Deciding When AND How to Sell Your Business

INTRO TO OUR INTERVIEWEES

 

Emily Page:

We have Davis Blaine and Eric Klein. Thank you guys for being here. Can you please introduce yourselves and tell people who you are?

Davis Blaine:

Thank you, Emily. I’m Davis Blaine, as it shows up on the screen. I built up a lot of expertise in valuations and selling businesses, so we look forward to explaining when and how to sell your company.

Eric Klein:

I’m Eric Klein. I have a 25-year history in investment banking and a business owner and operator of a variety of different businesses, and have reviewed and advised on many, many companies in a variety of industries.

 

Who is Mentor Securities and what type of services do you offer? (01:17)

Emily Page:

For everyone watching, these guys are experts. So who is Mentor Securities and what types of services you offer so that people can understand why you’re experts and why they should listen to the rest of this interview?

Davis Blaine:

Thank you, Mentor Securities is an investment bank. We’re actually a broker dealer, that is a FINRA broker dealer. The SEC is our monitoring body. We have to report to the SEC, which makes us a lot more circumspect in the things that we do.

Davis Blaine:

We really have three different services. The first is the sell side, second is buy side, and the third is capital raise. On the sell side, we are pretty much industry agnostic. We’re experts in a lot of different industries, but we’re not focused on one or two industries alone. We work with companies, revenues of roughly 15 million to up to 300 million and we like a minimum of 3 million of EBITDA. That is on the sell side.

Davis Blaine:

On the buy side, we work with strategic buyers or private equity firms. Whether we’re buying for a new platform or an add on to their current platform, let’s say the private equity firms, we will go and do targeted searches. But in both the buy side and the sell side, our fees are developed through two things. One, we’re retained so we have an upfront advisory fee. Secondly, we have a success fee.

Davis Blaine:

Now, the third service is capital raises. We’re looking for companies that want to raise about 50, excuse me, about 5 million and above. Fifty would be nice too. It’s a similar program where we’re retained and then we get a success fee.

Davis Blaine:

We’re looking for companies that have traction and they’re looking for growth capital either to grow their business or to make strategic acquisitions.

Emily Page:

For everyone listening, I know that if you have a lot of experience in selling a business, then you’d understand everything that he said. An executive summary for those of us who maybe don’t have as much experience is that basically Mentor Securities helps businesses create a fair market valuation and prepare for sale and find buyers.

Emily Page:

If you were, let’s just pretend you own a house. Everyone understands what a real estate agent might be, but a real estate agent just helps you sell. Mentor Securities does that, but they also can help you figure out how much it’s worth. You know, you want smart people on your side when you’re trying to figure out how to get the best value for your business, so that’s what Mentor Securities can provide for someone.

 

When is the right time to sell? What are the earmarks you look for in an ideal candidate to sell? (03:57)

 

Emily Page:

Let’s start getting into unpacking the biggest question which is deciding when and how to sell your business. Eric, would you mind helping to explain when is the right time to sell? I’m sure that means we need to know what our company would need to look like as well as the earmarks of an ideal candidate in terms of the inner structure; the right person, the right structure of the business in order to sell. So, when is the right time to sell your business?

Eric Klein:

There are a variety of facts that should be in place when selling a business and when the right time to sell the business. Some of these, I mean, that can be in any order, but typically when the right time to sell is if the owner is two to three years away from retirement and the children don’t want to take over the business. You might want to think in advance, well, should I groom one of my team members on my management team, to groom them to possibly take over the business and make sure that you’re prepared going forward especially when it comes to your management team.

Eric Klein:

We’ve seen time and time again where it’s a lifestyle business. The owner doesn’t have a professionalized management team and they’re tripping over themselves. They know how to run their business, they know how to make money but when it comes to really growing the business, and we’ve seen this a lot where we’ve see businesses under $5 million in revenues that have been running flat, or right around that and under, for five, six, eight, nine, 10 years, and we’re always asking that owner, “Why aren’t you a 50- or 100-million-dollar business?” It’s really important to have these midterm, long term goals.

Davis Blaine:

And Eric, I would also emphasize what you said before and that is a seller should really think at least two years ahead of time to prepare for a sale. It’s very important. Frankly, there are a lot of people, and I’m a firm believer in this. Every day you should look at your business as if you’re going to exit tomorrow. When you do that, you will work on the things that make your business more valuable. Okay?

Eric Klein:

Yeah. And then also, we’re currently in a very hot M&A market right now and trading multiples are very high. Business owners currently, right now as we speak, should really look at where they’re at and looking at their historical growth. Maybe they’re not growing year over year or maybe they’re flat and they really need to analyze why they’re flat and figure out why they aren’t growing.

Eric Klein:

They really need to do a bunch of homework, to really look at their historical operations and earnings and seeing where the gaps are to really show that they can garner a high multiple. Because we’ve seen time and time again where companies are flat and they’re going to get offers based on that. If they show growth, they have leverage and they can get those higher multiples.

Emily Page:

One thing that I think was interesting that you’re saying, basically, is that first of all an owner should know that they should consider their sale beforehand. Ideally, in an ideal situation, maybe two or three years before they actually plan, maybe even more depending upon the maturity of the company.

Emily Page:

Another earmark that people are looking for, Eric, if I understood you correctly, is obviously EBITDA. People want to know whether or not the company is profitable and they also might be looking for growth. So, an earmark of a really great candidate for sale would be one that has profits and is growing. But you don’t need to be growing if you have at least EBITDA and a very mature internal professionalized management team. That is another thing I just heard you say. Would you mind explaining to people if there’s anything else there that I didn’t maybe clearly explain? What does a professional management team look like?

Eric Klein:

Yeah. You mentioned, Emily, what earmarks that we look for in an ideal candidate. So, there’s a bunch of points. First off, we typically like to see service businesses with a minimum of about 25% EBITDA margin. In a products business, I mean, if it’s manufacturing, maybe we’ll see 15%. If it’s a service-related business, we’d like to see high recurring revenues of at least 60%, whether it’s subscription or contract revenue.

 

EBITDA = {E} + {I} + {T} + {D} + {A}

 

EBITDA       =        Earnings Before Interest, Taxes, Depreciation, and Amortization

{E}    =        net income

{I}      =        interest

{T}    =        taxes

{D}    =        depreciation

{A}    =        amortization

 

Eric Klein:

You asked, Emily, about what is really defined as a “professionalized management” team. They’re running the business on a normalized basis, not as a lifestyle business. That’s really, really important. I personally have seen business owners where they’re running QuickBooks and they’re running their business and personal expenses and income through the same set of books. I see that a lot. The next point is a clean set of books using corporate software like White Plains, NetSuite, SAP and the like.

Eric Klein:

As an ideal candidate, we’d like to see low customer concentration. There’s a way to minimize that if you have high customer concentration. Some businesses can’t get around government regulatory liabilities like health care services businesses. I mean, you really can’t get around that but you want to try to minimize those regulatory liabilities the best you can.

Eric Klein:

I’m also stating the obvious, but no current or near-term litigation or employment matters. I mean, it’s going to happen when it happens. We also, an ideal candidate for us is a company that is domiciled in North America. It’s okay if they have operations or revenue from international locales, but we like to see companies that are domiciled in North America.

Emily Page:

Any other comment about ownership of either intellectual property, because I think it’s a fair thing that affects valuations.

Davis Blaine:

Oh, absolutely. Yeah, ownership of IP is critical. If you think about it, probably 80% of a balance sheet of a private or public company is really made up of intellectual property. However, if you haven’t acquired the intellectual property through an outright acquisition, that’s never going to show up on your balance sheet. So that’s one of the things, as valuation experts, that we look into because we value a lot of intellectual property. Very important.

Emily Page:

Yes, and I’m even thinking of the product-based businesses that are watching. There’s IP in the recipes, making sure that you’re not just private labeling a product, but you don’t even know what you’re making. Or ideally if you own a factory, that is an asset that you guys would have value; but if you don’t own a factory, at least you have the processes in place, you own relationships. I mean, the amount of ownership is really important to be definable and measurable so that way when you’re transferring it to someone who’s not you, you’re no longer working and employed to that company that you built, the person who owns it can still continue to run it.And use the IP.

Davis Blaine:

Very important. Yeah.

 

What is the evaluation process Mentor Securities takes you through to create a valuation? (12:38)

Emily Page:

Yeah. Well, it’s so helpful to hear these things. I would love, Davis, if I could ask you a question now, Dave, I would like to know what is the evaluation process that Mentor Securities usually takes someone through when you’re creating an evaluation? I know you’ve got years of experience in valuation, so what would be the step-by-step process you take someone through?

Davis Blaine:

Well, and also like Eric, and I didn’t mention it at the top, but I have started four or five companies and bought and sold several businesses so we both have that operational experience and that understanding of how business should function. It’s funny, every owner thinks their business is unique. It is to a certain extent, but it’s not because there are certain principles that apply to every business.

Davis Blaine:

When we’re looking at the question here, looking at the evaluation process, I think probably the single most important thing we do is to try to find problems. Because if we don’t find them, and we bring in buyers, they’re going to find them. Okay? So, what we want to do is find the issues, the good and the bad, and then try to have answers or resolutions for the problems.

Davis Blaine:

Like Eric mentioned, maybe customer concentration. Maybe there’s a way that that’s not really, shouldn’t be looked at as customer concentration. Okay? Maybe it’s an industry that’s smaller and doesn’t have a lot of customers, so you want to emphasize that rather than the fact that they only have five or six customers.

Davis Blaine:

So, we’re looking for issues but we’re really, as part of the initial process, that advisory fee or the retain fee, we’re trying to determine what this company should sell for. We’re going through a process of discounted cash flows. We’re looking at various multiples, what other companies that are similar to our seller have sold for. Eric mentioned there’s two parameters there, and software companies really sell as a percentage of revenues or a multiple of revenues. So, there’s multiples of revenues and multiples of EBITDA.

 

MULTIPLES – The number used to calculate the sale value of a company for sale when someone makes an offer. This number is multiplied by either revenue or EBITDA to get your sale value. For example $3 Million in EBITDA x a multiple of 3 = $12 million payout price.

Davis Blaine:

We’re putting the other, the analytics, where we can come up with a good strong range of what that company should sell for. And then part of that process is to go back to the seller and make sure that we’re aligned in our interests, make sure that what we think they’re worth and what we think we can get in the marketplace is what they think. It’s very critical. Because if we go into a situation where they are thinking $100 and we’re thinking $10, we have a major disconnect. So, that’s a critical component of what we do.

Davis Blaine:

I think also, to look at this in terms of the ideal buyer, we want to find the buyers who want to eliminate competition, who want to buy intellectual property, and customers who are looking for key personnel that will complement their operations. We’re also looking for the strategic buyer who doesn’t have strong organic growth. What do they have to do? They have to go to the marketplace and acquire companies if they don’t have that strong organic growth.

Davis Blaine:

The other thing, the ideal buyer is really do they fit with our seller? Will they have a similar culture at the end of the day after they’ve signed off on all the documentations and that owner or owners of the seller are no longer there which could be one month or it could be two years?

Davis Blaine:

Those are the things that we look for in the ideal buyer, but it’s a whole process that we go through to find that.

Emily Page:

Yeah. It’s interesting to hear you say these things because I think anyone who is unfamiliar with this process would immediately know, well, it needs to be a profitable company. The average person can value something based on revenue and profit because it just makes sense. But what you’re also describing is something outside the scope of what most of us would consider, would be the ideal candidate would pay more than someone else who’s just evaluating it as an asset. Meaning, someone who requires something that adds value. Like, oh, I just bought this and now I own IP, so my current portfolio of a business, business A plus business B isn’t just one plus one equals two, it’s one plus one equals three, one plus one equals five.

 

A strategic buyer is one in the same industry who would get more synergies or value from buying than just the profit of a financial investment. They will usually be willing to pay a premium over other types of buyers.

 

Emily Page:

And so, you’re describing not checkers but chess, that you are entering the intimate area of getting to know a company when you’re doing evaluation and you’re helping the business owner to think from different vantage points; hmm, “who would find this company the most valuable”, so we can maximize an estimated valuation? I think that’s a mind blowing paradigm shift for the average person who maybe is not fully familiar with this concept.

Davis Blaine:

It is a paradigm shift. One other point I’ll add to that that’s very important is that most of our sellers are concerned about identifying the fact that they’re actually selling the company to their competitors. So, we’re very, very careful in selecting the buyers, so that we don’t go to the competitors right away. But the interesting thing is we want those people on our list because if we’ve gone through a whole series of other strategic buyers and private equity firms, a lot of times when they’re really down the line and in the process, they’ll go to a competitor and sometimes get the best price. But we keep them in abeyance, if you will, and we don’t want them to know until we’re down the line because they can harm our sellers. Right.

Emily Page:

And so, it makes a lot of sense. I guess, to make sure that it’s clear for anyone watching, there’s a lot of different investment banks and M&A companies out there. This is a similar process you would go through with anyone. We’re talking to Mentor Securities so they can give us their worldview, but if you are a company owner and you wanted to get this type of service, you wanted a valuation, you would hire a company like Mentor Securities and you’d sign a contract. They would give you a quote for a fee, and you’d have to then reveal everything. You’d have to share your bank statements. It’s a rigorous thing.

Emily Page:

Davis, is there anything else you wanted to add when it comes to this process that you should prepare the owner for? LIke how long does it take to do evaluation, what else do they need to give you?

Davis Blaine:

Well, you’re right, we need clean and dirty laundry. We need everything, really. We need to be as truthful as they will be with us.

Davis Blaine:

What’s interesting, I think, about Mentor Securities, we also have a sister company called the Mentor Group which is a full service valuation firm. We don’t sell businesses in the Mentor group, but we value hundreds of business entities, intellectual property, real estate, and equipment. Our people are very well versed in how to put values on a business and how to explain that to the sellers. I think it gives us an edge in the marketplace, yeah.

Emily Page:

The process is how long? They would reach out to you for a quote, you’d give them a quote, they’d sign a contract with an NDA, they’d pay a fee and then they’d give you all their data. You probably have a few meetings, maybe four meetings, and it takes two months, three months, four months?

Davis Blaine:

Well, if you’re talking about getting what we call a deck or a confidential information memorandum prepared, it could be easily six to eight weeks by the time you get the data and you understand the data and you’ve had conversations with them and you mush it together into a mathematical formulas. That’s how long that process takes.

Emily Page:

Okay. Just to be sure I’m packed, this is my last question on the topic, but let’s just say that we have anyone watching it and they’re like, “Hmm, I wonder what my company is valued at. I don’t know if I’m ready to sell yet in the sense that I don’t know if someone would value it.” Let’s just say they’re at the two- to three-year mark before they plan to sell or they are literally ready to sell, both of those types of potential sellers should reach out for or could reach out for evaluation and would find value in it, right?

Davis Blaine:

Oh, absolutely. In fact, we would do that through our valuation company. We counsel a lot of potential sellers, if they’re a couple of years away, to actually get that initial valuation and then figure out a way to share in a compensation package with their management team and then value it every year. The management team can see what they’ve created in that year period and they get more compensation out of it. So, everybody is aligned and driving toward the highest possible value.

Davis Blaine:

So, yes, we recommend strongly that if they’re not ready, they’re not on the market yet, get the initial valuation because there are a lot of things you can do with

Emily Page:

Yeah, I think that’s really crucial, and so I’m going to highlight it whenever I share this video. But for people who have the ambition to sell it for as much as they want, you have to plan it in advance, but you could get an expert. Because you might think your value should be a million dollars because your business is your baby and you spent your whole life building this thing.

Emily Page:

Most business owners, just like parents, love their baby and see the value of it and just think of their babies beautiful; but when you’re coming to sell a business, an outsider is going to have a much more critical perspective and you may not know what things they will not enjoy about your business. You might not know what criticisms they would have, so you might sell it for way less than you could. If you pre-plan, get an expert to give you a critical perspective.

Emily Page:

Their valuations can come with advice, like “Oh, this is what you’re missing. Three to five years from now, if you work on X, you can sell it for a different number.” So, that’s an asset. So, it’s important for people to be thinking ahead. I hope everyone listening heard that.

Davis Blaine:

Well, like I said and like you so clearly stated, a big part of our role initially is to find the problems and the advantages of the company. Solve the problems and emphasize the advantages.

Emily Page:

That’s awesome. Very encouraging for anyone who’s thinking about selling. There’s resources out there for you.

 

What are the metrics used in the industry to decide on a fair market valuation and earn the best valuation possible? (23:33)

Emily Page:

I want to ask another question, Eric. What I want to know is what are the metrics used in this industry to create a fair market value? I especially want to clarify, I need you to unpack things like EBITDA and how do you evaluate revenue and team and process? What are those words and how do you use those things to value a company?

Eric Klein:

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization.

 

It’s a typical term used when valuing a business based on a multiple of EBITDA. It’s more akin to profitable businesses that have EBITDA versus a company that’s flat, not profitable, maybe pre-bankruptcy. That’s typically based on net asset value, so assets minus liabilities, plus goodwill which could also include IP. That’s when it comes into play that if there is an IP valuation done, then I’ll come into play as far as valuation.

Eric Klein:

But once again, if there is no EBITDA,there is no multiple so there’s different metrics for that. As I mentioned, it’s based on net asset value to determine that, which include goodwill and, like I said, if there’s any IP value on that.

Eric Klein:

And then as it relates to revenue, there is, as Davis mentioned earlier, typically certain types of technology businesses that have high EBITDA margins are typically valued based on multiple revenue. I mean, you do the math and you still can quantify a multiple of EBITDA, right? But typically these tech businesses are valuing their businesses on a multiple revenue.

Emily Page:

And so in terms of when you’re using different metrics, those are two very strong metrics that are industry standards. Usually, whether you use EBITDA or revenue to evaluate a company, it has to do with the industry that you’re working in.

Emily Page:

Hey, anyone watching this, if you have a business in one category, usually people value your company based on the same type of process they would evaluate a similar company, but there’s a few exceptions and that’s why you sometimes want an outsider to help you think of the best way to position your company. If you position it in a different category, whether, for example a beauty skincare company. If you could position it as a software system because you have an app, it might get a different multiple. So it’s important to maximize your total value, you want to think those things through, and it’s especially important because some tech companies don’t even have any profit in the beginning, but they have users.

Emily Page:

I think the Black Rock Coffee, they recently sold and it was sold for just millions of dollars but they didn’t have crazy profitability at this point and even crazy revenue given how much they were selling for, but they had subscribers, loyal regular repeat buyers. And so, they had an excellent team help articulate the value so that they can maximize how much they’re going to get. So, is there any-

Davis Blaine:

That’s what Eric was mentioning, the recurring customers. There’s a lot of value in the recurring customers. Let me add one other thing, we have this metric of EBITDA times a multiple and that gives us a price. That math allows us to have commonality of conversation. But we do a lot of work on that number because there are a lot of things that run through the company that really need to be added back. When we ended up with EBITDA, it’s an adjusted EBITDA and it’s the highest possible EBITDA for that seller, so they get a higher price.

Eric Klein:

One thing that I wanted to layer on to what David just mentioned about adjusted EBITDA, there’s the add backs but there’s also non-recurring events. If the company is in, let’s say litigation and had to pay a two million dollar settlement, that’s a non-recurring event. You want to take that into account on non recurring events.

Eric Klein:

Also, as we have lived in the pandemic for the last two-and-a-half years, a lot of companies have had a hockey stick growth in top line revenue for one reason or another because of this non-recurring event. Now, granted pandemics happened over decades, that could effectively be a non-recurring event as it relates to the pandemic we’ve lived in the last two-and-a-half years. We have to take that into consideration.

Emily Page:

That’s really helpful. You usually need someone to calculate it for you, and be able to justify it for you because whoever is buying a company will be evaluating, will have their own team of financially savvy people who are going to try to argue for the lowest value so that they can pay the least for a high-value thing. So, you want someone, you need a team to eventually calculate those things for you and help explain why a valuation that you feel your company is worth is worth it. Whether you hire Mentor Securities or someone else, you should just keep that in mind. You need smarties on your team to help you think of your own business from a different angle.

Emily Page:

Are there any other metrics that you guys wanted to bring up either about team or process that you guys use in deciding your valuation that you want to unpack it all for people?

Eric Klein:

Yeah. One thing I wanted to add as it relates to the team, back to the professionalize management team, that’s a bit more critical to have in place when a financial buyer makes an offer on the business especially if they’re, again, they may not make a control investment, they may not do a full buyout, they may do a significant minority, call it 49%. A professionalized managed team is very critical versus a strategic buyer.

Eric Klein:

Now, strategic buyers have their own professional management team usually. They can adjust or they can leverage their current SG&A. The multiple of EBITDA, actually goes to their benefit, right? They can adjust and leverage their current SG&A and meld the recently acquired business into their operations. That’s less important when it comes to a strategic buyer as it relates to professionalizing the management team, but it will help.

Eric Klein:

There is intrinsic value to have a “professionalized management team” because it costs money to build, right? There’s value in a professionalized management team to have in place. Davis, do you have any input on the process?

 

What are the biggest hurdles you see that stop companies from getting the most from their sale? (31:25)

Davis Blaine:

Well, no, but I think this goes to another issue, Emily, that you’ve raised with us and that is, what are the biggest hurdles that a seller faces because this is really the heart and soul of that issue.

Davis Blaine:

Probably number one is that they’re unprepared. Preparation is critical. Number two is do they have enough of a strong management team, especially for that financial buyer like a private equity firm that Eric’s talking about, that can carry on the operations in the absence of the owner or the key people? That’s what the buyers are looking for. Do they have depth in their management, in their middle management?

Davis Blaine:

I’ll give you a quick story. A few years ago, we were selling a company. A very strong company, nice EBITDA, but they were a mess in terms of who made decisions. It was kind of an autocratic owner, and he made most of the decisions, and he actually had a couple of his sons working in the business. So, we sat down with him and we said, “Look, you need to create departments, you need to assign your sons and a couple other people to head up these departments, you need to work up the duties of what these people should be doing,” I call it doing, right? “And we put this whole thing together as part of the management presentations when we had the final buyers come in and talk to this company.”

Davis Blaine:

The org chart and the way they described their duties, they looked like they were so organized, that that controlling autocratic owner could walk away tomorrow and the company wouldn’t miss a beat. But we had to do a lot of planning and a lot of work internally so that that management team is critical to the value.

Emily Page:

I think it’s important for people to hear that because everyone building a business usually starts, it’s usually an owner operator in the very beginning. You’re the cash man and you’re the salesperson and the star quarterback as well as the coach. It’s difficult emotionally to think about yourself not being in that business.

Davis Blaine:

Exactly.

Emily Page:

You might think, “I want to sell this business,” but when the rubber hits the road, what it means is you have to imagine a world where you’re not a part of it and build away from you being essential. It takes a lot of strategy, it usually takes an outside eye because an entrepreneur had to be so forceful to make this business succeed that to imagine a world where they’re not essential to it is, I’ve seen it be difficult for some of my consulting clients.

Emily Page:

So, it’s smart to get an outside eye to help you strategize how to do that so you’re not also favoring yes men, people who just say yes. You want people who can lead the business when you’re not there so that it’s an asset and can be sold for its greatest value.

Davis Blaine:

Yeah. Exactly. The other thing Eric mentioned, customer concentration. We took on a company a few years ago. Their sole purpose, they did nearly $100 million dollars in revenues and their business model was that they found professional aerospace engineers.

Davis Blaine:

They did a certain amount of training and then they moved those people into the aerospace companies as subcontractors. They did really well, and when we got down to a couple of hte buyers, we started looking at where their revenues were coming from. They were separate divisions, but when we added up all of the separate divisions of this one company, 87% of their volume was with Boeing even though they had a lot of independent operations in Boeing that hired them. They were hired all over the country, but until the question was asked in a different way, we didn’t add up all those Boeing contracts.

Davis Blaine:

To tell you the truth, we were not able to sell that company. This was before Boeing had the airplane problems. So, the combination of that and Boeing not being the greatest company in the world at that point, that company never sold. Sometimes that happens. Yeah, sometimes it happens.

Emily Page:

And so, customer concentration by definition is when too much of your revenue is coming from-

Davis Blaine:

And too few customers, right.

Emily Page:

Few customers, right. Okay.

Davis Blaine:

Exactly. Yeah. Yeah, it’s another critical aspect of it.

Emily Page:

Interesting.

Davis Blaine:

The other thing is that you got to make sure that your financial records, your accounting records, your tax information ties out. We’ve seen situations where we walked in and the books are a mess. Eric was talking about this before, they have really good systems and procedures in place. But I think, Emily, that’s an area where we could bring you in because you’re great at process and at branding. So, we need to think about you as well as you’re thinking about us.

Emily Page:

Yes. I appreciate you saying that. Yeah, for everyone watching, I do consulting and everyone knows I’m very passionate about the power of a sales process. For example, standard operating procedures for your sales process so that you’re clear on where you’re generating leads from, how you’re closing those leads, the type of offers that you’re making so that it’s not just one of your salespeople or the owner making up a different sales scope every time. It needs to be something that belongs in a bucket so an outside person can repeat the sales process. Or your brand, making sure there’s a brand identity guide that if you sell this business, you have clear guidelines for how to use your brand, your logos, your fonts, to repeat that on every different asset.

Emily Page:

Things like this which seem very trivial, they seem like maybe a waste of time or investment, what’s great about it is it turns, if you write things down, you have your profit and loss statement, your balance sheet, your standard operating procedures, your job descriptions, your brand assets, everything’s clean and beautiful in a portfolio, think about the confidence that you can create enough as a feeling for the person who’s evaluating your company. They would look at the numbers and also be able to quickly evaluate, “Could I continue to make profit if I pay for this business?”

Davis Blaine:

Right.

Emily Page:

You’re going to create a feeling of confidence, an impression that this business is well thought out, and you will allow them to imagine themselves purchasing it.

Emily Page:

Sometimes sales is about numbers. That’s the place we start. It’s all in the mind. But sometimes the highest value is about emotion. It truly is because you have to convince a person that this is a worthwhile investment, that it’s on its way up. I’m not just buying something that is worth X today and is going to be worthless tomorrow. They have to imagine a future and feel excited and passionate about it to pay a little bit more.

Emily Page:

Eric gave a really funny example. One time we were out to dinner in Beverly Hills and he was explaining a strategy that they had used to position a company. Just by sending a certain email and explaining the business in a certain way, they were able to get hundreds and thousands of dollars more for their client because of the strategy that Eric had implemented and it wasn’t because the company was worth more on paper, it’s because there was a feeling that he generated by the email that was sent.

Davis Blaine:

You know, Emily, that’s a really, really good point because today buyers will do what they call quality of earnings analysis, and this is another important thing. As long as they see that the numbers tie together and they can track the revenues, they can track the profitability, you’re 100% correct. If that’s in focus and clean, then the buy is an emotional buy, right? It’s that emotional attachment to the seller because now I know that the issues are not there. They’re clean. This company is strong.

Emily Page:

Yes. An organization of the process. You know, I helped a company sell before. When we did that, we created a portfolio book that had all of these assets so that you could come and flip through it and quickly evaluate, “Oh, they’ve got their brand in place, they have an org chart in place.”

Emily Page:

These things, if you can just hold it in your hand, it’s simple. If it’s down so that it’s simple and clear the value, you’re going to get a lot more.

 

What is the process to sell your company? (40:19)

Emily Page:

Okay, we’ve discussed the plan to get everything ready for sale. Let’s pretend we finished our valuation process. Eric, I want to ask you, what is the sales process like? Once we’re done with the valuation and we’re ready to go, what are the steps that you would take us through to be able to sell?

Eric Klein:

First off I want to say that it’s very critical, and we’ve mentioned this earlier in the video here that it’s very critical that the client, the selling company is prepared. Clean setup box, also clear messaging by the stakeholder or a majority shareholder as far as protocol as it relates to who in the company knows that the company is for sale.

Eric Klein:

I’ve seen situations where it leaks out that the company is for sale. Let’s say it’s a single individual that owns the business and it leaks out that the business is for sale. Let’s say there’s 50 or 100 employees, it can create a very negative effect. So, being very cognizant who’s on first is very critical right off the bat.

Eric Klein:

So, there’s got to be a playbook, there’s got to be a plan and protocol as it is initiated in the beginning as to what the process is, and communications. Then we go through a due diligence process with the company to gain knowledge about the business. We usually set up a data room that’s prepared for prospective buyers to access once they’ve signed NDAs and all the formalities are in place. Once we have set that up, we review the due diligence materials to understand the business and we go through a Q&A process with the company after we have reviewed the due diligence materials.

Eric Klein:

We sometimes do site visits or in-person meetings with the clients that were selling their business. They may ask us to include various stakeholders and shareholders, it’s up to them who they want us to include in this process, and then we put together the marketing materials; the pitch decks, the sims, and put that all together. Depending on what the client’s requirement is we prefer to do a rifle approach on a marketing process once we’re ready to go to market. Some clients may want us to go to many people from a shotgun approach versus a rifle approach.

Eric Klein:

We also discussed the timeline in the sale process with the clients to set expectations. There’s a lot of clients that say, “How soon can you sell our business?” I mean, we have this one prospective client that is looking to do a bridge and says, “Well, you stated it’s a 90-day process, but we can’t wait 90 days.” So, it just depends how prepared the client is.

Eric Klein:

Once we go to the market, we’ll request indications of interest from prospective clients. We review those with the clients, we set up management meetings. We also set up a Q&A session after the prospective buyer or buyers have reviewed the materials. After the NDA is signed we’ll go through a Q&A process and then we’ll go back out to those prospective buyers to determine who wants to issue LOIs (Letter of Intent) or review the LOIs with the client. We’ll then go back to the prospective buyers and try to negotiate the best price.

Eric Klein:

Once we do that and we accept the LOI and our client accepts the LOI, then the prospective buyers go through their due diligence process. They dive deeper into the due diligence process. Once that all checks out okay by the buyer, the buyer issues a purchase and sale agreement. We then negotiate the purchase and sale agreement with the company and their counsel and then execute and close.

Davis Blaine:

Part of the magic of at least our process is that we try to get three to five really intense interested buyers. Behind the scenes, we keep encouraging them. They’d give us indication of interest which is usually, we’ve given them the EBITDA number because they haven’t done their due diligence yet so they have that number, they give us the multiple or maybe it’s a revenue in a multiple so we kind of know the pricing that they’re thinking of. A lot of them will actually come back to us and say, “Ah, we’re thinking of a multiple of six to seven. How’s that sound?”

Davis Blaine:

It’s this whole dance that we do at that point. Because, you see, when we put a seller on the market, it’s not like listing real estate. We don’t put a price out there. We let the market dictate to us what the price is. However, if the price is not as high as we want or we think we can leverage one buyer against the other, we might say, “Well, the couple of buyers that are kind of right around that eight multiple, you think you can push this up?” And so, it is a dance until you finally get to that ideal buyer at least price wise.

Davis Blaine:

But also, and this is part of the dance too, is when the management presentations are made, the seller really needs to be very, very acutely aware of who he thinks that his company will fit best with, because that’s a critical component. Right? Yes, cash is king but so is culture. That’s a very important part when we do the management presentations and they share what the buyer’s culture is, that there’s a really good fit for our sellers.

Emily Page:

It’s so interesting. I love hearing that about fit because I think, especially if a person is an owner operator, they’re the ones who originally built the business. They didn’t buy it from someone else and then take it over, there is an emotional attachment to employees. That livelihood, you want it to continue, and you want it to continue in a way that is aligned with your original vision.

Emily Page:

So. I think that’s important to hear that, first of all, you guys value that and recognize it. And I think it’s important for anyone who’s selling to realize that it’s not just about the money. Because the person who buys it and sees the culture fit will be able to pay more. You want to be really self aware of your own business and what the right buyer would look like.

Emily Page:

Two things that you said that I think I personally didn’t know was that in the very beginning you don’t actually put a price like we do on a house. It doesn’t say, “Hey, this house is a million dollars. Come buy me.” You are actually going through and doing the valuation process is incredibly important because you come up with either the EBITDA or the revenue, which is what’s central for the valuation, and then someone is actually bidding on the multiple.

Emily Page:

So, can you explain, just make sure it’s clear for people that that means you would say, “Hey, our EBITDA is X,” and the buyer would then say, “Okay, I’ll pay three times that.” That’s what this multiple means.

Davis Blaine:

Yes, that’s what it means. Right, it’s just a math formula. Right.

Emily Page:

So, if you have $3 million in EBITDA, which means kind of like, for those, again if you’re not familiar with it, you got to go “Google it” because it is a little complicated. But it’s basically like the net profit when everything’s close.

Davis Blaine:

It’s close, yeah. It’s pre-tax, but it’s close, yeah.

Emily Page:

Yeah, taking it into account. So, let’s say you did $3 million of net profit essentially, approximately, then your potential buyer would say, “I’ll do three times that,” or four times that. The average multiple they give, they would do comps, saying, “Oh, this other…” Let’s say you have a cookie company, 3 million in EBITDA, another cookie company was sold for three times their EBITDA. So, that’s what the buyer would do, they’d go research this with all of their team and say, “Hmm, I think it’s fair to pay three times that.”

Davis Blaine:

And we’ve done our own research to back up what we think that multiple should be too. So, we’re both going at it and we try to see if we come and converge together.

Emily Page:

Okay. So, once you’ve accepted a Letter Of Intent (LOI) and they do that deep dive, do you ever come back and find that they try and negotiate on the number that you guys calculated? Is that ever on the table?

Davis Blaine:

Yes, always. Honestly, they always try to come back and chip away. Maybe they analyzed that EBITDA number differently than you do. So, there’s a discussion of that. They look at working capital differently than you do. They look at problems that maybe aren’t really problems that we thought were advantages. They may turn it around and say, “Well, this is a problem for us.” So, yeah, they’re always trying to nibble away even though they’ve given you an indication of what they’re going to pay.

Davis Blaine:

Now, the best situation is where this company is so strong and we presented it so well. We’ve had a few of these where they don’t nibble. So I say, always they nibble. They nibble a little bit but now they know that they’re in a bidding contest with somebody else because there are a lot of people interested in this company.

Davis Blaine:

We had one where we had 30 parties interested. And the most difficult task we had, yes, was calling the 30 down to three to five buyers. It was amazing. And they kept bidding up the price. So, I shouldn’t say we always have them nibble, but that was an extreme example of an incredibly good company that everybody wanted. They weren’t going to nibble, but a lot of times they will nibble, yeah.

Emily Page:

Yeah. Well, in general, from a macro perspective, how long does the sales process typically take? I’m sure it depends on the type of company and how clear the sale is and how many people are interested, but could you give us a range?

Davis Blaine:

Eric, what do you think? I’ll let you tackle that. We’ve seen it.

Eric Klein:

Yeah, I would say there’s a number of factors. Assume that the selling company is prepared especially in the diligence process. But from soup to nuts, depending on the industry in which the business operates, I would say six to nine months. Davis, what do you think?

Davis Blaine:

If it’s a really good company, it should sell that quickly. It just depends. It could also take 12, 15 months too. It’s more complex. Also, the legalese the lawyers are debating issues and reps and warranties. You never know, but I think six to 15 months is probably a good broad range, if you will. It’s not overnight.

 

How should a seller pick the best buyer? (53:20)

Emily Page:

That’s the plan accordingly. Then I want to ask, let’s say we have these three to five people bidding on our company, how do we pick the best seller? You already mentioned some of the key elements, but you want to touch on that? How should you pick the best buyer?

Davis Blaine:

Yeah. Well, we have touched on that. The culture and the cash, I think, are probably critical. We counsel the owner sellers, it could be plural, as to how do they envision exiting the company. How long do they want to stay? Do they want to have an employment agreement that takes them for two years with the option that they could still get out in six months if they don’t like how things are being run because they’re no longer making all the decisions?

Davis Blaine:

The other critical element is do they want to roll over some equity? In other words, do they want to take a 20% interest in the new entity being the buyer? And so, they get basically 75% of the purchase price but they’re still in the game. And so they have, we call it, second bite of the apple, they have a chance to see that company continue to grow and they’re an equity holder so they can get something out of it.

Davis Blaine:

So, there’s a lot of different discussions that we have with the sellers in terms of the way they’re looking at the buyers. Sometimes we see it a little differently, so we try to give a very honest perspective of what we’re seeing in the buyers, and we respect the fact that the seller will give us their input.

Davis Blaine:

Sometimes it’s, Eric’s right, it’s not always the cash, it’s how does it fit afterward.

Emily Page:

Right. Right, and the type of offer. It’s interesting. I don’t know that many people stop and think about that, but it’s good to also have counsel to make sure that you pick the right buyer to take over-

Davis Blaine:

That’s why you hire an investment bank.

Emily Page:

Right.

Davis Blaine:

And good advisors. We’re very big on teams of excellent advisors. Be that the tax accountant; the lawer who does the M&A process with us; insurance agents to identify specific risks with that company; brand managers like yourself, Emily, that maybe can tweak a brand and make it much more visible, much more viable before the buyers have a chance to come in to the process. There’s a lot of great advisors. And wealth manager. Because the seller, once you sold the company, needs to know what’s going to happen with my money and how do I, tax wise, keep as much as I can. There’s different strategies for that too.

 

Once your company is sold – what are the issues and challenges you must worry about? (56:01)

Emily Page:

Well then, that rolls right into my next question, which is, what are those issues that we might expect to face and challenges after it’s sold? Let’s say it’s, everything you’ve described here will result in a successful sale. And once we’ve picked that buyer and it’s sold, what issues might we face that we should plan for?

Eric Klein:

I’ll address that, Emily. On a wealth advisor, you definitely want to, I’m stating the obvious, but you definitely want to select a highly experienced RIA or a wealth advisor as they they’re known as is important assisting growing the fruits of the owner’s success after liquidity event. Right? What do they do with all this cash?

Eric Klein:

They no longer have a cash flowing business to support their lifestyle so it’s very, very critical how they allocate that boatload of cash and how it’s going to grow. Not only grow, but also generate cashflow for that retired person or semi-retired person.

Eric Klein:

The other important point is tax consequence, which is very, very critical. As they say, tax avoidance, non-tax evasion. So, you want to have a highly experienced tax professional in place that gives you tax advice, far enough in advance of a closing. To determine whether a trust needs to be set up or some legal entity to set up as part of tax planning, that needs to be completed far enough in advance of a deal closing. Because if you do it too, and I’ve seen this, that they haven’t structured anything to mitigate their tax liability obviously from a legal perspective. That’s really, really critical.

Eric Klein:

The other element is transition planning. Do you have anything to add there, Davis, on transition?

Davis Blaine:

Well, in transition planning, one of the things we’ve seen clients do is take a certain amount of their shares and gift to a charity. If they’re charitably inclined, it’s a good way to create a tax expense, if you will, or an expense against your estate. We’ve seen people do different forms of gifting, we’ve worked with people who do different forms of installment sales. There’s a lot of current stuff in the marketplace that the sellers need to be aware of.

Emily Page:

Those are transition payment plans. There’s also the transition of staff, the training. So, who will take over that new role? You can hire someone to give you advice about that, but ideally you’ve planned that type of thing out in advance. For example, giving offers to your executive team so that they are motivated to stay on board during the transition. How are they going to be motivated? Well, maybe they get a piece of this new company or they get a bonus. These things need to be negotiated ahead of time.

Davis Blaine:

Well, that’s where I suggested early on that they value the business a couple of years ahead of time and maybe put in place an exec comp plan that allows the executives not only to see what value they’ve driven in the company, but participate to some extent. They’re part of the executive team and they know that they’re going to be part of a sale, they’re all working on the same sheet of music. It’s very, very important.

Emily Page:

Yeah, that’s great. There’s so many moving parts. If you’ve never done it before, we’ll just talk to someone else about it. You won’t be able to come up on your own and anticipate all of the challenges. You got to write a plan.

Davis Blaine:

That’s right. Yeah.

 

 

What are the biggest opportunities today for companies looking to sell? (1:00:08)

 

Emily Page:

So, what are the biggest opportunities today for companies looking to sell? What categories are really succeeding? I’m sure anyone can reach out to you, but do you have any input on this?

Davis Blaine:

Yeah, let me give you a few of the current hottest categories of businesses people want to buy:

●      Consumer goods is always strong in almost any market.

●      Software and SASS companies, software as a service is very strong.

●      Specialty engineering companies that are unique, maybe environmental engineering companies that are part of a rollup.

●      Veterinarian products are really hot now.

●      Subscription services, that’s where you have those recurring revenues.

●      Medical disposals is another area.

●      Packaging companies. There’s been a huge uptick on sales and acquisitions within this sector mainly that has been driving that is everything is becoming so e-commerce focused and less brick and mortar.

●      Surprisingly, military and government contracting is huge.

●      Healthcare & related services in which there is a recurring revenue. A good example of that would be lab facilities like Quest, for example. It’s one of the biggest in the marketplace.

 

Any last macro level advice for best practices when selling your business? (1:02:35)

Emily Page:

It’s good to hear. If anyone is in those categories and you’ve been wondering what they’re telling you, this could be a right time for you. I’ll be curious to hear from you guys, are there any other last minute best practices or pieces of advice just to really, as a capstone, piece of advice to anyone considering selling that you’d like to tell us?

Davis Blaine:

Well, first of all, hire you and then hire us.

Emily Page:

Yeah, good advice. That’s good advice. Make good experts on your team.

Davis Blaine:

Yes, we want to be your experts. We have a lot of fun with the process too. It’s interesting we never talk about that, but, well, it’s a very, very serious and detailed process. If you don’t have fun with it and you don’t enjoy it, it just makes it kind of onerous. We kid each other and we have a lot of fun internally.

Davis Blaine:

I’ll add one last thing. We put together quite an executive team and we did this principally for our buy side clients, the private equity firms and the strategics. We have former CEO, CFOs and COOs in a lot of different industries. We can always tap into our executive team for help if we’re on the buy side and targeting certain companies to find, or even on the sell side.

Davis Blaine:

Sometimes our executive team becomes part of the transition, Emily, because the buyer realizes their expertise is something that they didn’t quite have internally. And so, our executive team can transition over into the sold company, into the buyer’s company. It can be very, very important. It gives us an edge. It’s like our valuation expertise, our executive team, and the fact that we have fun.

Emily Page:

Well, it is helpful to remember that because that’s, I think that we talked about a good fit for a buyer and you selling. You want to have a good chemistry there. You also should have good chemistry with your advisors.

Davis Blaine:

Oh, yeah.

Emily Page:

They need to understand you, you need to like them and enjoy this process because you’re going to go through a little bit of a roller coaster.

Davis Blaine:

You will.

Emily Page:

You need to be sure that you have a good advocate who cares about your best interest and who you feel resonates with you and really will help to advocate for you. I think in terms of advice, what he’s saying here is hire great experts that you trust, that you like, that you find fun, who can give you the resources that you need. We also talked about planning in advance, make sure that you are thinking two to five years out if you’re planning your sale.

 

If we want to reach out to MENTOR SECURITIES how can we do that? (1:05:17)

Emily Page:

That brings me to the last question that I want to ask you. If someone is hearing this interview and feels maybe that Mentor Securities is the right person for them to possibly work with, do you want to just clarify who your best client is or what the right fit for you guys is? Because there’s lots of people out there who could handle very small businesses, very large businesses. Just repeat the right customer for you and how that person can reach out for you when they’re ready to hire Mentor Securities.

Davis Blaine:

Well, the easiest way is obviously to go to the website. There’s a form on the website that they could fill out. Or they could contact you directly, Emily, and you can put them in touch with us. The first part of the question was?

Emily Page:

Who would be the right fit? Because I can tell you, I have customers, for example, who don’t have $3 million in EBITDA yet but they would like to sell. There may be someone who’s in the one million dollar range. Because what I want people to understand is that there are lots of different investment banks and M&A valuation companies, you should go to one that is going to be a good fit for you.

Davis Blaine:

Well, like we discussed before, we want to talk to that company that’s a million dollars in EBITA because probably what we’d start with would be an overall business valuation and identify the issues that are going to come up that they need to clean up to drive value upward. Okay? Whether it’s having great intellectual property, or having a better management team, or whatever it is, or branding. Those are the types of things in the evaluation process that we can identify.

Davis Blaine:

So, no, we don’t exclude those companies. We do a lot of valuations of companies that don’t even have a million dollars in EBITDA that might be thinking down the road of selling.

Eric Klein:

Yeah, one thing that I wanted to add later on to what Davis mentioned about the one million dollar EBITDA business is we get quite a bit of inbound inquiries from private equity groups that we have relationships with on an ongoing basis. Also, strategics. Strategics are okay. They’re okay looking at smaller businesses. They’re looking to make add-on acquisitions.

Eric Klein:

So, not so much critical as to there’s got to be a minimum of three or five million minimum EBITDA. We’d rather look at the opportunity on the whim, and there could be a fit because we’re in constant communication in the corporate world, and you never know. So, we’d rather look at it and give you some input and possibly assist versus not even knowing about the opportunity.

Davis Blaine:

Well, that’s true, and maybe in an industry where we’ve got special private equity firms that are actually looking for a million dollar EBITDA company. So, we might even decide if it’s worthwhile and the client is okay of taking that client on. I mean, when we say 3 million in EBITDA, that’s an ideal, three million and up. That’s an ideal, but there’s some really nice companies that do a million dollars of EBITDA that could be sold. So, Eric’s right, we look at a lot of opportunities. We kiss a lot of frogs.

Emily Page:

Yeah. It’s good to keep in mind because your advice was plan. Plan in advance.

Davis Blaine:

Plan, plan, plan.

Emily Page:

Oftentimes you want to have a relationship with someone even before you’re ready.

Davis Blaine:

Yes.

Emily Page:

Let’s just say you’re going do it in eight years, five years, why not reach out, make a relationship, an introduction, get a preliminary idea whether or not it’s a good fit right now or not.

Davis Blaine:

Right.

Emily Page:

And then maybe a couple years down the road. I’ve written growth plans with clients before where we said, okay, in eight years they will take on venture capital money. The plan that we wrote, they followed it exactly and it literally happened because they had a lot of work to do. They were in a different position. They weren’t ready to fail.

Emily Page:

I’ve worked with other clients where they were ready to sell within two years. We wrote a plan and they followed it, and they were ready to come and talk about it.

Davis Blaine:

We helped a lot of companies, like Eric was mentioning, even smaller companies with that exit plan and bring in experts like yourself. Because they need to be surrounded by different experts that will clean up certain areas of the business. It’s all about driving value in the eye of the buyer. That’s all it is at the end of the day.

Emily Page:

Man, that’s a beautiful capstone to put out our video because we always talk about going from start to sold, and it’s the value to the end user that we always want to be communicating, whether it’s doing a day-to-day sale or selling our entire company. I appreciate that you close with that, very well done. We didn’t even coordinate that.

Emily Page:

So, for everyone watching, we just thank you guys for your time. I want to thank you, Davis and Eric, for joining us today.

Davis Blaine:

Thank you. We appreciate it.

Eric Klein:

Thank you.

Emily Page:

Yeah. Everyone, feel free to reach out. You can even add Eric and Davis on LinkedIn just to follow their articles in open a relationship if you want. Or if you’re interested in following up, go to mentorsecurities.com to read more about them and peruse and snoop. You can also leave questions in the comments. We welcome that. We’d love to hear what other things you were confused about, what part you absolutely loved, and what other things you’d like to learn about more in the future.

Emily Page:

Thank you, everyone. I hope this helped you to go from start to sold.

Davis Blaine:

Thank you.