Business Health Series – Building a Sellable Business: Positioning for Value Before You Exit

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Gershon Morgulis: Alright, good morning, everyone. I am Gershon Morgulis. I am the founder of Imperial Advisory. We are a team of…

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Gershon Morgulis: senior CFOs and financial executives who serve as part-time CFOs and Consultants?

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Gershon Morgulis: For businesses that need strategic financial leadership.

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Gershon Morgulis: who don’t need a full-time CFO.

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Gershon Morgulis: We focus on helping CEOs and CFOs solve complex financial challenges. For CEOs, we provide high-level financial strategy, assisting with growth planning, M&A, financial operations.

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Gershon Morgulis: basically sitting in the CFO’s seat. For companies that have a CFO, we act as an extended team, and we provide tactical.

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Gershon Morgulis: and or strategic work on FP&A, cash flow forecasting, audit readiness, Transaction… due diligence support, And…

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Gershon Morgulis: We do that, again, for CFOs that often are…

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Gershon Morgulis: On top of the game, but sometimes have some… You know, holes in the… team beneath them.

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Gershon Morgulis: Typically, we’ll work

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Gershon Morgulis: for one of the following two profiles, either a smaller company, let’s say 20 to 30 or more employees, whose CEO is

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Gershon Morgulis: Typically, the owner, And… is… challenged to deal with

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Gershon Morgulis: kind of being their own CFO.

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Gershon Morgulis: And so they’re busy running their business, but they’re also kind of their CFO.

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Gershon Morgulis: That’s one profile where we are…

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Gershon Morgulis: We come in, we help, we provide a lot of value, and the other is a CFO at a larger company.

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Gershon Morgulis: Frequently, that’s gonna be 100 million plus, or $100 million plus division.

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Gershon Morgulis: certainly could be smaller. And again, those people need FP&A support.

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Gershon Morgulis: Audit readiness, some kind of consulting.

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Gershon Morgulis: And that’s where we jump in.

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Gershon Morgulis: Our value lies in our ability to provide customized financial solutions and to Drive growth and operational efficiency.

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Gershon Morgulis: And… That’s where… That’s where we help. Anyway…

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Gershon Morgulis: That’s kind of my introduction to the firm.

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Gershon Morgulis: I want to welcome all of our guests, all of our teammates, and especially our three speakers today.

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Gershon Morgulis: So, today… We’re gonna start with…

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Gershon Morgulis: I’m gonna start by introducing our speakers.

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Gershon Morgulis: And I’m gonna let them each…

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Gershon Morgulis: Give us, you know, a short intro of themselves, and then we’ll jump into the questions and the program.

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Gershon Morgulis: So, first speaker is Mendel. Mendel runs a CPA firm called Shapira CPA in Brooklyn.

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Gershon Morgulis: Our second speaker is Av, who is an M&A and corporate attorney, and the third speaker is Rick.

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Gershon Morgulis: who is one of our CFOs, who’s got

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Gershon Morgulis: Many decades of experience. We’re excited to have you all.

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Gershon Morgulis: So, first, Mendel, want to take a moment to introduce yourself?

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Gershon Morgulis: Sure.

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Mendel Schapira: Thank you very much, Garrison. Sure. Thanks for having me. So I’m Mendel Shapir from Shapir CPA. We’re an accounting firm. We help clients be

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Mendel Schapira: more bank and exit ready. So, if you want to get a line of credit or any financing, we’ll help you present yourself to the bank, and if you’re thinking about a sale, we’ll prepare you and make sure that your financials tell your story, so you’re more presentable.

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Mendel Schapira: We’ve been in the space for 18 years now. We have a heavy focus in the manufacturing space, which is why we talk a lot about manufacturing. Although we have clients in different industries as well, manufacturing is one of our specialties, as we see manufacturers being helped a lot.

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Mendel Schapira: When it comes to help them be, more bankable and more, exit-ready.

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Gershon Morgulis: Thank you, Mendo.

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Gershon Morgulis: Alright, Av…

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Av Sinensky: Hey everyone, good morning. My name is Bob Sinensky. I’m a partner in the corporate practice at Falcon, Rappaport, and Berkman. We’re a full-service law firm based in New York. It’s a headquarter office in Long Island. My practice

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Av Sinensky: focuses on mergers and acquisitions, both on the buy side and the sell side, focusing primarily in the middle market and lower middle market. I would say that my favorite part of my practice is when I have the opportunity to work with

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Av Sinensky: Found their own businesses, or family-owned businesses, and helped navigate them through an exit.

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Av Sinensky: So, looking forward to talking about some of the best ways to do that today.

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Gershon Morgulis: Alright, and Rick.

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Gershon Morgulis: You’re up.

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Rik Katz: Hey, good morning, everybody. I am a,

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Rik Katz: retired full-time CFO from a, 40 years in the United States, and another

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Rik Katz: 10 in South Africa, you could hear from my accent, and I’ve had a concentration in the manufacturing and quasi-banking sectors, also covering distribution. I’ve worked closely with CEOs as their right-hand

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Rik Katz: man in the business, primarily owners, as previously people have mentioned. And I’ve joined, this, Imperial Advisory because I want to continue to contribute and help owners and CEOs grow and do what they want with their business.

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Rik Katz: And I’m looking forward to discussing this this morning.

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Gershon Morgulis: All right, thank you all. I’m going to take one moment to welcome some other people from our team who are here. Thank you, Tony, for… and Elizabeth for helping put this together.

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Gershon Morgulis: And…

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Gershon Morgulis: Thank you to all the people from our team who are here, and the ones whose names I… or faces I see are Dean and Marty, so you both get a special thank you.

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Gershon Morgulis: And… without further ado… Let’s get going.

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Gershon Morgulis: Alright, so our topic today is how to…

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Gershon Morgulis: how to build a sellable business. So, the first question that we’re gonna ask is.

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Gershon Morgulis: Why do we care? Why… why do we need a sellable business?

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Gershon Morgulis: And why is that something that people, the business owners, so that’s whether we have business owners on the call, whether it’s you, or we have advisors on the call, some of your clients, why is that something that we should aspire to, or that a business owner should aspire to? So, Av, why don’t you…

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Gershon Morgulis: Gus, get us started here.

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Av Sinensky: Yeah, I mean, that’s a question we get a lot, because a lot of business owners say, why do I care if my business is sellable? I’m not selling it. I want to own it. I plan on holding onto this for many years, maybe my children will take it over.

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Av Sinensky: But the reality of the matter is that your business is for sale, whether you think it is or not. First of all, you just have no idea what the future is going…

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Av Sinensky: to bring you, whether that’s for your business or for yourself. Things happen, circumstances change, life gets in the way, for better or for worse, and…

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Av Sinensky: you know, even if none of those things happen, if somebody shows up with the right offer, just like your house is for sale for a number, your business is likely also for sale for the right number. So, it behooves you to be in a position to have the ability to sell your business.

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Av Sinensky: if something like that unexpected happens. Moreover, even just putting aside, you know, extraordinary circumstances.

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Av Sinensky: Having a business that is sellable gives you options, and optionality is something that you shouldn’t take for granted. Having the option to either hold onto your business and continue to pocket the cash flow, or to exit and…

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Av Sinensky: Pocketed, you know, a larger check in one shot.

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Av Sinensky: you know, it’s not bad to have those options.

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Av Sinensky: the fact of the matter also is that the types of things that make your business more sellable, generally speaking, will also make your business more profitable and valuable to you. So, this isn’t a zero-sum game where focusing on sellability is going to impair

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Av Sinensky: your short-term value, or your, you know, your value of holding onto the business. They’re… it’s almost a mutually beneficial,

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Av Sinensky: exercise to go through. Before, before I turn it over to Mendel, just the last thing I’ll say is that

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Av Sinensky: Kind of, you know, tip…

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Av Sinensky: Building on that point is that a lot of times, going through the process, or even, you know, thinking about how to prepare your business for sale, will lead you to discover flaws in your business, or things that you could do to improve your business that…

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Av Sinensky: you wouldn’t have necessarily encountered or thought about if you hadn’t gone through that exercise. So, even merely just the exercise can add value to your business for yourself, even absence a planned sale. So, that’s kind of a high level. I think we’ll probably dig into some of more of these concepts over…

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Av Sinensky: the next, few questions, but, Mendel, turn it over to you.

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Mendel Schapira: I see you’re coming from the perspective where people are already reaching out to you and saying, why should I sell my business?

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Mendel Schapira: I’m coming a little from a different mindset. When I talk to people about this, it’s like, I see this in two groups. When I saw the question, there were two groups that came to mind, I guess from my experience, is there’s a group of people who say, my business is profitable, why would I sell my business? Why would I even think about it? It’s not like, why would I sell? Why would I even think about selling my business? I have a profitable business.

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Mendel Schapira: And then you have a group of people that say, yeah, you know, it’s something that I can think down the line, but I don’t see that something for today, so why should I prepare for it?

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Mendel Schapira: So, for the first group of people that are not even thinking about a sale, similar to what you’ve said of, building a business that others want to buy is a healthy business.

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Mendel Schapira: It’s giving you the optionality, as you mentioned, it’s options for financing, it’s options for partners, it’s options for investors. So all these options are being created if you build a sellable business. And for the group of people that say, yeah, this is something that I would think about down the line, just not for today.

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Mendel Schapira: The best time to prepare for a sale is when you’re not in the sale. So, you don’t have the pressure, you’re not trying to impress anyone, there’s no transaction going on. Now you have the mindset of focusing, how do I make this a healthy, sellable business? That is just the best time to do that.

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Gershon Morgulis: Alright.

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Gershon Morgulis: And I’ll just throw in a small anecdote. I had a conversation with a friend of mine who was running a

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Gershon Morgulis: Large, you know, many hundreds of millions of dollars, a large business, and…

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Gershon Morgulis: We were talking about the idea of best practices and having a…

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Gershon Morgulis: having things be done right, and, you know, he kept poo-pooing that, and then a few months later, I was having a conversation with him, and he had been approached by buyers with a very high number, but didn’t have the

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Gershon Morgulis: You know, he had grown fast, he didn’t have the underlying infrastructure to enable him to sell, and it was…

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Gershon Morgulis: Sure, he got cash flow while he was running it, but, you know…

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Gershon Morgulis: you know, I’ve focused more on this, but, like, when that comes up, But… you wanna be…

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Gershon Morgulis: You want to have the options, I guess, as you really both mentioned.

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Gershon Morgulis: In the end, he didn’t sell.

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Gershon Morgulis: Alright.

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Mendel Schapira: He had the option, right?

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Gershon Morgulis: he didn’t have the option because he didn’t listen to me when I took… I was the best practices guy, and he was like.

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Gershon Morgulis: Believe in best practices.

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Gershon Morgulis: I don’t know, I didn’t, like, go back to him to ask afterwards if he believed in them. I just… I tried to help him at the time, and hopefully we helped a little bit at that.

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Gershon Morgulis: at that point, when they were looking at the sale, but in the end, I think that,

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Gershon Morgulis: whatever. I’m sure it was a variety of factors why they didn’t…

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Gershon Morgulis: Do it, but it certainly would have hurt his valuation, no doubt.

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Gershon Morgulis: not having… the house in order, so to speak.

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Gershon Morgulis: Alright, so, another, another question for Av. How do… how do buyers evaluate risk?

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Gershon Morgulis: beyond numbers. So, right, we got Mendel and Rick, I’m sure we’re gonna hear a lot about numbers from them, but what…

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Gershon Morgulis: what else should we think about? And also, just, like, a little curveball, how much of this stuff

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Gershon Morgulis: Is really doable way in advance.

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Av Sinensky: Yeah, those are… those are both very good questions. You know, my… portion of…

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Av Sinensky: representation often has to do with specifically that. Assessing, evaluating, allocating risk beyond the numbers. When…

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Av Sinensky: A buyer looks at your business, the first thing they’re going to do is look at your numbers. They want to see, is this business profitable enough? Is it financially sound? Does it make sense? And if they conclude that the answer is yes, and they construct an offer based on those numbers.

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Av Sinensky: The next question becomes, and a lot of the subsequent due diligence we’ll focus on, is there anything outside the four walls of those numbers that isn’t showing up in the financials, that we can’t glean from the numbers, that we need to understand about this business, that is kind of like an off…

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Av Sinensky: financial statement risk or financial statement opportunity, something about this business that can’t be captured just by the numbers. And…

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Av Sinensky: Things like that include…

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Av Sinensky: the nature of your contracts, for example. And when we talk about contracts, we’re talking about contracts with customers, contracts with suppliers, contracts with key members of your management team.

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Av Sinensky: Are these relationships that you have merely…

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Av Sinensky: arrangements where, you know, we call up our suppliers and we order product when we feel like it, when we do the same thing to our customers, or do we have…

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Av Sinensky: binding, long-term, written contracts with them.

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Av Sinensky: do we… can we count on the business from these customers to recur?

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Av Sinensky: Are they locked into certain pricing? Are these contracts able to be transferred as part of a sale?

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Av Sinensky: All of these things really go to…

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Av Sinensky: the actual value of those relationships, because I can see in your numbers that you generate X dollars in sales a year, but if I have no assurance that those sales are going to continue after I buy your company, then what have I really bought?

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Av Sinensky: And those are the types of things that you absolutely can tackle head-on way in advance of a sale, and it’s exactly the type of thing that I was talking about earlier when I said, these are the categories where you could actually enhance the value of your own business by being thoughtful about

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Av Sinensky: our relationships. Are these… are these things that we actually have binding commitments on, or are these handshakes that anyone can walk away at any time if they don’t… if the relationship’s ours in some way? Similarly, things like…

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Av Sinensky: making sure that you have good corporate documentation, that if you have multiple owners, that there’s a operating agreement or shareholders agreement that governs how operations work, that governs what steps will have to take place in order for a sale to occur. Does it have to be approved by a board? Does it have to be approved by all of the shareholders? Can one of the owners unilaterally act?

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Av Sinensky: These are the types of things that you want to make sure you have a good understanding of.

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Av Sinensky: Before you get to a sale, so that nobody else has…

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Av Sinensky: a reason or leverage to try to extract something, and because they can hold up something.

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Av Sinensky: And like Mantel said.

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Av Sinensky: Making these arrangements outside the context of a sale is always advantageous, because then you’re not doing it with a gun to your head, you’re not doing it with the time ticking, you can do it on your own schedule, on your own terms, nobody feels like they have leverage to…

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Av Sinensky: Extract something from you because you need them, and these are the types of things that you really can

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Av Sinensky: Deal with well in advance, and absolutely should, regardless of any sort of contemplated future sale, or just wanting to have a healthy, sound business that can operate smoothly.

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Gershon Morgulis: Alright.

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Gershon Morgulis: There’s some other…

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Rik Katz: There’s some other risks, perhaps, that should be mentioned.

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Rik Katz: They are… how you’ll… Labour… Team… Runs your, your benefits.

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Rik Katz: And…

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Rik Katz: Whether you are following all overtime rules that apply today, there’s a whole labour side of it that needs to be checked.

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Rik Katz: Also, in terms of insurance.

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Rik Katz: Workers’ comp insurance is a big area where you don’t want to get involved in a company that has had a lot of claims in that area, and it’s a problem if you do not cover that up front.

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Rik Katz: And including even your general P&C insurers.

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Rik Katz: Where, if you’ve been,

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Rik Katz: doing, had issues and having claims. It’s another area where a buyer would want to,

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Rik Katz: Make further investigations in terms of a risk factor.

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Rik Katz: Those… those are also pretty important from the legal side.

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Av Sinensky: Oh, absolutely right, yeah, I didn’t even touch on that, but yes, anything to do with regulatory compliance, anything to do with potential litigations or disputes, these are… those are precisely the types of things that would never show up on your balance sheet, right? If somebody’s out there saying, I’m gonna sue you for $10 million because you screwed up my…

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Av Sinensky: my project, you don’t have to then go and put a $10 million liability on your balance sheet, but that’s a real potential liability that might come to pass, and obviously a buyer is going to need to know about that, and as well as all of the liabilities and extra risk that can come from

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Av Sinensky: Compliance issues that need to be examined carefully, and

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Av Sinensky: Should be examined carefully whether you’re selling or not, because those risks are ones that you will bear if you hold on to your business.

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Mendel Schapira: I think it’s worth mentioning non-competes and key member, key employee, contexts as well. Those are also, pretty big items that, should be done early on.

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Av Sinensky: Yeah, absolutely. I mean, I think we’re gonna talk…

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Av Sinensky: a little bit at some point about, you know, owner dependency as being a key thing that can drive down the value of the business. The idea that when someone is buying your business, they want to

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Av Sinensky: Generally speaking, acquire a business that doesn’t require the owner’s involvement, relationships.

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Av Sinensky: at least at the same level as it did when he was, you know, the sole owner, or the manager. And having in place a management team that is

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Av Sinensky: retained pursuant to binding agreements, that is motivated to work through a sale and after a sale, is paramount for a buyer in that situation, who wants to make sure that when I buy this business, it’s gonna be able to just keep operating day one. I don’t need to now go out and hire a new CEO, you know, a new CFO, all sorts of people to come and actually run this business.

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Av Sinensky: They want to buy a business with a management team that’s already in place, that’s aligned, that is motivated to grow the company and make it profitable for buyer.

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Gershon Morgulis: Alright, before we jump into the financial… next question is about financial-related things. I have a poll that I’m supposed to be doing that I forgot to put up, so…

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Gershon Morgulis: If everyone can just take a second and answer just 3 quick questions.

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Gershon Morgulis: One, how’d you hear about this? And two.

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Gershon Morgulis: Things are slightly, you know, more descriptive of your Situation.

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Gershon Morgulis: Give you, like, give a few seconds for people to answer that.

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Gershon Morgulis: And…

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Gershon Morgulis: Then we will keep going in a second.

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Gershon Morgulis: Alright.

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Gershon Morgulis: So, who…

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Gershon Morgulis: We’re gonna keep going, we’ll leave the poll open for another minute, but we’ll jump to the next question. Alright, what are…

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Gershon Morgulis: what are the key financial indicators needed to maximize your price? We’re gonna start with Mendel, but, like, what are some of those things that you look out for?

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Gershon Morgulis: And I guess,

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Gershon Morgulis: You can also add in, are there anything that you… there’s some things that we know this, and there’s… then there’s the things we can do something about, so…

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Gershon Morgulis: If you wanna… Sprinkle in, like, which other things are easy to fix?

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Gershon Morgulis: And maybe Richard just… The things that require longer-term thinking.

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Mendel Schapira: So, first, when you talk about key financial indicators, the first thing that comes to mind is very often you see, you have a business owner that tells you the story of the business, it’s a beautiful story, they tell you how they operate, how they’re profitable, and everything about the company, but then when you start looking at the financials, you get a different story.

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Mendel Schapira: And there’s a gap between what they’re saying and what the financials are saying.

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Mendel Schapira: So, that gap creates a certain uncertainty, and the KPIs is really what’s bridging the two together. Meaning to say, if you have a story, and the KPIs are the indicators telling you whether your story holds true, that keeps you in line and keeps you in shape, and if something is not indicating to the right direction.

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Mendel Schapira: It’s gonna help you and push you to the right direction.

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Mendel Schapira: So, when thinking about specific KPIs, I would probably split it between the P&L and the balance sheet. On the P&L side, you want to look at profit margin. You want to see a consistent profit margin.

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Mendel Schapira: If your profit margin is not consistent, something is wrong in your system. The display is not the way it should be, and that’s why we have the KPI set up to tell you that. EBITDA. EBITDA is a big one. You want to know what percent of your sales

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Mendel Schapira: stays over in the bottom line. The bigger that number is, the healthier the company is. It means the company doesn’t need that amount of output to generate profit. So, EBITDA and EBITDA percentage is a strong indicator. And the next thing on the P&L is the debt service coverage ratio.

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Mendel Schapira: You want to make sure the company has enough profit generated to cover the debt that they have.

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Mendel Schapira: So those are indicators that tell you the healthiness on the P&L side. When it comes to the balance sheet, the things I would look at would be the turnover ratios, which is the AR, accounts receivable. How many days does it take for you from when you have a sale until you actually get paid?

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Mendel Schapira: And the simple logic on that is, if it takes you 20 days to get paid, that’s the amount of cash flow that you have outstanding. The longer the period, the bigger the cash flow gap becomes. Same thing with inventory.

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Mendel Schapira: The inventory turnover ratio tells you how many days your inventory sits on the shelf.

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Mendel Schapira: The longer your inventory sits on the shelf, the more cash outlay you have, and that creates a constraint on cash flow.

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Mendel Schapira: And, last but not least is the AP, turnover ratio. The longer period you have that you can pay your vendors.

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Mendel Schapira: That creates more cash flow availability for yourself.

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Mendel Schapira: So, those are the things that you would want to work on and create for yourself a healthy, not only measurement stick, but healthy numbers that, whether it’s 30 days or 45 days, depending on the industry, those are the numbers you want to focus and shift on, to make sure you’re hitting those numbers. There’s one more item that may be a little more for Rick, I’ll leave that over, that’s the CAPEX, that may be a little more technical.

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Mendel Schapira: That’s also an important indicator.

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Gershon Morgulis: That’s a good point. I was actually gonna ask, but maybe I’ll wait till Rick is done. I was gonna ask about EBITDA, especially in the manufacturing context, EBITDA can kind of potentially ignore

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Gershon Morgulis: a lot of capex, because it’s not considered an expense now, and it’s backed out of profits later.

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Gershon Morgulis: But, alright, we’ll leave the hearts… we’ll leave that for Rick. But I want to ask you one quick question, Mendel, on what you were saying. We were talking a lot about the ratios. Are you looking at absolute ratios and saying, like, it needs to be X, or are you looking more and saying, well, it used to be X, and now it’s, you know.

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Gershon Morgulis: your accounts receivable is going up, and therefore, I don’t necessarily have a problem with it the way it is, but why is it getting worse? So, is… are you looking more at trend analysis, or more at, like, this is how a business should be?

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Mendel Schapira: No, obviously, you want to put some logic to KPIs, and you want them to represent the company, so it’s not like, this is what it has to be, and this is the way it should be. It should explain the trend of the company. So, if you see your accounts as fuel going up, you would want this to be a result because your revenue went up.

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Mendel Schapira: if the accounts receivable went up when the revenue did not go up, that’s an indicator that it just takes more days to collect your receivables. So, that’s what I’m saying, it’s not just an absolute number, you want to see the trends, what’s causing it. Obviously, you want to see consistency first, but you want to see improvements, and you want to see alignment between one indicator to the other.

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Gershon Morgulis: God.

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Rik Katz: I would actually go further and say you need to have a targeted number.

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Rik Katz: Because if your sales are growing, Your accounts receivable are growing.

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Rik Katz: Your payables could be growing. Your inventory could be growing.

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Rik Katz: So, to manage the interplay of the three, you really need to have a target. If 46 days has been your regular number, you should stick to at least 46 days.

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Rik Katz: Otherwise, if you’re letting that stretch, and you’re growing.

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Rik Katz: You’re really going to have a big cash requirement, which you may not be ready for.

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Rik Katz: So, I think it does have to have an absolute target that you’re aiming for, and you try and manage to. And if you’re not succeeding, you know you’re going to need more money. You have to go to your bank at that point, or if you’re cash rich, I guess you cover it.

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Rik Katz: But I think that is important, managing those numbers.

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Gershon Morgulis: I want to jump in for a second, Rick. Potentially, even if you are

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Gershon Morgulis: If you’re growing and you keep it at 46 days, in your example, you could still end up in trouble if you’re not doing a proper…

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Gershon Morgulis: You know, forward-looking cash flow to rec… because…

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Rik Katz: Right. It’s 4060.

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Gershon Morgulis: Days of a larger revenue number.

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Rik Katz: Yes, I’ll try to indicate that as well, yes.

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Gershon Morgulis: So what else? What else do you have for us, Rick, in terms of.

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Rik Katz: So, here we, here we go. So…

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Rik Katz: First of all, normally, and again, it depends on the size of your business.

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Rik Katz: But normally, you need to produce a 3-5 year history.

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Rik Katz: Showing your, you know, your growth over the period, your consistency over the period.

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Rik Katz: And some of the numbers beyond sales will become important. And then you’re also looking, perhaps, to a 3-year projection.

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Rik Katz: on your revenue.

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Rik Katz: So once you start with that, you’ve got to look at how much recurring revenue you’ve got.

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Rik Katz: And how much new revenue you have to produce.

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Rik Katz: And that creates, questions about your, how you sell in your pipeline, and where the num… where your future sales are coming from.

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Rik Katz: Going beyond revenue, you’re going to profit. So, there are 3 areas there that I would look at.

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Rik Katz: Your gross margin is very important, especially in manufacturing.

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Rik Katz: Because your gross margin is going to give you your margin over your direct cost, which is mostly

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Rik Katz: Labor, and more importantly, material.

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Rik Katz: And if you can maintain the relationship of selling price, material, and labor.

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Rik Katz: Then you are showing a constant

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Rik Katz: Management level that can handle all your overheads below the line.

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Rik Katz: If you are growing sales and your gross margin starts dropping.

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Rik Katz: You are buying sales at lower margins, which can, in the long run, be very,

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Rik Katz: Poor for a buying point of view.

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Rik Katz: EBITDA is also very important, of course, as Mendel mentioned.

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Rik Katz: And for a buyer, I believe you need an EBITDA of at least 10%, and maybe your business can do 15 or even 20.

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Rik Katz: But if the EBITDA number in a percentage term to an investment is not there, then there is no point in wanting to buy the business.

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Rik Katz: So, benchmarking generally in the M&A business is around about 10 to 15, and you know, there are businesses, of course, that make much more, if you’re in IT, for example.

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Rik Katz: The other area of EBITDA, as an owner that you have to consider.

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Rik Katz: is what I call lifestyle expenses.

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Rik Katz: When you own the business, you may be doing more travel.

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Rik Katz: More entertainment, have a better car.

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Rik Katz: You may be having expenses that a buyer would not consider normal.

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Rik Katz: And that can be added back to your profit.

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Rik Katz: So you would have an adjusted EBITDA covering those. Very important to look at that up front.

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Rik Katz: It’s very important that the first look a buyer gets Is the right book.

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Rik Katz: If you are changing numbers along the line, very quickly, your whole credibility suffers.

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Rik Katz: Very quickly. And a deal can disappear very fast if things change, if this is proven to be incorrect, if the quality of earnings doesn’t match your P&L accounts closely enough.

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Rik Katz: As far as the rest of the P&L goes, you know, I would look at import material numbers only. There are other material numbers that can change.

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Rik Katz: Some of them, perhaps, are sales and marketing. You need to have a target total and work within that number.

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Rik Katz: And you don’t spend more to gain business than you earn from the business.

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Rik Katz: Something that, if you’re in the IT business, is very complicated to calculate. But in manufacturing, it’s very straightforward.

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Rik Katz: Or distribution, as a reseller.

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Rik Katz: So that is very important as well. But I would look at, perhaps.

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Rik Katz: any expense over 10% worth looking at closely. You may need answers if there are changes due… of those numbers.

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Rik Katz: Because the buyer would look at that.

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Rik Katz: He would look at where the risks are in terms of the actual numbers.

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Rik Katz: Then… Above that, really, it’s in terms of Being consistent.

404
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Rik Katz: If there are cycles in your business, showing them on a month… on the monthly History and look forward.

405
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Rik Katz: Know the answers to those peaks and valleys if they exist.

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Rik Katz: That they come every year and go every year.

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Rik Katz: If numbers start changing, you’re going to have to have answers.

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Rik Katz: The very important thing is that what you show a buyer stands up to any… Curiosity.

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Rik Katz: You know, any test.

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Rik Katz: You can’t change your mind midfield. It is a disaster in terms of keeping a buyer.

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Rik Katz: So those basically are the financial matters, you know, that I would look for. KPIs can get deeper. Your labour percentage.

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Rik Katz: You know, there’s inflation out there. Sometimes labor costs change dramatically, as we’ve seen. Minimum wage levels.

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Rik Katz: If you have entry-level people, they may be on the minimum wage. That can jump on you.

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Rik Katz: How do you counter that? Efficiency and productivity are keys in the long term.

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Rik Katz: Finally, the capital expenses that, Mendel said I may talk about.

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Rik Katz: If you’re a capital-intensive company, you’ve got high capital investments, how old are they?

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Rik Katz: How long are they going to last in the future? Is their productivity suffering, or are you falling behind in competition because others have better capital equipment today?

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Rik Katz: Very important as you move forward.

419
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Rik Katz: And the replacement cost is nowhere near what you originally paid.

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Rik Katz: Be cognizant of replacement costs. Check them, even if you’re not buying today.

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Rik Katz: Because your buyer will probably look at that if you have old equipment.

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Rik Katz: Benchmarking is very common.

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Rik Katz: When a buyer looks at your business.

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Rik Katz: He wants to see what others are doing.

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Rik Katz: And you’ve got to be at least at benchmark, if not better, if you really want to get a good price.

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Rik Katz: So that’s also a key in terms of the basis of your business. Even if you’re in other businesses, construction or whatever it is, you’ve still got material, you’ve still got labor.

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Rik Katz: And you’ve still got inflation, and you’ve still got replacement.

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Rik Katz: Those are big factors.

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Mendel Schapira: I can just add… sorry, go ahead.

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Mendel Schapira: Now, I was just gonna add, on the CapEx side, when the buyer looks at capital expenditure, they basically would want to answer the question, how much reinvestment do we need to keep the business operational? And as you mentioned, some of those machines might be outdated, and we just need more money in a year, in two years, to just have the company in operation, or stay afloat.

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Mendel Schapira: So that’s another measurement stick for the buyer to figure out how much additional investment will they need down the line to keep the company going or growing.

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Rik Katz: Absolutely.

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Gershon Morgulis: you could say almost that there’s two kinds of capital expenses. There’s all kinds of things that might qualify as CapEx, but they’re almost like keep the lights on, and then there’s those big, major investments, which…

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Gershon Morgulis: maybe there’s an argument should not be included. Those are more optional.

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Gershon Morgulis: More longer-term investments, and not just Keep the lights on.

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Mendel Schapira: Right, but from a buyer’s side, they have to look at both, and if I want to tame down a little bit what you mentioned

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Mendel Schapira: what you can or nice to have. In some cases, if you don’t have up-to-date machines, or if you don’t update yourself, you’re just falling out of the game. So, it’s not only a nice-to-have, it’s almost a must-have, maybe not today, but in a year or two today, so that is part of the mechanics and the calculations.

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Mendel Schapira: They’ll be making when looking at this.

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Gershon Morgulis: Right, and for anyone who’s familiar with Charlie Munger, who passed recently, you can Google Charlie Munger in EBITDA to see what he thinks about

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Gershon Morgulis: That, and how it affects…

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Rik Katz: you have EBITDA, yes.

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Gershon Morgulis: I’m not gonna use the term that he used, but he doesn’t think that EBITDA really is…

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Gershon Morgulis: is reflective of reality, specifically because of what Mendel’s saying, right? You don’t have to buy it today, but you’re gonna have to buy it in a few years, and you just…

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Gershon Morgulis: Systematically ignore, like, a major part of what your business has required and will require, and how is that really meaningful?

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Gershon Morgulis: earnings picture. But, anyway…

446
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Gershon Morgulis: do that after the webinar. Google Charlie Munger and EBITDA. I have a quick question, though, and this is really for all three

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Gershon Morgulis: For any of our guests, whoever wants to jump in.

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Gershon Morgulis: Rick mentioned 10% EBITDA. If you’re not earning 10% EBITDA, don’t even try. My question is, there is this whole concept, and, you know, Rick, you’re at least a few years older than me, so you’ve probably seen this, like, where people

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Gershon Morgulis: I mean, I’m sure you’ve all seen it, but I feel like it went on more a while ago. But anyway, there’s this concept of buying companies and turning them around.

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Gershon Morgulis: Right? And so… so the question is, is there…

451
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Gershon Morgulis: Like, don’t people also buy, or how do…

452
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Gershon Morgulis: how do buyers react to very low earnings? Is there really no way to…

453
00:52:23.820 –> 00:52:33.609
Gershon Morgulis: no way to sell them, or is it just that you’re not gonna get whatever you think is a reasonable multiple on your earnings, because it’s clearly an unhealthy business? And so…

454
00:52:34.370 –> 00:52:35.760
Rik Katz: Yes, in fact.

455
00:52:36.570 –> 00:52:44.250
Rik Katz: both those factors are true. And again, you know, if you’re looking at a financial buyer.

456
00:52:44.660 –> 00:52:46.999
Rik Katz: Those numbers are much more important.

457
00:52:47.450 –> 00:52:52.349
Rik Katz: And unless they see obvious areas where you are

458
00:52:52.820 –> 00:52:55.250
Rik Katz: They say, call it just wasting money.

459
00:52:55.930 –> 00:52:57.460
Rik Katz: Or you’re too cheap.

460
00:52:57.570 –> 00:53:02.799
Rik Katz: in the marketplace, they may know how they can fix that.

461
00:53:03.230 –> 00:53:06.640
Rik Katz: And they’ll offer less, and then make it up on their own.

462
00:53:07.580 –> 00:53:10.479
Rik Katz: The other area is a strategic buyer.

463
00:53:10.670 –> 00:53:16.769
Rik Katz: Where you’re not the platform for future business, but you’re being added to an existing business.

464
00:53:18.280 –> 00:53:24.110
Rik Katz: Gain market share, or gain other attributes that your business has.

465
00:53:24.240 –> 00:53:30.479
Rik Katz: And there, there’s a lot of extra… room, for them.

466
00:53:30.640 –> 00:53:40.030
Rik Katz: To take out some of those expenses as part of a merger, and still make the required Bottom line.

467
00:53:40.340 –> 00:53:42.489
Rik Katz: From your part of the business.

468
00:53:42.930 –> 00:53:47.739
Rik Katz: And that, that is quite common in the PE market.

469
00:53:48.380 –> 00:53:51.240
Rik Katz: Where they will pay more if you’re doing well.

470
00:53:51.820 –> 00:53:59.389
Rik Katz: But may give you the same as the other people, you know, the financial buyers on a lower margin.

471
00:54:00.360 –> 00:54:03.550
Rik Katz: So that is a whole, dinner.

472
00:54:03.840 –> 00:54:15.630
Rik Katz: individual circumstance situation, and I think there are a lot of variances there. Of course, the, you know, you want to go back in time, interest rates have gone in all directions over a period of time.

473
00:54:15.750 –> 00:54:21.839
Rik Katz: So, the, the 10% to 15% kind of survives all of them.

474
00:54:24.520 –> 00:54:27.079
Gershon Morgulis: Av Mendel, anything you want to add to that, or…

475
00:54:27.080 –> 00:54:48.870
Mendel Schapira: Yeah, what I would say is, the conversation we’re having today is, how do you build a business that’s sellable? And you want to build something that’s healthy and sellable, that’s the plan, that’s the direction you should go. I think no one disagrees over here to say that you… there’s no possibility to sell a business that’s below 10. You can always find unique situations where a buyer has an interest for a specific reason.

476
00:54:48.870 –> 00:54:59.990
Mendel Schapira: Either because strategically it works for them, or for whatever other reason, but it’s not something you should plan and work on. This is not something that you’re building up. If you’re building a business that’s…

477
00:55:00.050 –> 00:55:23.049
Mendel Schapira: that others want to buy, you want to build that business that impresses other people, and you have more options. And by far, you’re getting a lot more options once you hit that 10% mark and up, because there are more people interested, and they have more ways of how to build that business and continue growing it, as opposed to if you find a unique case where someone would buy a business that’s lower than the 10% mark.

478
00:55:23.900 –> 00:55:28.899
Gershon Morgulis: And to your point, Mandel, I know that there are certain… also certain target

479
00:55:29.010 –> 00:55:34.430
Gershon Morgulis: EBITDA, like, absolute numbers, where when you get past a certain point, you end up in the…

480
00:55:34.750 –> 00:55:41.819
Gershon Morgulis: Whether you’ve now become eligible for private equity, or whoever and whatever, you can sometimes have a totally different set of buyers.

481
00:55:42.490 –> 00:55:54.810
Av Sinensky: Yeah, just… I just wanted to just, chime in. You know, I think the fundamental perspective that a seller always needs to have, and like, I think it’s germane to this point, but I think makes sense in general, is that

482
00:55:54.860 –> 00:56:11.960
Av Sinensky: When a buyer is looking to buy you, they are obviously looking at your past, but what they’re buying is your future. They’re using the past to try to build a predictive model of the future. But, you know, in your case where, you know, maybe the earnings are not quite there, if the buyer can be

483
00:56:12.030 –> 00:56:14.569
Av Sinensky: Sold a story of how…

484
00:56:14.760 –> 00:56:24.950
Av Sinensky: they’re getting involved, they’re putting in resources, them, you know, cleaning up operations in some way will create future value. They may not pay you

485
00:56:24.950 –> 00:56:37.930
Av Sinensky: full price for that, but it doesn’t make your business unsellable. There just… there needs to be a turnaround story that a buyer can be told. And, you know, the flip side is the opposite. If your business is making money hand over fist.

486
00:56:37.930 –> 00:56:46.040
Av Sinensky: But a buyer sees problems with the future, whether that’s something in the market, something innate to your business, something about

487
00:56:46.040 –> 00:56:58.429
Av Sinensky: Their ability to actually operate that business that just, you know, the past doesn’t matter if the future is not going to follow in whatever story you’re telling the buyer, whatever story the buyer is seeing there.

488
00:57:00.390 –> 00:57:01.040
Gershon Morgulis: Got it.

489
00:57:01.460 –> 00:57:02.380
Gershon Morgulis: Thank you, huh?

490
00:57:02.740 –> 00:57:08.229
Gershon Morgulis: We actually had a situation not, not that long ago where we were working with a

491
00:57:08.600 –> 00:57:09.670
Gershon Morgulis: a buyer.

492
00:57:09.840 –> 00:57:15.340
Gershon Morgulis: The seller had… you know, little to no EBITDA.

493
00:57:16.560 –> 00:57:20.559
Gershon Morgulis: And they really didn’t have a story. They had figured out how to grow sales really quickly.

494
00:57:20.720 –> 00:57:24.150
Gershon Morgulis: They were probably close to $10 million in sales, but they had no…

495
00:57:25.120 –> 00:57:41.290
Gershon Morgulis: no real profit to talk about, and, you know, they tried firing their whole sales force, and they’re like, oh, okay, well, it’ll be profitable next year, now that there’s no sales force, but it’s like, okay, but how are you gonna grow, and who’s going to maintain all those relationships? But at the end of the day, I mean, we were working with the buyer, and we were helping

496
00:57:41.660 –> 00:57:55.290
Gershon Morgulis: we were kind of coming up with the story, and eventually, you know, the buyer’s like, look, we’re not paying you to come up with the story. They had to come up with the story, and they… maybe they… maybe they did lose money, but they need to articulate what was it. And by the way, they had gross margin erosion as well, so it wasn’t like it was clear that

497
00:57:55.680 –> 00:57:57.570
Gershon Morgulis: Growth was even working for them.

498
00:57:59.170 –> 00:58:08.619
Gershon Morgulis: you know, even if they did fire the whole sales force and get rid of a bunch of other overhead, or what they viewed as overhead. But yeah, I mean, the seller really needs to have

499
00:58:09.400 –> 00:58:13.420
Gershon Morgulis: have that story, and to Rick’s point, be able to defend the story.

500
00:58:14.150 –> 00:58:18.730
Gershon Morgulis: In order to make You know, it’s not just having the story, it’s having it end.

501
00:58:19.550 –> 00:58:20.910
Gershon Morgulis: And really selling it.

502
00:58:21.080 –> 00:58:22.649
Gershon Morgulis: Alright.

503
00:58:23.930 –> 00:58:30.830
Gershon Morgulis: Let’s see, I guess we have time for another one or two questions, and then we will, maybe we’ll take a few questions from the crowd, and…

504
00:58:31.430 –> 00:58:33.929
Gershon Morgulis: Set up next steps. Alright, so…

505
00:58:39.100 –> 00:58:40.939
Gershon Morgulis: Question is, do we really…

506
00:58:46.550 –> 00:58:52.359
Gershon Morgulis: I feel like we covered this one. The next question was for you. What story does a buyer need to believe in order to pay a premium?

507
00:58:53.240 –> 00:58:54.319
Av Sinensky: Yeah.

508
00:58:54.320 –> 00:58:55.379
Gershon Morgulis: You want to stay on that, or…

509
00:58:55.380 –> 00:59:01.129
Av Sinensky: Yeah, I mean, it’s kind of what we just talked about. It’s, you know, will this business

510
00:59:01.300 –> 00:59:09.909
Av Sinensky: continue to perform as represented, right? A buyer is looking for certainty,

511
00:59:09.910 –> 00:59:21.540
Av Sinensky: the opposite of certainty is risk. If there’s risk, then I’m not gonna pay you as much for a business that I feel good about. And…

512
00:59:22.920 –> 00:59:26.080
Av Sinensky: A business that has value is one that…

513
00:59:26.370 –> 00:59:29.330
Av Sinensky: Reflects on paper what the owner

514
00:59:30.330 –> 00:59:49.439
Av Sinensky: is selling in that story, right? A lot of the due diligence is an exercise of trust but verify. It’s an exercise of show your work. It’s saying, okay, you’re telling me that you have a clean, healthy business, open up your books, open up your contracts, open up everything, and let’s find out. And very frequently.

515
00:59:49.440 –> 01:00:02.860
Av Sinensky: the process itself can be what makes a buyer feel good or not as good about your business. You know, when a buyer starts asking for documentation, for numbers, for backup.

516
01:00:03.270 –> 01:00:21.830
Av Sinensky: are they handed over within a matter of days, or is this an elongated process where sellers tracking things down for a long time? That never gives a buyer a good feeling that this is an organized, well-run business. And those things tend to carry over.

517
01:00:21.830 –> 01:00:24.210
Av Sinensky: You know, people who run a tight ship.

518
01:00:24.480 –> 01:00:36.130
Av Sinensky: generally have their house in order. It doesn’t take them 4 weeks to locate the stock certificates to show that they actually own the company. When you start doing due diligence, are you finding that key pieces of IP

519
01:00:36.130 –> 01:00:48.569
Av Sinensky: That this business relies on are actually owned somewhere other than the company, whether it’s in one of the owners, in some former employee who is a developer, or something like that. And now, is this going to create

520
01:00:48.570 –> 01:00:51.710
Av Sinensky: Additional friction, additional risk to…

521
01:00:51.710 –> 01:01:08.850
Av Sinensky: A getting a deal done, and B, if we get our deal done to actually owning what we think we own. So, it’s all a lot of, you know, it can feel artificial and aesthetic at times, but, you know, I think the model of buying a house is apt. You know, every…

522
01:01:09.370 –> 01:01:27.529
Av Sinensky: even rookie real estate broker would tell you, if you’re putting your house on the market, mow the lawn, paint it, you know, make sure you clean the house before people come to look at it. Does that actually affect the house? No, because the buyer can mow the lawn and clean it up when he gets there, but

523
01:01:27.630 –> 01:01:34.349
Av Sinensky: It’s psychological, and it’s real, and first impressions make a really important…

524
01:01:34.980 –> 01:01:47.890
Av Sinensky: consequence, so it’s just really important to be mindful of. You only get one chance for your buyer to look at your business for the first time, and if they sour immediately, then it’s going to be very hard to unring that bell.

525
01:01:50.610 –> 01:01:51.370
Gershon Morgulis: Got it.

526
01:01:52.520 –> 01:01:53.340
Gershon Morgulis: Thank you.

527
01:01:53.670 –> 01:01:54.430
Gershon Morgulis: Alright.

528
01:01:54.600 –> 01:01:59.949
Gershon Morgulis: So let’s… let’s get one more. This one, we’re gonna ask, really, all of you.

529
01:02:00.760 –> 01:02:01.600
Gershon Morgulis: So…

530
01:02:02.720 –> 01:02:08.540
Gershon Morgulis: And I think… I think after this, we’re probably gonna take some questions from the crowd. We’ll see how much time we have left.

531
01:02:08.940 –> 01:02:11.049
Gershon Morgulis: One of the biggest red flags

532
01:02:11.820 –> 01:02:15.790
Gershon Morgulis: And this really relates to what Av was saying. What are the biggest red flags that fail

533
01:02:16.360 –> 01:02:18.370
Gershon Morgulis: The initial buyer sniff test.

534
01:02:21.120 –> 01:02:27.070
Gershon Morgulis: What are those things? Besides all the things I’ve just said? I guess maybe we’ll start with Mendel and Rick. What are the…

535
01:02:27.070 –> 01:02:32.030
Rik Katz: Well, we already mentioned, you know, the fact that you’re,

536
01:02:32.180 –> 01:02:37.839
Rik Katz: Your numbers as presented up front have to be the same numbers that you live or die by.

537
01:02:38.210 –> 01:02:39.679
Rik Katz: You can’t change them.

538
01:02:40.860 –> 01:02:49.659
Rik Katz: if there is anything you put in writing, and then afterwards the QOV says, well, that’s not the case, I mean, you’ve lost your credibility.

539
01:02:49.810 –> 01:02:54.480
Rik Katz: Anything like that is a red flag. Any past,

540
01:02:55.360 –> 01:02:58.279
Rik Katz: Any past legal action is a red flag.

541
01:02:59.510 –> 01:03:07.920
Rik Katz: And any outstanding legal action the seller would have to attest to. So it’s very important that those are covered.

542
01:03:09.790 –> 01:03:13.369
Rik Katz: That you can maintain your management structure.

543
01:03:13.720 –> 01:03:16.550
Rik Katz: As said previously, you know, the owner…

544
01:03:16.900 –> 01:03:20.820
Rik Katz: Needs to have a team that can do the job without it.

545
01:03:21.020 –> 01:03:32.969
Rik Katz: Sometimes buyers want a contract for the owner to stay on for a period to cover that issue, but not always, and sometimes the owner wants to get out and go, you know?

546
01:03:33.290 –> 01:03:37.390
Rik Katz: So it’s important that the team left behind can manage the business.

547
01:03:37.950 –> 01:03:41.240
Rik Katz: And they may interview some of them, so there’s…

548
01:03:41.570 –> 01:03:44.279
Rik Katz: There’s a red flag if you have people leaving.

549
01:03:44.790 –> 01:03:46.569
Rik Katz: Or not people who are unhappy?

550
01:03:49.650 –> 01:03:53.039
Rik Katz: I’ll leave others, perhaps, if somebody else wants to comment.

551
01:03:53.250 –> 01:04:02.679
Mendel Schapira: Yeah, first of all, obviously, we all agree to that. The financial gap, which we mentioned, if you have a story about your business and the financials show something else.

552
01:04:02.680 –> 01:04:14.379
Mendel Schapira: that turns buyers away. You want to keep that consistent, you want to gain and earn that credibility by saying your story and actually showing up on the financials. So that’s definitely number one.

553
01:04:14.380 –> 01:04:18.860
Mendel Schapira: the concentration, which was also mentioned, but I think the…

554
01:04:18.860 –> 01:04:39.229
Mendel Schapira: The concentration is not only owner concentration, which means that the owner runs the business, and if he’s not here, the business just falls apart. It’s concentration in any key area. If your revenue is created by, 80% by one customer, that means when the buyer will do a what-if analysis, it’s gonna just take out that

555
01:04:39.250 –> 01:04:43.170
Mendel Schapira: Piece of revenue, and that means we’re losing 80% of the business.

556
01:04:43.170 –> 01:05:05.979
Mendel Schapira: Think of a simple story we had 2 years ago with a client that had a very beautiful, profitable business, and we started looking into deeper, we found they had 40% of their revenue from a government grant that has just been created at that point, it was 2 years ago, and if the government decides to shut down that grant, 40% of the business is just not there anymore.

557
01:05:05.980 –> 01:05:11.840
Mendel Schapira: So, so, dependency on customer concentration, owner concentration, vendor concentration.

558
01:05:11.840 –> 01:05:18.989
Mendel Schapira: All those things make a big difference. What I think is also worth mentioning is excessive distributions.

559
01:05:19.010 –> 01:05:31.200
Mendel Schapira: When you see a business owner taking out a very big portion of the profits of the company, that tells buyers this is an unsustainable model.

560
01:05:31.200 –> 01:05:40.769
Mendel Schapira: He’s just liquidating the profits of the company, so excessive distributions is another big thing that, has seen being a big red flag.

561
01:05:41.430 –> 01:05:43.389
Gershon Morgulis: Is that because it…

562
01:05:43.920 –> 01:05:54.519
Gershon Morgulis: it… they’re starving the business? Or is that because even if the business… they give all the capital needed for the business still, just the fact that they’re pulling money out rather than leaving it in

563
01:05:55.000 –> 01:05:59.899
Gershon Morgulis: You know, that means that if there’s a hiccup in the future, the business won’t have any money, or, like, what…

564
01:06:00.930 –> 01:06:15.210
Mendel Schapira: It means that they’re basically trying to impress someone, showing that the company has healthy profits, but by the end of the day, he’s not taking his proper salary, or he’s not paying people properly, and he’s just taking it out from a different angle.

565
01:06:15.210 –> 01:06:35.119
Mendel Schapira: And the company is being cash thin, and not being able to have the owner continue running the business for the next 2-3 years, if that’s part of the commitment, because he cannot sustain his living, cost of living, or his style of living without having those excessive distributions.

566
01:06:37.090 –> 01:07:01.840
Mendel Schapira: So, it concerns the buyer from both angles. A, the continuation of the business owner staying on for the next 2-3 years, and obviously, if the buyer comes in, he’s not going to be able to do the amount of distributions he did until now, which means he’s not going to be able to continue serving the new buyer. And at the same time, it also tells that he’s probably not taking the proper salary, and just trying to show up on paper as a very profitable company.

567
01:07:01.840 –> 01:07:06.919
Mendel Schapira: While being, drained out from the… from the earnings side.

568
01:07:09.810 –> 01:07:10.500
Gershon Morgulis: Interesting.

569
01:07:11.200 –> 01:07:12.060
Gershon Morgulis: Thank you.

570
01:07:12.430 –> 01:07:15.660
Gershon Morgulis: Av, anything you want to add, or should we turn it over to the… to the crowd?

571
01:07:15.660 –> 01:07:16.870
Av Sinensky: Let’s go to the crowd.

572
01:07:17.400 –> 01:07:18.260
Gershon Morgulis: Alright.

573
01:07:18.920 –> 01:07:19.870
Gershon Morgulis: So,

574
01:07:20.740 –> 01:07:25.479
Gershon Morgulis: We got a few minutes, we have 5 minutes now for Q&A. I’m gonna put up a second poll.

575
01:07:26.970 –> 01:07:31.339
Gershon Morgulis: Kind of asking you about future things, and if you’d like to speak with any of the…

576
01:07:31.610 –> 01:07:37.319
Gershon Morgulis: People on the panel, if you’re… please just take a second to answer that, and

577
01:07:37.820 –> 01:07:40.770
Gershon Morgulis: Jump in with any questions.

578
01:07:52.250 –> 01:07:56.600
Gershon Morgulis: Alright, let’s see, we got one question in the… Chat, I’ll read that out.

579
01:08:00.690 –> 01:08:05.339
Gershon Morgulis: What is your experience in giving incentives to keep key employees?

580
01:08:06.770 –> 01:08:10.510
Rik Katz: We certainly have done that in various cases.

581
01:08:11.380 –> 01:08:17.399
Rik Katz: either a, incentive to spend a period of time.

582
01:08:17.590 –> 01:08:22.750
Rik Katz: with, A building incentive that gets, that’s…

583
01:08:23.120 –> 01:08:25.149
Rik Katz: Gets paid at the end of the time.

584
01:08:25.790 –> 01:08:32.189
Rik Katz: Or even an… A bonus that is just for the next 12 months.

585
01:08:33.189 –> 01:08:36.280
Rik Katz: But yes, it can be done at the right level.

586
01:08:36.680 –> 01:08:45.310
Rik Katz: And some incentive into… if the person is important enough, perhaps the buyer would, do something…

587
01:08:46.410 –> 01:08:51.319
Rik Katz: To, to… to enrich that that incentive.

588
01:08:54.380 –> 01:08:55.409
Mendel Schapira: Have you ever seen…

589
01:08:55.600 –> 01:08:56.460
Gershon Morgulis: Go ahead.

590
01:08:56.460 –> 01:09:12.250
Mendel Schapira: just to Rick’s point, I would just add, incentivizing your team or your key members is part of your success. You can’t do it without them, so you want them on board, and you want them to feel a reason to continue doing what you’re trying to execute.

591
01:09:12.250 –> 01:09:29.919
Av Sinensky: Yeah, and the important thing to know is also there’s a lot of different ways to do that. You can incentivize through some sort of profit sharing, through a transaction bonus, through issuance of actual equity. There’s a lot of ways to do it, there’s a lot of

592
01:09:29.920 –> 01:09:32.979
Av Sinensky: Tax implications involved in how you do it, so definitely

593
01:09:32.979 –> 01:09:51.469
Av Sinensky: consult with professionals when you do so, but it’s not one size fits all. It really depends on what you’re trying to accomplish, who you’re trying to incentivize, and for how long, and for what, and, you know, it can be highly customized and tailored to your situation.

594
01:09:51.750 –> 01:09:58.389
Av Sinensky: It’s something to really, look into if you have key employees that are vital to your business that

595
01:09:58.860 –> 01:10:07.390
Av Sinensky: Or, you know, that you don’t have tied down under some sort of… Formal agreements with proper incentivized alignment.

596
01:10:08.470 –> 01:10:10.910
Gershon Morgulis: And, just another plug,

597
01:10:12.160 –> 01:10:17.779
Gershon Morgulis: Thank you to everyone who answered the poll. Just take a second, please, everyone try and,

598
01:10:18.380 –> 01:10:28.389
Gershon Morgulis: try and vote over there, that’d be very helpful. And I want to just share a small anecdote related to what we’re talking about. I have a relative of mine who worked at a technology company.

599
01:10:28.590 –> 01:10:37.160
Gershon Morgulis: and they were about to go through some sale, and basically, I think maybe they were gonna give some small… some of the older employees, you know.

600
01:10:37.270 –> 01:10:41.979
Gershon Morgulis: More senior, or had been there for a while, had some equity, other people didn’t, and they basically…

601
01:10:42.110 –> 01:10:51.489
Gershon Morgulis: ended up with a threatened strike. Like, half the company threatened to walk out. And it’s like, in manufacturing, maybe you can replace the people. In a technology company.

602
01:10:51.770 –> 01:10:57.029
Gershon Morgulis: Like, the people are the… the whole business, and so if those people walked out, the business basically ceased to…

603
01:10:57.800 –> 01:11:04.859
Gershon Morgulis: To be able to operate, and they ended up… Giving a deal bonus to… To all those people.

604
01:11:05.410 –> 01:11:12.399
Gershon Morgulis: and… Yeah, it’s just… There’s the key people, but then sometimes, depending on what your business is.

605
01:11:12.580 –> 01:11:15.260
Gershon Morgulis: Sometimes all the people are, in some way, key.

606
01:11:15.950 –> 01:11:17.999
Gershon Morgulis: Or at least when they act together as a group.

607
01:11:19.590 –> 01:11:30.929
Gershon Morgulis: Alright, next question. We’ll try one more. In a volatile market where contracts do not hold due to supply issues, as frequent force majeure tariffs and raw materials get increased.

608
01:11:31.970 –> 01:11:36.910
Gershon Morgulis: How does that show to a potential buyer, and if anything can be done to mitigate this?

609
01:11:42.600 –> 01:11:44.080
Av Sinensky: I’m not sure I understand the question.

610
01:11:45.500 –> 01:11:48.119
Gershon Morgulis: Well, I’ll make a guess. Let’s say you have…

611
01:11:49.370 –> 01:11:52.270
Gershon Morgulis: Issues that relate to supply chain things.

612
01:11:54.410 –> 01:11:55.160
Gershon Morgulis: I guess…

613
01:11:55.350 –> 01:12:04.970
Av Sinensky: In terms of how does that show, I mean, the general answer to how does that show to a buyer across everything is, you know, it’s an important thing to think about because

614
01:12:06.150 –> 01:12:10.060
Av Sinensky: Most of what your buyer is going to…

615
01:12:10.620 –> 01:12:17.140
Av Sinensky: know about your business is going to be based on what you tell them, and there’s going to be a section in

616
01:12:17.190 –> 01:12:30.930
Av Sinensky: virtually every purchase agreement called Representations and Warranties, where you make a bunch of statements at closing about the nature of your business. Such as, have you had supply chain disruptions? Have suppliers been able to

617
01:12:30.930 –> 01:12:44.350
Av Sinensky: fulfill their obligations to you, and it’s… these are not the types of things that you’re going to be able to hide from your buyer, before closing. So, you know, as a general rule of thumb, I tend to favor

618
01:12:44.350 –> 01:12:54.750
Av Sinensky: Disclosure, transparency. There’s very few things that can’t be worked through in order to get a deal done when both parties want to get a deal done.

619
01:12:54.750 –> 01:13:06.900
Av Sinensky: But when a buyer feels like they’re being misled, where things are being hidden, where they are discovering issues that should have been brought to their attention earlier in the process, those are the types of things that could really

620
01:13:06.900 –> 01:13:13.289
Av Sinensky: A road trust, and… sink a deal, but it’s… it didn’t have to be that way.

621
01:13:14.180 –> 01:13:31.300
Mendel Schapira: If I can add, I believe the question is, like, if I’ve mentioned in the beginning, you want to have contracts with your vendors, and if someone is in a situation where contracts are not a perfect fit because of the volatility or the supply chain issues.

622
01:13:31.300 –> 01:13:37.940
Mendel Schapira: I believe as long as your profit margin indicates you have a consistent profit margin, which means you’re addressing

623
01:13:37.940 –> 01:13:40.460
Mendel Schapira: The up and the down of your costs.

624
01:13:40.460 –> 01:13:58.040
Mendel Schapira: Yeah, you will mention that you don’t have contracts and you have volatility in your buying power, but you will also indicate that you have kept your profit margin consistent. That’s going to be the counter-argument that how you’re mitigating the risk of being in a volatile market.

625
01:14:00.680 –> 01:14:02.400
Rik Katz: Well, in fact, I think most…

626
01:14:02.800 –> 01:14:08.469
Rik Katz: Contracts where you are buying materials in the future, construction contracts.

627
01:14:08.670 –> 01:14:13.690
Rik Katz: Should have clauses in them in terms of material cost changes.

628
01:14:14.110 –> 01:14:18.009
Rik Katz: I mean, in the last few years, you know, construction costs have

629
01:14:18.480 –> 01:14:30.170
Rik Katz: The inflation has been very big, but people do complete the contracts, and everybody, you know, at the end of the day, has served what they had to serve.

630
01:14:30.610 –> 01:14:36.530
Rik Katz: Unless your contracts don’t cater to that, it shouldn’t be a problem.

631
01:14:36.880 –> 01:14:39.210
Rik Katz: It’s part of doing business today.

632
01:14:40.400 –> 01:14:41.410
Rik Katz: Marza?

633
01:14:42.290 –> 01:14:51.790
Gershon Morgulis: Thank you. Speaker, everyone, thank you all for joining us. We have a few more questions. I’m gonna see if the speakers are available. Is everyone available to stay for a few more minutes? Answer 2 or 3 more?

634
01:14:52.080 –> 01:14:52.890
Rik Katz: Okay.

635
01:14:53.090 –> 01:15:09.519
Gershon Morgulis: Alright, so, everyone, thank you for joining. If you need to be in touch with any of the speakers, let me know, and you are all welcome to stay for a couple more minutes as we go through the other questions in the chat. Alright, any advice on enticing partners to buy out your share

636
01:15:09.880 –> 01:15:15.000
Gershon Morgulis: Of share… your share of shared client revenue in the professional services business.

637
01:15:15.180 –> 01:15:15.740
Rik Katz: Hmm.

638
01:15:16.280 –> 01:15:20.469
Gershon Morgulis: I guess that’s like an accounting firm or a law firm, where you have a few partners, each one

639
01:15:21.160 –> 01:15:22.130
Gershon Morgulis: has…

640
01:15:22.480 –> 01:15:27.749
Gershon Morgulis: revenue that’s kind of related to them, though it says here it’s shared client revenue, so I’m not sure…

641
01:15:29.690 –> 01:15:32.829
Gershon Morgulis: Let’s say 2 people share a client? Was…

642
01:15:34.630 –> 01:15:36.350
Gershon Morgulis: Anyone have any thoughts on that?

643
01:15:37.960 –> 01:15:48.799
Gershon Morgulis: Financial advisor. Alright, so we have a financial advisor, and we have a few… everyone’s got a book of business. So it’s… is the… I guess the question is, how do you sell your book to your partner?

644
01:15:52.600 –> 01:15:53.910
Gershon Morgulis: Shared clients.

645
01:15:54.410 –> 01:15:55.690
Gershon Morgulis: Anyone want to jump in?

646
01:15:56.520 –> 01:16:16.159
Mendel Schapira: I guess we have to do a cost analysis to see what percentage belongs to partner A, what percentage belongs to partner B, and there’s a price to everything, so splitting up the, value of customer A to partner A, and the value of customer A to partner B, will tell us what the future price of this is.

647
01:16:16.160 –> 01:16:25.609
Mendel Schapira: Again, assuming that this is in a monthly recurrent revenue, type of business, which allows us to calculate the future revenue of that,

648
01:16:25.830 –> 01:16:27.790
Mendel Schapira: Shared customer. Client.

649
01:16:27.790 –> 01:16:33.050
Rik Katz: And also assuming the customer stays after that particular shared partner leaves.

650
01:16:34.760 –> 01:16:35.160
Mendel Schapira: Correct.

651
01:16:35.730 –> 01:16:41.090
Gershon Morgulis: There are businesses where they, you know, where it’s in theory,

652
01:16:41.240 –> 01:16:49.619
Gershon Morgulis: Ongoing, recurring, either monthly or annual revenue, but that won’t necessarily stay, and often that’s done with some kind of an earn-out.

653
01:16:49.980 –> 01:16:55.650
Gershon Morgulis: Where people buy it, but they only pay based on the percentage of whatever of that book, so to speak, stays.

654
01:16:55.650 –> 01:16:56.630
Rik Katz: Exactly.

655
01:16:56.630 –> 01:17:01.499
Gershon Morgulis: Smaller accounting firms. Mendel, I don’t know if you ever bought another accounting firm, but I think that smaller accounting

656
01:17:01.830 –> 01:17:06.369
Gershon Morgulis: If you’re buying, like, an individual, like, one guy’s book.

657
01:17:06.500 –> 01:17:11.839
Gershon Morgulis: Or girl. Then at least sometimes that’s how they transact, where you’re paying them.

658
01:17:11.840 –> 01:17:30.709
Mendel Schapira: Correct, they would first… they would first set a price, that would be step one, and step two would be, now we’re taking a period, whether it’s 2 years, 3 years, 5 years, and make an earn-out period, assuming the clients stay on, and that’s how the payouts go, accordingly. But step one would be to determine a price, and I believe that was the question, how do we determine a price?

659
01:17:30.720 –> 01:17:37.049
Mendel Schapira: And step two would be, to your point, creating some sort of guarantee for yourself.

660
01:17:39.890 –> 01:17:49.419
Gershon Morgulis: Okay, yeah, okay, so let… thank you, let’s see what’s the next one? What guarantees can be expected when there’s an agreement for the owner to stay for a while, and he’s not given

661
01:17:50.240 –> 01:17:52.910
Gershon Morgulis: Oh, he’s not giving what he promised.

662
01:17:53.160 –> 01:17:58.339
Gershon Morgulis: So… I guess you can’t fire him at that point, it probably doesn’t help.

663
01:18:01.040 –> 01:18:02.940
Gershon Morgulis: Av, how do we enforce that?

664
01:18:02.940 –> 01:18:06.880
Rik Katz: I think that the best possibility, perhaps, is a retention amount.

665
01:18:07.360 –> 01:18:11.259
Rik Katz: With certain, provisions about performance.

666
01:18:13.030 –> 01:18:16.020
Gershon Morgulis: He’s not just staying. He’s staying in exchange for…

667
01:18:16.020 –> 01:18:21.769
Av Sinensky: And another thing that is often… if you’re going to have your owner

668
01:18:22.020 –> 01:18:37.139
Av Sinensky: continue. That’s a fundamental question, is how are we going to continue to incentivize this guy, right? He just took a lot of money off the table, maybe that’s all he needs? How are we going to keep him motivated? And there’s a lot of…

669
01:18:37.370 –> 01:18:50.250
Av Sinensky: different ways to do that economically. I mean, the private equity model is typically that you require owners to roll over a portion of their purchase price into equity in

670
01:18:50.250 –> 01:19:05.830
Av Sinensky: the future business, or in a portfolio company that includes the future business and other businesses. So if, you know, rather than getting his, let’s say, $50 million payout at closing, he’s only gonna get $40 million, and that last $10 million is going to be…

671
01:19:05.850 –> 01:19:10.799
Av Sinensky: Wrapped up in equity, or in some sort of earn-out, or some sort of economic…

672
01:19:10.910 –> 01:19:29.459
Av Sinensky: tool that motivates owner to stay involved, to continue to help grow the company. I mean, that’s generally speaking really the best you can do. I mean, we’ve abolished the 13th Amendment, so you can’t force someone against their will to work for you and to do a good job, but…

673
01:19:29.460 –> 01:19:32.030
Av Sinensky: You need to figure out how are you going to motivate them.

674
01:19:33.630 –> 01:19:39.820
Gershon Morgulis: Now, do you… is that typically… typically what happens just in private equity, typically everywhere?

675
01:19:39.820 –> 01:19:40.570
Av Sinensky: No, it’s…

676
01:19:40.570 –> 01:19:42.270
Gershon Morgulis: Part of the sale is a rollover?

677
01:19:42.270 –> 01:19:49.979
Av Sinensky: It’s, it’s… it’s increasingly common. I mean, it’s the private equity model, but it’s…

678
01:19:50.120 –> 01:20:02.370
Av Sinensky: becoming more and more common across the board, and… and even if it not specifically rollover, the idea of future compensation, or a portion of your…

679
01:20:02.850 –> 01:20:09.529
Av Sinensky: Total possible purchase price being dependent on future performance of the business is extremely common.

680
01:20:11.810 –> 01:20:20.790
Mendel Schapira: There’s always… there’s always some mechanics. Either you’re gonna do a compensation which is big enough for the owner to stay on, so you’re incentivizing it that way, or…

681
01:20:20.790 –> 01:20:36.459
Mendel Schapira: taking a portion of the enterprise value of the company and holding back to it in one shape or form, whether that’s equity or just a holdback, earn out. There’s always going to be a certain holdback in different names.

682
01:20:36.460 –> 01:20:41.869
Mendel Schapira: Of that holdback to keep the business owner incentivized and motivated to stay on.

683
01:20:41.870 –> 01:21:01.180
Av Sinensky: Yeah, and, you know, just to build on that point, one of the things I always stress when we’re on the sell side is that the number that matters by far the most, and sometimes is the only number that you should care about, is the cash payment at closing. With the amount of money that you’re putting in your pocket at closing that, you know, is…

684
01:21:01.280 –> 01:21:08.280
Av Sinensky: Not subject to future performance, not subject to contingency, not being held in an escrow.

685
01:21:08.710 –> 01:21:20.930
Av Sinensky: that’s the most reliable purchase price that you can count on. Everything else, you kind of have to view as a maybe. And if the amount that you’re getting at closing is not

686
01:21:21.590 –> 01:21:39.060
Av Sinensky: worth it for you to sell the business, then you need to strongly think about whether or not it’s worth doing, because you can’t rely on the earnouts hitting, you can’t rely on, you know, my rollover equity is going to become valuable in a second exit. It very well might be, it very frequently does, but…

687
01:21:39.060 –> 01:21:41.659
Av Sinensky: It’s, you know, it’s not something that you could take to the bank.

688
01:21:44.600 –> 01:21:45.270
Gershon Morgulis: Got it.

689
01:21:45.690 –> 01:21:49.800
Gershon Morgulis: Thank you. Alright, we got one more question, and then we will jump. Can you…

690
01:21:50.030 –> 01:21:53.040
Gershon Morgulis: Demand partial seller financing.

691
01:21:53.140 –> 01:21:54.680
Gershon Morgulis: For the finance.

692
01:21:54.800 –> 01:21:55.940
Gershon Morgulis: For that matter.

693
01:21:56.990 –> 01:21:59.339
Rik Katz: Hmm. Demand is a strong word.

694
01:22:01.450 –> 01:22:03.650
Av Sinensky: You could demand whatever you want, the other, you know…

695
01:22:03.650 –> 01:22:04.750
Rik Katz: request.

696
01:22:04.750 –> 01:22:10.359
Av Sinensky: It’s a bilateral agreement, they have to agree to it. But, you know, seller financing, again, it’s a…

697
01:22:10.400 –> 01:22:29.859
Av Sinensky: It’s another tool that is used to bridge gaps in valuation, bridge gaps in available capital to buy out the seller, and also gives sellers some skin in the game about the future performance. If I… if 10% or 20% of my purchase price is tied up in a note.

698
01:22:30.570 –> 01:22:47.190
Av Sinensky: then it’s very important to me that your business will continue to perform well after closing, because I am no longer the owner of the business, I’m now essentially a lender of the business. And just like a bank wants to make sure that they are lending money to a healthy business that will be able to pay them back.

699
01:22:47.190 –> 01:22:53.120
Av Sinensky: Same thing with a seller. Just because you used to be the owner doesn’t change that… Calculus.

700
01:22:55.750 –> 01:23:07.459
Gershon Morgulis: Alright, thank you, everyone, who joined us today. Thank you especially to our three guests, Mendel, Rick, Av.

701
01:23:08.310 –> 01:23:11.339
Gershon Morgulis: It was great to be here and chat with you today.

702
01:23:11.760 –> 01:23:14.779
Gershon Morgulis: And hope to see you all back again sometime soon.

703
01:23:15.600 –> 01:23:16.170
Rik Katz: Pretty good.

704
01:23:16.170 –> 01:23:17.909
Mendel Schapira: Thank you, Gersh, for putting this together.

705
01:23:18.670 –> 01:23:19.340
Gershon Morgulis: Alright.

706
01:23:19.640 –> 01:23:20.240
Mendel Schapira: All the best.