirk what do you want people in the audience to get from the show today yeah so without um being too controversial I
Predators and Prey: Understanding the Buyer-Seller Dynamic
1:25
would say it’s good for any founder who’s thinking about selling or having having a capital event that your
1:32
investor or your buyer is a full-time Predator your part-time prey you need to armor up you need to protect yourself
1:38
you need to have some guidance around the transaction doesn’t mean you need to hire an investment banker um but you
1:44
should probably get a knowledgeable lawyer involved in whatever you do to make sure you don’t agree to terms that
1:50
are unfamiliar and um and absolutely don’t use hope as a strategy um if you get an
1:56
Loi don’t sign it Loi is a ceiling it is Mount ofl you know the buyers aren’t bad
2:02
people it’s just they’ve got a different objective than you do as the seller cool so that’s some king of the jungle I
2:08
love it and also I love the Peter teal reference there as well hope is not a strategy um so okay buyers are predators
2:18
and you are part-time prey what is so I heard you give one example of that Loi is a floor not a ceiling don’t sign it
2:26
until you make sure that you have people negotiating on your behalf talk to me about that so the LOI is a is a ceiling
The Importance of Legal and Financial Guidance
2:33
not a floor yeah when I say that the buyer is a full-time Predator what I mean by that
2:38
is whether they’re a strategic buyer like a company in your business um or a
2:44
financial buyer a private Equity Firm or search fund or an independent sponsor they do this all the time so when they
2:51
reach out to you and say hey send us over a QuickBooks uh download because
2:57
we’ve been you know tracking or did some research on business and you’re exactly the kind of business we want to buy and
3:03
you get really excited about it you think that their requests are heads up
3:09
business people collaborative kind of discussion and that what’s going to result from that is some fantastic you
3:15
know amount of cash and prizes and all you got to do is provide them with a few additional bits of information a wire
3:21
transfer is going to happen in your account and that’s just not how the process works um the first thing is if
3:27
they’re a financial buyer they’re looking to if they want to acquire your business and you provide them with information that says the transferable
3:34
economics are as attractive as they think they are then just like when you walk onto a Car Lot having decided that
3:42
that you know new Big Range Rover or G550 Mercedes or for that matter the
3:47
newest Prius is exactly what you want to get you want to pay as little as possible for it right they going to do
3:53
the same thing with your company they’re not bad people but if they’re investing money on behalf of investors or share
3:59
holders then it’s their fiduciary obligation to buy your business for as little as possible and that is not the
4:06
same as your objective and exiting and they’re going to do that by structuring
4:12
the deal so they put as little Equity as possible to try and create leverage and
4:18
higher return for them and their investors um doesn’t mean they’re going to be Reckless with it but they’re not
4:24
going to put more Equity than they need to in the deal they’re going to give you as little cash as possible because they
4:29
don’t want to fully take on the risk of running your business they’d like you to keep some of that risk and drisk it for
4:36
them and their investors and so they’re going probably use a number of structure elements so as little cash as Clos as
4:42
possible as many contingent payments as possible so that might be earnout it
4:48
might be a seller note it might be rolled or retained Equity but so you as the seller have not heard those terms
4:55
before you’ve been busy running you know your machine shop with four different locations or your injection molding
5:02
business or you know your um you know chain of 25 tire stores and you just
5:08
don’t know these terms right so that makes you that makes you part-time prey you’re now in a world that you just you
5:15
know kind of have no familiarity with and you’re a Savvy business person but the m&a world is a totally different
5:21
thing totally makes sense so yeah talk to me about some of these structural
Negotiating Deal Structures
5:28
elements that you mentioned um how have you seen them uh put into into play what
5:34
should Founders know about them and how outside of you know if they were to hire
5:39
for example cander how do you help negotiate those various structures to help them get you know yeah the highest
5:47
ceiling possible which I also want to ask you about but yeah yeah so um like both your business and your podcast
5:54
we’re trying to get guide Founders to the best possible outcome whether that’s an internal sale like to an ESOP or
6:01
developing you know kind of a successor and becoming an LP in your own business or an external sale to a strategic or
6:07
financial buyer when it’s an external sale um you know what we’re trying to
6:13
maximize for is the the highest possible amount of the proceeds coming to the
6:20
seller at the earliest possible moment think about discounted cash flow
6:26
analysis think about getting as much money as possible creating the shortest duration window and the maximal risk
6:33
transfer to the buyer um so to do that you know we’re going to use a framework
6:41
that we call kind of you know sellers price buyer terms buyer price sellers terms we’re going to negotiate in a
6:47
heads up way we’re going to tell our buyer what we’re trying to get to and what cander is going to do if we’re
6:54
involved is to make sure that we explain to the founder on every trade on
7:00
you know kind of what they can negotiate for next so you know think about it this
7:05
way that um you know if if a buyer comes across with a letter of intent or or a
7:13
indication of interest and that’s the point at which we’re retained and there’s sort of a a general like you
7:20
know maybe the buyer says that the business is worth $25 million based upon $5 million worth of via do and the
7:27
relative growth rate in the sector MH and let’s say that we at cander look at our databases and all the precedent
7:34
transactions we know about and um you know kind of incorporate our work and say that might be a reasonable number
7:42
you know as long as um the bulk of the transaction is in cash but the the buyer
7:48
has put a an Loi together that says we’ll give you 60% of um the purchase
7:54
price and cash up front and the rest in a two-year earnout based upon the
8:00
proforma forecast that you sent over to us right okay well the proforma forecast
8:06
um that they asked you for as a business owner is a trap most businesses um that
8:12
have been around for any length of time that were started by entrepreneurs at their kitchen table or in their garage
8:18
don’t run based upon looking at the total addressable Market the serviceable addressable market and iteratively
8:25
developing a forecast or a budget for next year when they said to you when they reached out hey um can you give us
8:32
the last few years worth of financials and a forecast for next year or the next couple of years and you knew that you
8:39
couldn’t show them a flat or down year next year because that would make your business seem less attractive so you
8:46
went I’m gonna grow at 10 doesn’t seem enough so and 20 seems too aggressive so
8:52
I’m G to put 15% in there and so then what they say to you is 40% of the
8:58
proceeds on this business that you’ve been running for the last 25 years building having the existential risk of
9:05
running and making payroll all the time 40% of the purchase price is come coming
9:11
to you based upon the achievement of some forecast that you did on the back of an envelope last night and they’re
9:18
going to take advantage of that so the first thing we’re going to do as the advisor is say yeah no we’re not going
9:25
to do an earnout or um if you want an earnout we want more cash up front and
9:30
we want the earnout based upon um you know future growth um you know but we
9:37
want it uncapped so um we want it over a longer period of time and we want it
9:44
incrementally right so we don’t want it all or none and we want to make sure and the conversation we’re having then
9:50
privately with our client and me is to say assume you’re never going to get any
9:55
part of the earn yeah most don’t most don’t right I mean I had coffee couple
10:01
weeks ago with an m&a attorney who’s been working um as a partner in his firm for the last 25 years I asked him um how
10:09
many times he’s seen businesses get their full earnout he said maybe 20%
10:16
right so we counsel them hey look let’s assume that you’re not going to get any part of the earnout can you live with
10:22
the initial cash proceeds if it never happens we’re not saying don’t agree to it but let’s make sure that we’re
10:29
getting getting enough upfront so that if you never get the earn out you’re still okay that you sold to these people
10:34
because I promise you if they’re a private Equity Firm probably within a year you’re not gonna like them very much anyway because they’re not
10:40
operating people they don’t speak your language right so you know that that that’s an example probably a long-winded
10:47
one but that’s an example that’s perfect I want to talk to you about the ceiling piece actually the reason why I called
10:53
it a the floor was well you know so the LOI you just described it as a ceiling
11:00
and and and I actually would like to get a different definition of what you mean as a ceiling because yeah it by ceiling
11:07
do you mean that this is the most that the buyer is willing to pay because if
11:14
that’s the case then what are the tactics other than the one that you have
11:20
suggested in terms of hey give us more upfront let’s you know uh reduce the earnout amount and actually let’s make
11:27
sure that we’re completely comfortable with you know making sure that if you never earned the earnout then you’d be
11:33
okay with you know the ultimate purchase price because to me that actually means that the ceiling is kind of movable so
11:40
yeah yeah great question I’m glad you’re drilling down on that we because um what
11:46
I should probably more precisely say is ass signed Lois a ceing yes as a as a
11:54
um another m&a lawyer I know says it only gets worse after thei is signed
11:59
um which is to say look if you agree to um an Loi based upon the Quickbooks
12:07
download you sent across to them that shows your p&l without any awareness
12:12
that you need to adjust your p&l your net income to an eaon number which adds
12:20
back you know your interest taxes appreciation amortization and your
12:25
nonrecurring items and it looks at things like should you be advertizing
12:30
certain expenses and capitalizing other ones um if you haven’t gotten that
12:36
feedback yet and what you sent across to the buyer was just a Quickbooks download and they made a few tweaks um to say
12:43
here’s what we think your ebiti is and you agree they’re not going to allow you
12:49
after the fact if we get retained bring in a good accounting firm to do quality
12:56
of earnings to look at your financials and come up with with an eaon number from your net income and create a bridge
13:03
we’re going to have to fight with the buyer over increasing the purchase price
13:08
because we’re saying we agree with the multiple but you got the Eva done wrong right so if we step in beforehand we say
13:15
listen we can show you um you know what the net income looks like but we haven’t done an iida so we’re not going to agree
13:24
to um a deal based on the justed eiton until we get that work done if you want to give us some some time to work with
13:30
our accounting firm to do something happy to do it right before the fact
13:36
they might not like it but you know um you know in in some ways and this might
13:41
be kind of an imprecise analogy but like if you’re wealthy and you’re marrying
13:48
someone who’s not and you want them to sign a prup a court would tell you that
13:53
that prenup is not enforcable if the non-wealthy person marrying you didn’t
13:59
get Good Counsel that prup will not stand up if they didn’t get good counsil
14:04
the smartest thing you can do if you’re in that scenario is to recommend Good Counsel to the person you’re asking to
14:10
sign the prenup in the same way here any buyer who you know once um you know a
14:18
prospective client retains you to say hey will you take a look at this Loi and Mark it up for me and you come back with
14:24
that kind of feedback to say you need to do adjusted evit you need to tweak here you need to change this any buyer that
14:31
you scare away by doing that work or or your client scares Away by saying we’re
14:36
going to bring in on me to do this was not a legit buyer agre you know you just
14:42
saved a lot of Heartache um you didn’t miss out on a big payday but you did
14:48
save losing a lot of you know maybe Millions maybe tens of millions of
14:54
dollars on your sale because any buyer that would scare away is not a legit head up buyer they’re trying to steal
15:00
the company yeah I’ve never understood Founders that get approached by buyers and the buyer like oh yeah like you know
15:06
don’t don’t don’t talk to anyone about this like you know I think that should immediately be a red flag like um any
15:15
anytime you or oftentimes we’ll also see Brokers that are like oh you don’t need a lawyer like don’t don’t use a lawyer
15:23
just use these forms like just sign the forms often times in you know in the in
15:28
the small deals usually this is usually in the like you know purchase price one
15:33
to two million um often times we you know these these kind of longstanding brokerages
15:41
oftentimes in Main Street deals for example we’ll see a lot of that but I
15:46
think that should be for sure as you mentioned like the number one red flag like if if the if the buyer is telling
15:54
you not to seek advice and to just like trust them like definitely run in the
16:00
opposite direction and cover your bases so 100% align there with you you nailed
16:06
it I mean I’ll tell you that um whether in small deals and big deals I think um
16:12
I think you’re absolutely right I mean you sort of picture the the woles in
16:17
Little Red Riding Hood in Grandma’s night and sleeping cap saying
16:23
we don’t need lawyers or transaction advisors involved in this deal look I was on a call
16:29
um in a deal that resulted in a pretty big nine figure sale of a business where
16:35
the CEO of a 12 billion do public company said um you know hey look guys
16:42
we do this all the time we don’t need a bunch of lawyers and accountants in here and we don’t need transaction advisors
16:49
and um and one of the things I will tell you is that on the call on his side was
16:56
his general counsel his outside Council um lawyered up and and and um a
17:04
former McKenzie partner who did nothing but transaction advisory Services who
17:09
was in charge of corporate development and you know so he in effect had two
17:14
Super Lawyers and an investment banker inh house telling my f hey we don’t need a bunch of lawyers and accountants on
17:21
this deal and this is the guy who’s a billionaire who’s running a12 billion company you know whenever somebody says
17:27
that you know thank okay in whose interest is it yes right exactly and so we got in
17:36
that deal um there was about ultimately around a 50% increase in purchase price
17:42
and a dramatic change in terms just by getting lawyers and transaction advisers
17:47
involved yeah a deals H you know a a a Founder friendly private Equity Firm is
17:54
never going to give their best possible offer to somebody with without lawyers
17:59
and transaction advisors involved just doesn’t happen yeah you know why you got to fight for it you got why would it
18:06
yeah yeah I mean their whole model is
18:12
you know uh optimize cut cost pay as
18:18
little as possible get they’re out there to get great deals so you know yeah if
18:23
you don’t have people on your side fighting for that then you’re going to fall into their model which is the very
18:29
basis of the buyer of your business is a full-time predator and you’re their part-time prey which I’d love to dig
18:35
into a little more is there anything else that you can tell me about is this tra is it trademarked or is you just
18:41
like TM it just because like no it’s actually it’s actually trademark we have a US TPO number on the buyer of your
18:49
business as a fulltime predator and your part-time freay yeah I don’t intend to spend a whole lot of time effort energy
18:55
or money defending it yeah you know if uh if if if Scott Galloway and bernee
19:02
brown and uh Tony Robins start using that terminology I like Simon cynic will be
19:09
thrilled um when people say you know find your why yeah and uh and Simon
19:15
synic was even more courageous than I was in that he never sought to protect that intellectual property because he
19:21
thought that might limit its root you know I aspire to be as trusting and and
19:26
bountiful as he is yeah remember what class of goods it’s like is it t-shirts
19:32
or like uh um digital no no it’s in
19:37
printed material and promotional material and um I don’t like I think if
19:43
somebody if somebody titled their book anything close to that we’d probably
19:48
have you know a uh an actionable um kind of thing as to whether we would ever do
19:54
it I don’t know I wasn’t sure if there was like merch or something out there that cuz I like you know these sorts of
20:00
things I love rocking you know hats and t-shirts so I’m here for it but yeah go
20:05
ahead not not yet but um one of the two members of my Advisory Board said you
20:11
know that’s at least aund million idea you should you should protect that and
20:16
um you know I I you know I take my advisory board’s guidance sometimes
20:22
kicking in streaming and other times because I completely agree with it right off the bat um that one just felt neat
20:28
from a ego standpoint to have tradar yeah you know I love that so yeah what
20:34
else do we need to know about the buyer of the business being a full-time Predator I understand that the core of
20:39
the concept is buyers do this all the time you know you’re a Founder in your lifetime you may only sell a business a
20:47
handful of times so they’re just going to have a lot more experience than you they have robust teams you know they
20:53
have Financial diligence teams marketing teams operation teams legal teams so on and so forth that Lit Lally come in and
20:59
dissect your business and analyze every piece of it whereas you know you are just the founder of your business and so
21:07
you may not have that much experience selling your business so what else is this concept made up of yeah so I would
The Role of Strategic and Financial Buyers
21:13
I would draw distinctions between the two kinds of buyers so if you have a strategic buyer a company that’s like
21:18
maybe a mega version of your company or maybe a company that’s kind of adjacent to your business and they’re adding you
21:25
know products or services or geography by acquiring you a strategic buyer is typically not as
21:32
good and systematic at um putting together their offer and doing due
21:37
diligence um as a private Equity Firm would be but they’re better buyers of businesses in the sense that they know
21:43
when to stop asking questions and they know when they’ve learned enough and they know when they’ve der risked enough
21:49
to be able to integrate the business in and they’re probably because their cost of capital in many cases is lower
21:57
especially if they’re public a company um they’ve already done kind of the analysis on you know let’s say if
22:04
they’re paying you know eight times for your business um and their Public Market
22:10
multiple is 15 times as soon as they load your eida into their p&l they get
22:16
an immediate um you know double on whatever price they pay for you you don’t get credit for that but you know
22:24
they know that they don’t have to ask the in degree or grind or try and screw
22:30
you on the working capital calculation or something like that to make a ton of money on just getting your business into
22:37
their business um there where their predatory is not really being clear with
22:42
you about what’s going to happen after the sale and what’s going to happen to your people and um there’s going to be
22:49
this big clumsy All Hands meeting where they’re head of HR and their you know CEO act like they’re really magnanimous
22:57
and stuff like that and they talk to your people about how this is going to be a great marriage and um you know they
23:04
really value the company and the culture and blah blah blah and six months later um you know your culture is gone and
23:11
you’re part of this big MW and you’ve been in entrepreneur with no boss for 25
23:17
years and now all of a sudden you’ve got some mid-level executive who couldn’t carry your gym into a customer meeting
23:23
or your your gym bag into a customer meeting and now you’re reporting to that
23:28
person well it’s not going to work out right so you don’t know that going in and that’s
23:33
why I mean you’re part-time fori right with a financial buyer like a private Equity Firm they’re going to tell you
23:40
that some version of We’re going to add our Capital our strategic guidance our operating expertise and our
23:46
relationships we’re going to build this and um the second bite of the Apple for you because we’re asking you to retain
23:52
Equity is going to be even bigger than this first chunk of cash we’re giving you we’re going to build the business together we’re going to be a great
23:58
Financial partner you’re going to be the operating guy we’re going to be the financial people yada yada yada well
24:04
look if you take their Capital you sure as sure as hell are going to get their strategic guidance you have no choice
24:12
but to listen to them if they own the majority of your company right operating
24:17
expertise they don’t have any I don’t care which private Equity Firm we’re talking about they don’t have your
Understanding the Buyer’s Perspective
24:24
operating expertise they might have some useful operating experience they might
24:29
have worked in other companies they might have even built they might have an operating partner that comes in from
24:34
time to time and um you know he’s both spy and he might actually be a decent
24:39
coach but generally speaking they’re looking at your business and they’re going to make their offer based upon the
24:46
transferable economics in other words you the cash flow the eida right and
24:51
they’re going to try and capture those customer relationships and the way that those customer relationships persist and
24:58
they’re going to try and generate kind of a two and a half to 4X or higher
25:03
return on the money that they invest in your business and they’re going to try and do it in five to seven years or less
25:10
right and that may be doable maybe there’s some low hanging fruit that you missed as an entrepreneur and that may
25:18
be actionable with more capital and the ability to hire more salespeople or
25:24
develop some strategic Partnerships or to you know kind of build out your supply chain that may be doable
25:31
absolutely may be doable but um they’re going to structure the deal so that from
25:36
a risk Capital standpoint you still bear a lot of that risk and that’s what I mean by predatory there yes and so in
25:44
that instance that’s where you come in and you push the buyer more Capital up
25:49
front you know make sure that and make sure that the founder is comfortable with the purchase price you know minus
25:56
never earning the earnout that’s the strategy there yeah so what we do you
The Role of an Advisor in Business Sales
26:02
know it’s a it’s an interesting thing for at the client level um we play three different roles we’re Guru I mean we we
26:08
know things they don’t know we’re guide we have the experience the useful scar tissue of saying hey we’ve seen people
26:16
in the past come to this kind of inflection point here’s how we’ve seen them make the best decisions about this
26:22
and here’s how you should think about those things and then we’re Gladiator and a lot of people think I mean that
26:28
like we fight with the law firm to keep their fee down or we fight with the buyer we might but I’ll tell you what I
26:34
mean by that is we fight with current you Who’s Your Own Worst Enemy on behalf of future you the one you’ve told us you
26:41
want to be when you like retire or be finished with this thing um we tell you
26:46
what things not to react to which things in what appear to be really invasive and
26:52
accusatory due diligence are just normal so don’t worry about it and then we will
26:57
also tell you which things are what we would call non-market or Oddball things that we think we ought to dig into and
Evaluating Potential Buyers
27:04
on the buyer side what happens with us is that we speak their same language and
27:09
while I may from time to time play the designated asset I’m likable and I’m knowledgeable so the buyer can’t blow me
27:16
out of the deal by trying to communicate with my client directly and say you’re investment banker doesn’t know what he’s
27:22
talking about look I’ve been a partner at a buyout firm I’ve been involved in a lot of deals
27:28
um we don’t get steamrolled I don’t care how big their Law Firm is compared to ours I don’t care which Investment Bank
27:35
they’re using compared to ours we don’t get steamroll because we know the essence of the deal we also know that
27:42
for our client that the the key animating factor is their why in selling
27:48
so look if they have shared with us that they can’t imagine running the business for six more months much less six more
27:56
years well whether we tell the buyer that or not you bet we’re going to pick our buyer based upon the idea that if
28:03
our client wants to exit the business ASAP we’re going to structure the deal so that they don’t have a bunch of
28:08
contingent payments down the road and they don’t have to keep running the business on the other hand if they truly
28:14
want to play for the second bu of the apple and they think a new Financial partner um could help get them there
28:19
we’re going to make sure that we understand um at a really specific level what the buyer’s track record is because
28:27
if our client is selling a $25 million business and taking 40% of the proceeds
28:33
in equity and the combined entity we want to see a track record I don’t mean
28:39
resumés I don’t mean the stuff that’s on the buyou harms website I want to see
28:44
internal rates of return and multiples on invested Capital why should my client take this big chunk of their net worth
28:52
and invest it with you what my client has built up a business that’s worth $25 million we all agree on that because
28:58
we’d signed the LOI you know why should he take you know eight figures and
29:04
reinvest it with you I want to see your tracker yeah and we have been in
29:09
conversations where you know the private Equity Firm was asking our client to
29:14
roll a bunch of equity and they took our client’s lack of willingness to do that as a sign that he didn’t have confidence
29:21
in his business and what we told him is my client has a ton of confidence in his business he doesn’t have confidence in
29:26
you you have not demonstrated the track record that should make him believe that
29:31
you can do what you say you’re going to do and just because you and your other propeller heads figured this thing out
29:37
on on spreadsheets and came up with the idea that it’s going to be this massive outcome down the road I you might be
29:44
right but my client’s not going to gamble you know a business he spent decades building and 40% of his net
29:51
worth on your hypothesis we got to see a Tracker makes sense makes sense I mean
29:57
that’s one of the you know things that I always uh Council founders with respect to is like if if it’s an equity swap or
30:06
they’re yeah they’re asking for you know rollover or anything like that you have
30:11
the right to do due diligence on the buyer the same way that they are doing due diligence on you and I think that
30:17
kind of blows some Founders minds I think you should be doing due diligence on your buyer irrespective of whether
30:24
that’s the case or not even with a strategic like you pointed out I made a meme a few months ago it’s like it was
30:31
like a super popular meme it’s like that girl and she’s like it’s like this little girl sitting in a car seat and
30:37
she’s like worried or scared and uh the caption of of the meme was after you
30:44
sell your company and you watch your strategic cut 20% of your Workforce and completely you know destroy the the
30:50
thing that you had worked so hard to build yep um because as you mentioned with strategics the story over and over
30:57
again you know with most Founders is uh they hear one thing the buyer
31:03
super excited about you know some sort of vision and then it just doesn’t play out that way and they you know watch
31:10
this thing that they work so hard to build essentially just be burned to the ground which I actually want to ask you
Legacy and Employee Considerations
31:16
about it sounds like with most strategics you know what you identified as to how they’re the full-time Predator
31:23
is how they how they um obfuscate how they’re going to handle the business
31:29
after acquisition so what do you do in in that respect how do you help Founders
31:35
navigate that process well first of all props on great three syllable word choice auu skate is fantastic that you
31:42
know that that happens a lot that’s you know what we call gaslighting you know where the buyer is
31:48
essentially trying to convince our client that what they say is reality look we think if you run a successful
31:55
business you need to be focused on three things when you sell the first one is price the second one is terms and the
32:02
third one is Legacy control and we don’t mean an egoic Legacy control we’re not
32:08
talking about you know leaving the name the same so that your name Carries On We’re talking about your legacy if you
32:14
built a business is your customer relationships the products or Services you developed that are unique IP and
32:20
your people right so if you’re selling to a strategic assume that your staff
32:26
might be vulnerable especially the people that the Strategic has duplicated
32:33
right if you got controller and a CFO and the buyer has a controller and a CFO
32:40
one of your people is going away maybe both of those people are going away your buyer is not going to tell you that
32:46
before they do the deal so you know if if that’s not workable for you then
32:52
maybe a private Equity Firm is the right buyer because private Equity Firm has no operating people no duplicate ated
32:58
people and they’re probably going to want you to leave it intact they might initially if not longterm add people um
33:05
strategic might add people too but the strategic’s already got a bunch of people I mean we’ve sold businesses to
33:12
public companies that have um tens of thousands of employees and my clients
33:18
have like 80 right so you know you just got to kind of look at um you know what
33:25
reasonably is the buyer going to do with business business and God forbid they should say something like we’re looking
33:31
for synergies I mean you know we call that the swword within cander advisor
33:36
like you know I believe it could happen you know maybe um but I’ll tell you I
33:41
was at um you know Apple paid a billion dollars for Beats by Dre which is cool
33:47
because it made Jimmy ivine and Dr Dre billionaires um because they were already pretty wealthy and the extra
33:53
half a billion took them over the you know but the I’m met an Apple store the other day and I asked the gal um because I’m
34:00
getting a backup set of airpods whether the Beats By Dre are comparable to the
34:07
airpods and she says they’re good and I’m like are they better she
34:15
goes no they’re just different I’m like so what do you have she says well the
34:21
airpods connect really easily and they’re kind of you know designed to work specifically with Apple devices and
34:27
all that back so I get another pair of airpods um now if you I bet if you go
34:33
back and look at the press release of you know the buyout I’m not sure about this but I bet you Synergy was somewhere
34:39
in there oh um yeah and Synergy would suggest that she has a different
34:45
response on features and benefits and differences and unique characteristics and things like that so we just say look
34:53
maybe the buyer thinks there’s going to be synergies between the products Services people
34:58
whatever let’s not bet um your proceeds on it let’s make sure that’s their risk
35:04
not your what would you say the breakdown is between Founders who care you know because Legacy is something
35:09
that you mentioned that is you know important do you find that a lot of Founders think about Legacy in the sale
35:16
process or is this something that you have to educate them about yeah great question so um we sometimes have to
35:22
clarify what we mean by it uh but we don’t have to educate them about it they’re thinking about it and they’re
35:28
wondering if they can um do something about it and we talked to them early in the process about you know how important
35:34
are your people to you we talked to them about considering making um you know transaction bonuses to key people and if
35:42
those people are key to the deal working and there’s some contingent proceeds to
35:47
um to maybe do you know part of it in cash at closing and part of it is a retention bonus down the road and
35:52
there’s a way to structure that we talked to them about whether it makes sense to give transactions bonuses to
35:58
people who are probably going to get blown out after the deal um and this is all with the eye towards Legacy
36:03
mattering and and people understand Legacy is you know what you built the jobs you provided the families you’ve
36:09
you know kind of given opportunities to not like you know you’re you’re the king
36:15
and you know you’re you’re kind of you know sharing with the the serfs but more of a you know be reasonable about what
36:23
this firey is likely to do and what their history is some of which we can
36:28
study you know so go in eyes open Heads Up don’t make promises you’re not sure
36:33
you can keep um that might create legal problems for you say I’m not sure what
36:38
they’re going to do the people but if they get rid of you I’ll take care of you don’t say that don’t know that and
36:45
that creates a legal Li you know or at least something that’s actionable but you know do kind of think
36:51
about that do pay attention to you know kind of who the buyer is we’ve only worked with I mean we’ve done a lot of
36:58
projects in just five years we probably um you know been involved in 60 or so um
37:04
you know either Consulting contracts or m&a deals um we are in some ways prouder of
37:10
the bad buyers we’ve chased away than the deals that we’ve closed um you know because we got to preserve a better
37:17
outcome for a founder and we’ve only worked with one who didn’t care what happened to his
37:24
people when he sold and um we had a 90day Consulting contract a month at a
37:31
time we elected at the um you know in the third month of that contract to take
37:37
the 15-day notice in there to tell him that um you know we wanted to terminate the contract and we thought that he
37:43
could find a better transaction advisor that we weren’t the right people and it wasn’t because we didn’t have the
37:48
subject matter expertise and it wasn’t because we didn’t think we could create the right buyer universe and compelling
37:53
materials and go out to Market uh we just didn’t want to work for the guy yeah misaligned values yeah
38:00
I mean look anybody that doesn’t care about their people it’s not my like I don’t get to be the person who decides
38:07
um who’s a good person who’s not a good person but I do know what matters to us
38:13
and I do know that if we’re going to be in the trenches with somebody for you know nine months or more we we’re going
38:20
to want to like them and they’re going to need to trust us enough that we can have hard conversations with them and
38:26
that was just a BRD too far we just didn’t think we’d be able to align with that there’s so much Nuance in this
38:31
conversation that I think is not talked about enough especially like I think a lot of
38:37
Founders don’t understand the Nuance necessarily between you know strategic
38:43
buyers and private equity and you know and then even drilling down specifically with strategic buyers you know in terms
38:51
of how to take care of the individual people thinking about how strategics for example might have a controller and a
38:57
CFO and so you’re going to lose yours and who might stay who might go this level of nuance is I think actually
39:04
quite unique in in how to do deals it’s very detail oriented as opposed to oh
39:10
you want to sell your company here’s a buyer and yeah uh I think that you know
39:16
for for people who don’t operate in the space I think that is how a lot of
39:21
people tend to think that the process might go but it actually is much more it can be much more detailed than that it
39:28
can have much more Nuance than that and I want to talk to you about on the other
39:33
side of things so we talked about how to you know do diligence on the Strategic buyer specifically around you know those
39:40
three things uh which you mentioned were uh I believe price terms and Legacy
39:46
essentially yeah yeah and then on the private Equity side where there’s a
Due Diligence and Financial Models
39:53
rollover in play doing due diligence on the uh on the buyer there I heard you
40:00
talk about um asking for example to see proof of like irr the investment returns
40:06
for the rate of return what does that look like at what point should a seller
40:12
be asking the buyer you know these sort of due diligence questions is it prei
40:19
post Loi where are where should a seller be expecting to ask for that level of
40:24
due diligence and what does that look like yeah great question so you know coming back to where you started for a
40:31
second I going tell you that um there are a lot of investment Banks out there with equal or greater transactional
40:36
expertise and more bench depth than we have where we Excel is on the behavioral
40:42
side and on the advisory side I mean it’s like you know look if for the people on the call who are familiar with
40:49
kind of great bigname investment bankers like Ken molus who has his own firm it’s
40:54
a public company or Frank quatron Catalyst um you know one of the great
41:00
you know kind of tech investment bankers of all time look if you want somebody that’s got sort of comparable deal
41:06
skills to those firms maybe certainly not the reputation and Renown um but is
41:12
a bit more ber brown or Arthur Brooks you know happier and um you know guilt
41:17
and shame and you know kind of getting to where Simon synic find your why we’re more that into the Spectrum um it
41:25
doesn’t mean that everybody we work with is crunchy and seances and stuff like that but I will tell you that the Nuance
41:31
it matters because so much of m&a is behavioral um you know 100% yeah and I
41:38
would tell you that um so um before signing the LOI if there is a meaningful
41:43
component of rolled or retained Equity um we want to see the track hard we have um and look if if um if the private
41:51
Equity Firm has limited partners you know investors like um you know public
41:56
pension fund funds or high net worth investors believe me they’re showing a track record of some kind it’s
42:03
reasonable for us to see it we even will push a little further where uh where a private Equity Firm is telling us that
42:11
um you know they want to pay six and a half times for our client and they intend to exit at nine times and so
42:17
they’re assuming some level of multiple Arbitrage we ask to see their financial model and the ones that won’t show it to
42:24
us I’m not saying it’s easy to walk away from their but I mean come on I mean like you want
42:30
me to roll equity on a and and we have said no to two pretty attractive offers
42:35
two different clients we found one buyer’s approach structure and pricing
42:42
attractive and they had come up with a way to roll all of their portfolio
42:48
companies Equity into one big pool so our client wasn’t just rolling equity in his own deal he was getting a percentage
42:56
of like 16 other transactions and that sounded like a really cool thing that sounded like and from a a tax standpoint
43:03
it actually worked you know we had a tax person research it but when we asked to see the portfolio marks and um some
43:11
level of kind of traveling um you know irr they wouldn’t share it and in the
43:18
other case where our client was a strategic fact by a private Equity Firm that wanted us to roll a meaningful
43:24
amount of equity and we asked to see their financial model and they gave us
43:30
sort of a high level just assume X and Y in which case we restructured our deal
43:35
to say well then in addition to the rolled Equity we want um you know a two-year
43:41
earnout because you’ve got a baked two and a half turn Arbitrage in there
43:47
between you know six and a half and nine times they wouldn’t agree to it and we
43:52
said well if you believe that you’re going to be able to exit at the number you said and you think you should buy our client at much lower multiple than
43:59
you’re getting you know then you’ve got a built-in Arbitrage why would you say no and when when the corporate
44:05
development person at that firm said well we’re not going to take the risk that we’re wrong about the portfolio
44:11
about the multiple um expansion to which case we said well okay then you’re gonna have to give us
44:17
more catch up front and we’re just not going to agree the de right and and you know so on that one um you know our
44:24
client has a really really attractive business are plenty of other suitors and we just said look we think you’re the
44:30
right buyer but if you’re stuck where you are we just we can’t do the deal you know so you know with the private Equity
44:37
firms they ought to be able to share it but I think they’re so used to the
44:43
asymmetric nature of the information they have versus what they’re willing to share and they’re also in our experience
44:51
not deeply emotionally secure people in many cases and they’re not quite sure
44:58
why they’re as rich as they are or as successful as they are and so they don’t want to give away they don’t want to
45:04
open the kimono a little bit because they’re not sure if it’s going to give away kind of the keys to the kingdom
45:10
right they like the Predator status that comes from like yeah they don’t want to be called Predators but you know that’s
45:17
kind of the nature of a predator right yeah it’s like I have this upper hand over you and yeah toying with you
45:23
because I know things that you don’t yeah absolutely anything you want to leave the audience with that maybe we
45:31
haven’t covered like a last kind of tip or point maybe something that you notice
45:38
Founders and you wish that they knew for example yeah yeah yeah so um you know we
Six Secrets to a Successful Business Sale
45:46
think of six secrets to a successful sale of a business partly because we like alliteration and partly because you
45:52
know we’ve narrowed down to that so look the first one is understand your why get a really clear handle on why you’re
45:58
selling the business you know whether it’s retirement burnout opportunism want to do something else be clear about and
46:05
then make sure your buyer aligns with your why right you don’t sell to a
46:10
strategic if you care about whether your people get preserved um and you don’t
46:16
sell to a private Equity Firm if you don’t want to stay involved in the business and don’t have a successor that they’re going to accept as your
46:22
replacement right and then you know make sure that your financials are are professionalized it goes back to what we
46:28
were talking about early on about the adjusted ebit do versus the p&l and to that end don’t give up too much too soon
46:35
don’t share too much information there is no reason that you need to get distracted in a conversation about
46:41
buying your business and exchanging a bunch of information if they can’t give you an indication of interest on
46:47
valuation it can be non-binding and really really broad but what are we
46:52
talking about here you don’t want to be thinking you’re going to sell your company for 30 million and find out that they were thinking they were going to
46:58
buy you for 12 million and have exchanged a bunch of information right and so don’t try and do this alone right
47:05
whether you hire omit or Kirk or not at least go to your vistage Geo YPO group
47:12
or pure CEOs and say hey have you ever sold a company before what do you wish you’d done differently um how should I
47:19
think about whether I sign an Loi which advice do I need which advisors mattered most to you definitely get some help
47:27
whether you pay for it or not get some help some people that have some scar tissue and then lastly don’t argue with
47:33
the market if there’s a price for your business that’s signed based upon your transferable economics I do not care how
47:40
unique your business is um it’s going to be bought as a multiple of its transferable economics it will be those
47:47
those that multiple will be increased by your growth rate and how unique your intellectual property and your growth
47:53
rate are but they will not sell based on on those things and and then they will
47:59
be decreased by your customer concentrations or your supplier dependencies or things like that and so
48:05
whatever the market tells you through some experienced transaction advisors that your business is worth except that
48:11
that’s the way your business is value if you don’t want to transact at that price there are probably some Alternatives you can pursue right and dovetailing with
48:20
that you know whether you have higher you know cander advisors or not like all of our stuff and 180 plus videos or the
48:27
Insight section of our website cander dvisor docomo do free um webinars every couple
48:35
of weeks at IID University that’s IID university.com um where we teach a lot
48:41
of Founders about the six secrets in more detail and um and do you know a
48:46
live and free Q&A every couple of weeks so um you know I I would leave them with that like our our stuff’s pretty easily
48:54
accessible and I’ll make it even more access by dropping it in the show notes below so happy to do that Kirk thanks so
Conclusion and Final Thoughts
49:02
much for joining this week got so much out of this conversation always really enjoy speaking with you and yeah as
49:09
mentioned his contact information will be found in the show notes below you’ll be able to find uh the Eid University
49:16
Link in the show notes below as well and for everyone out there uh thanks again
49:23
for watching this has been another episode of saspy Club so thanks for
49:28
joining thanks am great being with you awesome see you next week everyone