Buy-Side M&A Masterclass, Pt. 2 | How to Value a Business and Make a Smart Offer

Jimmy was second-guessing himself as he sat alone at a table at Chesterfields, a table he had dined at dozens of times before. He was there to meet Mark, a potential buyer for his business. Now, although he had gotten a lot of interest over the years from potential buyers, this was the first time he was actually going to meet one in person. And even he was surprised.

As Jimmy sat there, head full of numbers, trying to think about how he was going to pitch this business, he looked up to see a man far more casually dressed than he was approaching the table. "Jimmy, it's such a pleasure to meet you. Thank you for having me up. Now, what do you say? Shall we start with the greens?"

"Absolutely. Let's do it. But Mark, I'm kind of surprised you even know what Udica Greens are."

"Well, Jimmy, I've heard for years how famous Utica Greens are, and I'm dying to actually try them. Walmart, my first time was over 50 years ago, and I might be the only person here in Utica that hasn't gotten tired of them."

"Jimmy, it sounds like you've been here your whole life. Tell me what that was like growing up here."

"Yeah, I was born and raised here, actually. And you know, this restaurant is famous for having invented the Grin, but I don't know. I first experienced them in my mom's kitchen. My father worked for the railroad and really wasn't able to take us here. Thinking back, he'd probably be tickled knowing that I can come here anytime I want."

"Your father sounds like a real hardworking man, Jimmy, just like my old man. But I'm not going to lie to you. If we went out to eat when I was a kid, it was because somebody else was paying."

Over the course of the next 2 hours, Mark and Jimmy ate, talked, and laughed. Time really seemed to fly by. And all those numbers Jimmy memorized prior to the lunch proved unnecessary. Sure, they talked about business, but they spent a lot more time talking about background and family, goals, desires, what Jimmy might do if he does sell his business.

As Jimmy walked Mark out to his car, he wondered, had he dropped the ball? I mean, he didn't even pitch his business, and he did a lot of talking. Maybe he was rude. Should he have asked Mark more questions? Either way, he had a wonderful time with Mark and was left with a great feeling about it.

Hi, I'm Paul Gammore. I'm an investment banker and I negotiate for a living. In today's dialogue between Mark and Jimmy, you'd be forgiven for thinking that meeting was a total waste of time. I mean, look, Mark gets in a car, drives all the way from Philadelphia to Udica, eats some greens, talks about hobbies, doesn't really ask many questions about the business, doesn't present an offer, doesn't talk about deal structure. I mean, he literally talks to Jimmy about what he wants to do with his life, where he comes from, what's his family like, what's his goals and aspirations, gets in the car, and drives away.

But in reality, that was the fourth or fifth step in a highly choreographed, very sophisticated process run by Mark that ultimately resulted in an offer being tendered to Jimmy the very next day. And this transaction closed some months down the road, creating a tremendous amount of value for Mark, but left Jimmy feeling like he got everything he wanted. And that's what we're going to focus on in today's continuation, the buy side. M&A masterclass series. We're going to go from the initial approach like when Mark approached Jimmy to valuing the business to ultimately structuring the offer.

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In the first installment of the byside M&A masterass series, we talked about simply whether or not making an acquisition is right for you. And today we're going to get you into the game. And I'm going to focus on the front end of the acquisition process, the sourcing and meeting of the potential seller, the valuation of the business, and ultimately the crafting of the offer. And traditionally in buyside M&A, there's a tremendous amount of focus on technical skills, right? Valuation, financial, accounting, due diligence, and there's not so much focus on psychology, negotiation, as well as building rapport with the seller.

And so, as you know, I'm a sellside adviser. I mean, I spent a couple years on the buy side, but the extreme majority of my time has always been spent on the sell side. And that provides me some unique insight into the mind of a seller. So, for example, I do hundreds of meetings per year with sellers and buyers sitting down together and talking. I get to see how the seller performs. I get to watch how the buyer performs. But then I get to see the magic happen after the buyer leaves. And I get to talk to the seller and I get to understand, well, that guy was a pompous this guy was super nice, so on and so forth. And I've been able to really understand what makes sellers tick, how buyers can put themselves in a great position, but also how buyers could completely shift the bet.

And when I think about buy side M&A, I think it's important to take a lot of the skill sets that one can learn on the sell side and apply on the buy side. So, for example, you know, look, you could have the best lead generation engine, right? You can get very technical about sending out emails and letters and phone calls and so on and so forth and bring in a bunch of potential buy side leads. But if you can't build a rapport with a seller, they become worthless. From a valuation perspective, you could be great with numbers, right? CFA certificate on the wall, desk full of monitors, spreadsheets, all sorts of stuff, and you could precisely value a business. But if you can't keep that seller from having eyes for other buyers, if you can't corral them into your process, you're going to end up overpaying for the deal if you do it at all. So understanding how to do that is equally as important and I would often argue more important than the ability to value the business. So these are the concepts that I want to focus on today.

So, let's go back to the conversation between Mark and Jimmy. So, Mark is actually a very sophisticated business owner. He's got a degree from Stanford. He's got a degree from Wharton. He knows technology. He knows software. He's bought and sold many businesses. Right now, he owns a software business that focuses on the hospitality space. And he had grown that for some years. And then he decided now was the time for me to do an acquisition. and being skilled in acquisitions, he knew how to deal with sellers. He began his process with Jimmy months before he ever reached out to Jimmy.

As the owner of a software business focused on hospitality, he really began to understand the various different players in the space and what their capabilities were. And he knew that it's a relatively narrow field. He's not in a business where there's 100 or 200 potential acquisition targets. He's in a business where there's maybe five or six. So he did his research up front. He understood which various different businesses exist, what sort of capabilities they could provide him, but he made an important decision from the front end. He said to himself, if I do an acquisition, the acquisition has to work from a financial perspective on a standalone basis. I am not going to pay for synergies, right? And I'm not going to do a deal if I don't get synergies. I don't want to just buy another software company. I want to buy a software company that I can somehow utilize.

And when he looked at the field, what he determined was not a lot of these companies provided him any sort of software code or technology that he could really utilize. But there were a few of them that had some really marquee accounts and would allow him to cross-sell his services into the hotels in which those companies are already operating. And so over the last few years, he kept stumbling upon Jimmy's business. So Jimmy's business focuses on point of sale and inventory control in hotel restaurants, right? It just focuses on the hotel restaurants as opposed to operating the front or back office as a hotel. Whereas Mark's business focused more on front office operations.

Mark looked at Jimmy's business and thought to himself, look, I can add on an additional suite of services, right? So now I can deal with the restaurants. But more importantly, Jimmy's got a lot. He's been around 30 years. I haven't. He's got a lot of great customer relationships and some really great hotel chains. He also has a small team of direct sales folks that have very deep relationships with hotels across the country. And these are folks that have worked for Jimmy for years and years and years. And Mark was doing a lot of online sales. He didn't have folks to go out go into a hotel in Manhattan. Jimmy had account reps that would go out into these hotels that had longstanding deep relationships with management at a variety of hotels.

So Mark began to think, hm, I can buy this business. His software is not Jimmy's software, by the way, is not outstanding, but it's operative. and maybe over time I could take my skills and change the software offer. Right? So that was one opportunity, but that wasn't a near-term thing. It was a longer term value creation potentially. But immediately he could take Jimmy's software and add it to his suite of software. So to him that made a lot of sense, but most importantly getting the sales force with the deep relationships which would allow Mark to really accelerate growth on his side. So he put Jimmy in tier one. So this was a tier one target for him. He was going to focus a lot of effort on Jimmy. There were some other smaller software providers that did different things within hotels that he thought, okay, these are great tier 2 acquisition targets and there were three of them. And then he found a few others which were like, hey, if I could really get these at a great price, like pay next to nothing for them, they're worth it. So those were tier three.

So, what Mark did some months ago is sat down and he wrote a very personalized letter to each of the owners, right? He could have sent an email. It could ended up in spam or it would have been one of the 500 other emails guys like Jimmy get from search funds and private equity firms and other strategic acquirers, which again would likely have been ignored. So, Mark wrote the letter and he had done research so he understood the history of Jimmy's business, how Jimmy founded it. He knew who Jimmy's key people were. He knew what awards and prizes the company had won. He also knew what hotels Jimmy operated at. So, in the letter, he was able to say, "Jimmy, I know you operate from XYZ Hotel. I love that restaurant. I know you operate from this hotel and that hotel." He's able to reference the accolades that Jimmy's business had earned over the years and demonstrates sincere interest.

So when Jimmy received this letter, it was really hard for him to he could look at it and say, "Well, this is a form letter, right? Like this is some 20-year-old kid pumping these things out." Well, he looked at it and said, "Okay, this is a guy who knows me. This is a guy who knows my business, so it was worth returning the call." So Jimmy showed up at the office one day and there's a FedEx pack on his desk. He opened it up. He read the letter and he's like, "Man, this is different from all the emails I get from Cedar Fork Capital that, say Jimmy, we love your business. We really want to get in this industry. You got 15 minutes to chat." Or from a buy side business broker. So Jimmy picked up the phone and he called Mark back and he said, "Mark, I got your letter. You did some impressive research. Are you really serious about doing the deal? Like what really makes you interested in my company?"

So they had a very brief chat. Mark told him a little bit about himself. You know, I used to be in investment banking, then I went to private equity, but I've always been a software guy, so I've bought and sold some software companies. I'm in the process of growing mine. And I think there's some great synergies between our businesses, and I would love to chat with you about it. And Mark was elated to get the call from Jimmy, but he was also prepared. He had already prepared a non-disclosure agreement that protected the information that Jimmy would subsequently provide to him. But it even protected Jimmy from the fact that he was even having a conversation with the buyer in the non-disclosure agreement. It said, "Hey, the fact that we're having this conversation, period, and that you know me is confidential." And Mark had that prepared and he said, "Jimmy, I really want to have a serious discussion with you and I put together a mutual non-disclosure agreement. I want you to know that I'm serious, so I'm going to send it to you." So, he got Jimmy's email and sent him the non-disclosure agreement. Then he set up another call.

And they had a series of calls over the following few weeks. And Jimmy felt comfortable. There was a non-disclosure agreement. He liked talking to Mark. He thought Mark had a good personality. He thought Mark was smart. And Mark started to ask for financials. And Mark said to Jimmy, "Jimmy, you know, I realize you're busy running your business. And I would really like to dig into the details of your business to make a relatively quick decision. All right, you're a busy guy. I don't want to distract you. I've got a lot of stuff to do. I want to kind of see if there's something there. And so, I'm wondering if you would be willing to provide me any financial information. I don't want to see anything about your accounts. I don't want to see anything right now that you would be uncomfortable giving me. But if you have some financial statements that I could take a look at because I can start to think about the economics of this deal."

So what Mark did is he took control of this. He didn't ask Jimmy what Jimmy wants from a purchase price perspective. He also didn't provide Jimmy a massive request list. He had a telephone call and he said, "Jimmy, if I could see three years of financial statements, I don't need tax returns. If you have them, that's great. If you have internal financial statements, I'm happy to take a look at those. Maybe you use QuickBooks. If you have something that shows me your accounts, but something that's sanitized, right? I don't need to see the name of your accounts, but I I'd like to understand the customer concentration of your business. How many hotels do you serve? Like, I would imagine you serve the Marriott, so that's a big chain. Do you have one account there which accounts for 25% of your business or are you selling directly into individual hotels?" He had a very very casual and informal conversation. No request list went out. It was just, hey, a couple of different bullet points. This will orient me and kind of give me a sense of how our businesses fit together because I'm not really interested in doing a deal unless there's a cultural fit, a financial fit between the businesses. And I and I think you would appreciate that from me as well, Jimmy.

So Jimmy went and talked to his wife Cheryl over dinner, explained to her what happened. And she said, "Hey, that might be an, you know, Mark seems like a sister guy." Talked to the lawyer. So he talked to his lawyer. The lawyer looked at the NDA and said, "Yeah, it looks it looks appropriate for what you're trying to do." So Jimmy sent Mark financial information. And over the course of the next few weeks, Mark spent time, he put together a very basic financial model.

And so when we start to think about valuation, Mark wasn't concerned about comparable transaction statistics. You know, when you think about valuation, there's a variety of ways you can do it, right? Like from a broadbrush perspective, you have the comparable acquisition approach, right? We call this the market approach. You have the income approach which is internal rates of return, discounted cash flow analysis and all this financial mumbo jumbo. Now Mark was actually sophisticated enough to understand that Mark could build a DCF. Mark could go out and find industry comps. He wasn't concerned with that.

As Mark went into this acquisition process, he thought to himself, I'm going to determine what this business is worth on a standalone basis. I'm not going to concern myself with highest investment value or what the business would look like being combined with mine. I'm going to take a step back and forget about synergies and just say if I were a financial buyer and if I were going to buy Jimmy's business on a standalone basis, what would that business potentially be worth? I like to do fair deals, but I'm the one writing the check and I'm the one taking the risk. So my purchase price is going to be inversely related to risk. So the higher the price that I pay, the more risk I'm going to have and naturally the lower return. So I'm going to go into this with the mindset that as a buyer, I always need to be focused on decreasing my risk. Now, one of the unfortunate byproducts of that for a seller means lower price. But Mark couldn't concern himself with that. that he needed to focus first on his risk profile.

So instead of going out and talking to private equity firms and bankers and getting online and doing research as to what software companies trade for, wasn't concerned about that. He was concerned about what that business would be worth to him. So he looked at the financial statements and the business was doing about $10 million a year. And it wasn't growing particularly rapidly. In fact, it was barely growing at the rate of inflation. It was growing at single-digit topline rates. and he realized Jimmy's in his 60s. The business is kicking off almost $2 million a year in cash flow. So, we've got Jimmy who lives up in Ludica, New York, conservative, generating $2 million per year. Jimmy wasn't trying to break anything, right? Jimmy wasn't going to go out and blow this thing up. That wasn't his goal. It was a lifestyle business for him that he literally founded 30 odd years ago when he was working the night shift at a hotel.

So when Mark looked at the financials, he said, "Okay, a $10 million business growing at roughly 5% per year, $2 million in cash flow, if he focuses on software comparable acquisition statistics, this could have been a 10 times deal or a 15 times deal or even a 20 times EBA dot deal." But he at this point in time wasn't sure what Jimmy's expectations were. So he looked at that business and said, "Man, if I can buy this business for five times EBIDA, that's a $10 million purchase price. That's a slam dunk for me. That's really where I would like to be." And then he looked at it and said, "At what point does the price get too high for me?" So, as he ran his numbers, he said, "Look, you know, I could potentially go up to 10 times on this deal, but it really starts to squeeze my return." And again, Mark's not running discounted cash flow models here. He's got he's doing bro math, right? He's got the napkin out. He's saying, "Okay, 2 million in cash flow. I pay five times for it. I'm going to get a 20% return." Um, yeah, I don't know that I really want to go much much above that. And could I potentially on a standalone basis get this up in the higher single digits? Sure. But 10 times or north of that, I don't think it really makes sense for me because quite frankly, I could take that cash and redeploy it into my business. I can take that money and hire a sales force similar to Jimmy. I mean, maybe I go out and overpay to poach some of Jimmy's sales folks. So, I don't really need to do that, but I would like to get his software because I think I can make some significant changes to that over time and really ramp that business up as well.

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Now, Mark has the basis to craft an offer. So, he's doing all this work in the background, right? He had a couple of conversations with Jimmy over the phone. He received some financial information and in his last call, he said, "Hey, Jimmy, I'd really like the opportunity to sit down with you in person so we can get to know each other." So, while they were coordinating schedules, Mark sat down and actually drafted an offer.

Now, from an offer perspective, you could do this a variety of different ways, and there's a lot of different names for offers, right? There's an indication of interest, which tends to be a one-pager. And an indication of interest is a very short limited document that just literally expresses interest, right? Hey, I'm interested in buying their business for between 9 and $11 million, right? Often times there's a range in an indication of interest because you're trying to gauge the other side. And in formal sellside processes, this is what we typically deal with on the front end of the process, right? If we go out to 12 strategic acquirers and 25 private equity firms, we're usually not getting letters of intent. We're getting indications of interest because on the buy side, they're trying to test where the market might be. And on the sell side, we're also trying to test where the market is. So, where are these indications?

But Mark took a different approach. I mean, he wasn't in a competitive process. He had a direct one-on-one line to the seller. What he wanted to do is draft a term sheet or what we'll call a letter of intent. And in my mind, a term sheet and a letter of intent are the exact same thing. And those tend to be documents that range from one to, you know, 10 or 20 pages. I mean, they typically are a couple of pages. And they outline the rationale for doing the deal. And they talk about the trucks.

And I want to step away from Jimmy and Mark for a second and focus on the letter of intent. And I want to say when I'm talking about letters of intent or LOIs, I'm talking to the US market because when I talk about binding or non-binding, in certain jurisdictions, the letter of intent actually is binding. Um, but broadly under US common law specifically, if you say this is a non-binding offer, it's a non-binding offer. Again, I'm never giving legal advice. You under no circumstances should get involved in buying a business without competent M&A counsel. And I strongly suggest that you have competent counsel review even non-binding documents like LOI. So they never put something in there that you regret.

But a letter of intent, I mean, look, you can get online and pull up letters of intent. You can probably go to chat GPT and pull up letters of intent. I'm not going to focus on the technical aspects. What I'm going to talk a little bit about today is what Mark did slightly different. So when Mark drafted his letter of intent, normally what you'll see is, you know, typically a letter of intent would have an introductory paragraph and then say this letter establishes the terms by which we intend to acquire XYZ business or substantially all the assets of this business or the shares of this business for such and such price and here's all the terms.

Now, Mark knew he was dealing with a seller who had never been through an acquisition process before, right? I mean, he talked to Jimmy about it on the phone and Jimmy like, "I've never really had any conversations with anyone about selling a business." So, Mark said, "You know what? I'm going to take a very casual, informal approach to Jimmy, and I'm going to write this thing in plain English. There's not going to be a lot of legal ease on it. I'm going to draft a document where I am going to outline how excited I am, why this business makes a lot of sense from a rational perspective. I'm going to talk about the purchase price and the structure. Jimmy, I'm really interested in acquiring all of the assets of your business and I've come up with this purchase price which I think is extremely fair to both you and I." And so instead of taking the very legal approach to this, he laid out the terms in the LOI and signed it, put it aside.

Once he did that, he realized, I can just email this to Jimmy just to see how it goes, but I really need to build a rapport with Jimmy, and I want to make sure that I can validate some of my thoughts in the offer that I've drafted. Right? So, I've got this offer ready to go. I'd like to hand it to him, but I really need to get into Jimmy's head. What does Jimmy actually want to do? I mean, does Jimmy want to sell his business? Does Jimmy want to sell his business and kind of stick around? Is Jimmy's ego so tied to this business where it's going to be very, very difficult for him to leave it? Right? I mean, this is a common issue that I deal with every single day. It's like sellers often identify with their business in a way that a father or mother would identify with a child. And to remove a seller from that business, there's an actual grieving process, right? We don't often think about grief, but there's I mean, we as humans face grief all the time. You know, the manager that we really love leaves. We're going to grieve that loss. We had a particular dream for our lives and our life has taken a different turn. We have to grieve the loss of that dream. So you can't underestimate the importance of the attachment between an actual founder in the business.

And Mark was cognizant of that. Like he knew that he was a founder himself. Like he knew what it was like to put his blood, sweat, and tears into his business, build a relationship with his team and his customers and then lose that. So he wanted to be able to sit down with Jimmy to really understand Jimmy's connection with the business. But what motivates Jimmy? Was Jimmy looking to buy the $20 million yacht, which probably was never going to happen for Jimmy, but is that what he wanted to do? Or is Jimmy a family guy? He's got some children. He's got a wife. Maybe he wants to buy a vacation home, continue to live in Udica, has a nice savings already. What does Jimmy's financial situation look like? What were Jimmy's aspirations? How did Jimmy think about investments? You know, if you sit down and talk to a seller, you they've got their business, but how does a seller deploy excess capital? Is it a bank account somewhere? Are they investing in real estate? Do they dabble in other businesses? What is what is their risk profile? And how has it changed over time? What did they do 20 years ago? What do they do today? Understanding these nuances can provide a lot of valuable information to you as a buyer when you actually sit down with a seller because now you can actually craft an offer.

So understanding does Jimmy have an immediate use of proceeds, right? Does he need cash today? Does he need a million? Does he need $5 million? Is he to comfortable getting cash over time? Right? So when Mark's looking at this, Mark thinks, "Okay, I've got a few million bucks um available for this acquisition. If I'm going to do a $10 million deal, I'm going to have to finance this somehow. How will I do that? Can I go to a bank and leverage it? Will Jimmy take a seller note? Right. I Mark can be more flexible on my price and terms if Jimmy's going to act as my bank. I really don't want to put that on an LOI that like I don't want to I don't want to structure this deal until I know what's important to him because I know you're sitting here thinking, "Well, well Paul, like I don't know. Why doesn't he just ask Jimmy?" Like, why doesn't he say, "Jimmy, what do you need? How much cash do you need? And you can certainly ask these direct questions, and I've done it before. I think again, in dealing with a seller who's not done this before, it's often times better to take a very indirect approach. And one of the things that I've realized over time is that when somebody like Jimmy feels like you're really interested in their business and you're spending time and effort, it's really hard for Jimmy to question the assumptions you're making.

So if Mark says, "Hey, Jimmy, here's a $10 million offer. I'm going to put $2 million of my equity capital into this. I'm going to borrow $3 million and you're going to hold a seller. Now, that's a reasonable proposal. He hands that to Jimmy. He doesn't have any background information. Doesn't know what Jimmy wants. Has no idea about Jimmy's need or use of capital. Jimmy might look at that and Jimmy might not know that he has permission to negotiate. He likes Mark. He doesn't want to lose the deal. So he stays silent on his needs because he doesn't want to offend or he doesn't understand it. He thinks like, hm, maybe this is just how deals are structured. So he talks to Ron at the diner and he sold a business a long time ago. Yeah, I had an earn out. I had a seller note. Like that's part for the course. Or he talks to his lawyer and his lawyer's like, "You don't know this guy. You need to get all your money up front, otherwise don't do a deal." So he gets all this kind of conflicting advice and he might not find himself comfortable enough to have a direct conversation with Mark.

So Mark being the sophisticated buyer that he is knows that he's got to ascertain this information and often times he has to take an indirect approach and so he's got to really understand what makes Jimmy tick before he even puts that offer in front of him. So Mark didn't spend a tremendous time doing research, but he did do his work. He read an article on Jimmy and the software company from years ago in an industry rack. He took a look at his Facebook page just to kind of understand what sort of stuff did Jimmy do? What is his hobbies? Does he like to be out on a boat? Does he golf? What does he do? And then he stumbled upon a very obscure podcast that Jimmy had done in some sort of minor hospitality industry magazine. and they did podcasts at a at an industry event some years ago and it was a 15-minute discussion and it he learned Jimmy grew up in Udica. His father worked for the railroad. His mother worked at a knitting factory. He dropped out of university because he had to take a job at a hotel because his future wife had just gotten pregnant. Now he's working night shift at a hotel and he'd always like to tinker with software. So he developed now the software that ultimately became his company.

So, for Mark, he's like, "This is a normal guy. I'm going to I'm going to show up as a normal guy. I'm not coming in in a three-piece suit, right? I'm certainly not going to wear my bathing suit, but I'm going to come in in jeans and a t-shirt." And Mark knew enough to not attempt to impress Jimmy coming up from the city in the suit. He's like, "Look, I'm going to wear jeans and a t-shirt."

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Now, it's time for the face to face meeting. Mark's going to take the long drive from Philly to Udica. So, he's got some hours in the car. Let's talk about what Mark knows, what Mark might be thinking about. The facts says they stand. He wants to do a deal. He did an acquisition search, reached out to some various parties. And Jimmy, his tier one acquisition candidate, responded. Jimmy didn't respond to a lot of other folks, but Mark did it right. Now, Jimmy has responded to him. Mark has somewhat earned Jimmy's trust. I mean, they executed an NDA and Jimmy Eden shared some financials. So now Mark has a sense of what the financials of the business look like. He understands operations a little bit better. This is a deal that he wants to do. He's dropped in an offer and he based that offer on his research and what he could figure out and assume about Jimmy. But today's the day. Today's the day he's really going to dig in.

What he wants to do today is put himself in a position where Jimmy will accept a reasonable offer. Now, you might say, "Well, he hasn't done a lot of diligence. This might be problematic. He needs to dig in more." Well, Mark knows that he's got a month or two months after the signing of the offer. You know, there'll be an exclusivity. And what that means is Jimmy won't be able to deal with any other buyers, but in consideration for Mark spending time, money, and effort on diligence, Jimmy's somewhat locked in, at least through the exclusivity period. It's not a binding deal, and it won't be binding until they sign the purchase agreement. But Mark has a few months to investigate. He can line up financing, draft the documents, do financial accounting, legal due diligence, so on and so forth. So Mark is very comfortable at this point in time, but he's got some issues he's got to deal with.

He needs to get up there and elicit an emotional response from Jimmy. He needs to feel like Mark's not coming off as he's superior to him in any way. And what I mean by this is like, you know, sometimes corporate buy side guys or private equity guys are such douchebags, right? They come in, they talk about all the deals they do and all this money and I went to Harvard and Stanford and Yale and so on and so forth. And the sellers are like, man, like I'm way out of my league here. These guys know a lot more than I know. That makes me uncomfortable. That makes me want to seek out advisors that know more than I do so that I'm not making mistakes. So, if Mark comes in hot with his Wharton degree and his Stanford degree and all the deals he's done and how sophisticated he is, he's not actually helping himself. He's putting himself at a significant disadvantage from a psychological perspective because now Jimmy's like, "Man, I am outgunned and outmatched. I need to go out and find some sophisticated adviserss to make sure this guy doesn't take advantage of me."

Mark knows that. So, Mark's like, "You know what? I'm coming in in a t-shirt in jeans. My focus is not on me. My focus is going to be on Jimmy. I want him to be the cleverest man in the room and not me. I am not going to focus on numbers. I'm not going to interrogate him. I am going to go there and build a relationship with him. That's number one. But number two, Mark knows that information is important in any bargaining. Right? So understanding context behind Jimmy's goals and motivations and objectives are going to be very very important not only crafting the offer and get through diligence but even executing the purchase agreement really understanding what's important Jenny as well as postlose.

Mark also knows that he needs to conceal information. Now Mark's not an unethical guy. He's not going to lie to Jimmy. If Jimmy asks him questions he's going to tell him that. But he's not going to volunteer things that may make Jimmy feel like he's at a disadvantage. So, he's going to focus on family and friends and hobbies and lifestyle and what it's like to found a business. And his attention will really be on eliciting responses from Jimmy. Let's get Jimmy in his element, talking about what Jimmy wants to talk about, and just let it all flow.

Mark's most important objective for this meeting is number one, he wants Jimmy to be thrilled to do business with him. He wants Jimmy to say, you know, Mark's a stand-up guy. He's a great guy. He's personable. I can get along with him. We can do business together. I trust him. Number two, Mark wants to farad out as much information about Jimmy's goals, desires, and objectives as he possibly can. He wants to understand how tied is he to this business emotionally. Is he the type of guy that's frustrated and wants to get rid of it? Is he the type of guy that has been thinking about it for 5 years but just can't let go? Has he had any failed acquisition attempts? Right? You know, Jimmy said, "Hey, I don't really talk to buyers, but had two other buyers been in there, tried to do a deal, and Jimmy just couldn't pull the trigger." It's really good to know if that's the case because now Mark can start to think about hm I've got another acquisition that might be yeah it's not as good as Jimmy's business but but from a time and resource perspective I might be better off focused over here. So understanding those sorts of things and if you know you're the type of person that goes in there and talks the whole time and I think buyers sometimes think they got to go in there and sell a seller, right? And that backfires I think sometimes horrendously when you want to go in there and point to all the great things that you've done, I would be such a great partner and so on and so forth. Certainly a little bit of that makes sense, but when you're talking the whole time, like when stuff's coming out of your mouth, like I'm talking right now, I can't hear, right? So, you're not going to be listening to the seller, which is a massive, massive wasted opportunity.

So, what Mark thinks right now, he's getting himself geared up. I got to be warm. I've got to be friendly. I've got to ask a lot of questions, but I shouldn't seem like I'm interrogating Jimmy. I should talk a little bit about the business from a highle perspective. If there's any questions that I really need to know, I'm going to ask him. But listen, I don't need to get into the weeds here. That's for diligence. I'm going to save that. I want to get Jimmy talking. This is what I want to do. And this is how he amps himself up in the car. Thinking about questions, thinking about Jimmy's interest, so on and so forth.

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Jimmy left that meeting thinking that he dropped the ball. Like he had all these numbers in his head, right? He was reading this P&L on EBITDA and cash flow and the growth rates and god knows what he was thinking about. And I think he expected Mark to interrogate him a little bit about the financials. You know, what's this charge on line 32? Why is your insurance rates go up in 2022 and down in 2021? Mark didn't do any of that. So, it left Jimmy feeling like, hm, maybe he's not that interested or maybe I didn't do such a great job. But mission was accomplished for Mark. He made Jimmy really feel good about him. Jimmy trusted him. He liked him. And Mark got two hours worth of Jimmy talking about everything from his family, what he wants to do, the fact that he is starting to get burned out in the business, the fact that he would be happy to walk away, the fact that his wife has been talking about buying a vacation home on Lake Kauga for a decade and he continues to put it off and put it off, but now it might be the time to do it. the fact that both of his children just had children of their own. So, he's a relatively recent grandfather. He's got other obligations outside of the business. All of this sort of stuff helps Mark understand what his immediate need for cash is and his potential willingness to take a seller.

Now, he talked to Jimmy about his investment philosophy. Where does Jimmy tend to put his money? Is he out there buying Bitcoin and tech stocks or is he a conservative investor? Does he invest in real estate? How does he deploy his capital? Narc was able to find out that that Jimmy's actually a very conservative guy. He buys some real estate there. He's got a lot of money sitting in US treasuries, which means he's not used to experiencing large yields. Like he's okay with perhaps a decent coupon on a seller note. So, it was mission accomplished for Mark. He definitely left Jimmy wanting a little more. But instead of dragging Jimmy out, he did a brilliant thing. He drove back to Philadelphia that day and the very next morning he revised his offer, put it in a FedEx envelope and he attached a very nice handwritten note to the letter of intent that basically explained to Jimmy about how comfortable he is, how excited he is about this opportunity, how this is a perfect match. He went on and on in the letter, put it on the LOI, FedEx it to Jimmy.

So now Jimmy's not in a position to wait for this thing, right? Like Jimmy's not like I mean he wondered after the lunch if Mark really was interested in the business or if maybe Jimmy dropped the ball, but Mark didn't make him wait for a week or two or 3 weeks. Mark was on it. Jimmy was thinking about doing a deal. This wet his appetite to be able to leave the burnout, spend time with his family. This was his opportunity. He's thinking about it. And this happens a lot, I think, when you as a potential buyer approach a seller and the seller may not actively be thinking about selling the business. You approach, you talk about doing the deal. All of a sudden, the seller's like, "Man, I hadn't really given that any thought. I had been denying the awareness of my desire to sell this, whether consciously or unconsciously, and now I actually think about doing it. Now it's on his mind. It's fresh." and you have these sorts of meetings and if you delay your response, he's going to think your tire kicking, but he's already thinking about selling. So now he's either out talking to other buyers while you're trolling around or he's out talking to adviserss and in that case, you're going to end up paying way more for the business. So it's important to move very quickly.

You know, you're in control. Remember, I always talk on the sell side, the buyer side, I always talk about being in control of the process. It's hard for a buyer to be in control of a formal sellside process. Right? If I'm a bank a sellside banker and I take a business out to market, it's my process. Now, a buyer might try to preempt. A buyer might try to less control the process. But if I do my job right as a banker, I'm controlling the process. The same thing for you as a buyer. You're not in a formal process. Like you've got a proprietary deal. You've got a seller with no advisor. There's no other buyers kind of waiting around. Think about how you can turn this into an orchestrated process, right? Think about how your your deal flow engine works, your valuation processes, your offers. You can kind of put together your own little corporate development process and be ready for that. But in Mark's case, he was ready for that. He FedEx that letter to Jimmy and Jimmy received it the next day. And it was a Friday when Jimmy received it. Jimmy went into the weekend and on Sunday morning he sent Mark an email said, "Hey, thanks so much. It was really great meeting you. I got your offer letter. Let me digest this and I'll get back to you."

Now Mark's in the waiting period. And this period can be a little bit complicated because, you know, look, if Mark were dealing with a publicly traded company that was disposing of a division, if Mark was buying a portfolio company of a private equity firm, if Mark were buying a business from a sellside adviser, an investment banker, there would be some protocols that would typically be followed in terms of communication. ation and offers and so on and so forth. But when you've got a seller who right now you're like, "Okay, he doesn't really have a lawyer." And if he does have a lawyer, it's certainly not an M&A attorney. He doesn't have an M&A adviser. And now he's looking at this offer in a vacuum. and he's calling his brother-in-law and he's talking to his wife who's been an elementary school teacher for 41 years and doesn't have any experience in that. She's critiquing, you know, syntax and grammar perhaps. But what does he do? How does it feel to get that offer? He looks at it and says, "Well, I thought my business was worth way more than 10 million bucks." Maybe he did. Maybe he didn't. I don't know. Maybe he never expected to get more than 5 million. But Mark never asked him what he wanted for the business. And Mark took control of that process. And I typically advise buyers when you have any sort of information or technical advantage over the seller. when you know more about valuation than they do, it should be you putting the first offer on the table. And I'm not talking purely from an anchoring perspective, but you get your

numbers out there first. And I know, you know, it's like on the sell side, I never put an asking price on the business, right? Like I want buyers to make offers. I want indications of interest. I'm not putting numbers out there. I'm going to wait to see what comes to me. That kind of gives me an idea where the market is.

But on the buy side, it's very difficult when you wait for a seller or you ask a seller because I got to be honest with you, I haven't met many people in the last 25 years who think that their business is worth less than it actually is. It's usually an order of magnitude, right? Like the guy with the $5 million business is sure it's worth 20 million bucks.

Um, and so now, you know, if Jimmy thinks his business is worth 25 million bucks and he he puts a $25 million asking price on the table, now you're negotiating, you know, now Mark Mark's stuck negotiating against his $25 million anchor. So, anything that Mark puts on the table is going to be insulting. But in absence of Jimmy having said $25 million, there's no face to be saved, right? Jimmy didn't come out and say $25 million and the mark's like 10 and now it's just, oh, we're so far apart.

Now Jimmy has some time to accept, right? When I talk about, you know, the principal investment, I talk about acceptance time. Subs need time to reorient expectations. So what would typically happen here? Like if Jimmy expected $20 million for this business, he would initially panic and he would do one of two things.

Um, a pretty typical thing is be like, "Hey, Mark is a tire kicker and I'm wasting my time and Jimmy would just be done with the process." Like he wouldn't even try to counter offer. He would just be like, "That's it. This guy's trying to screw with me." Even though Mark's not actually Mark put a a val a very reasonable fair off on the table. Mark's not trying to take advantage of this guy, but that could be a potential response.

Um, you know, sometimes in a very rare occasion, the offer is for more than what the seller expects. And, you know, you would typically expect a seller to jump on that, right? Like it's like if Jimmy thought it was worth 8 million bucks and Mark put $10 million on the table, what you would expect is for Jim to be like, "Well, that's $2 million more. I better sign this paper." It's not often what happens. What happens is a seller will look at that and say, "Well, hm, how wrong am I? If I thought this thing was worth 8 million, this guy's putting $10 million on the table. Maybe I need to talk to somebody who knows more than me and him because I think this thing might be worth 15 million."

So, as a buyer, it's very difficult to win, particularly right out of the gate. I think anyone that has experience dealing with sellers knows exactly what I'm talking about. So I think the best thing that you can do, you're in Mark's position, you're the buyer, is again, you have to think about your own economic parameters. I think before going into any sort of deal, you need to say, "Okay, here's what I would like to pay for this business. Here's the most I'll pay for this business." And then you have to determine what your initial offer is going to be. And you know there's tons of debates as to what you should do. Should you come in at 50%? Are you guys going to do positional bargaining back and forth, meet in the middle, so on and so forth.

I think the answer to that question, at least for me, and and I think a lot of this comes from the experience over time. I think you can kind of read the seller to a certain degree. You can kind of get a sense for I mean there's there's certain people out there who are going to bargain everything and as buyers you know I've seen this all the time there's nothing worse than a seller that does not know when to stop negotiating you know it's like every concession you make as a buyer is just an invitation to more bargaining right and and that's a miserable position to be in as a buyer because the seller's never satisfied.

The way I tend to personally, this is personal style. The way I tend to handle this is like look, I want to do a deal at 10 million. I would go up to 12 million with some structure in the deal, something to mitigate my risk, maybe an oral, but I'd go up to maybe 12, 13, right? On the high end, where do I need to come in? And so for me, from a personal style perspective, I would tend to come in slightly lower than the 10 million bucks. I might come in at 8 million, 8.5 million and be prepared to move up to 10 million. You always always have to give yourself room. People don't feel like they've won unless they've bargained for something and gotten concessions. And so, um, some of you though may look at that and say, "Paul, I want to pay 10 million bucks. I'm going to go in at 5 million." And that would be an appropriate thing to do. It depends on how badly you actually want the transaction. What I'm, you know, coming in so low may do to the seller and cause him to look elsewhere.

You know, in Mark's situation, he looked at it and said, "Well, this is a slam dunk for me at 10 million. I could pay 12, maybe 13, but 10 million bucks, this is great. I think this is a very fair price for Jimmy. I don't want to come in too low because number one, I don't want Jimmy to shut down. I don't want him to ignore me. I don't want him to think I'm a tire kicker. I actually want to do the deal. I'm not out there to just buy cheap assets and if I can't get it, whatever, I'll move on to the next one. No, this is strategic for me. So, I want to put a fair and respectable offer on the table that I can talk about and substantiate with a straight face."

So, you know, in this case, maybe Mark went in at 8 million bucks. So Jimmy gets the $8 million offer. We have no idea what that Jimmy's thinking, right? We don't think it's worth 5 million or 20 million or whatever. But Mark came in what he thought was a fair and reasonable price. Jimmy's got the offer. Mark's now waiting for the response.

So, let's take a 50,000 foot view here at this situation. You know, if you've watched the sellside M&A master class, you know that Jimmy's making all sorts of errors, right? At at this point, he's dealing with one buyer. He's getting effectively no market price discovery. He doesn't have multiple buyers coming in making offers. Uh, he, like I said, he's dealing with one buyer. There's no competition whatsoever. So, you know, Mark can afford to kind of be relaxed. He's moving the process along as quickly as possible, but he doesn't there's no other buyers necessarily waiting in the wings that he believes or suspects.

So, Jimmy now has somewhat of a conundrum. Jimmy's not a finance guy. Jimmy doesn't deal much with the valuation of things. He's particularly conservative. So now he's asking not necessarily the people who are best suited to provide him answers. Jimmy is asking the people that he trusts the most. One being his wife, the school teacher, the other being his brother-in-law. He knows a guy at church that sold a business before. It was an entirely different sort of business, but he knows a guy that sold a business. And he's got a local attorney that he's worked with for 27 years. And the attorney does everything from retirement plans to wills and trusts and estates and real estate. He dabbles in a business sale here and there.

So Jimmy sits down with the lawyer and the first thing the lawyer looks at and he's like, "Ah, Jimmy, there's no deposit language in this letter of intent." Jimmy said, "What do you mean?" Lawyer said, "Well, you know, when you buy a home, you put a deposit down." Meaning there's got to be earnest money. Like how do we know this guy is serious? He's not putting any earnest money. It doesn't say like, "I'm going to give you a check for 10%." Um, that's returnable if you walk away. And Simon's like, "Well, I didn't know we needed to do that." And the attorney is like, "Absolutely. We do 100%. This all deals are done that way."

Now, the problem is the attorney is 100% wrong. The attorney does real estate transactions. He's not an M&A attorney. Um, it is very rare maybe in the lower middle market business brokerage realm but the realm in which I operate in the middle market larger transactions there's no ear money and look Mark's going to spend a lot of time money and resources doing due diligence he doesn't need to put money down to prove that he's serious.

So Jimmy's already getting I don't want to call it bad advice because I mean I think the attorney does have his best interest in mind but not appropriate advice for the situation. And then of course the attorney tells Jimmy, "Wow, that's a great price for your business, Jimmy." Now the attorney has no basis in value. He's got zero experience in financial matters whatsoever. Now he's opining on non-legal terms which is one of my biggest frustrations. If lawyers for me when lawyers start to get involved in business and financial terms it frustrates me because they have no background experience or expertise in financial matters and I quite frankly wish that they would stay out of it to a certain degree.

Um, but Jimmy's attorney is already doing this. He's already opining on the purchase price, which quite frankly is unfair for Jimmy because Jimmy's looking at the lawyer as somebody who knows more than he does. Uh, this guy does deals and he says that's a good price. Well, the problem that Jimmy has right now is he's talking to a general attorney about an M&A assignment. And this attorney does not have experience. And that's a problem for Jimmy, but it's also a problem for Mark because what often happens is the attorney will say, "Hey, there should be deposit language. This guy's trying to take advantage of you, Jimmy."

So now here, Mark's trying to do the right thing. Actually, Mark's following the book, right? This is textbook what he's doing. And there's an attorney in the background telling Jimmy that he's dealing with somebody that may be trying to take advantage of him. So, I know this is a buy side discussion and not a sellside discussion, but I would be remiss to not bring up the point that whether you're on the sell side or the buy side, do make sure that you have competent counsel that has experience in the subject matter that you're dealing with. If you're dealing with a buy side transaction, engage an attorney that's done a lot of buy side work. If you're a seller, do the same damn thing. It's on you to go out and get good advice. So, go out and find somebody who actually knows what they're doing.

Um, like I said, this creates a problem now for Mark. So, Jimmy, what he's doing is talking to a variety of people, hearing a bunch of different opinions. Now he's starting to form judgments as to who Mark is in Mark's absence based on what Mark put on the paper, which is not entirely fair to Mark, but this is how life is. And so as a buyer, you have to deal with these things. So Jimmy's making notes. Mark didn't even offer to give me a deposit. What does he think I'm stupid? You know, and he's going through this letter of intent. And the attorney by the way is talking about all these various different asinite terms and how attorneys tend to talk to clients in general my experience particularly some of the attorneys that do not focus on M&A transactions is it's always the other sides trying to take advantage of you which is not helpful from an emotional and psychological perspective when trying to do a deal right when the attorney is like hey Scott trying to take advantage of you why are you dealing with him so on and so forth Well, it's easy for you to say, "Mr. Attorney, and when you're the buyer, there's not a whole lot you can do about it."

In situations that I've seen that are similar to this with Jimmy, it does make sense sometimes if you're a buyer to suggest a couple different sophisticated M&A attorneys to review documents on behalf of the seller. Right? It's like, "Hey, Jimmy, you've never done this before. I've done this before once or twice and I learned some hard lessons that sometimes these attorneys don't really understand that. I know you trust your guy. I'm not going to tell you who to deal with, but you might want to find somebody who focuses purely on M&A because honestly, I'm not taking advantage of you. Honestly, this is what my attorney advises me to do and this is practice protocol. This is customary. This is the way that this works. Uh saying your attorney is a liar. I'm just saying that he and I might have a different opinion on that. So, wanted to go out and maybe seek some other counsel. And at first blush, you think that's not going to work, but I have seen it work many, many times. I've seen sellers actually they want to do a deal with Mark. They listen to him and they're like, you know what, maybe I will talk to somebody else and then they talk to an M&A attorney and the M&A attorney says, well, hey, listen, I'm not going to appine on the price. That's something that you have to figure out. >> But as for the deposit, yeah, I mean, I love to see deposits, but it's not really customary for this particular type of transaction >> in the world that I live in.

I would typically get a written counter proposal or response. That's not the world Jimmy lives in. And it's not going to be the world that you live in. You go out and you deal with Jimmy. He's going to talk to his adviserss. He's going to talk to his friends. He's going to talk to his family. He's going to come up with his counter proposal. And it likely will not be in writing. And it's not going to be a former counter proposal. It might be a cryptic text. It might be a random email, but likely what it's going to be is a phone call.

>> Hello.

>> Jimmy's going to call out Lamont and say, "Mark, I got your proposal. I appreciate you making the offer. Your offer is for much less than I expected it to be for." Okay, Jimmy, what did you expect it to be for? And again, I don't know how Jimmy's going to respond in this particular case. Jimmy actually, true story, Jimmy actually wanted $10 million. Now, Jimmy's business, unfortunately for Jimmy, was dramatically underpriced had he gone out to a competitive process, but the $10 million made Jimmy happy. But when he called Mark up, he said, "You know, I I I really expected a lot more for my business."

Now, Jimmy had the same problem. How does Jimmy respond to Mark? Does Jimmy just say $10 million and then they meet somewhere at the middle at nine? Or does Jimmy overstate his demands? Now, in this particular case, although Jimmy wanted $10 million, Jimmy knew he was negotiating. His attorney told him was a negotiation. His wife's like, "You got to have some backbone and really ask for more." So, Jimmy asked for more. Jimmy, however, shot over the top. Jimmy responded with 15 million. That was Jimmy's ask. So Jimmy said, "Mark, you know, I really want him more for this business. I expect, you know, be around 15 million bucks." And he troubled when he said that.

Mark was paying very close attention to his language, body language, the sound of his voice. And Jimmy had a difficult time getting it out. With that hesitation in the voice, Jimmy had a hard time getting out. Mark picked up on that. So he was on the one hand frustrated when he heard the 15 million. On the other hand, he felt comfortable and relaxed because he knew Jimmy was negotiating. And these two find themselves engaged in positional bargaining, right? You say a number, I say a number. You say a number, I say a number, we both make concessions.

There's a variety of ways this, you know, I'm going to tell you how this typically happens. Somebody wants $10 million for the business. Somebody offers eight. Somebody comes back at 12. If both parties are like Jimmy and Mark, they kind of end up around they typically end up around the midpoint. Sometimes a guy like Jimmy will be ironfisted and say, "I want $15 and not a penny less and then he's kind of blown the negotiations, right? Like, okay, well, I don't know what to do if I'm Mark."

Um, so you have to be prepared for sellers to respond in a variety of different ways, but for Mark it was a good sign. You know, sure he asked for more money, but he did it with hesitation. It was like 15 million. Okay. They ultimately ended up getting to the point and agreed on $10 million.

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In this particular case, when Jimmy came back at 15 million and was a little bit hesitant when he made his verbal counter offer, Mark stopped for a second and used some judgment. He said, "Okay, let me think about the leverage dynamics at play. I have strong reason to believe that Jimmy does not have another buyer. He's never talked about another buyer. He's never been to process. So, I literally am with the only buyer at the table right now. I've done my homework. I know what Jimmy needs in terms of cash. I know that Jimmy is comfortable with a seller note with a reasonable return."

So Mark instantly made a counter offer to Jimmy's counter offer and he moved all the way up to his $10 million mark. He said, "Jimmy, this is a deal I'm comfortable with. I'm going to give you $5 million in cash. I'm going to give you $5 million in the seller note." The 5 million in cash would handle the taxes as well as the lake home that Jimmy wants to buy for his wife as well as the other things that Jimmy wants to do. And then the seller note over time and would pay him a decent return. And then he stood pat. It was a potentially risky maneuver, but the way he looked at it was Jimmy really didn't want 15 million. He was bargaining. He didn't know where Jimmy wanted to be. He also knew that there was no other competition and he has the ability, you know, should Jimmy introduce competition at some point. He's got the ability to go up on his offer. He doesn't have the ability to move an offer down.

So ultimately 10 million, five upfront, five overtime stood pat, and then gave Jimmy the requisite amount of time to get comfortable with that and ultimately accept it, which he did.

Now, one of the things that I think is very important, it's something that Mark truly understands, and it's something that I tell junior bankers all the time, pay as much, if not more, attention to actions and behaviors than you do to words. Experienced negotiators know that actions and words need to be congruent. They need to be integrated. And when there's a dissonance or a disparity between somebody's actions and their words, that's when it raises some questions. And I'll give you an example. Say you're dealing with a seller who says, "Yeah, you know, I'm really thinking about my business, but I'm not quite sure. And you know, if I get a great price, I'll do it, but you know, I'm kind of on the fence." And that seller contacts you every other day for a status update. Well, he said he's not that interested, but he's hounding me. So, you've got the words, not interested. You've got the actions. Every 24 to 48 hours I hear from this guy. He's either not being truthful to you, but more likely he's not being truthful to himself. This is often times not an overt uh deceit. He's actually denying awareness of his own desires and those are being acted out, right? He's saying, "I'm not interested." But he's doing something different.

Juxtapose that to the seller who says, "Yeah, I'm not really that interested. Maybe I would do it if I got the right offer, but I'm not really interested." And then you don't hear from the guy, right? He doesn't call you. He waits to see what you're going to do. The language, the words, and the actions are far more congruent there. And I would give them a weight to that.

Inevitably when you deal with sellers that are not out in a formal process that do not have advisors. The problem for the sellers and the problem for Jimmy is he lacked that shield per se, meaning he lacked the ability for an adviser to trial balloon things. Had he had somebody there who was able to negotiate on his behalf, even if he wasn't running a full process, that individual may have been able to have a conversation with Mark and say, "Hey, Mark, listen. Your eight or 8.5 super low, buddy. Um, Jimmy really wants 15 million for this. Where can you go?" Right? Would you do 13? They can trial balloon things in a way that would come off as a very weak position if Jimmy did it.

And when I think about human nature in general, when I talk about actions and behaviors, you know, I think innately as humans, we know that competition increases value. You don't have to be a negotiated expert for that. I mean, just think about anything you've ever tried to buy, right? You wanted to buy that bicycle you saw on Craigslist and you call up the seller and it's 100 bucks and he's like, "Yeah, but you know, I've got a couple other buyers that are in there. You better move quick. There's no other buyers." Right? Especially if the guy says, "Yeah, there's a lot of other buyers." And he's calling you four or five times. I mean, he's demonstrating through action.

Sellers will often throw around the other B. I mean, I hear it all the time. I mean, every seller out there, he's got multiple buyers. Every seller, you know, think about it. Every seller that you go out and talk to has probably received emails and phone calls from other potential buyers. And as we know, most of that will ultimately turn into nothing. But in their mind, they've got 100 people banging down their door. You know, I've heard sellers say, "Yeah, you know, I got an offer on my business. What was it?" Well, like, you know, some guy wants to talk to me. What? That's not an offer.

So, it's very easy for sellers to throw around, I've got other buyers. I've got two other buyers that want to buy this. You can listen to their words, but how you really understand the meat behind that is their actions. If I've got a bunch of other buyers, but then I'm hounding you, calling you, emailing you, wanting to know the status of you because I'm concerned about you and I don't want you to miss this opportunity. It's a pretty good indication that you are likely the only buyer at the table. But again, as humans, we know competition increases value. And it's an easy thing. It's cheap. Like it doesn't cost the seller anything to say, "Yeah, there's other buyers." Even if there's a little bit of truth to that, there's other folks that have expressed interest. Those folks that have expressed interest are all of a sudden, you know, in their mind, legitimate buyers waiting in the wings to do this deal.

So as you commence your buy side process, you know, I would highly advise you to go back and watch the sell side M&A master class, the first one that we did because a lot of that advice for sellers, you'll be dealing with the exact opposite of that. And in in the buy side process, you're going to deal with things like I mean leverage is bilateral, right? I mean buyers have leverage, sellers have leverage. In this particular case, um Jimmy didn't have a tremendous amount of leverage. Like he he didn't really understand what his business was worth. He didn't hire any adviserss. He didn't go out to a competitive process. I would imagine that Mark was not the only viable buyer for that business. I mean, you know, one could argue that, you know, maybe there was a large strategic that would have looked and said, "That technology, that salesforce, those customer accounts, 2 million in cash flow, I can easily pay 10 times, if not 15 times for that business, and now we're talking about a 20 or $30 million deal when Jimmy sold it for 10."

So, you know, Jimmy did himself a disservice by not running a competitive process. Um, and Mark ultimately helped influence that decision. You know, Mark was personable. He built a rapport. He, you know, every commitment he made, he lived up to. And he started to build a track record of credibility in Jimmy's mind, which I think is important. And I think if you're a buyer, you have to be careful to not do anything. And again, this is always subjective. You never know what's going to trigger this, but you want to just keep yourself, it's a survival round, right? You want to keep yourself in the game and you want to keep the seller from seeking out any other buyers.

You know, if we go back to the original private equity survival guide, um, I did one and two and I talked about how the private equity guys do it. Now, I don't suspect you will take the exact same path as they will in terms of money and resources thrown at Sellers Courtzside at the Balls, Dinner, at Gibson's. But you can spend time, you can whine and dime these guys. You can certainly make them feel special that you only have eyes for them. And likewise, they should have only eyes for you. because the more they get invested in the process with you as a buyer, the more difficult it will be for them to talk to other buyers. So those aspects of kind of courting the seller are are are very important for you as the buyer.

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In later segments of the byside M&A master class series, we'll go into financial and accounting and legal due diligence. We're going to talk about drafting the purchase agreement, which I always say is kind of that private body of law that's negotiated between buyer and seller and will govern the transaction and the working relationship of the parties going forward, you know. But for our purposes today, you know, we we've kind of taken Jimmy from, you know, initial discovery all the way through acceptance of the letter of intent. Again, we'll be talking about their future together at some point in a later episode, but for now, I want to go back over some very key points.

Number one, Mark was very sophisticated about determining why he wants to do an acquisition. The guy wasn't trying to boil the ocean. He didn't go out and contact 200 different companies. He specifically focused on the small handful of companies that could potentially add value to his business. Now, I'm not saying that you shouldn't go out and boil the ocean and you know, if you're a search fund or you know, you're out looking to you don't own a business now and you're looking to buy a company, then you actually have to do that. But you as a business owner who might want to do some add-on acquisitions, you have to do the upfront work and determine who the right targets are and for what reasons. And as I said in the first installment of this series, you know, your primary goal is either decreasing risk or increasing cash flow. So it's got to live by one of those two masters or both. And when you can start to locate those potential targets, you'll never get an opportunity to make all sorts of mistakes in due diligence around the purchase agreement if you can't get through the front door. So you have to think about how you can differentiate your approach. And differentiating your approach probably means don't send these guys an email. I mean, certainly you can do it, but I mean, the average business owner now probably gets 50 emails a week from brokers and buy side advisors and private equity firms and search funds and the guy down the street that wants to retire from AT&T and start his own business and is looking to buy something. I mean, it's it's really hard to get anyone to respond to that. And so if you can reach out directly, whether that's through a FedEx pack or whether that's um a telephone call, if you can get the owner on the phone, I've seen buyers, sophisticated ones, actually show up in an office and say, "Hey, I'd like to talk to Jim, the owner. I'm uninvited guest right now. If he's got some time, that'd be great. If not, here's my information. Have him track me down because you want to get a meeting with these guys."

And again, it's really easy to get focused on technicals and valuation and diligence and all that sort of stuff, but when you're a buyer, you got to focus on that relationship. I can't tell. I mean, I have been in thousands probably over the course of my career, literally thousands of meetings between buyers and sellers. I can tell you that the relationship and the rapport, the emotions that you're able to elicit in sellers, your ability to make them feel good about themselves and to feel good about you often times will carry the day. That'll oftenimes get you through the hard negotiations. And it boggles my mind how many buyers don't focus on that. But if you can build a a relationship of trust with the seller, you're starting off in a great position.

The other thing that I always talk about, I talked extensively about it in this side M&A master class is credibility, right? It is really hard, if not impossible, to negotiate with anyone if you don't have credibility. If you don't keep your commitments, if you don't do what you say you're going to do or not do what you say you're not going to do, it is really hard for anyone to take you seriously in a negotiation. It breeds mistrust. And I bring this up and I feel like I mean should I should have to? I can't tell you how many times buyers will look at a variety of different targets and not keep their own commitments. I will send you a letter of intent on Tuesday afternoon and then miss it by two days. Why? Why do that? Because that little rupture there will come back as a massive wave later in the negotiation process if you don't immediately correct it. So remaining consistent in focusing on building credibility over the course of the process will be really really important for you. And it only takes one or two missteps to blow that credibility.

We saw Mark focus on information and the asymmetrical nature of information in a bargaining scenario. Mark wasn't deceitful. Mark didn't hide the truth. Mark didn't talk a lot about himself. Mark well Mark wanted to be in a position where he didn't want to say anything that would work against his own best interest. Um so the best way to do that is not say a lot but he didn't sit there silently either. He was very engaged with Jimmy right so a lot of business owners you being one of them knows that this is a ton of work to build and manage business. And as business owners we're all suckers to a little flattering here and there. And so, so if you can understand what makes the seller tick and have that constructive conversation with him, not only are you going to be building rapport, but now you can get information. And there's a great way to do that indirectly in conversation and get as much information as you can up front.

Remember, if you're sophisticated, right, whether you are a buyer or a seller, you know that you're never not negotiating. Know that from the very first phone call, email, letter, sitdown and what have you, negotiations have already begun. There is the concealment and feriting out of information. There's the building of credibility or the destroying of credibility. There's the assessment of leverage factors, right? So, you always need to keep in mind that you are molding perceptions from the very first second you deal with a buyer. Everything that you do is under a microscope. There's things that you will say and do that will ultimately offend buyers that will boggle your mind as to why, but it's going to happen. And why I say this is because, you know, I've sat at so many of these meetings where buyers will come in and talk about all their accolades and degrees and all sorts of stuff. And like I said earlier, not only does that make the seller feel like there's a disparity between you and them in terms of abilities, in terms of knowledge, information, perhaps resources. It's just kind of a douchebag thing to do, right? And it sometimes can turn people off and you do not want to do anything. It's like you're trying to like herd this little like trying to get this little raccoon to eat out of your hand. The last thing you want to do is make any sudden movements. And so do keep that in mind. Negotiations start literally, you know, I know this sounds like a negotiation cliche. Probably it is, but I mean they literally do start from the first second. So you need to be cognizant of that.

When you talk about leverage factors within buy side and sell side, you know, as a buyer up against a seller kind of one-on-one, the seller has far more ability to influence the playing field than you do, at least from a leverage perspective. So when I think about leverage, we talked about this in the Southside M&A master class. I think about like the disparity of desire to do a deal. I mean that's one leverage factor whether somebody needs to do a deal or really wants to do a deal so on so forth you have that of course another big area for leverage is competition and competition is not really relevant for our discussion today because you're on the buy side um you're hoping to deal with the seller and you're hoping there's no competition there and if there is you've got to handle this a little bit differently and in future episodes we're going to talk about that but disparity of desire. This is an important one.

>> Yeah.

>> You know, I said earlier that you should pay just as much attention to behaviors and actions as you do words, right? And sophisticated sellers are going to be doing the same thing. And there's a cadence to a M&A deal. And one of the best ways to inoculate yourself, you know, you don't want to be like Moby Dick with the big whale. Like it's like look, you need to set yourself up in a position where you have options, right? So try to give yourself optionality up front. So Jimmy is not the only game in town, right? You've got other and they might not be uh as enticing, but if the price is right, they can be just as good of an investment. So optionality is important.

Also your transference of desire. I mean I have seen everyone from private equity guys to corporate executives to individuals out there that get so sucked into wanting to do a deal. I mean the sellers basically got them out of their hands. So you need to establish the rules of the road before you go out and start to do this. And what I mean by that is determine what it is you're willing to buy and not buy. Figure out those targets. Give yourself optionality. So now you're not like, "Okay, there's only one girl at the dance, right?" No, there's multiple girls at the dance. Then think about what it is you're willing to do and not do. And this really comes down to financial metrics. You have to think about where what territory are you not willing to go to. A lot of lines in the sand for buyers tend to be drawn much too late in the process. I would encourage you to really think about what you want to pay for the business, what you're going to offer upfront, and then where you won't go a penny above no matter what happens. Like you will not be enticed because again I talk about in the cellside M&A master class, the first one and the second one, incrementalism, right?

So let's do a little let's do a little mental gymnastics here shall we? So in the second one the psychology behind selling a business I gave the example of no more the no more transaction and it was an auction process. It was a modified auction and we found ourselves in a position I was on the sell side of course where the price that we wanted was deemed astronomical and from the starting point at where all the buyers were none of them we're going to get there like there's no way we're going to ever get to any sort of price like that. Okay, fine. We ultimately ended up selling it for exactly that price. And how that took place is incrementalism, right? So you've got a business and you know the seller wants 100 million bucks for it and you're like well I think I'll pay 80 for it but probably not a lot more than that. You start at 60 now you find yourself at 80 and then you're like ah maybe 82 84 and then before you know it, there's a very narrow gap between what they want what you want. Maybe they've come down a little bit, but as that gap narrows, it becomes very difficult for you to resist because now it's not like you've moved from 60 million to 90. You just moved from $85 million to 90 and that's not that big of an incremental change and but you're so far off the mark from where you originally wanted to be. So, it's important from a cognitive perspective to not get sucked into the whole incrementalism.

Now, chances are if you're doing a proprietary deal and you're dealing one-on-one with the seller, you're going to have positional bargaining, right? So, in a formal process, what we do is we run up the price. Uh, you bid 50 and then we ask you to revise your bid and then you're at 55 and then next thing you know you're at 60 and then 62 and you're like, "Holy how did I get here?" That's incrementalism and that happens from iterative big rounds. That's a formal process and that's the beauty of it. It works when you're dealing one-on-one with a seller. It it's pro you're probably not going to find yourself in a in a situation where you offer 10 million for something and then the seller says 11 million and you say okay I accept 11 million the seller says 12 million and back and forth. No, you're going to offer eight and the seller is going to say 15 and you're going to try to narrow that gap. So incrementalism doesn't hit you the same way when you're dealing one-on-one with a seller. But you can very easily find yourself justifying things that you would not have justified with a calm, cool, unemotional mind, an analytical mind at the front end of the process. I see it every single day. In fact, I make my living based on this premise. So, it is real, it is live, and it is well in all M&A deals. So, as a buyer, draw that line in the sand up front and actually respect yourself. Meaning like you will have more respect for yourself as a dealmaker. If you make rules that you live by like you make a lot of rules that you bend at some point you quit respecting yourself as a dealmaker and you get bad deals. So my advice to you again, where am I stopping? And I don't care what happens. I'm not going a penny over this. And I say a penny over I mean if it's a penny over that do a penny over that. is your brand here.

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During the discussion about Jimmy and Mark, we talked a little bit about the offer, right? The term sheet or the letter of intent. I think it's really important to expand on that because I think a lot of buyers run into issues around this, but let's talk about broad theory first for a second. The letter of intent or the trump sheet is the prelude >> to the definitive purchase agreement. Right? It's the framework. It's like the menu of the purchase agreement. And the purchase agreement will be derived from the terms in the letter of intent. And if you've ever talked to any deal attorney, they're going to really work hard to make sure that whatever's in the letter of intent jives with what's in the purchase agreement.

So, a purchase agreement, who does it protect? Well, it protects the buyer because the buyer's taking the risk. The buyer's writing the check. The purchase agreement, I mean, in a lot of ways, I wouldn't mind being a seller and just selling a business with a bill of sale, right? Like as is, where is sign, give me the money, and I'm done. But that's not the way it works. Buyers are like, I'm writing a big check. I want protection. So, here you have it. And when I'm on the south side myself, I want expansive, extensive LOIs. I want all the terms in there. I want to know what the indemnification clauses look like. I want to know how long representations are going to survive for. Like, is it going to be the statute, 18 months, a year, 2 years, 5 years, 10 years? I want to know all those sorts of things.

I know that as a seller, >> one of my highest leverage points in a deal is immediately the second prior to signing the letter of intent. I know that whatever I need to ask for, I need to ask for it now because once I sign the LOI, as a seller, I am locked in. Now, I'm not locked in in perpetuity, but I am in an exclusivity period. So now I've got to tell all my competition, bye-bye. That's a problem for me as a seller because I don't have any leverage now. Like, so I'm locked in with this buyer. And if the buyer is silent on certain things. So now I've taken this thing off the market. I've told sellers get lo I'm sorry, I've told buyers get lost. I'm mating now with one particular buyer. And during diligence, the buyer's like, you know what? We need a special indemnity clause of $5 million. we need um, you know what this indemnification provision is going to be extremely expansive so on and so forth. Now sometimes they find stuff in diligence and there's a reason for that but if we were silent on it in the letter of intent is the buyer really retrading right is is the buyer actually really doing anything wrong like for example if sometimes in on European deals more so than US deals US deals tend to be a little bit more precise in certain manners but a lot of times in in In European deals, there will be reference to maybe a portion of the purchase price held in escrow. Okay, great. That's pretty standard. But is it really an escrow or is it a hold back? Like who has that money? Is it in a bank escrow account or is it in a is the company holding that money back? Where is it going? And is it contingent upon anything? And so if we're not clear in the letter of intent, um, there's a lot of confusion. And when you deal with sophisticated corporate buyers, private equity firms, so on and so forth, there's less danger of that because, well, I guess maybe they're more suited to figure it out.

Um, but when you deal with a seller who's never sold a business before, you know, I could argue on the one hand, man, it's great to have a onepage term sheet. Like let's just put the purchase price and then figure it all out and then we can kind of push that seller around. And as a matter of fact, that was my general operating principle for some time. But as I got older, lost a lot of hair, gained a little bit of weight, but certainly got a lot more experience, one of the things that I have noticed is that's probably not the right way to do it. And here's why. Because the sellers aren't the sophisticated corporate buyers. And if the letter of intent is silent on something, something that's a necessity, something that it will be in the purchase agreement, it is your fault, Mr. Buyer. It is your fault that you didn't mention in the LOI. They're not going to say, "Oh, you know what? Damn it. I should have asked for that. I'm the seller. It's my responsibility to make sure the LOI is robust." That's not what they're going to say. What they're going to say is, "You tried to screw me. You're deceptive. You're underhanded." And their lawyer is going to echo that. Yeah, this guy's bad news. What are you doing? And now you find yourself, you're like, "Well, well, I, you know, sure, I wanted to give myself a little room. I'm not trying to take advantage of this guy. Now he thinks I'm trying to screw him. That's not what I'm trying to do." But perceptions are reality, unfortunately, in the game of bargaining. And that's exactly what you're doing. So,

Those of you who are more experienced take more poetic license with the LOI for sure. For you newbies out there, if this is your first acquisition or second acquisition and you're still kind of getting wings, I think it's really important to kind of go long on the LOI and get those terms in there. Talk about like what indemnification provisions look like. Talk about survival reps and warranties. Go into perhaps what the reps will look like. What does the seller actually rep? Um the more expansive you are and you can get them to agree to it upfront, the less problems you'll have. And granted, while it should be the seller, right? The seller has the leverage part of signing the LOI. The seller should be demanding that stuff. I don't know. I think sometimes it might put you in a a better position because I think a thing that's really frustrating for buyers, especially newer buyers, is to do a lot of work and spend a lot of money and then um you know have a $12 million deal fall apart because there's disagreement about $500 in monthly rent for the facility that you don't even want to lease. and the seller thinks you're trying to screw him and he's only going to deal with people who don't lie and he can't live with you and he can't trust you. I've seen it.

I know I'm going to get a lot of questions about due diligence and I know I'm going to get a lot of questions about how on earth is it that Mark got a P&L and made an offer. He how was he even sure if he wanted to buy the business? So, there's a variety of different ways to look at this. There's some buyers that'll go out there and literally put an offer on anything. They get some basic financial statements. They put an offer out there, see if it sticks, and if it does, now we're going to invest some time and actually try to investigate. There's other buyers who are maddening, and this shouldn't be you. You shouldn't request reams of data prior to even making an offer because you're just frustrating the seller, right? They got to do a lot of work. They're trying to run a business. You're going to naturally have a lot of these people self- select out of your process. You don't need to get into their tax returns prior to doing a deal, so on and so forth.

You know, it's like you need to assess for you and your business what are the most important things that you need. So the primary question is why are you doing the deal? Like so the primary reason that you're doing the deal should actually lead you do the types of things that you need to look at right so if you really care about the customer accounts you're like man I need these customer I can crossell these customers well you know a little bit of upfront customer DD of course is going to serve you well customer concentration what do they look like size so on and so forth if this is just a cash flow buy for you then you might be far more concerned primarily on the financial statements right if you have management that's going to run that business, then that's great. You don't really care as much to dig into management structures and management structures and incentives up front. If you need that management team, well, boy, you better make sure they're sticking around, right? Like, so those would be questions to ask up front. Like, if there's somebody, you got a woman running a business, the owner is selling it and leaving it, and you need that woman, and she's valuable to your process. Well, listen. Does she have a non-competition agreement or a non-solicitation agreement with a current entity? What sort of incentive structures does she have? Does she have a stay bonus? Um what is her relationship with ownership and the board so on and so forth? Like the things that are important to you upfront warrant discussion? Um because it makes scant sense to negotiate things, get into letter of intent, hire lawyers, do all sorts of stuff and then figure everything out in diligence. No. Zero in 8020 principle here all day on upfront zero in on the most important things the rest of them can be figured out in due diligence

I think one of the issues that's always comical um here in the US is you know US corporations would file tax returns and you know there's always debates is to you know so for me like a real M&A process you're not providing tax returns to any buyer outside actual due diligence, right? Like one buyer is going to see that and that's going to be the buyer that's in diligence or unless you have multiple buyers doing diligence at the same time. But preliminarily to that, that's not going to happen. So, as a buyer, I mean, what's the advice for you? Focus on your key points that need pre-offer DD, right? Just those. Focus on the materials that you need. Do not use a canned request list. It's annoying, right? It is madly annoying to be like, uh, here's 49 different documents I need to see in order to make an offer. No. 8020 principle. Pick the most important ones. If you have a particular concern about the business and you're like, man, I it's got liability claim issues or whatever, like then focus on that. Focus on the things that are important because you don't want a seller to self- select out of your process prior to actually engaging you in any sort of constructive discussions or negotiations. It would spend all this time looking for a target and then to have somebody get frustrated because you're asking for too much information and they will and everyone's frustrated with too much information. Like you're going to ask for five things and the seller is going to wish it were three. You're going to ask for three things and you're going to wish it were one. So, I realize what you're dealing with, but do yourself a favor. Make it easier for them. It's going to make it easier for you.

[Music] Another point we talked about was Mark's valuation of Jimmy's business and we did some basic broad math and I want to talk a little bit about valuation for your purposes. You might be a business that's looking to do add-on acquisitions. You might be an individual. We have lived in an era of everincreasing asset prices. Right? So if you think about the great financial crisis that took place in 2008, 2009, global economy created and then between central governments and central banks around the world. um debt instruments were created, monetary assets were created. We had just an explosion of asset price inflation where you know we saw companies that would traditionally you know trade on on on exchanges in the US for like six or seven times EBIT dial now start trading at 10 11 12 13 14 15 time I mean valuations went crazy. Private equity is now prolific. Like even 10 years ago, they were not nearly as active. So private equity is in everything. And when more buyers get in, prices get bit up. It is extremely difficult to be a buyer. However, you shouldn't be discouraged because there are a lot of sellers out there that understand far less about this than you do. And buyers will come to me. So here at PTOIC, we only do sellside advisory, but what's interesting is we actually do more buy side work than we do sellside, which is kind of strange. So what do you mean? Well, so we have clients that engage us on sell side, and they'll say something like, "Hey, I'm going to sell 5 years from now, 2 years from now, 2 weeks from now, what have you, but they're all at different phases of their life cycle, but they want to engage us, and we put together a preliminary evaluation on their business, and we start to talk about how they create value." And then inevitably somebody will call me up and say, 'Hey Paul, I um yeah, I was talking to some guy at a trade show and he introduced me to another guy and there's a business in my industry and it does, you know, like $8 million a year in revenue and I think I want to buy it. Like, you know, I think it's a good I think it's a good fit. Can you guys help us? And so we will do as much buyside work as we possibly can. We don't charge our CL. there are clients and we want them to be huge so when we sell them we make more money but we'll do buy side work for them and so we'll we'll get financial statements and our analyst team will build a financial model we'll look at comparable acquisition statistics so on and so forth we'll get our clients the intelligence that they need they want to do due diligence on something well we're not PWC or ENY but we do have a transaction services team so our transaction services team can do the same thing at big accountant firm can do is they'll go in and they'll look at they'll do cash proof analyses and they'll verify books and records and so on and so forth. So again, we don't charge for that. And by the way, I tell every one of our clients like that's a service like we'll get to it when we can and sometimes we don't have the capacity to do it. We charge you for it, but we do it to build value and I think it's a very unique uh and valuable thing that we do and every one of our clients love it. So we do hundreds of buy side deals preview and so while I am not a buyside guy, I'm qualified to speak on it because I deal with a lot of sellers and I also deal with a lot of buyers.

So when it comes to valuation, when our clients come to us and they say, "Hey, I want to buy this, I don't know, make up the industry, this tool and die shop doing $3 million a year in revenue. It's got this CNC thing and all that this widget gizmo and we'll get the financial statements. We'll put together a financial model and we'll do a discounted cash flow analysis, maybe internal rates of return and we'll kind of look at this and determine what sort of purchase price multiple would make sense from a value creation perspective and we're going to be a little bit more sophisticated than you will be. But but that's okay and I'm going to tell you why. Like so for our clients, we might say, "Hey Fred, your business is currently valued at 12 to 13 times trailing EBIDA." That's what it would get in the current market in a competitive process. if you can buy this business at six times, here's how much value you can you can create and here's how you should structure it. But given the fact that we've lived in a world of everincreasing asset prices, like I said earlier, like sellers typically never want less than what their business actually would fetch out in the open market, at least in a competitive process. And so I don't really care so much about cops. Like if you're out there buying, you name the business, a bottled water company, a software business, an IT staffing company, the more you learn about what private equity is paying and other strategic acquirers are paying, the worse it is for you because they're paying more money than you are. They've got a more of a capacity to pay. Um the cost of capital might be lower. They're getting better arbitrage than you are. And so why anchor yourself to that? I mean, I'm probably the only investment banker on the planet that's telling you don't worry about cops. Worry about what actually makes sense for you. Like what sort of return parameters do you have? And sure, you could do internal rate of return and you could do a discounted cash flow, but like when you're just getting started at this, I think bromath like back of the napkin, it's like, okay, this business is kicking off 2 million per year in cash flow. And I know it's cash flow, not just EBITDA, like adjusted EBID dial because I'm looking at the financial statements and, you know, I understand what working capital requirements are and I understand what capital expenditures are. So I know what's happening below the line. I'm going to adjust that and make sure I really understand what true cash flow is. Then yeah, I'm going to pay four, five, six, seven times because again, as I always say, like you know, you buy the best company in the world, if you overpay for it, it's a bad investment. You can buy a middling business, but if you get it at a dynamite price, it could be a phenomenal investment. And so if you're an a value investor, I would really focus on IBIDA or some metric of cash flow and look at it from a multiple perspective and try to be somewhere in the mid single digits. I think if you can do that, now again that might be high actually for some businesses out there, but I'm saying on the average if you can do that, you're living in a world where you could probably create a lot of value.

You start looking at comps. This company's went for 12x. This one went for 13 times. that one went for 10 times and you're like, "Man, I want to pay 5x for it. I'm super low." Now you're discouraged. Now you're not going to make an offer. And now you might not even have an opportunity. So get out there and make an offer that you actually can reasonably support. I can support a five times eB. And I'm I know sophisticated buyers out there are laughing at me right now because they're like, "Paul, that's not even possible." It is possible. I see it all the time. I mean, every single day of the week, I see companies out there creating a ton of value, paying lower prices. What does that mean? Means you have to avoid competitive processes, right? You can't go to an investment bank, right? You can't call up Goldman Sachs or Harris Williams or PTOAC or any of us and get a deal. That's not the way it works. You have to go out there and do the hard work and get the proprietary deals. You have to find the sellers who are potentially ignorant of what's going on in the market. Or maybe they're not ignorant, but maybe they've fallen so much in love with you and your company and your culture and the business that you built that they're willing to actually leave money on the table to do a deal with you. Never underestimate that. Never underestimate businesses making the decision. I see it all the time. It I it boggles. I scratch my head. I'm like, why would you leave that sort of money on the table to do a deal with them? But you like the company, you like the owner, you like the president. So, don't create constraints in your own mind. Don't create limiting beliefs as to what you could ultimately do, especially if you're new to buyside M&A and you're new to going out and doing deals. Like, you got to get yourself centered and grounded and say, you know what, I'm going to focus on doing a deal. I'm going to focus on doing a deal that is is right for me from a financial perspective irrespective of where the market is. And if you shake enough bushes and you kiss enough frogs and you get out there, you will find opportunity and you're going to be doing deals at such low risk that it'll actually be very hard for you to lose.

So, [Music] we covered a lot today with the example of Jiminy and Mark. I hope that provided you a little context and background in the dynamics of the one-on-one negotiation between buyer and seller. In upcoming installments of the buy side M&A masterclass series, I'm going to get into due diligence. So, what happens once Jimmy signs that letter of intent? Now, it's time to due diligence. ers, finance, accounting, cash proof analysis, so on and so forth. We're going to talk about that. Then we'll also at some point talk about the drafting and negotiation of the definitive purchase agreement. So, is it a stock deal? Is it an asset deal? And then what are all the provisions in this private body of law that's negotiated between buyer and seller? And of course, because this is the buy side, I'm going to be focusing on this from a buy side perspective. And I'll also be doing this in the sellside M&A master class series from the sellside perspective. Here at PTOAC, we love to kill it for our clients. And I think that education is the cornerstone which allows our clients to make the best decisions for themselves. the more you can understand about the nuances of how strategic acquirers work, how the operations of private equity firms work and the psychology and the tactics of an M&A transaction, the better you're going to be when it comes time to pull the trigger. If you own a business and you're being contacted by strategic acquire, search funds, private equity firms, and you're trying to size up what you might do, take a step back and give us a call. We'll help you forge a plan. Whether that exit is a year from now, five years from now, or 10 years from now, we'll help you think through a plan that is specifically tailored to your financial goals and objectives. So, please contact us directly. I've put a link to the contact form in the description of this video, and you can also contact me directly on LinkedIn. And feel free to share this master class series with somebody who you think might benefit from it. Again, I'm Paul Johnore. Thank you for joining me today and I'll see you on the next one.

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