Transcription
I got a call last week from one of my good friends who runs a very successful business. As we were going through the conversation together, the topic of selling his business came up, and he got nervous. He said, "Well, I've I've run this business all my life; this is my baby. Why would I sell this?" But it was as if he was about to walk down the aisle and give his daughter to somebody. I said, "If he is having so much trouble thinking about selling his own company, like most founders and entrepreneurs do, there's probably tens of thousands of other people that are going through the same thing. Why don't we make a video about it?"
Whether you're 19, 28, or 42 years old, whether you run a business, you're not a founder, not a CEO, maybe you're an employee or an executive, maybe a salesperson or realtor—you are going to learn what it is to go through the process of selling a business in this video. However, if you are the entrepreneur, the founder, the CEO, or a partner in a company, and you are wondering, "Should we sell? Should we not sell?" Some are telling you, "Should sell," "Never sell a business," you're going to get a lot of clarity from this video. These twelve points are going to give you a lot of clarity, and some of them are going to be points that maybe you haven't even thought about yet. Because look, you may have done nine million last year; you may have done ninety-two million dollars of revenue last year; maybe you did 1.6 billion dollars last year. What do you do? It's a lonely world sometimes, right? These twelve points are going to give you a lot of clarity. And by the way, stick around because at the end, I'm also going to have a PDF for you to download and go through and see if selling your company makes sense to you.
Number one: Look, the first thing you got to ask yourself before even thinking about selling your company is, "Why do you want to sell in the first place?" Why are you tired? Or are you burned out? Why are you tired? Why are you burned out? Are you not taking some time off with your wife or with your husband? How's your personal life? Is it caused by that? Are you going through something? You know how sometimes people sell a home because they're going through a divorce? Are they trying to sell the business? Is that really the reason? Can your marriage be saved? Is it a tax consequence? Is it bad financial decisions you made? Are you being forced out by your partners? Your vendors? Maybe one of your investors is buying you out, and no one knows about it. Maybe one of your big customers is saying, "Look, you're too big; we can't give you this much control; we've got to buy you out." What is the reasoning? Are you simply just wanting to retire and go live by a beach house and hang out and have the money and enjoy the restaurant? What do you want to do? See, these are all questions you got to ask yourself. Um, go through—by the way, some of these I'm giving you—believe me, a lot of people call me, and they want to come and give me $100,000, say, "I want to sell my business; can I sit with you for two hours because I need advice?" With you, my partner's want to come to you. This is something you got to do with five other people to sit with who have sold their businesses. And afterwards, they change their minds and they said, "I wish I wouldn't have sold it," and some that did sell it and they made the right decision. I do what you're going to get a lot of counsel to know whether it's a good time for yourself right now or whether it's not.
Number two: So listen, once you've addressed why you want to sell the company and you're kind of clear about it, the next thing you need to do is get educated. And the way you do it is by meeting with an M&A broker or a banker. This is a merger and acquisition banker; this is what they do for a living. These are guys who have contacts with lots of money; some are billionaires, some are worth a couple hundred million dollars, and they are looking to buy businesses. And this is how simple it is. So let's just say I'm Johnny; I'm the M&A broker, I'm the merger and acquisition broker. I know Bobby; he's one of my clients; he's worth a billion dollars. Bobby wants to buy businesses. I introduced him to Cindy; Cindy's business is worth a hundred million dollars. Bobby buys Cindy's business. Without me, Bobby doesn't meet Cindy; Cindy doesn't meet Bobby. That hundred million dollar transaction that takes place, I get two to five percent on that deal, which means two to five million dollars for making the contact. That's what the M&A brokers do. So now you realize when you meet with these guys, you got to know what they do; that's how they make their money. So when you meet, they're probably going to ask you a lot of questions: "Tell me about your business; how long you've been doing this for? What's your numbers look like? What's your EBITDA? What's your profit? How many employees do you have? Who else is on your team? What's your executive team?" They can ask you a lot of different questions. "Who would you compare your business to, to other businesses? What are they valued at? What's their numbers? What do you think your company's worth? What do you think the market thinks your company's worth? You know, what do you think sellers think your company's worth? What seller would want your business? What investor would want your business?" You go through this process, and this entire sit-down with three M&A bankers, it's going to be as if you went to university for three years to learn how to sell your company.
Number three: So look, once you figure out why you want to sell your business and you're comfortable with it, then you meet with the M&A broker, and you're getting educated about what the market looks like, right? Then it's about setting timeline expectations of when you feel comfortable even having the conversation, right? You may say, "Three years, I'll have the conversation; five years, I'll have the conversation; ten years, I'm open to it right now. I'm very happy; I am burned out a little bit, but all I needed was to get away; maybe I'm going to go on a vacation with some family." Because what I'm doing here with this, I'm good though; I'm good to go; everything makes sense to me. Great. Even when you set time on expectations, things could change; the economy could turn; a new president could be elected; regulation could change. You still have to be nimble enough to know what's going on with the marketplace and knowing that your own timeline could still change, but you have to mentally get to a place to say, "I'm comfortable for this 2023," so now I have to work backwards to ask myself where I need to be six months from now, twelve months from now, 24 months, 36 months from now, so I'm getting ready for the day that I may sell the company.
Number four: So once you've set your timeline—you're saying, "I'm comfortable seven years from now having a conversation; five years; three years"—and you know how you need to work back, the next thing you need to think about is the following: your exit strategy. Meaning, who is an ideal buyer for you? Is your ideal buyer anybody with a checkbook? Because you can go to New York and sit down with a PE firm who is willing to cut a hundred million dollar check to you based on the profits that you make. They don't really look at your business; they don't really look at the heartbeat; they don't really look at that stuff; they simply look at numbers and they say, "Well, you know, there's seven million dollars of profits; the industry is typically twelve X; seven million will give you ten X; ten X on seven million is seventy million dollars. You want seventy million dollars, and that's it." Or it's a strategic buyer; one of the current people you work with; you know they need your technology; you know they need your shipping; you know they need certain things that you have that without you they're going to be in trouble, so they may come in and pay twice as much as these guys are going to pay because you have something they need. But who is that person going to be for you? You need to identify that from now; start thinking about that.
Number five: So now you have your numbers; you know your exit strategy; you know who you want to be your strategic partner to buy your business; right, you're comfortable with that; great, no problem; you know your timeline; what do you expect from these buyers? What kind of buyers are there? By the way, there's four different kinds of—I've met every single one of them, and I've dealt with every single one of them—into what this looks like. First kind of buyer: it's a person who's very interested in your business; would love to buy it, but they can't afford it. This is like a person who goes through a Ferrari dealership and they want a Ferrari; they love Ferraris, but they can't even afford to buy one. Focus, that's the first one. Second one: it's a buyer that can buy ten of you but has no interest in your business. No problem. Third one: ready? This one's a little tricky. This is the one that's disguised like a buyer. He comes in so interested; he has no interest in him buying your company; he only has one thing in mind: insider information, because he wants to leak it to competitors so they know exactly what's going on; they're trying to study or—it's like a realtor that acts like a client and a buyer and walks into the house and saying, "Oh wow, this is a nice home; so show me—so what's this? And what do you—" Are they going through a divorce? What's going on with the husband and wife? Can you tell me? It's a realtor, not a client. That's what happens with some of these guys as well. And last but not least, it's the kind you want to sit—what's a person who is interested, has the money, and would like to cut a deal with you? That's what you want to meet with, but you need to know the different kind of buyers they're going to sit with you.
Number six: So now that you know your exit strategy, now that you know what kind of buyers are going to come knock on your door to want to buy your business, what can you do in the interim to increase the value of your business, right? What could you do? It's like, "I want to sell my house, but maybe it doesn't look that good; I've got to paint that house; I've got to clean the garden; the backyards kind of messy; maybe I've got to spend an additional fifty to a hundred thousand dollars to increase the value of the company by four hundred thousand dollars," right? So in the interim, what could you do? Hire a new CFO that kind of knows what they're doing that's been through this process before and you kind of come in advance for three years, so prepare for that opportunity that comes up. Could it be technology? Could it be increasing sales? Could it be extending your contracts with your customers or your vendors or suppliers? What is it? There are certain things you can do today to increase the value of business between now and the day you sell your business.
Number seven: So the next thing is a little dirty because you got to start dealing with attorneys, and you know how I feel about attorneys. By the way, I'm not a fan of 80 percent of attorneys, but when you find a good attorney, you got to keep them. You got to bring your attorney in, spend a little bit more money, and get the attorney to update every single contract and bring it all in one place. Because when somebody buys a business, they're looking for all the contracts, all the agreements. This is the stuff they're really relying on. Sometimes the value of a company is based on the contracts and the agreements that they have with their vendors, partners, all those different kinds of people you were dealing with. If you're wondering how you find a good attorney, I sat down with Robert Shapiro a few months ago, and he's one of the most celebrated attorneys in America, ranked top 100 on some list, top 10 on many other lists. He explains three things every entrepreneur needs to know about before hiring an attorney. More is going to put a link below if you're able to watch that episode.
Number eight: So look, now that you dealt with your attorney, now we've got to talk to your CPAs. And by the way, there's a few things you got to be thinking about when it comes down to CPAs. Here's a couple things: one, what is the buyer expecting to see with your finances? This is what a buyer likes. I am NOT a fan of businesses, once they cross $10,000,000, your business to still deal with a friendly local CPA. I'm not a fan of that. A friendly local CPA is good if it's a one-office shop and you're doing a couple million; you're fine; they can handle that. Ten million plus, you want to get to the next level; you need to go through an accounting firm. Now that's going to cost you five times more, but it's going to save you so much more because of a buy. You're saying, "Wow, you got audited financials for how many years? Three years straight? Very impressive." Audited financials could cost twenty-five to two hundred thousand dollars, depending on how the business is; it could cost millions of dollars, but I'm saying a business that that's 50 million, your hundred million dollars a year, could cost you between 25 to 40 thousand dollars; 25 to two hundred thousand dollars you're doing, but it's audited financials, and the more consecutive years you have audited financials, the buyer is liking this; the value goes higher. Let me explain it in a way that makes sense to you. Look, if you want to buy a house, you've got to get your credit score done earlier to know where you're at because you're going to know, "Why is my score 620 here? Why is it 630?" I know I'm not going to get the best interest rate, and so you first fix your credit, then you go see if you're going to get a proof or million-dollar home. It's going to be the difference between you paying, you know, forty-nine hundred dollars a month for a mortgage payment versus $7,300 a month for a mortgage payment because of your credit score, right? So this is the difference between a buyer wanting to buy your business for 180 million dollars versus buying it for ninety-two million dollars; that's a big difference. I like baseball cards; I don't buy baseball cards that are not graded by PSA; I don't I don't buy them because that gives me credibility. The same goes that a buyer buys a business that has audited financials from a very good size, good-name accounting firm.
Number nine: Let's just say at this point you've done your attorney stuff; you've done your accountant stuff; you're ready; it's that time; you've already gone through the five years from now to go out there and start putting your business in a marketplace, right? Are you ready to tell your story? How are you going to sell your story? What is your story? Is your website aligned with the way you want to tell your story? Is it updated? What does your home office look like? Is it an updated home office? There's a look like the businesses within your industry where somebody comes in and says, "Wow, I like the way these guys dress up here." What is it? Do you have proper marketing material? You have a pitch deck? What does your presentation look like when you go and say, "Hey, here you go, Mark, the material, marketing material, marketing material, marketing material." Oh wow, this is good stuff; high-end stuff. You may want to spend a little bit more money before you present your business to buyers that you are expecting to cut a big check for you, so you've got to spend some time getting your story together and your website, marketing, home office, all of that stuff; it's part of the story.
Number ten: So it's that time; it's negotiation time. This is like fourth-quarter type of stuff; someone's going to cut a check; what are you doing? Typically owners take two different routes: one is the owner says, "I don't need anybody's help; I don't want to pay nobody a 5% broker fee; I know how to sell the business; I don't need anybody," so and they go by themselves; it's one of the ways you could do it. The other way is you go and hire somebody; you hire a team; you hired the M&A broker, the banker, and they come and help you sell. Now why is that a good thing? Well, I typically believe in capitalism because a lot of people make money together. If a lot of people make money together and you put the tiers of bonuses based on what amount they sell it for, you're probably going to sell it for a higher number than you thought you're going to sell it for, right? So I lean more towards this side, especially if you're dealing with a hundred million dollar plus check; go get a pro. Some of you that are not good in sales and you're selling for 10 million, you still go get a pro.
Number eleven: So you start to negotiate; you got numbers; they're making offers; what kind of offers should you expect? Which one should you take? What do you do? Well, there's different kinds of offers. One of the offers, the one that everybody wants: cash, 50 million, but no commitment, no non-compete; you're good to go; if you want to compete with us in the same space, we're not worried; all the best to you. That's one. Come on, we'll give you 150 million dollars with a 10-year non-compete because you are never going to compete with us in real estate, in IT, in technology, in insurance, whatever. Maybe the next one is they buy in exchange for stock options; they give you stock of the company. Sometimes they'll do 50 percent cash, 50 percent stock; it's completely up to you. Do you trust the stock? You trust the company? Is the company trending? Is the company on a downfall? What is it? That's on you. And last but not least, they'll buy whether it's cash, stock, whatever way it is, and they'll tie your salary to you with you sticking around for two years in a non-compete. After that, we want you to stick around; we'll give you a hundred million upfront, then we'll give you two years' salary of a million dollars per year; then we give you stocks at the end, and the company performs the next two years; we'll give you another 75 million dollars, dot dot dot, another five-year non-compete after that. That also happens as well. So you need to know all your options on how you're selling, what you're most comfortable with, but those are generally some of the options you'll have when you sell your business.
Number twelve: So look, everything could go right in the first eleven steps; everything could go right, and then all of a sudden 80 percent of the deals don't go through because of step twelve. And here's what step twelve is; it's actually the closing part of the sale. So as you go through the first eleven steps, if you tell any numbers to the buyers that are slightly off the real numbers, after they audit your numbers, they're going to say, "Wait a minute; these numbers don't match up; we're coming out of this deal," right? So three things you need to know about: one, it's called IOI; this is indication of interest; I am indicating to you that I, the investor, I'm interested in buying your business; very cool; open up the books a little bit for us to see something; okay, cool. So next is the LOI; LOI stands for a letter of intent; you and I, you're the buyer, I'm the one that wants to invest into your business and buy you, right? We give you a letter of intent based on this term sheet; we're going to buy your business. So, for instance, we want seven years non-compete; you're out of your mind; I won't give you no more than three years; we can't do that, but we want five years; okay, let's agree on five years; we'll give you 75 million in cash and 75 million stock; I'm not doing that; I want 100 million dollars cash and 75 million dollar stock; we're not doing it; we'll give you 50 stocks, 100 million cash; great; we agree on all this stuff; this is all good, but it's still not done until everything proves here based on the audit do with you. And in comes a purchase agreement. When the purchase agreement comes and you get the call from your guy, from your CPA, from your accountant that says, "125 million dollars is in a checking account," your banker from the bank calls you and says, "You're 17 million is in the checking account here; 228 million is in the checking account; by the way, your checking account has 1.7 billion dollars," and you go to the ATM; you keep saying, "John, look at the statement, baby; we finally did it, right?" Or you're going to wake up the next day and say, "Oh my gosh, I can't believe I sold this business; this is my baby; I just let her go; what do I do now?" But regardless, you can have all those emotions. Anyways, these are the 12 steps that you go through in selling your business. This alone, by itself, could be a six-hour course that we couldn't do purely on your selling your business because there are so many different questions you probably want to be asking me about the different dynamics, right? This is why we get the email saying, "I'll give you a hundred grand for two hours; help us sell our business; should we go through? Shall we not go through it?" Anyways, it is to give you an idea about these 12 steps on what you should be thinking about whether to sell or whether or not to sell. By the way, for some of you that wanted to raise money, you don't want to sell your business, but you want to raise money; I did a video called "How to raise money as an entrepreneur"; you probably see the thumbnail right here; Mario is going to put a link below for you to go and watch this video; I highly recommend you go watch that video right after watching this video. And then, if you want the PDF from today's video, the 12 steps, click on the link below as well; there'll be somewhere for you to go to my website, Patrickbetterbe.com, and download the PDF. So if you have any questions, thoughts, comments, you can comment below. If you want to reach out to me directly on Twitter, my handle is @PatrickBetDavid. And if you haven't yet subscribed—or close to a million subs—click us up and click on that alert button right next to it. Thanks for watching, Flavio; take care; bye-bye.