Know Your Buyer, Maximize Your Value: What Every Business Owner Should Know Before a Sale

Welcome everyone. Thank you all for joining us today. My name is Gershon Morgulis. I am the founder of Imperial Advisory. We are a fractional CFO firm.

Thank you, Elizabeth. Welcome. Thank you for putting this together. welcome, Dean, welcome Rick, welcome Tom, welcome Adrian. and those are the faces I’m able to see. I know we have other people whose faces I can’t see.

But welcome to you all as well. all right. So, like I said, I’m the founder of Imperial Advisory. We are a fractional CFO firm. We provide CFO level financial leadership to growing businesses, either as a fractional CFO on a project basis, which is typically for a full-time CFO, or as an interim solution when a senior financial leader exits. We typically work with

Two types of clients, either CFOs of successful growing companies who need a strategic, who need strategic financial leadership. They need someone in that CFO seat. They just don’t need it to be a full-time role. We help owners like that with growth planning, cash flow, profitability, preparing for transactions or an event eventual exit. Second, we work with CFOs at larger companies.

I would call middle market companies who need an experience resource to deal with complex complex issues like FPNA, prepping for an audit, prepping for an acquisition, or a variety of other things that could come up when they have bandwidth or expertise gaps. One of the things that sets us apart from many others out there is the level of experience that we bring. Each of our CFOs has over 30 years of experience.

And most have over 10 years of experience in the CFO seat. We don’t send career consultants, we’re sending people who have lived and breathed corporate operators who sat in that chair. We partner closely with CPA firms and other professional services providers, and we provide

financial leadership that complements the tax and compliance work that comes from CPA firms without creating conflicts or duplicating those relationships. We also partners with attorney partner with attorneys and bankers to provide strategic financial assistance to their client base.

One thing I will add here is that besides for hosting this webinar, we also have something which we’re going to be sending out after the webinar.

which we’ve put together, which is a an acquisition readiness assessment. So it’s going to be a little bit of information primarily geared toward the sell side to know is your business ready to sell? It should be an interesting thing for everyone to look at, whether you’re on the sell side or the buy side. The buy side, those are the things you should be looking at, the sell side, those are the things you should be preparing. So keep an eye out. That will be coming soon. It should take about five minutes to fill out and

Provide a lot of really good insights. Anyway, I’m really excited to be here today with you all and very happy to have our guest, Matt, with us today. Matt is an experienced investment banker who has done many transactions over his career and worked with one of our CFOs, Rick Katz. Thank you, Rick, for introducing us to Matt. Rick says that he had an excellent experience with Matt, and Matt was amazing.

So anyway, we’re really happy to have Matt here to talk to us a little bit about the marketplace, where the buyers are, what are they looking for? And Matt, you know, please introduce yourself and take it away. ⁓ my pleasure. Thank you so much, Gershon. Glad to be here. Rick Katz, again, thank you for the introduction. we’re gonna dig into lifting the veil on some of the stuff that happens in MA processes that a lot of folks don’t really.

Really know about and help you as advisors to business owners on how you can provide really good insight and advice to your clients, especially if there’s some type of private equity group that gets involved. A little background on me and my firm, I started the business about 21 years ago. We’ve closed over 220 transactions, about 2.2 billion in transaction value.

over a thousand private equity relationships. But we did the math not that long ago and we found out that in that 21 year period, we’ve had 24,000, over 24,000 interactions with buyers. And so the amount of insight on how buyers view your client, typically for every sell side client, we’re going to get 100 to 125 NDAs in

From different buyers for every single prospective client. They all have a point of view on what our client is worth or how a business is valued. So we’re able to take that and provide some pretty quick feedback. On buyer-seller interactions, not everybody makes the cut to actually move forward and have an interaction with our seller client. But we did the math, and there’s about 4,000 interactions between buyers and sellers where we really witnessed.

Those guys that do a great job or not a great job, and we can share some of that as well. the space that we work in is typically 10 million to 200 million of lower middle market enterprise value. Occasionally it’ll be a little smaller than 10 million, might do a five or six million dollar deal on the buy side. And then our clients, I would say most of them have a 85%, have a blue-collar workforce. So that’s manufacturing.

distribution, B2B services, B2C services. And then on the white-collar businesses, typically outsourced services, medical billing, software development, ⁓ things like that. A lot of sophisticated buyers on the 50-50 time split that is between the buy side and the sell side. We’re always working on behalf of private equity groups, trying to find some companies to buy for them.

but our revenue comes in 60, 40, 60% on the sell side, 40% on the buy side. The biggest aha that I would say I’m in the process of writing a book on this is one of the first chapters is begin the end in mind to your client. To get the best PE transaction, do not have your client give up their power. And oftentimes your clients are being solicited.

Without running a process, they get an offer and they feel they have to react to that buyer. And I would encourage you as advisors to say, stop, tell me what you really want to do. Give them the lay of the land. You know, do you want to transition out over the next six to 12 months? Do you want to keep a stake in your business? Do you want to fully exit? Do you want your management team to participate?

Would you like to get out of day-to-day operations and have a position on the board? So we start to paint a picture of all of the different scenarios. And then once they know some of their options, they can really light in and say, hey, this is really my ideal transaction. If I could wave the magic wand, this is what I want. And that gives us as advisors the chance to really shape that transaction into one that they’re looking for.

So understand their goals, understand their timeline. And then also, most important, understand the people culture dynamic of that business. It’s so often overlooked in the investment banking community. They think it’s only about the transaction and the dollars. But that business is like a member of their family and they’re gonna marry off their daughter. They want to make sure that whoever they’re marrying their off or their daughter off to is not a jerk and is gonna be a really good.

home and steward of their business. I like to ask advisors this question. I speak a lot at investment banking conferences to other bankers or brokers. And I’ll throw this scenario out there and I say, hey, you’ve got two companies, company one ⁓ and company two, each doing 30 million of revenue. One has much higher cost of goods sold and is generating a gross profit of 16%. Another one is

lower expenses and generating a gross profit of 30% GNA between the two. And you can see that ⁓ EBITDA is the same. If we took this business, each of these businesses to market, you’ve got the same top line, the same bottom line. Is there going to be much of a difference to private equity on which one is more attractive to them?

The answer is it’s about 85% that will absolutely be way more attracted to company two because of the gross margin and the gross profit delineation that’s outlined there. It almost says that for every dollar of incremental revenue to this business, that there’s 30 cents that can flow to the bottom line, or a good portion of the gross profit that can flow to the bottom line.

So when I’m working with CFOs or accountants or outside folks, this is the same company. We literally got the financials from a client, 30 million and three, and their gross profit looked like 16%. And what their accountant and CFO had done is they wanted to burden and put some overhead in some things as part of cost of goods sold to.

To try to allocate costs. And it really didn’t fairly reflect what happens with the next incremental dollar of value. We see this a lot with manufacturing companies. We see it with mostly manufacturing companies, frankly. But I would encourage you to really understand that a tool that I want is I want to pull the lever on gross profit margin, how strong gross profit margins are, you guys as fractional CFOs.

you know that gross profits are the truth teller. That allows you to put a stake in the ground and said, my client, their business customers really like it because they’re getting 35, 40% gross margins, or they’re only selling on price because they’re getting 18 or 20% gross margins.

Now we’re going to talk a little bit about private equity groups and flavors of private equity groups. All these family offices, strategic owned private equity, fundless sponsors, search funds, independent sponsors. MES groups have a component of equity within their MES. But know that they all look at businesses and values them differently. And I want to help you help your clients understand.

There’s so many differences in private equity. I’m going to start out with committed funds. These are when we look at private equity, we look at committed funds as the best scenarios. Okay, these guys have contractual obligations from their investors to be able to call capital and have it there within a couple of weeks so that they can move forward and close on a deal. When I’m

Talking to private equity, I don’t want to be in their inaugural fund, their very first fund. If I’m representing the best interest of my client, I want to have the best private equity with a proven track record. Hopefully they’ve been in business 15, 20 years. They’re on fund number seven or fund number eight. And the only way that they get to fund number eight is to be consistent in providing decent returns and being a good operator of.

private equity investments. They have capital move quickly. They will often raise capital based on a specific target mandate. Maybe they’re manufacturing and B2B services. Maybe they’re just technology and software businesses. Maybe they’re heavy into home services or real estate and facility services. There are many flavors, even within the committed funds. There are groups that are completely

Completely hands-off, and they have a quarterly board meeting, and they look to support management buyouts, and they they just let the management team and run the way that they run. In some cases, that’s the perfect fit when you’ve got a really talented management team. There’s some types that really look for carve-outs of either larger private equity groups or public companies, and they look to stand up.

companies that are divisions that no longer make a strategic fit. There are certain private equity groups, while most of them say they will do acquisitions, they’re a very small percent that are absolutely impeccable at roll-ups or buy-and-builds. And they can do within three or four years, 40 or 50 acquisitions and build these massive companies over that period of time. Our clients typically

10, 20, 30, 40 million dollar revenue businesses. We like the next category, guys that have operational expertise and operating partners that can come in and support the management team and really taking that business to the next level. They typically have a full toolbox to support HR, to support manufacturing, support IT, support sales and marketing. So really good resources, all things being equal.

Know that they’re professional buyers, they’ve closed a lot of deals, and that they know how to get deals done. The weakness, it’s 80-20. Even in these funds that have a lot of experience, I’m gonna say 80%. I don’t want them as my partner. Okay. 20% are really good. I say don’t want them as my partner. This can get back to culture and experience.

Most private equity groups will play less than strategic buyers. They assume less risk than most strategic buyers. They may not have the same level of understanding that a strategic does on a different industry. They are notorious for punishing your client in due diligence if faults are found. So it’s really critical that whatever we negotiate in a letter of intent before we go under contract.

That we have our eyes wide open and we know where ⁓ potential issues may arise and we’ve disclosed them up front so we don’t get dinged on them later. 95% of your platform of private equity, you’re gonna require a rollover stake. They’re gonna want that manager or that owner to have a stake in the business going forward. ⁓ the professional buyers, meaning deals lean their way. They write the first draft of the purchase agreement.

The seller does not. And so right away, we’re gonna be able to assess what kind of toothiness this private equity group’s based on the draft of the first agreement. Are they coming more down the middle of the road? Are they really tugging the agreement towards their side of the fence? typically they’ll in their in their mandate, they can only do a majority recap unless they’re set up as a private equity group that can do minority deals. I typically don’t see

Many private equity groups doing minority deals, unless there’s at least five million dollars of EBITDA. Okay. they will often have complex security structures, meaning preferred tranches of equity that are not fair to founders. So it’s important that if you’re ever asked to give an opinion and you look at that, make sure you understand what the different ⁓ rights and relationships are with the securities that are involved in those.

Deals. And then, as I mentioned earlier, many lack experience. We love family office buyers. good investors. They’ve typically made their money operating businesses before. ⁓ oftentimes they set up a family office at around $100 million or more to invest, or a couple family offices will come together and they set up their own organization to invest those funds in private companies. Friendlier docs, they resonate really well with sellers because they’re other business owners.

⁓ longer hold periods, it’s not surprising to either have evergreen or at least 10 to 20 year hold periods. good network of advisors. Again, they’ve run businesses before. They’re notorious for keeping little things little and only make a big issue out of a big issue. Very relational. The downside is they’re about one to two turns, all things being equal, they’re conservative on valuation. It’ll be one to two turns of EBITDA less.

Than the market, unless they have a special angle as to why they would pay more. It’s usually a lean organization. You don’t have the same operating partners and other infrastructure within that firm, like you do with some of the larger private equity groups. And then their pace, there’s no gun to their head to put money to work. They actually move a lot slower than traditional private equity.

lower middle market buyer strategic buyers. We love a private equity-owned or a strategic buyer because they can move fast. They understand the industry. There are certainly options to save some money and allow them to pay more due to some of the synergies or pro forma personnel savings that they may have. easier diligence because they understand the business.

one of the weaknesses, if our client really, let’s say they’re 40 to 50 years old and they see that they’ve got another five to 10 years left, the downside with some strategic buyers is they will often not allow the owner to roll over equity. the other thing that we find that can be a conflict is around culture. If it’s a strategic buyer that was a heavy competitor and these guys have been fighting tooth and nail back and forth, oftentimes that doesn’t work.

If it’s a well-respected industry player and these guys know each other from different regions, they work out really well if they’ve got common culture. one other downside is when the team learns that a strategic buyer is coming in, they can often see some turnover where people they make stuff up, they get freaked out, and they may put in their resignation. These are like the

⁓ be careful, fundless sponsors, search funds, independent sponsors is another name. these are guys that are wannabes. oftentimes they some guys came out of private equity, they didn’t get promoted within the career path, they got frustrated, and typically I’m gonna say they really didn’t pull their weight like some of the other guys did in most career paths to really become a partner. And so now they’re going out on their own.

It’s kind of ⁓ what they say in Texas, big big, big hat, no cattle. And so they want to get a deal done. They’re typically not the real decision maker at the end of the day. There’s two sales that have to take place. One is to get them to go under contract, and then whoever their investors are, they’ve got to agree later on. So this is not a high probability scenario in most cases.

As an advisor, when we have an independent sponsor, fun list sponsor, we push them hard before they submit their letter of intent that we need to know who their capital partners are, that they’ve brought their capital partners up to speed. If you don’t do that, oftentimes they will have not they have not brought capital partners along and it just will delay the process and really puts it at risk.

⁓ I’ll keep moving on. And then lower middle market buyers, mes groups. You know, mes groups typically the way they structure their investment, it is a subordinated debt to senior lovers, ⁓ senior lenders, but they’ll often get the ability to have a small trunch of equity. A lot of times mes groups are actually some of the backers of the independent sponsors, and so this is why I do like to bring them up.

Understand they have very little to no operational help in the business. some of their agreements with the independent sponsors to really ⁓ stand back. The nature of their term is it’s typically interest only, and then a pay-in-kind compounding interest that accrues as well. So the attractiveness of MES to that independent sponsor is it doesn’t have

Big debt payments, just a small interest payment on the outstanding balance there. So different buyers, different value. I’m gonna kind of go through this. I hit on most of these things, but who can pay the most in value typically? Strategic or private equity. Fundless sponsors do not, search funds do not, family offices do not. private equity, if it’s a platform, will often allow for.

Rollover equity. If it’s a platform to a strategic and that strategic was just funded recently, you’re in the first one to two years, that would be the scenario where they will allow private equity to come on. If it’s in the last two years or so of the hold of that strategic before they look to go back to market, oftentimes you don’t get a chance to participate in equity family offices, you do.

management equity, I have spoken just a little bit about it, but understand a lot of times when we lay out scenarios for business owners, they’re hardworking and they’re humble and they recognize that it wasn’t all them and it was their management team that helped them get to this point. And they love to open up and try to come up with a scenario so their management team can participate in the future ownership of the business going forward.

⁓ retaining branding, that is often important. And so you want to understand that and how the different buyers will be impacted there. long-term hold, modest leverage, healthy return, culture retention. ⁓ if you’re the platform, very, very good. Family offices are very good on culture, and then sometimes on the fundless sponsor search funds. Industry experience, really, really big.

As to if you look back five years from now, when I meet with a client, I want them, like I know if we’re successful five years from now, they look back and said, you know what, it really was a good transaction. My management team has equity, they’ve been able to grow this business. most everybody stayed, and it was a good outcome for them. Just some of the tells that we look for on what makes a buyer good when I a private equity buyer. And I said 80% are not.

⁓ the real good ones are wicked smart and super humble. They don’t tell you how smart they are. So look for humility and experience. That combination is so, so valuable. They will value culture, and that comes from experience. Culture is a real thing. They’re not know-it-alls, they’re not just book smart.

They have scar tissue from having lived in the trenches and growing businesses in the past. They really can add value. I can have groups from the top business schools in the world and the 20%. I can have buyers from the top business schools in the world in the 80%. And so I do want to bring up like the element is not just being smart, but the humility to

allow decisions to happen and growth to happen through the management team is the catalyst that really makes it run. A buyer lousy, they’re arrogant, they try to retrade, they never ran anything before. They’re not really a risk taker. They’re scared to death. They don’t understand the value of culture. ⁓ they haven’t had PL operating experience before. We see that so much. Somebody they they worked in a business or they worked at a private equity group, but they never hired, fired.

Or ran anything before, but they think they know. These next two slides, I’m actually going to camp out. This is going to be some of the biggest meat. As I mentioned, we’ve had conversations with 24,000 different buyers who have looked at our clients over the years. And if I could put the top 15 items there that we look for, that they look and how they rank, I would say number one when I’m taking a company to market.

Or how can I build stories and put stakes in the ground around these drivers? It has highly predictable, reliable cash flow. And a bunch of these points here are gonna allow me to reiterate that there’s highly predictable, reliable cash flow. There’s steady top line growth, five, ten percent a year, but it grows consistently year after year. Margins are strong and expanding with AI. We’re seeing like a new trend.

For how people can incorporate AI and show margin expansion as a result of that. The best scenarios that get the best prices are when you have all those happening and it doesn’t require tons of CapEx. So CapEx, you don’t want to be making all your EBITDA only for 80% of it have to go out every year to reinforce buying equipment, heavy equipment, trucks, capital equipment in the business.

The best companies use automation. And again, that could be through technology, robotics. you’re gonna see ERP system and AI implementation. I’ll tie that to automation as well, that they’re able to automate a lot of the processes that they have. Quality assets. If they do have assets, they don’t have a 16 year old trucking fleet in order to get work done.

And they have a regular cycle of when they upgrade their assets that you walk in there and you know that it’s ready to go. A strong management team, I have this down in the second row, but for all intents and purposes, recognize strong management team is as important or the most important item as predictable cash flow. A really strong management team is delivering predictable cash flow. Steady workforce, not a lot of turnover, good customer diversity.

Nobody’s more than 10% of revenue. workforce retention is good. Long-term agreements in place. And again, it could be long-term relationships with open purchase orders. Say if it’s a manufacturer and they do all of that part, they’ve got exclusive on certain parts. Those work great. A diverse supply chain, you’re not at risk. You’re not held over the battery.

by certain suppliers. You’re a power user of AI and your ERP system, and you can show real-time fractional CFOs here. You can show real-time data to the management team so they can make the best decisions quickly. You’re not looking 45 days later after reviewing the financial statements to see how you did. They’ve got quality certifications and

Pricing power, pricing power gets back to gross margins. Love to see when I can put stakes in the ground and pricing power. What are the biggest dingers? Revenue is flat or declining. Margins or flat or declining or thin. The asset base is tired. Your equipment is 10 years old and above. You’ve got customer concentration, 20, 30, 40.

Percent customers, 50% customers. When I say complex financials, they’re not easy to understand and read. I can’t see where gross margin is. I can’t see where GNA is. I can’t see where the levers are that a next buyer can come in and pull and really have an impact to move or improve the business. It’s reliant on the owner or the management team, is really thin.

⁓ we’ll sit down as part of our onboarding. You know, I’ve got a nice $77 million client that we’re going to be taking to market in about a week and a half, two weeks. And we asked them the question. I said, is this the management team that can run 150 million revenue business? You want to know that the people are in the seats on the bus that can double the size of the business. If not, and you’re looking to pre prep for sale.

And you’ve got one or two years, really look to upgrade key positions so that they can answer affirmatively on the management team. ⁓ it’s heavily project-oriented. ⁓ there could be environmental health, safety concerns, inspection concerns, OSHA concerns, high employee turnover, ⁓ lots of litigation in the past. It looks like commodity work that is just a widget with the lowest price possible.

And then it’s dependent on the owner. So as you go and you advise your clients, focus on drivers, how we can we do it. If you see any of these things, pick two or three that’ll have the biggest impact and look to improve those. so common, what’s the value of my business? Size really matters. If you’re less than a million of eBit duh, depending on your values and drivers, if it’s

Heavy drivers, you’re going to be up to the right side of this. If you’ve got lots of dingers, you’re going to be down at the lower end. If it’s 2 million of Ibita, three to six. And I’m going to characterize this as this range represents about 85 to 90% of the businesses that would we would see in a certain category. And then there’s going to be, you know, 15% that could be outliers of this.

And the outliers because their growth rates 30%. Their management team is exceptional. Their gross margins are 80%, like you know, just real big outliers. 5 million of EBITDA. Again, you’ve got some dingers or customer concentration, you can be four to five times. If all those other things look good, it can be eight or more times EBITDA. 10 million of EBITDA, 20, 50. So size matters.

Typically, as you get bigger, you’re providing more infrastructure. We see all the time that the model in the system that gets you from 1 million to 2 million of eBITDA is not the same management model in system that’s going to get you from two to five. So we need to make sure that they’re looking at that. We’re always asking, hey, to double. Do you have the right people? Do you have the right systems? Do you have the right business model to operate to get it to the next level?

What to expect in a sale process? If we have a perfect sales process, it’s about six months. I’m going to say most of them are going to end up six to nine months. And it’s this marketing qualifying, these blue categories that typically are the ones that’ll add a little bit more time. We’ll go into that. But prep, identify the owner goals, make sure that we can.

Characterize our plan, our story, our communication, that we’re looking for a very specific transaction that will help our client achieve their goals. We’re looking at the business ⁓ metrics and the performance of the company. We want to make sure that their wealth advisors, their tax advisors, legal advisors are in there to do any tax or estate planning. If they haven’t done it, we set up a data room to collect all this information and then get engaged. Within the

First 30 days, we are also pre-marketing the business so that when I have my SIM dumb, which my confidential information memorandum, when that’s done at the end of the first month, I have about 100, 120 NDAs in from prospective buyers. All of the buyers that submit an NDA, we qualify those as a one, a two, or a three. Ones are the best buyers. It’s typically 30.

to 40% of our buyer pool. twos are 30 to 40% of the buyer pool. And then the balance about 30 to 40%, depending they don’t have a shot, they’re not going to get any information. As soon as we see that you do not have a shot as a buyer, we politely allow you to step out of the process. Because there’s only going to be one. Remember that there’s only one buyer. I want the absolute top four or five at the end of the day.

Standing, competing, bidding on my client where I know they’re going to really fit with the goals that my client has. We’re having intro calls with these folks. They have received the SIM, they’ve asked us questions, we’ve distributed answers. And around the end of this third month, indications of interest are due. Okay, indications of interest are due.

And again, we’ll get out of ⁓ a hundred prospective buyers and qualifying down, we may get 15 to 20 offers or 15 to 20 initial indications of interest. We’re only going to have calls with the top eight or 10 of those. Those indications of interest don’t know the name of our client, the location of our client. They’re just looking at the information, assessing their own experience and saying, based on my experience and how I look at this.

I’m to pay you this amount, this range of what I would pay. The ones that we do have calls, this is the first time that now we’re going to disclose who our client is and where they’re located. And we’ll have a 30 to 45 minute Zoom call with the eight to 10, ⁓ I’ll call them pre finalists, and then look for a client to after those calls, assess who do they really like the best and who would.

Who would they like to come in and marry off their daughter to, so to speak?

we have management presentations and we get final letters of intent and then we pick the best buyer and under go under contract with them. Due diligence happens after an initial 30 days or so of due diligence and the financial information all checks out. Then they start drafting legal docs and working on their integration plan. And again, this whole process to get to closing typically takes six to nine months.

IOI versus LOI. An indication of interest comes in off of a SIM, a blind SIM with no identifiable information. It allows you to have enough information to say, hey, if I’m looking for this niche contract manufacturing business of certain things with this margin profile and this dynamic on customer concentration without disclosing who the customers are, this is what I would pay.

It allows us to move buyers forward. Hey, these are good. They’ve got great experience. Or kick guys out. An LOI only comes after they have met the management team. They have gone through a management presentation. It’s a very specific valuation. And it details structure if rollover equity is there, classes of stock, timeline, due diligence, indemnification, escrow’s networking capital is heavily reviewed. And to give you an impact.

Here’s three clients. One was a niche water compliance services business. because there was compliance, huge interest, 21 indications of interest. Our client was 10.3 of revenue, two of eBITDA. IOIs came in between 12 and 22 million dollars. Out of that, we picked four, and they were between

The top four were between $18 and $22 million to have meetings. That led to four letters of intent. HVAC services, 15 IOIs, indication of interest range 28 to 44 million. This was a 13.7 million revenue business that was flat for three years in a row, and four million of EBITDA for three years in a row. Four meetings in the meetings, it was a much

Broader spectrum is like 30 to the top four were 30 to 44 million. And in the meetings, the two of the guys that were at the low, lower end just knew they would not be able to compete. We ended up with two LOIs and then a commercial landscaping business, seven indications, tight indication range, four meetings, three LOIs. Here was the outcome. After management presentations and letters of intent, the final

price that we got was twenty eight million dollars.

On this one here, even though it was flat, the story, the profile, it had so much growth potential. The final buyer ended up being $48 million, was a family office. And I talked to him not that long ago, and he said, This will be the best investment they’ve ever made. They’ve dramatically grown this business like crazy. My client’s very happy because he rolled over a little equity in it. And then

This one, I bring it up because they don’t all go like this. This particular business, when they got in and they met the management team and they recognized the management team was not as strong as what they would hope to see. And the fleet, the average aid of the ⁓ age of the fleet was over 10 years old, and they knew they’d need about two million dollars to put into upgrading the fleet. So while IOIs came in at 10 and a half to 13.

The final price because of those things actually was eleven million dollars.

So, how do advisors maximize value? Definitely we don’t once we pull the trigger and we start the process, we don’t want to lose momentum. We want this thing to go, go, go and keep going the whole time. So, to the extent that you can really help your clients be prepared, be ready, if there’s a state planning that needs to happen, tax planning that needs to happen, legal planning that needs to happen to get agreements in place.

Let’s get that stuff going before ⁓ we’re ready to go. I want to understand discretionary items and just order a magnitude. You know, all businesses, all businesses have a little bit or more of discretionary expenses that run through the business. We don’t want to see 80% of EBITDA is addbacks to discretionary expenses. And I would say ⁓ we usually can get almost

Anything through if the total amount of adbacks is not more than 10 or 15 percent of the total EBITDA. So if you’ve got clients that you’re working on and 50 percent they’re running really discretionary stuff through, and it’s 50, I would encourage you to work and trying to clean that up and reduce some of those discretionary items. For MA advisors, obviously.

doing a good job at understanding what our client wants and then understanding the different types of buyers and who is good and who isn’t good and who’s going to match. That’s one of the big drivers that we would bring to the table. Where do blow deals blow up? quality of earnings. And on qualitative earnings, probably the biggest one is around non-gap revenue recognition or not having

Gap accruals for any kind of benefits, retirement benefits, ⁓ vacation PTO, having ⁓ and not use it or lose it, and having this huge amount of deferred PTO that they’re obligated for. typically buyers are not going to come in and step into those things. ⁓ if there are union relationships in place, if it’s a union business.

Lots of times there could be an unfunded withdrawal liability to get out of the union if there’s a multi employer plan. So that’s one of the big ones. legal diligence.

So much of getting the deal to the finish line is around trust. And it’s important that you understand, we understand our clients that I’m gonna tell you, almost every business has something that happened to them during their 20 to 40 years of existence. And we just want to know what it is because buyers, before they pay 40 or 50 or 100 million dollars for a business or 10 million for a business.

They’re gonna do due diligence, they’re gonna do background checks, they’re gonna do legal searches, and stuff will come up that you’ll never believe they’re gonna find, but they do. And so I have been frustrated a handful of times when I’ve had clients who have not fully disclosed stuff in their past that they shouldn’t have disclosed. If you disclose it,

We can manage the message and there’s not a trust violation. It doesn’t feel like I’m hiding something or that your client’s hiding something to that prospective buyer. So it’s really important understand some of the stuff. Employee HR issues, if there was sexual harassment, if there were inappropriate relationships between managers, key managers in your business, if there was a bankruptcy in the past. You know, those are all things, ⁓ if they had legal issues, ⁓

We want to know what it is. do they do they have real title to the assets? that’s a big one that you need to make sure if they’ve bought the company or if they’ve had partners in the past, make sure that title transfer is all clear. assurance, know that there’s a dozen or so different advisors. They’re looking at benefits.

The company self-insure a lot around claims history on insurance? do you have ⁓ a scenario that the buyer you can negatively impact some of their workmen’s comp rates, or can you help their workmen’s comp rates? Do you have any issues around environmental or lease or real estate or how much term is left? what is the nature between the landlord and the tenant? And then

Know that the last ⁓ four to six weeks you’re really working on integration in special projects. you do want to make sure you’re going into closing, knowing that first week when there’s so many questions, that those questions can get answered and it feels like it’s business as usual. You want to know what things are going to change, what things are going to be static, what employees may move from being an employee to a consultant for three to six months and are not going to transfer over.

And then ⁓ finally understanding Peg math. I like to use this as an example to see kind of structure of deal and how we will push back on certain things. but as an example, we we gave a range of say four to six times. Let’s say I have a five times two million e-bit ⁓ ten million revenue business with an enterprise value of 10 million, and we get an offer.

And that offer, we ask for the sources and use is really, really important that you get this. And the buyer says, Hey, I want to buy 70% of your business. You’re going to roll over $3 million of equity. They use a little bit of MES and some senior debt. The seller gets $7 million and rolls over three. So he thinks it’s a $10 million deal. And there was $500,000 a transaction cost.

This we call the head fake. You never accept this deal. And you never accept this deal because out of the total equity, all the appreciation flows to the common equity. And you are only owning three, 30% of it, but you’re providing 60% of the total equity. I’m fine if my client rolls over $3 million of equity, but they should own 60%, not 30%.

And another way to run this scenario, if for some reason a week later you sold this same business for $10 million, how much is your client going to get? Well, he’s only going to get 30% of the net proceeds after ⁓ of the net equity value after paying off. And the private equity partner is gonna get the other 70%. So they would not come at home.

We might counter at something like this if they’re using leverage. And we say, hey, same deal. It’s $10 million, but my client’s going to get $9 million at closing. He’s going to roll over $1 million. If the peg is still putting in $1 million, my client now owns 33% of the common equity. We have Mez who comes in at three and a half, which is just interest on three and a half.

And you’ve got a term loan on four million dollars. So what did we do? We just added two million dollars of consideration into our client’s pocket and they got a little bit more retained equity going forward.

⁓ one of the questions and how we kind of solve when somebody says, Hey, I want my management team to have equity, this gets back to different classes of stock. Recognize all the appreciation in the future growth of that business typically goes to the common equity holders. If a peg is providing preferred, or they go out and I raise a preferred equity tranche.

This is typically just like an interest rate. the preferred may give them a right to own a percent of the common, and that’s where their upside comes from. But in a scenario like this, let’s say I’ve got the same business, it’s a 10 million going to the seller. He’s not rolling over anything, he gets all 10 million dollars. But this time we worked at a deal where the management team can come up with 100,000, and it’s not uncommon that the seller will give them a transaction bonus.

Of $100,000 and it is $10 million, so they can go and ⁓ invest that and own 10% of the upside of the business. If they can take this business and double it in size, so it’s a 20, 25 million enterprise value business, they’ll do really, really well owning 10% of that business. That 100,000 can grow over a million bucks.

In closing, get the transaction that your clients want. Make sure you’re understanding what their goals are and can paint the picture of all the different scenarios. And I’ll tell you this again. Most of the time, most of the time, the client still wants to have some role, ideally a board role, or ideally helping to shape a growth or acquisition.

They’re done with Groundhog Day and the day-to-day grind of running it. So if they do want, if they’re 40s, 50s, early 60s, that’s typically the case. If they’re over 65, 67 years old, that’s typically not the case. The wife is really saying, let’s go. I want to travel the world. We’re not getting any younger. You know, look at a six to 12 month transition, sell all of it, and ⁓ get a good deal for your management.

Have strong advisors engaged around you so you can take a holistic approach to what this transaction might look like. You can shape where it should be structured as an asset deal, a stock deal, how to limit depreciation recapture and other things like that. Run a competitive process, both strategic and financial buyers to get the best price and terms. And then identify early on.

dingers and drivers. That really is gonna be the thing that says, do I get at the low end or the high end of a range for a specific size eBit dot IM? And then understand some of the peg math, how they can try to pull the deal over to their side of the fence.

any questions?

Your example kept being about a hundred or over a hundred potential buyers. Is that is that typical? Was that always typical? Is that only like if you engage an investment banker, but if you’re trying to sell it yourself, that’s not typical. Like where does that hundred number yeah I’m gonna say for us, we out of 21 years in business, I’m gonna say the

First four to five years, that was not typical. And it was more as we marketed to different buyers that they would come in and we’d try to get the best price from those top one or two buyers. About 15 years ago, we lit onto an investment banking process and we don’t violate it. We say 30 days is marketing to get as big a pool as possible.

Literally within 24 hours, I’ve got an analyst looking for strategic buyers. Who are the contacts? I’m looking for private equity groups that have invested or they own in this space today. Okay. They’ve invested in the past. And we’re hammering. And until I’m actually until we’re under contract, we are always marketing, like trying to. Did we miss some? Is there a better buyer out there? We ask our client, who do you think is a good buyer for your business? You know, we want to include them in the process.

I I didn’t have time for this story and we’re out of time, but I’ll I’ll give you one quick one. I followed up with a client, he had two LOIs from strategics. One was 23 million, one was 25 million. And he said, you know, I’m ready to go. These are good offers. I said, I think your business is worth 28 to 30 million bucks. I said, Let me run a process, we’ll keep them in.

We ended up getting him $46 million for his business. Neither one of those guys got ⁓ one got just a little over $30 million, the other one was still in the 20s. You never know. I never know. I never know what the highest price is gonna be. Okay. But I I know that beauty is in the eye of beholder. Somebody brings experience or a need that they’ll pay way more. That business wasn’t worth $46 million, but they’ll pay way more.

Because they needed it. And that was a financial buyer who wanted it as a platform. They grew two other similar businesses to over three hundred million dollars. They would pay anything to get a good platform. And that’s why they paid it. Got it.

⁓ all right. Any other questions before we I’ve got a question. D Matt, do you have ⁓ any insight into ⁓ the number of deals you do that don’t work out ⁓ the way it was planned after sale? In other words, what happened with the buyer post sale? Very few. I’m not gonna say it’s never.

But very few. there were a couple back in the real estate crisis of 2008, 2010. And for all intents and purposes, somebody had the the lucky spoon where they sold at just the right time. You’ll see that. If something geopolitical happens, and that wasn’t geopolitical, that was you know, economic cycle where anything tied to real estate.

We had sold businesses that provided real estate service, they completely they completely stopped performing well. That would not be a good situation.

But very few. I’m going to say in 21 years, three or four that we would characterize as not really being a good outcome five years later. Wow. Because you hit a lot more than that in the PE market. Yeah. I’ve got to tell you, you’ve got to match make these guys. As soon as you go into the process, knowing that 20% are not good, and you have your antenna up.

Trust, but verify and don’t trust. I mean, like, it’s crazy. But I’ll again my my simple tip to everybody, believe it or not, it’s as simple as look, they have really good experience, but they’re so humble and they don’t talk about themselves and they want to talk and learn and understand from your client. And that behavior, you don’t see it.

A lot. You see someone who’s trying to show how smart they are when we’re in these meetings. And it’s like, okay, that’s not a hundred percent there. I’m looking for really good humility plus experience in that space.

Okay. Hey Matt, you I assume you’re located in the southeast. Yeah. And ⁓ do you do business across the country? Do you see regions in Francis? Yeah, I’ve got one right now in California. We just picked up one in Florida. we just picked up one in West Virginia. Okay, how do you source your business? about forty percent is from referrals, from past clients.

30 to 40% is from referrals from past advisors, lawyers or accountants. And then the balance comes from cast offs on the sell side. Excuse me, cast offs on the buy side. On the buy side, we find 30 to 40 targets for every buy side engagement. And the most that any one of our clients has ever bought on any buy side engagement is four companies. Okay. Which means they pass on a lot.

Do you find yourself in competition at the outset for getting the job? No. Okay. About ten percent of the time, ninety percent we are not.

Matt, quick question. regarding how you get paid and do you share with other brokers? ⁓ I’ve I’ve taken on business listings in the like three to four times EBIT range up to twenty million. I’m a commercial real estate agent, but I’m I’m transitioning into a sponsor. do you share that way? And and then also what do you look for in IOIs? What do I look for in IOIs? I’m look first of all on a case by case basis.

⁓ we will have referral fees for certain groups. Okay. I can’t say that it’s 100%. I want to understand what the opportunity is and then come up with a referral fee reflective of that opportunity. If it’s really hairy and a crazy amount of work, then probably not. on IOIs, I’m looking for a valuation within 10%.

So if a business is worth $20 million, I am looking for a valuation range within $18 to $20 million or $20 to $22 million. Okay. I am looking for if they have committed capital, I’m looking for if there is an opportunity for equity for the management team, if that’s part of it. I’m really looking to, and there’s a process letter.

For IOIs for every single client based on what that client wants, what their goals are. And so it ties back to will the client be able to do X, Y, and Z? will the management team be able to participate in equity? do you have committed capital? what is your put put down your initial opening balance sheet? How much leverage is gonna be on this business?

Again, that’s important for us to understand. Are they going to lever it all? Are they going to be two turns of leverage? Are they thinking it’s four turns of leverage? I want my client and their management team to understand how much they may be under the gun with this particular prospective buyer. Operational experience in that industry as well. Yeah, that usually comes in earlier. Like that’s not at IOI stage. That’s in our initial five questions when we get their NDA.

is to understand their experience. But we do ask them to tell us in the IOI why they think they would be a good buyer and home. So they’re they’ll reiterate that to our client what their experience is. But we we will have gotten that as soon as we get their NDA. And that’s part of our ranking of a one, a two or three. Well okay. Matt on the client side, you’ve seen a lot of prospective sellers

A group of them must be not ready to be sold. In the case where you see a company with potential, but it’s not ready. Do you ever engage in helping them get ready or suggest to them a process of how to get ready? We do not engage with helping them get ready. we will tell them, we will walk through the value drivers and dangers. That’s probably one of the most valuable.

Tools from this presentation for you to hit on these things and let them self-rate where they are. Then the other thing is they can’t do all of them, right? Really pick the one, two, or three that are going to move the needle the most on value. And they do they have time to do it? I’ll tell you, it’s perceived as risky if within six months of going to market they change the president or CEO. I wanna know there’s at least 18 months.

Of seasoning of that president CEO who is going to replace them. We tell them, and by the way, you guys know this. You get someone 64, 66, 70 years old, and they’ve had their business for 18 to 22 years, and it’s groundhog diet, because I just had one. He doesn’t care. He doesn’t need the money. He doesn’t need to optimize his value. He is ready to sell.

And right, he comes to you. I don’t care. I just want to sell it. I want to be done. I want to be done in six months. I want to be done in 12 months. You know, and I do not care. It’s groundhog day. He’s done what he can do with that business, and he doesn’t want to double down. If they’re 40 or 50 years old, they will. If they’ve had it for less than 15 years, they’re going to be more inclined to go ahead and do the work. Or if they’ve

put in a management team and they’ve stepped out and that management team has been operating and they’re really looking at maximizing value. That’s another scenario where the heavy work isn’t on them. These guys have had their business for 20 years and they’ve been in the trenches, they’re, they’re worn out.

Does that make sense? Yeah, I’m just thinking about ⁓ the situation where the right value added over a six to twelve month period could dramatically change value. Hey, the right, the easiest value add that we tell them, and they don’t even have to execute on it. Find out two or three customer concentration. Like the biggest change, if you’ve got some friends in the industry.

And you can help alleviate customer concentration because that is a big ding. Let’s go have a conversation with them. And we do as part of this process that we are looking to grow through acquisition. We are not telling them that we are selling our business, but we are looking at bringing in some growth capital so that we can grow through acquisition and then get one under contract. And if I go in a management presentation,

Or I go in a management presentation and I’ve had three calls with competitors that are one to three million of EBITDA. And all of a sudden I can show my customer concentration goes away. And they’re real. Like it’s, yeah, these guys are also in their 60s. They want to cash out. We got a great relationship. Or I put a term sheet in and they greet. Hey, we’re in the right ballpark. I just need you guys to help do it. Way huge value driver. Huge.

All right. thank you, Matt. If anyone else has any questions, I don’t know if Matt has a few more minutes, but I think we should just wind this down. We try to end by twelve. But this is really interesting. So thank you all for joining us. Thank you, Matt. ⁓ anyone wants an intro, hopefully you either fill out the poll or you reach out to us at Imperial and we will make an intro to Matt.

And look out for that survey that’s coming around. My pleasure being here today with you guys. Thank you. Thank you very much. Thank you. Thank you. Thank you, Gershon. Bye bye. Yep.