Episode 33: Rewarding Exits: Accounting Matters
Episode Summary
As the old saying goes, you never get a second chance to make a first impression, and this is definitely true when engaging with a potential buyer or investor. On today's episode, part of our series on getting your Middle Market business ready to go to market, Cheryl Ashenbrener, National Leader for Transaction Advisory Services at Sikich (and one of our most popular guests here on Right In the Middle Market), comes back on the podcast to talk about the accounting (and a few other) aspects of getting your business ready for a transaction.
Episode Transcript
SUMMARY KEYWORDS
business, buyer, market, business owners, company, expenses, customer, sell, capital, thinking, revenue recognition, cheryl, accounting, question, popping, clients, deal, cash, starting, capital advisors
SPEAKERS
Cheryl Aschenbrener, Stephanie Chambliss Gaffin
Stephanie Chambliss Gaffin 00:00
You have probably heard a business owner talk about getting ready to go to market in relation to selling their business or raising capital. But have you ever wondered, just exactly what does that entail? A recent Deloitte study found that over 61% of US deal makers expect M&A activity to return to pre COVID levels within the next six to 12 months. Anecdotally, this matches what we're hearing in the market from deal professionals who say they're as busy as ever, not to mention business owners fielding inbound offers. All of this means that if you are thinking about selling or raising capital in the next year or two, it's time to get ready. In our continued mission to support middle market business owners and those who advise them, we are kicking off a new series bringing our pragmatic approach on what it means to get ready to go to market. In today's episode, Cheryl Aschenbrener, National Leader for Transaction Advisory Services at Sikich, and, one of our most popular guests here on Right in the Middle Market, comes back on the podcast for the first installment of this new series to talk about the accounting and a few other aspects of getting your business ready. Welcome to Right in the Middle Market, a podcast about pragmatic perspectives on running, growing and selling your business. We talk about the challenges, decisions and most importantly, the actions business owners can take to create long term value in their companies. Welcome to Right in the Middle Market, I'm Stephanie Chambliss Gaffin. And I am here today with Cheryl Aschenbrener, national leader of Transaction Advisory Services for Sikich. So excited, Cheryl, to have you back today to join us for a second episode. Thank you.
Cheryl Aschenbrener 01:45
Thank you, I'm so excited to be back. I love doing this with you. These are so much fun.
Stephanie Chambliss Gaffin 01:50
You know, the episode that we did before on de-mystifying the quality of earnings has been one of our most popular episodes. And so we're so excited to have you back today to dive in on a little bit of a different topic.
Cheryl Aschenbrener 02:05
I'm excited. I'm really excited.
Stephanie Chambliss Gaffin 02:07
If you listen to what's happening in the market right now. And I know in this uncertain year, and you know, as we're recording this, it is December 2020. I think many of us can't wait for this year to be over. And are trying to, at least I personally, I'm trying to convince myself that the artificial demarcation of 2020 to 2021 is going to have some magical property that is going to make everything better in the world. But there is a lot of talk, of course about what's been happening in the M&A market. After a depression in transaction numbers in the second quarter of the year in particular, there's been increased activity in the third quarter, anecdotally and Cheryl, want to get your thoughts on what you're seeing as well. But there's certainly been pickup in activity. And I think there's a feeling that that is going to continue into 2021. What I'm hearing from a couple of perspectives, one is that there was a depression and activity in 2020. So people who may have thought about selling, maybe held off. And also with a change in administration always questions about what may happen from a tax perspective. So anybody who was thinking about in the next few years, may decide to go ahead and get that done. That's kind of what I'm hearing Cheryl, what are you hearing in terms of transaction volume?
Cheryl Aschenbrener 03:32
Absolutely, that's a really good question. And one that is changing, as you said daily. Right now, what I'm really seeing is more of a seller's market, because the deals out there are just, they're sparse, you know, so there's a lot of cash out there, the dry powder out there, the private equity, you know, groups that are looking to build platforms with the funds that they've raised. And and the deals that are out there are sparse. One of the most unique things we're seeing is the companies that are up for sale out there, it's kind of a unique ride in that they've kind of weathered the storm. So they've almost had, they can prove to those sellers, that that they are a strong and withholding company, something that was kind of always my job, if that's a word to say, you know, in looking at that financial due diligence. Because they've weathered the storm. They've gone through this, you know, 9-10 months of you know, what, and have gotten there. So that's what we're seeing a lot of, you know, the political situation, the tax situation is something that is very intense right now. And I mean, just I think last evening, you know, the legislative, they're starting to talk again, so at least that's promising and bills are out there, that parties are starting to look at so so we'll see what's to come, you know, More PPP money, I don't know, we'll have to see. There's talk again of, you know, the deductibility of the expenses. Again, it's such a wait and see mode. But I think there are a lot of active businesses looking further to sell now going through this much longer than I think people were anticipating.
Stephanie Chambliss Gaffin 05:21
You know, I love your point about that those that are in the market that are able to demonstrate that they truly have weathered the storm, I've actually often said this year, it feels like, you know, kind of the tale of two cities, right, the tale of two M&A markets. That for those companies that are strong, again, there was so much dry powder coming into 2020 a depression and activity in certainly Q2, you know, even the end of may be the end of Q1 and sort of an unusual activity, I guess, to the understatement across the rest of the year, that there's still a lot of dry powder out there chasing companies, and that those that have performed well and are in the market are commanding a real premium in in terms of multiples. Those however, that have struggled or that you know, and it may be because there was a weakness in the company that this has really exposed, it may be just the market that they're in. Somebody that's in travel, entertainment, food and beverage, certain aspects of food and beverage anyway, they're, you know, the restaurants, obviously, through no fault of their own, is experiencing a very, very tough year. And so it seems like there's this, you know, kind of tale of two M&A markets, that the strong are so sought after, and absolutely a seller's market, and the ones that are struggling, are going to have a really tough time.
Cheryl Aschenbrener 06:51
Oh, it's hands down, hands down. And I think one of the toughest things, you know, that we always encounter when we go into transactions is, is the emotional aspect to the deals, you know, so just are they emotionally prepared? And if it's, you know, on the buy side, are they emotionally prepared to engage in bringing in another company, if, you know, they're bringing it in into some sort of platform or token, but on that sell side, we really see that emotion, you know, right up towards the end, and I think the pandemic and that regime has helped us because a lot of times in the past, we had told our buyers, one of the biggest things you can do is step away from your business, try it first for a week, you know, then maybe two weeks, a month, you know, just to get that emotional, I can be away from my baby. But what we're seeing with this pandemic is people are kind of emotionally more prepared now. So transactions aren't taking maybe as long as they had been in the past. And I would say a lot of people are coming in a lot more prepared when it comes to due diligence.
Stephanie Chambliss Gaffin 07:59
It's really interesting that you say that, because that is one of the other things that I've wondered, is somebody who looks and says, gosh, I know, sometime in the next, you know, five years I want to sell. After this year, it may just be saying, I'm done. Right? I'm exhausted. They're just exhausted and saying, you know what, it's time I just, I want to sell. I want to make sure that my business goes on, and I'm exhausted. I'm done.
Cheryl Aschenbrener 08:29
Well, I think one of the greatest things, I mean, you and I here today, I mean, I used to have to beg some of my fellow clients or, you know, business owners to educate themselves on, what is it, Cheryl that a buyer is going to be looking at when they come in. What are they what are they going to want to see? I have my financial statements, I have my tax returns, what else do they need? You know, I have never been asked now more than ever, you know, to jump on a call with you and see if we can educate business owners or just my business owners in general, just sitting down with them and saying, okay, here's the things you really need to think about. It's not just about a financial statement. It's not just, Well, I have audited financial statements, and I've done my tax returns and I'm filing in what I believe are the proper states. They really want to understand and get to that point to know that they're fully prepared so that when someone comes in to look under their sheets, they're ready.
Stephanie Chambliss Gaffin 09:25
That's a perfect lead in because I think that's really where we want to focus today, is for somebody who is thinking about selling their business and obviously there are some businesses that decide they want to go to market and they get ready very quickly. But very often, they get in and they discover, Wow, there's a lot of things I wish I had known, I wish I had started this earlier. And so I think what we wanted to do today and this is part of a series that we have on getting ready to go to market and so today, with you want to focus on some of those financial and accounting pieces. Because I think a lot of business owners say, Why on earth would you tell me that I need to take 6-12 months maybe even longer to get ready to go to market?
Cheryl Aschenbrener 10:12
That that's the number one question I get asked all the time, you know, why does it take so long, I would be doing a disservice of not letting a business owner know you, you really need to get the right team, you know, that may not be the current accounting firm you're working with, you know, you, you may need to look to, you know, someone that literally like, such as myself is specifically focused in transaction advisory, because we take a different look at things when you're getting ready for sale. You know, just having that perfectly planned diligence in place in advance is, is so key. From a high level, what I always tell people is, you know, it's, it's really looking at a review of your business, looking at the company background, looking at your management team, looking at those key employees, you know, what type of capital structure are you in, you know, what, what tech structure? Are you a C Corp? Are you a flow through entity? What structure are you there? And then looking at the details surrounding that working capital, I mean, that is the working capital and EBITDA. Those are key in deals. The biggest surprises we're seeing lately is, is revenue recognition, you know, it's still out there, there was a change in the accounting method. And just really honing in on those contracts and PO's of the customers, and making sure that that you have that properly recorded, because those can be some really big deal breakers or mess up those, those numbers that you thought you were going to be getting if you've been pushing revenue in the wrong years. So that's where due diligence teams really focus their efforts. And then I would say another one that's really been popping up to as of lately is inventory. And I know on our last podcast, we talked a lot about those supply chains, you know, on both sides of the fence. And what's really popping up lately, is those inventory levels, and really looking at, are you making the right stuff? And are you making too much of it too little of it? You know, are you watching those key performance indicators or just those trends? And maybe you're making all the wrong things, you know, so when we start looking at turnover, inventory turnover, you start peeling back that onion, you're like, well, this isn't making sense, this isn't making sense. And all of a sudden, you start uncovering that, that they're just producing the wrong things. So some of those things you don't see from a financial statement audit or a tax return. And those are the things that you kind of go, Oh, that's gonna take me longer to clean up than a week or two weeks, you know, so that's where the timeframe starts, starts ramping up. And then we can go into the personal expenses. But those are the things you know, that are the the bigger things that pop up when you're starting to get ready for sale and plan.
Stephanie Chambliss Gaffin 13:10
I think I'm hearing two things when I'm when I'm listening to you talk about that, Cheryl. I think one is do you have the core FP&A system systems, right, the financial performance analysis systems in place, so that you're able to see inventory turns, so that you're able to see really what's happening in terms of different parts of your business. Can you identify this weaknesses in your supply chain, or where your market has shifted where your customer buying habits have shifted? So to me, the first thing is, do you have the right reporting in place? Number one, any buyer is going to ask for those reports. And you're going to want to be able to produce them. And if you can't, you know, we always say, why not. And so when they start in this, by the way, this probably should not just be an Excel spreadsheet that you're keeping up manually. Because any buyer, if you can't produce a report based on a reasonable data request, not the true esoteric data request, but a reasonable report in a fairly short period of time they're gonna do they're going to start discounting that purchase price. If it shows up and it's in a manual Excel spreadsheet, they're gonna start discounting that purchase price. And so to me, the first part of what you're saying is around, do you have the right information to both be able to show this to a buyer, but also the second part is so that you know it and that you are making decisions in the way that you're operating the business so that it is as strong as possible. So for example, if you've had one sector of your business that has taken a real hit, it may be a good time to really look at how much cost we have tied up in that. Do we need to shut down that line of business, rather than take it into market? Maybe you could sell it, maybe you could divest it. But if it's something that has taken a hit, and it is not coming back, then figuring out what to do with that, before you go to market is definitely in your best interest.
Cheryl Aschenbrener 15:20
That is, that is you hit it spot on, you hit it spot on Stephanie, I mean, the number one thing we love to do when we go in and prepare companies is, you know, they look at, well, here's my revenue, here's my cost of goods sold, here's my operating expenses, you know, and then outside of those are selling in general, and administrative types expenses, but it's like, Yeah, but you have different sectors in your business. And everyone else says, No, I'm just, you know, I work in this industry, and this is who I sell. But there are, there's always different sectors. And it's amazing how many people do not have their system set up that way. But when someone comes in to do due diligence on you, those are the things they're going to be looking at and trying to figure out where are the big moneymakers here in this business? And I think you also as a business owner would be shocked and kind of go, Well, why wasn't I looking at it that way? You know, to know where I was actually making the money? Or maybe, maybe it's just by customer, you know, sometimes maybe you really aren't sectored? But then it's starting to look at your customers and really looking at which customers are you making proper sales with and margins on, and how much time you're spending on them.
Stephanie Chambliss Gaffin 16:33
And customer concentration, which is, yeah, you know, you think about, particularly, and I'll come back to what you were saying earlier about supply chain. But I think that the same is true in kind of your customers, where some of them may have been doing great, and some of them may not be doing so great. And many of them may have had to pivot. And so if you have, you know, 60, 70 plus percent of your sales are going to one customer or one related side of customers, you know, that's a huge exposure. And so being able to look and you know, this is something where I guess I would look at it and say, depending on your timeframe for selling, I would have different answers for what you should do about it. Right? So if you think I want to go to market in Q1 of next year, the answer is at least be able to show the data, right? Know where the answer is and if there is a gap, have a plan for how you or a buyer could address it. If it's a little bit longer, if you say I want to go to go to market in a year, then I would look at it and say, How do I increase my customer diversification? How do I maybe balance or open up new market segments? Or, you know, conversely, do you even think about if there's really different aspects of the business? Do you think about how do I maybe even start to move those apart? So that I could sell one, but not the other?
Cheryl Aschenbrener 18:07
Exactly. And it's so funny, I was talking with a group of manufacturing business owners yesterday, a large group of them. And one of the things that has been popping up, and they brought it up on this call that I was like, wow, this isn't just me seeing this is, with those customers, and especially customer concentrations, the question is always how sticky are they? Right? So you question and you try to uncover how sticky those relationships are. What's coming out now, is a lot of those relationships are with people that are pretty senior in the organization. And a lot of people now during COVID are retiring a little bit earlier, they're saying, You know what, I was going to be here another two years, but it's just for my health, whatever, I'm going to retire earlier. And all of a sudden, that sticky customer that that customer concentration, has left the building, and they're starting to build these new relationships. And now, if you're coming in, you're looking to sell your company, and you have to go to that potential buyer and they start interviewing who your relationships were with, you need to be prepared for that. You know, it's tough to pull your shorts down. But you have to make yourself honest with yourself to make sure that what you're putting forward isn't something they uncover again during those diligence processes. So customers are, are huge. They're huge, and a lot of payment terms are changing. You know, there's just there's so many things that are popping up that hadn't been so out in your face before, during diligence processes.
Stephanie Chambliss Gaffin 19:49
Well, and I think one of the things that I often say it's not that a buyer expects the business to be 100% squeaky clean. There's no challenges anywhere in the business, right? That's not what they're looking for. And so, you know, I would never want a potential seller to think, Oh, my gosh, I have to fix every single problem. But I think there's a big difference if, when somebody asks a question, and part of what I always see is they're looking for the response. Right? Yes. Ideally, they're getting a great answer around customer relationships and stickiness and, and, you know, customer concentration. But the next best thing is to say, You know, here's what we have seen in this. And actually, you know, here's how we are now monitoring this, here's what we learned when we put this new analysis in place last quarter. And here's the plan that we have developed and are executing on to try to close some of the gaps that we've recently identified. That to me, again, shows that this is somebody who is thoughtful about the way that they're managing their business, they are on top of the issues. And they identify, you know, the potential challenges. We had a conversation yesterday with a client and a potential investor. And they asked a really interesting question- the potential investor asked a really interesting question. And they said, in, you know, three years from now, if you have not achieved, what you put in your pitch deck, right, that you say, this company, you think is going to be able to do, what will have been the reason? Right? And it was sort of a different way to ask what are your biggest risk factors, but it led to actually a really good conversation about, you know, here are the biggest things that we have to address, to be able to really make this company grow in the way that we believe that it can. And in this situation, the CEO had a fabulous, fabulous answer about it, here's what we're doing about it.
Cheryl Aschenbrener 21:52
Right. It was all about the preparation. He was prepared for that, because I would agree with you, you can never fix everything. And honestly, if I were the buyer coming in, I would kind of question that as well. You know, like there's got to be things here. So, again, that transparency to me always means what you think your company is worth is what you will get. And the minute they start uncovering things that weren't either truthful, or things you weren't aware of that they uncovered. They just keep digging more and more, because they know there's something there.
Stephanie Chambliss Gaffin 22:30
Yeah, both of those right, there's nothing worse than identifying something that that then the buyer feels like the seller was trying to hide, right? That's never a good thing. And I don't know which one's worse, that or finding something that the seller didn't even know. Right? So we always say, due diligence is the time to be honest, it is the time to put on your Sunday best. But it's also the time to be honest. So when we come back, we're gonna take just a moment for a word from our sponsor. And when we come back, I want to talk a little bit more about some of these landmines. What are the ones that we need to make sure that we're aware of and what do you do about them? Right in the Middle Market is brought to you by SLS Capital Advisors. SLS Capital Advisors is a boutique financial advisory firm working directly with middle market leadership to tackle critical growth opportunities, including exits, mergers and acquisitions and access to capital. The principles of SLS Capital Advisors bring deep industry, financial and consulting experience to firms seeking tailored strategic opportunities, including capital for major growth initiatives and alternatives for those evaluating corporate transitions and exits. SLS Capital Advisors services include managing effective exits and sales processes, involving sophisticated buyers, such as strategic purchasers, financial buyers and operator to operator transactions, and raising capital to fund our clients growth including debt and equity elements. They also assist companies and capture growth opportunities through focused and effective organic growth in M&A programs and unlocking profit potential through business portfolio, rationalization and divestiture. SLS Capital Advisors focused on delivering consultative executions for clients seeking strategic growth in capital. Find us at SLSCapitalAdvisors.com to learn more about how we can help you. Welcome back. I'm here with Cheryl Aschenbrener of Sikich Transaction Advisory Services. And Cheryl, I think this is such a timely conversation about, what are the things to be thinking about and to be doing if you are contemplating selling your business anytime, whether it's in three months or three years, what are the things that we should be doing? Or the business owner should be doing? So let's now talk about maybe what are some of those landmines that we find and when people say gosh I really should do a little bit of accounting clean up. Or what are some of those things they should be looking for and thinking about?
Cheryl Aschenbrener 25:07
You know, the easier ones are those personal expenses. And you really have to think hard about that, you know, what everyone thinks, Oh, yeah, you know, my cell phone, my car, though, those types of things, and, you know, maybe by my country club dues, but you really have to take a step back, one of the ones that usually pops up quite often, and I'm usually shocked by is, people don't realize when, especially in a younger company, and you know, now you're getting to that next step, where you're looking to infuse some more capital in, is the use of personal credit cards. And those are pretty much off the books, you know, so what were those expenses that went through? So, you know, start thinking about those, and a lot of other times, it's the accruals, it's what's what's not there you need to make sure of. Are there are there profit sharing, you know, every year has been placed into the company, but isn't recorded throughout the year. Are there commission structures, are there management, bonus structures are there, you know, interest, unrelated party debts, just even those related party debts, you know, maybe getting those cleaned up, a lot of times, they're just cross collateralizing, those between, you know, some of their separate buildings or rental income that they have out there. And then you can get to some of the bigger ones, you know, like we talked about earlier here, the revenue recognition, that one is just popping up like crazy lately, because people aren't as fully aware of how revenue recognition has changed, and a lot of warranties that are attached to products or training or service of the products after in those warranties. You know, people are like, well, we bill for that after the fact Well, with the new revenue recognition rules, that's no longer the case. So you know, those are things that I see as, as cleanup type items. Other things that pop out are, as I alluded to earlier, to taxes, you know, you think you're filing and all the right states, because you're you know, but you start nosing around and asking you a few more questions as to you know, what states your products are landing in or, again, getting back to the credit cards, I was buying in states that didn't charge me sales tax, well, then you should be, you know, paying and use tax. So there's all these little things that pop up and just need to be cleaned up, you know, by asking the right questions of yourself and your advisors.
Stephanie Chambliss Gaffin 27:42
Yeah, it's those are great examples. And I want to go back to your point about personal expenses. This is a conversation that we often have with our clients and our role as an investment banker, that as they start to go through and identify those personal expenses, which we do, either to be able to add back to EBITDA or to calculate an SDE, a sellers discretionary earnings. Depending on the size of company. But that becomes really important from two perspectives. One, you really do want to be able to give a sense to a potential buyer of how much money this business makes, because that will be the foundation for their valuation of the company. But the other piece that was interesting, we had a client about a year ago, who started to look and she said, Wow, I actually had never really added up how much I was running through the business. And these are all things that from an accounting perspective, she wasn't doing anything untoward, there was nothing, you know, questionable about what she was doing. But when she really started to add it all up, and factored into her thinking about what price she needed to get for the company, because she was one, who was kind of on the fence about selling, she'd like to sell it, but you know, was maybe a little bit on the fence. And it really factored into thinking about unless I can get it you know, this price, quite frankly, it's not worth it for me to sell because it's such a good vehicle for me to be able to manage expenses, like a cell phone, where, you know, she is using it for business. And so she would still have if it were personal, but she could run it through the business.
Cheryl Aschenbrener 29:19
No, those are huge. I mean, I think that pre pandemic, like travel expenses used to be a big one, right? Because, did you really need to go to trade shows, you know, how many trade shows did you really need to be at, you know, to be in the right places? Or were they just you know, you had friends in the industry and you wanted to be there so there's just so many things that just pop up that again, I love your example there because until they take an inventory of their personal expenses that are running through the business. It is shocking. I'm always amazed. Honestly, I think my clients are always amazed. Just like yours was like wow, I do not realize all that was running through here. Yeah.
Stephanie Chambliss Gaffin 30:05
Right. And I think, to your point on some of the accruals, as well, there are things that, you know, and you may have a slightly different view on this as you're with an accounting background, but when you look at whether it's employee bonuses or profit sharing, or certain expenses, where you say, look, if, you know, if the annual financial statements are really being used for a sole owner, then yes, it should you be accounting for it in this particular way? Yes. Is it if you will, hurting anyone, if you didn't accrue for it throughout the year, and then you have the expense all common a single month. No, it's really not hurting anyone you know that that expense is coming as the owner, however, again, when you start to think about for a different buyer, then the question becomes, Why weren't you accruing for that particular expense? Now, there may be a great reason, right? We had, again, another client and in due diligence and good question came from the the buyer about why aren't you, you're telling me that your ratio of employee benefits is going to go up significantly in the next couple of months because of PTO. Why aren't you accruing for PTO? And the answer was that in their particular state where they did business, there was a choice about the accounting treatment, and they had a perfectly valid answer for why they chose one method over the other. But again, that goes back to, there was a question, they immediately had a valid and well thought out answer. So it put the issue to rest, really quite promptly. But those kinds of things, if the answer had been, well, gosh, we never thought about it, that would have had a very different reaction from the buyer.
Cheryl Aschenbrener 31:53
Oh, agreed. But, like I say, I always look at my clients, because no matter what financial information is always about the working capital, it's always about the cash, right? So those are the surprises, we always find, you know, that arent' recorded. If it doesn't hit cash, it's usually not going to be recorded. So you look at even, you know, like deferred revenue. I mean, that's literally a liability. And you know, an income statement type item, it didn't hit cash. So a lot of times, those are things that are missed. I think about even like off balance sheet type items, you know, such as letters of credit, contingencies, any sort of commitments that are out there, any guarantees. You know, so those are things, again, that aren't recorded, but they are legitimate expenses that could potentially be out there for that company that aren't again, on that financial statements.
Stephanie Chambliss Gaffin 32:53
Yeah, when I think about, you know, I think of a couple of other examples, when you talked about working capital, I think that's also one where to look and to say, is there excess cash that you are keeping in the business? And again, a number of different reasons that you may do that- you may do that just as somebody who is conservative and always want to have that cushion there, there may be tax reasons that you haven't wanted to take that distribution. But that then can lead to questions when a buyer comes in and says, Well, is there a reason that they need to keep that cash there, and it can make those conversations around working capital, much more challenging. And so you know, that to me, would be another thing to look at, again, well in advance, if you are right, before you put the company on the market, you're taking out $2 million in cash, that's probably going to raise some questions. But if you are looking ahead and saying I think I want to, you know, to sell the company, to, again, just look and be thoughtful, make sure that you're talking with your accountant, about how much cash you're keeping in the business and in what format, so that you're thinking ahead about that.
Cheryl Aschenbrener 34:01
100% agree. One of the examples that I can give, was in customer deposits, you know, the cash came in, they put it in customer deposits, right? After that, no one really watched that account. You know, it's, again, one of those balance sheet type items that yes, you got the cash in, you booked it, you knew it wasn't yours yet, but who went back and cleaned it up after the fact when the job was done? No one. So just looming. And again, you know, it's it's to your benefit. So you don't want to leave that there because that could be potentially a landmine laying for someone to say with, I'm doing an asset deal, that's mine.
Stephanie Chambliss Gaffin 34:40
Yeah, that that's exactly right. And you know, the other thing, and this is, this might fit in one of our later sessions, but I'll bring it up now is to also think about the ownership structure that you have. And, you know, again, we recently were talking with someone who actually was contemplating going to market and having this very similar conversation. And, you know, the owner told me that, you know, she had a couple of long term employees that she'd always thought about and it kind of always meant to give them a small ownership, percentage of the company. And, you know, we kind of said, if that's something that you have always meant to do, you probably need to get that done- not probably- you need to get that done before you would take the company to market. Because otherwise, now, you can always choose to do it on a cash basis out of your proceeds. But if you actually want them to own a part of the company, you're going to need to get that done. And likewise, if you've done that, in the past, going back, you know, did you give 1% of the company to somebody who left five years ago, and they actually had, you know, something in that documentation about needing to approve any sort of potential sale, hopefully, you didn't structure it that way. But you're going back and looking at those things to make sure that any minority shareholders are really, that all of that is clean in terms of being able to go to market.
Cheryl Aschenbrener 36:15
100% it's pulling out those bylaws or articles of incorporation. Those things, the big black book that no one's touched and put on the shelf for years. Right? But again, it's that planning that that is key.
Stephanie Chambliss Gaffin 36:31
Right. Cheryl, you know that we always like to end with two pragmatic tips. And so I'd love to get on this. So for business owners who are thinking about either actively thinking about going to market, or know that sometime in the next six to 36 months, they want to go to market, what are the two top things they should do today?
Cheryl Aschenbrener 36:55
I hate to bring it all the way back to the beginning. But step away from your business, get prepared emotionally, mentally, because that is 99% of the deal. And the other one is educate yourself. Find the right person that you can connect with and can give you the honesty, and let you know what really is involved in due diligence and how to prepare yourself.
Stephanie Chambliss Gaffin 37:24
Yeah, I think those those are great ones. The more that you know, the more that you understand.
Cheryl Aschenbrener 37:29
I can't tell you how many times I've done a call and no one understands what SG&A is. Cheryl, I've never heard of SG&A. I'm like, Oh, I'm so sorry. Selling general and administrative expenses. You know, you don't want to be like that, when a buyer comes in.
Stephanie Chambliss Gaffin 37:46
Exactly. And it's- it is the whole reason that we are doing this podcast series, right, is because we want business owners to be educated and to have that information. Yeah, I think my tip, I'm going to take two and kind of combine them into one. But I think for me, it is really going back and looking at your processes to make sure that you have the information that you need to be driving decisions. So I guess that's my first one. And then my second one is where you see a gap, make a plan. Know that that's a gap. It's okay, if you have a gap. No business is perfect. But be aware of it. Be knowledgeable about your business. Have that data driven action planning and say, here's here's what we're going to do about it. Or here's what a potential buyer could do about it. So that you're not blindsided when you get into due diligence with a potential buyer that you're really excited about. And all of a sudden they find something that you didn't know. Cheryl, thank you.
Cheryl Aschenbrener 38:50
Thank you for once again, so fun. And I hope I can help other business owners out there to understand what this process is.
Stephanie Chambliss Gaffin 39:01
Yeah, absolutely. And we'll put your contact information in the in the show notes for anybody who wants to reach out to you directly. I'm Stephanie Chambliss Gaffin. And you've been listening to Right in the Middle Market, a podcast about running, growing and selling your middle market business. If you'd like to work with us, feel free to contact us you'll see our contact information in the show notes and we would love to talk to you about how we can help you and what you're doing in your business. We'd also love to hear your comments about today's episode, or ideas for topics you'd most like to hear in the future. Send me a message on LinkedIn or drop me a line at podcast@gaffingroup.com. Be sure to subscribe to hear more pragmatic tips on upcoming episodes. Until next time, be well and be pragmatic.