Valuetainment - Episode 187： How To Sell Your Business at the Highest Value

00:00:00.000 30 seconds. One time for the underdog. Ignition sequence start. Let me see you put them up. Reach the sky, touch the stars up above. Cause it's one time for the underdog. One time for the underdog.

00:00:17.240 I'm Patrick Bedevi, host of Value Team, and today I'm going to talk to you about how to sell your business at the highest possible value.

00:00:23.020 Number one. Look, the first thing you've got to ask yourself before you even think about selling your company is why do you want to sell in the first place? Why?

00:00:30.540 Are you tired? Are you burned out? Why are you tired? Why are you burned out? Are you not taking some time off with your wife or with your husband?

00:00:38.640 How's your personal life? Is it caused by that? Are you going through something? You know how sometimes people sell a home because they're going through a divorce or they're trying to sell the business?

00:00:45.940 Is that really the reason? Can your marriage be saved? Is it a tax consequence? Is it bad financial decisions you made?

00:00:52.300 Are you being forced out by your partners, your vendors? Maybe one of your investors is buying you out and no one knows about it.

00:00:57.480 Maybe one of your big customers is saying, look, you're too big. We can't give you this much control. We've got to buy you out.

00:01:02.720 What is the reasoning? Are you simply just wanting to retire and go live by a beach house and hang out and have the money and enjoy the rest of your life?

00:01:10.260 What do you want to do? See, these are all questions you've got to ask yourself and go through.

00:01:13.420 By the way, some of these I'm giving you. Believe me, a lot of people call me and they want to come and give me $100,000 and say,

00:01:19.020 I want to sell my business. Can I sit with you for two hours because I need advice with you.

00:01:23.380 My partners want to come to you.

00:01:25.140 This is something you've got to do with five other people to sit with who have sold their businesses and afterwards they changed their minds

00:01:32.780 and they said, I wish I wouldn't have sold it and some that did sell it and they made the right decision.

00:01:38.660 Either way, you're going to get a lot of counsel to know whether it's a good time for you to sell right now or whether it's not.

00:01:44.060 Number two, so listen, once you've addressed why you want to sell the company and you're kind of clear about it,

00:01:48.560 the next thing you need to do is get educated.

00:01:50.840 And the way you do it is by meeting with an M&A broker or a banker.

00:01:55.440 This is a merger and acquisition banker.

00:01:57.860 This is what they do for a living.

00:01:59.200 These are guys who have contacts with lots of money.

00:02:02.280 Some are billionaires, some are worth a couple hundred million dollars and they are looking to buy businesses.

00:02:07.960 And this is how simple it is.

00:02:09.100 So let's just say, I'm Johnny. I'm the M&A broker.

00:02:11.140 I'm the merger and acquisition broker.

00:02:12.540 I know Bobby. He's one of my clients. He's worth a billion dollars.

00:02:15.760 Bobby wants to buy businesses, so I introduce him to Cindy.

00:02:19.000 Cindy's business is worth a hundred million dollars. 1.00

00:02:21.640 Bobby buys Cindy's business.

00:02:23.460 Without me, Bobby doesn't meet Cindy.

00:02:25.680 Cindy doesn't meet Bobby.

00:02:27.360 That a hundred million dollar transaction that takes place, I get two to five percent on that deal,

00:02:32.320 which means two to five million dollars for making the contact.

00:02:34.980 That's what the M&A brokers do. 0.62

00:02:36.920 So now, you realize when you meet with these guys, you've got to know what they do.

00:02:40.020 That's how they make their money.

00:02:41.020 So when you meet, they're probably going to ask you a lot of questions.

00:02:43.780 Tell me about your business.

00:02:44.540 How long have you been doing this for?

00:02:45.900 What's your numbers look like?

00:02:47.240 What's your EBITDA?

00:02:48.080 What's your profit?

00:02:48.820 How many employees do you have?

00:02:50.220 Who else is on your team?

00:02:51.120 What's your executive team?

00:02:51.960 They're going to ask you a lot of different questions.

00:02:53.440 Who would you compare your business to, to other businesses?

00:02:55.880 What are they valued at?

00:02:56.980 What's their numbers?

00:02:58.120 What do you think your company's worth?

00:02:59.640 What do you think the market thinks your company's worth?

00:03:01.860 What do you think sellers think your company's worth?

00:03:04.000 What seller would want your business?

00:03:05.480 What investor would want your business?

00:03:06.660 You go through this process, and this entire sit-down, with three M&A bankers, it's going

00:03:13.560 to be as if you went to university for three years to learn how to sell your company.

00:03:17.280 Number three.

00:03:18.180 So look, once you figure out why you want to sell your business, and you're comfortable

00:03:20.880 with it, then you meet with the M&A broker, and you're getting educated about what the

00:03:25.220 market looks like, right?

00:03:26.720 Then it's about setting timeline expectations of when you feel comfortable even having the

00:03:32.180 conversation, right?

00:03:33.060 You may say, three years I'll have the conversation, five years I'll have the conversation, ten years

00:03:38.280 I'm open to it, right now I'm very happy, I am burned out a little bit, but all I need

00:03:42.240 is to get away, maybe I'm going to go on a vacation with some family because of what I'm

00:03:45.040 doing here with this.

00:03:45.920 I'm good though.

00:03:46.700 I'm good to go.

00:03:47.320 Everything makes sense to me.

00:03:48.520 Great.

00:03:48.980 Even when you set timeline expectations, things could change.

00:03:52.220 The economy could turn.

00:03:53.860 A new president could be elected.

00:03:56.140 Regulation could change.

00:03:57.040 You still have to be nimble enough to know what's going on with the marketplace, and knowing that

00:04:01.400 your own timeline could still change, but you have to mentally get to a place to say,

00:04:05.860 I'm comfortable for this 2023, so now I have to work backwards to ask myself where I need

00:04:11.100 to be six months from now, 12 months from now, 24 months from now, 36 months from now,

00:04:15.020 so I'm getting ready for the day that I may sell the company.

00:04:17.620 Number four.

00:04:18.420 So once you've set your timeline, you're saying, I'm comfortable seven years from now having

00:04:22.040 a conversation.

00:04:23.220 Five years, three years, and you know how you need to work back.

00:04:25.440 The next thing you need to think about is the following.

00:04:27.200 One, your exit strategy, meaning, who is an ideal buyer for you?

00:04:31.900 Is your ideal buyer anybody with a checkbook?

00:04:34.220 Because you can go to New York and sit down with a PE firm who is willing to cut a $100

00:04:38.900 million check to you based on the profits that you make.

00:04:42.040 They don't really look at your business.

00:04:43.540 They don't really look at the heartbeat.

00:04:44.780 They don't really look at that stuff.

00:04:46.260 They simply look at numbers.

00:04:47.540 And they say, well, you know, there's $7 million of profits.

00:04:50.400 The industry is typically 12x on $7 million.

00:04:53.100 We'll give you 10x.

00:04:54.080 10x on $7 million, $70 million, you want $70 million, and that's it.

00:04:58.580 Or it's a strategic buyer, one of the current people you work with.

00:05:01.900 You know they need your technology.

00:05:03.720 You know they need your shipping.

00:05:05.040 You know they need certain things that you have that without you, they're going to be

00:05:08.260 in trouble.

00:05:08.720 So they may come in and pay twice as much as these guys are going to pay because you

00:05:12.660 have something they need.

00:05:14.160 But who is that person going to be for you?

00:05:16.420 You need to identify that from now and start thinking about that.

00:05:19.400 Number five.

00:05:20.240 So now you have your number.

00:05:21.400 You know your exit strategy.

00:05:22.380 You know who you want to be your strategic partner to buy your business, right?

00:05:25.240 You're comfortable with that.

00:05:26.180 Great.

00:05:26.900 No problem.

00:05:27.640 You know your timeline.

00:05:29.020 What do you expect from these buyers?

00:05:30.780 What kind of buyers are there?

00:05:31.820 By the way, there's four different kinds of buyers.

00:05:33.320 I've met every single one of them and I've dealt with every single one of them.

00:05:36.700 Let me tell you what this looks like.

00:05:37.560 First kind of buyer.

00:05:38.940 It's a person who's very interested in your business, would love to buy it, but they can't

00:05:42.680 afford it.

00:05:43.360 This is like a person who goes to a Ferrari dealership and they want a Ferrari.

00:05:46.740 They love Ferraris.

00:05:48.120 But they can't even afford to buy a Ford Focus.

00:05:50.200 That's the first one.

00:05:50.840 Second one.

00:05:52.360 It's a buyer that can buy 10 of you, but has no interest in your business.

00:05:56.360 No problem.

00:05:57.360 Third one.

00:05:58.000 Ready?

00:05:58.240 This one's a little tricky.

00:05:59.760 This is the one that's disguised like a buyer.

00:06:02.420 He comes in so interested.

00:06:04.360 He has no interest in buying your company.

00:06:06.620 He only has one thing in mind.

00:06:08.260 Insider information.

00:06:09.340 Because he wants to leak it to competitors so they know exactly what's going on.

00:06:12.020 They're trying to study your money.

00:06:13.200 It's like a realtor that acts like a client and a buyer and walks into the house and saying,

00:06:19.200 Oh wow, this is a nice home.

00:06:20.380 So show me.

00:06:20.920 So what's this?

00:06:21.580 And what are you, are they going through a divorce?

00:06:23.480 What's going on with the husband and wife?

00:06:24.660 Can you tell me?

00:06:25.320 It's a realtor, not a client.

00:06:27.260 That's what happens with some of these guys as well.

00:06:29.600 And last but not least, it's the kind you want to sit with.

00:06:31.560 It's a person who is interested, has the money, and would like to cut a deal with you.

00:06:36.360 That's who you want to meet with.

00:06:37.420 But you need to know all the different kind of buyers that are going to sit with you.

00:06:40.500 Number six.

00:06:41.560 So now that you know your exit strategy, now that you know what kind of buyers are going

00:06:44.480 to come, knock on your door to want to buy your business, what can you do in the interim

00:06:48.560 to increase the value of your business, right?

00:06:50.720 What could you do?

00:06:51.260 It's like, I want to sell my house, but maybe it doesn't look that good.

00:06:54.080 I've got to paint the house.

00:06:55.100 I've got to clean the garden.

00:06:56.060 The backyard's kind of messy.

00:06:57.380 Maybe I've got to spend an additional $1,500,000 to increase the value of the company by $400,000,

00:07:01.960 right?

00:07:02.680 So in the interim, what could you do?

00:07:03.820 Hire a new CFO that kind of knows what they're doing, that's been through this process before.

00:07:07.420 And you kind of come in advance for three years, so prepare for that opportunity that

00:07:11.080 comes up.

00:07:11.780 Could it be technology?

00:07:12.820 Could it be increasing sales?

00:07:13.960 Could it be extending your contracts with your customers or your vendors or suppliers?

00:07:18.240 What is it?

00:07:18.760 There are certain things you can do today to increase the value of your business between

00:07:22.800 now and the day you sell your business.

00:07:24.700 Number seven.

00:07:25.380 So the next thing is a little dirty because you've got to start dealing with attorneys,

00:07:28.200 and you know how I feel about attorneys.

00:07:29.440 By the way, I'm not a fan of 80% of attorneys, but when you find a good attorney, you've got to

00:07:34.260 keep them.

00:07:34.620 You've got to bring your attorney in, spend a little bit more money, and get the attorney

00:07:38.940 to update every single contract and bring it all in one place.

00:07:43.340 Because when somebody buys a business, they're looking for all the contracts, all the agreements.

00:07:48.060 This is the stuff they're really relying on.

00:07:49.840 Sometimes the value of a company is based on the contracts and the agreements that they

00:07:53.240 have with their vendors, partners, all those different kinds of people you're dealing

00:07:56.080 with.

00:07:56.320 If you're wondering how you find a good attorney, I sat down with Robert Shapiro a few months

00:08:00.560 ago, and he's one of the most celebrated attorneys in America, ranked top 100 on some list, top

00:08:05.040 10 on many other lists, he explains three things every entrepreneur needs to know about before

00:08:10.460 hiring an attorney.

00:08:11.340 Number eight.

00:08:12.360 So look, now that you've dealt with your attorney, now we've got to talk to your CPAs.

00:08:15.740 And by the way, there's a few things you've got to be thinking about when it comes down

00:08:18.220 to CPAs.

00:08:18.880 Here's a couple things.

00:08:19.700 One, what is the buyer expecting to see with your finances?

00:08:24.060 This is what a buyer likes.

00:08:25.300 I am not a fan of businesses, once they cross $10 million a year business, to still deal

00:08:30.460 with a friendly local CPA.

00:08:32.220 I'm not a fan of that.

00:08:33.020 A friendly local CPA is good.

00:08:34.900 If it's a one office shop and you're doing a couple million, you're fine, they can handle

00:08:38.080 that.

00:08:38.720 $10 million plus you want to get to the next level, you need to go to an accounting firm.

00:08:41.580 Now that's going to cost you five times more.

00:08:43.320 But it's going to save you so much more because of a buyer saying, wow, you got audited financials

00:08:48.900 for how many years?

00:08:49.560 Three years straight?

00:08:50.220 Very impressive.

00:08:50.840 Audited financials could cost $25,000 to $100,000, depending on how the business is.

00:08:55.520 It could cost millions of dollars.

00:08:56.860 But I'm saying a business that does $50 million a year, $100 million a year, could cost you

00:09:00.460 between $25,000 to $40,000, $25,000 to $100,000 you're doing.

00:09:03.800 But it's audited financials.

00:09:05.220 And the more consecutive years you have audited financials, the buyer is liking this.

00:09:10.040 The value goes higher.

00:09:11.000 Let me explain it in a way that makes sense to you.

00:09:12.920 Look, if you want to buy a house, you've got to get your credit score done earlier to know

00:09:16.480 where you're at because you're going to know, why is my score 620 here?

00:09:19.560 Why is it 630?

00:09:21.780 I know I'm not going to get the best interest rate.

00:09:24.240 And so you first fix your credit.

00:09:26.000 Then you go see if you're going to get approved for a million dollar home.

00:09:28.820 It's going to be the difference between you paying $4,900 a month for a mortgage payment

00:09:32.800 versus $7,300 a month for a mortgage payment because your credit score, right?

00:09:36.160 So this is the difference between a buyer wanting to buy your business for $180 million versus

00:09:40.340 buying it for $92 million.

00:09:41.840 That's a big difference.

00:09:43.340 I like baseball cards.

00:09:44.760 I don't buy baseball cards that are not graded by PSA.

00:09:48.680 I don't.

00:09:49.260 I don't buy them because that gives me credibility.

00:09:52.400 The same goes that a buyer buys a business that has audited financials from a very good

00:09:58.840 size, good name accounting firm.

00:10:00.780 Number nine, let's just see at this point you've done your attorney stuff, you've done

00:10:04.820 your accountant stuff, you're ready.

00:10:06.640 It's that time.

00:10:07.340 You are ready three to five years from now to go out there and start putting your business

00:10:10.720 in a marketplace, right?

00:10:12.360 Are you ready to tell your story?

00:10:14.040 How are you going to tell your story?

00:10:15.620 What is your story?

00:10:16.840 Is your website aligned with the way you want to tell your story?

00:10:19.720 Is it updated?

00:10:20.760 What does your home office look like?

00:10:22.120 Is it an updated home office?

00:10:23.360 Does it look like the businesses within your industry where somebody comes in and say,

00:10:27.180 wow, I like the way these guys dress up here?

00:10:28.640 What is it?

00:10:29.540 Do you have proper marketing material?

00:10:31.280 Do you have a pitch deck?

00:10:32.080 What does your presentation look like?

00:10:33.700 When you go and say, hey, here you go, marketing material, marketing material, marketing material,

00:10:37.800 marketing material, oh, wow, this is good stuff, high-end stuff.

00:10:40.360 You may want to spend a little bit more money before you present your business to buyers

00:10:44.020 that you're expecting to cut a big check for you.

00:10:47.060 So you've got to spend some time getting your story together.

00:10:50.900 And your website, marketing, home office, all of that stuff is part of the story.

00:10:55.120 Number 10, so it's that time, it's negotiation time.

00:10:58.340 This is like fourth quarter type of stuff.

00:11:01.140 Someone's going to cut a check.

00:11:02.360 What are you doing?

00:11:03.220 Typically, owners take two different routes.

00:11:05.820 One is the owner says, I don't need anybody's help.

00:11:08.620 I don't want to pay nobody a 5% broker fee.

00:11:11.380 I know how to sell the business.

00:11:12.760 I don't need anybody's help.

00:11:13.800 And they go by themselves.

00:11:15.240 It's one of the ways you could do it.

00:11:17.060 The other way is you go and hire somebody.

00:11:18.940 You hire a team.

00:11:19.580 You hire the M&A broker, the banker.

00:11:22.080 And they come and help you sell.

00:11:23.140 Now, why is that a good thing?

00:11:24.120 Well, I typically believe in capitalism because a lot of people make money together.

00:11:28.940 And if a lot of people make money together, and you put the tiers of bonuses based on

00:11:33.280 what amount they sell it for, you're probably going to sell it for a higher number than you

00:11:36.640 thought we were going to sell it, right?

00:11:38.000 So I lean more towards this side, especially if you're dealing with a $100 million plus check.

00:11:42.560 Go get a pro.

00:11:43.820 Some of you that are not good in sales and you're selling for $10 million, you still go get a pro.

00:11:48.360 Number 11, so you're starting to negotiate.

00:11:50.380 You've got numbers.

00:11:50.920 They're making offers.

00:11:51.800 What kind of offers should you expect?

00:11:53.680 Which one should you take?

00:11:55.280 What do you do?

00:11:55.980 Well, there's different kind of offers.

00:11:57.200 One of the offers is the one that everybody wants.

00:11:59.520 Cash!

00:12:00.300 $50 million.

00:12:01.320 Boom! 0.99

00:12:01.960 No commitment.

00:12:02.820 No non-compete.

00:12:03.920 You're good to go.

00:12:05.340 If you want to compete with us in the same space, we're not worried.

00:12:08.380 All the best to you.

00:12:09.360 That's one.

00:12:10.160 Second one.

00:12:11.600 We'll give you $150 million with a 10-year non-compete because you are never going to compete

00:12:16.620 with us in real estate, in IT, in technology, in insurance, whatever it may be.

00:12:21.160 The next one is they buy and exchange for stock options.

00:12:24.360 They give you stock at the company.

00:12:25.960 Sometimes they'll do 50% cash, 50% stock.

00:12:28.480 It's completely up to you.

00:12:29.300 Do you trust the stock?

00:12:30.180 Do you trust the company?

00:12:31.400 Is the company trending?

00:12:32.540 Is the company on a downfall?

00:12:33.560 What is it that's on you?

00:12:35.260 And last but not least, they'll buy, whether it's cash, stock, whatever way it is, and they'll

00:12:40.780 tie a salary to you with you sticking around for two years and a non-compete after that.

00:12:44.740 We want you to stick around, we'll give you $100 million up front, then we'll give you

00:12:48.820 a two-year salary of $1 million per year, then we'll give you stocks at the end, and

00:12:52.520 if the company performs the next two years, we'll give you another $75 million, dot, dot,

00:12:56.780 dot, another five-year non-compete after that.

00:12:59.160 That also happens as well.

00:13:00.440 So you need to know all your options on how you're selling, what you're most comfortable

00:13:04.600 with, but those are generally some of the options you'll have when you sell your business.

00:13:08.300 Number 12.

00:13:09.380 So look, everything could go right in the first 11 steps.

00:13:12.660 Everything could go right.

00:13:13.900 And then all of a sudden, 80% of the deals don't go through because of the 12th step.

00:13:19.120 And here's what the 12th step is.

00:13:20.380 It's actually the closing part of the sale.

00:13:22.980 So as you go through the first 11 steps, if you tell any numbers to the buyers that are

00:13:28.020 slightly off the real numbers after they audit your numbers, they're going to say, wait a

00:13:32.460 minute, these numbers don't match up.

00:13:33.580 We're coming out of this deal, right?

00:13:35.020 So three things you need to know about.

00:13:36.360 One is called IOI.

00:13:37.780 This is indication of interest.

00:13:39.100 First, I am indicating to you that I, the investor, am interested in buying your business.

00:13:43.140 Very cool.

00:13:44.240 Open up the books a little bit for us to see something.

00:13:47.220 Okay, cool.

00:13:48.380 So next is the LOI.

00:13:50.220 LOI stands for letter of intent.

00:13:52.100 You and I, you're the buyer.

00:13:53.180 I'm the one that wants to invest into your business and buy you, right?

00:13:56.140 We give you a letter of intent.

00:13:57.300 Based on this term sheet, we're going to buy your business.

00:14:00.240 So for instance, we want seven years non-compete.

00:14:02.680 You're out of your mind.

00:14:03.380 I won't give you no more than three years.

00:14:04.540 We can't do that.

00:14:05.180 But we want five years.

00:14:06.000 Okay, let's agree on five years.

00:14:07.420 We'll give you 75 million cash and 75 million stock.

00:14:10.160 I'm not doing that.

00:14:10.800 I want $100 million cash and $75 million stock.

00:14:13.700 We're not doing it.

00:14:14.140 We'll give you 50 stocks, 100 million cash.

00:14:16.260 Great.

00:14:16.540 We agree on all this stuff.

00:14:18.000 This is all good, but it's still not done.

00:14:20.760 Until everything proves here based on the audit we do with you.

00:14:24.620 And then comes the purchase agreement.

00:14:26.400 When the purchase agreement comes and you get the call from your guy, from your CPA,

00:14:32.420 from your accountant that says the $125 million is in the checking account.

00:14:36.880 Your banker from the bank calls you and says your $17 million is in the checking account.

00:14:40.680 Your $228 million is in the checking account.

00:14:42.520 By the way, your checking account has $1.7 million.

00:14:44.360 And you go to the ATM.

00:14:45.460 You keep telling me, oh my God, look at the statement, baby.

00:14:48.620 We finally did it, right?

00:14:49.880 Or you're going to wake up the next day and say, oh my gosh, I can't believe I sold this business.

00:14:55.240 This is my baby.

00:14:56.220 I just let her go.

00:14:57.220 What do I do?

00:14:57.860 But regardless, you're going to have all those emotions.

00:14:59.600 Anyways, these are the 12 steps that you go through when selling your business.

00:15:03.240 Thanks, everybody, for listening.

00:15:04.660 And by the way, if you haven't already subscribed to Valuetainment on iTunes, please do so.

00:15:09.400 Give us a five-star.

00:15:10.800 Write a review if you haven't already.

00:15:12.300 And if you have any questions for me that you may have, you can always find me on Snapchat,

00:15:16.360 Instagram, Facebook, or YouTube.

00:15:18.320 Just search my name, Patrick MidDavid.

00:15:20.220 And I actually do respond back when you snap me or send me a message on Instagram.

00:15:25.220 With that being said, have a great day today.

00:15:26.960 Take care, everybody.

00:15:27.660 Bye-bye.

00:15:27.920 Bye-bye.

Valuetainment - October 12, 2018

Episode 187： How To Sell Your Business at the Highest Value

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