Episode 4: Selling Your Business - Part 1

Episode Summary

Most middle market business owners plan to sell their business at some point - whether at retirement, or simply when there is an interesting opportunity to do so. But how exactly does the process of selling a business work? Is it just like selling a house, or different? Across this three part series, co-hosts Stephanie Chambliss Gaffin and Mark Gaffin walk you through the process of selling your business. Part 1 covers an overview of the process, selecting an advisor, getting ready to go to market, and creating a "buyer universe".

Episode Transcript

Mark Gaffin : 0:01

In today's Right in the Middle Market, we'll be talking about an important process in selling your business. And this kind of gives an overview of the sales process, the timeline, the key components of it. Don't miss this exciting episode.

Stephanie Chambliss Gaffin : 0:16

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.

Mark Gaffin : 0:37

Welcome to Right in the Middle Market. My name is Mark Gaffin and today I have Stephanie Chambliss Gaffin, who is our Managing Partner, to talk to you a little bit about a really important area. We've had a lot of questions about this from listeners about the the sales process- what drives that? What's the typical timing and how much of that's been changed due to COVID? So Stephanie, could we just start off with: What are the major components of a sales process, if someone's getting ready to go through this?

Stephanie Chambliss Gaffin : 1:08

When you think about a middle market business owner, they, most often not always, but most often, when they go to sell their business, they are doing it for the first time, where if not, for the first time, it's not something that they do all day, every day. They are expert at running their business. They're really good at what it is that they do. But they need a chance to be able to learn and understand what this looks like. So we always love when we're working with clients to spend time early on, to be able to share this kind of information. So the first part of this is that the advisor that the business owner is working with needs to spend time really understanding the business. This is really important. We'll go into this in a little bit more detail, but this is really important so that the adviser can work with the seller to think about how are we going to position the business most effectively for sale. The second piece then is creating the marketing materials. Simply put, if you're going to go out to market, you need to be able to have something that summarizes what does the business do? What did the financials look like? What is this market? What is the industry? And why would somebody want to buy this company? The third piece then is identifying and qualifying potential buyers. So this is really important on both fronts. Identifying is being able to understand who is the most likely type of buyer, and identify specific individuals who may fit within that. And then to be able to really qualify, is this somebody who is going to be able to both purchase the company, and are they going to be effective in running it. And then finally, once you go through all of that, there are a number of steps to actually executing the final sale. The way that I think about this in summary, is I always think about the process that we need to be able to tell the right story to the right investors at the right time. And so that's what we seek to do throughout that process.

Mark Gaffin : 3:10

Stephanie, in a normal time frame, I know we've gotten this question a couple different times from clients about starting the process. What's the expectation in normal times about a timeframe, and how do you think that might have been affected by COVID?

Stephanie Chambliss Gaffin : 3:30

Yeah, so let me start with the normal process first. I think the first thing that I would say is that a lot of this will depend on if there's work that needs to be done before the company is really ready to as we say go to market. It's like putting your house on the market. If your house is absolutely ready that you could show it today, then you can get it on the market pretty quickly. If when you look around you say gosh, if I don't actually fix up that bathroom and that crooked banister, and paint that really ugly back room that we keep meaning to paint and we never get around to, right, you can put it on the market that way. But buyers will discount the price if they are going to have to come in and fix those things. So the same is true when you're selling a company. So you want to make sure that you're giving yourself some time to get those things ready to go. Depending on how much work there is to do, then that will determine how long it takes. A big part of that is how readily you can access the information to be able to get that to your advisor. So if it takes you a while to be able to pull together financial information, customer information, all of the kinds of things that a potential buyer is going to want to assess to understand how strong of a business is this, is this an investment that that would make sense? The longer that takes, the longer it takes to get ready to go to market. So once all of that information is in place, it's typically call it four to six weeks, usually to pull together those marketing materials. Within that, the advisor that you're working with should also be doing an analysis of the competitive market of the industry so that they can really accurately portray how your company fits within that broader environment. If I think about those pieces, most of that, quite frankly, is really not impacted by COVID. Unless you have individual people changes that have been impacted, you know, so for example, if you had to let go of your finance team, or if your finance team is out for, for personal reasons, then it's probably going to be a little harder to pull that information. But assuming that you've got the information, shouldn't really be impacted. Then if you think about the next phase of being able to start to identify buyers, again, so in normal times, let me start there- in normal times, identifying the buyers is something that, you know, it's interesting if there's a really clear buyer set for this company. So let's say that this is a company with an EBITDA of at least two to 3 million, maybe higher, or I would put even a second threshold at a million. Then you're starting to have a company that may be of interest to institutional buyers. And so identifying a potential buyer said, if that's the right kind of buyer for this company, that can happen fairly quickly. If you're looking for a type of buyer, that is a strategic buyer, right? So you're looking for somebody else in your industry who's maybe a little bit bigger, or in an adjacent market that would want to acquire a capability that you have, or if you're looking for an individual buyer, those can take quite a bit longer. So again, it can be it really can vary from a few weeks to a few months to find that set of buyers, depending on what what buyer subset you're targeting.

Mark Gaffin : 7:00

So Stephanie, question for you- sometimes owners have been a little bit concerned about letting the whole team know about the process. Is there a way to do these parts of the process, I'm assuming that some of these things are done in parallel, some are sequential. Is there a way to do this in a way that's discreet? Even if you're just testing the market, is there a way to do that so that you're not getting people really riled up?

Stephanie Chambliss Gaffin : 7:27

Yeah, it's a great question Mark. And absolutely, there is a way to do it. This is one of the benefits of working with an outside advisor. People will joke about the project names that get used, but the truth is that this is why we use project names. A good advisor that is working with a company, number one, they are the intermediary. And so you always work with a client, work with a seller to say how can we describe your business in a way that is sufficiently vague that somebody can't come in and automatically know exactly who it is. But it's specific enough that a potential buyer can make an informed decision about, yes, this is something that would be of interest or, you know, thank you, but no, and go ahead and move on. So that use of an intermediary, and then some of the tools that an intermediary will use in terms of both how they describe the business, and even some things as simple as the project name. The other thing that I will say is that this is where I think it's really important for you as the seller to have good communication and good dialogue with your advisor. So for example, there is, and I would argue, should be a greater comfort level with reaching out to financial buyers. So think about private equity firms or family offices or somebody like that, who's really in the financial world and quite frankly, they're dealing in confidential information all the time. Versus a strategic, where you're reaching out to somebody who in some situations may actually be your competitor. And there, you obviously want to be much more delicate.

Mark Gaffin : 9:04

And it would seem like as an advisor, there's some terms here, there's some new things about private equity. How do I approach private equity? How will they view me? I'm assuming that's where an advisor brings an awful lot to helping the the owner get ready for the process, get ready for these meetings, understand what private equity is looking for, understand what a family office is looking for, and why they do what they do. Is that fair?

Stephanie Chambliss Gaffin : 9:29

If you look at Hollywood and not to pick on Hollywood, but in the movies and TV shows, it's really easy to paint private equity as the bad guys. My experience with private equity is that by and large, they're really good people. And the other thing I would say is that not all private equity firms are the same. And again, that's where I think a good advisor will help you number one, determine if an institutional buyer like a private equity firm would be appropriate for your business and for your industry. Number two, then to start to look within private equity firms to say which sub segment is going to be the right group to approach? And then finally, how do you shape that message? Because you're exactly right Mark, when we're going out on behalf of clients, I do shape the message very differently if I'm going to a potential strategic buyer, versus going to a financial buyer, like a private equity firm.

Mark Gaffin : 10:23

I think all this builds on itself, right? To me, it's prepping the owner, prepping the company, making sure what we call an investment thesis is very clear to the buyers. We want to make sure that this is what the inimitable competitive advantages of this company are so you're like, that's why I need this company as part of my portfolio- to add on to my portfolio. And that might be another operator, right? And maybe an operator says, gosh, that's a geography I'd never thought of before, but thanks, this information is very helpful. And this is a way to get into that geography.

Stephanie Chambliss Gaffin : 10:58

So if I come back to my mantra in this, "Right story, to the right people, at the right time." It's exactly that, that story, when I say with the right story, it's how do we succinctly describe who this company is and why someone would want to buy it. What is it that provides such great value within this company that somebody is going to look at it and say, yeah, I want to buy that company. But that story is only going to be effective with the right people. So if you're targeting two different groups of buyers, you may need to have slightly different stories. With a financial buyer, such as a private equity firm or a family office, you're probably going to emphasize the financial returns and the growth opportunity. If you're targeting a strategic buyer, then you're probably going to emphasize specific capabilities, whether it's geography, or customer segment, or something else that is going to be of interest to that strategic buyer. So really thinking about that, right story and right people, to me is what helps to drive successfully finding the right buyer.

Mark Gaffin : 12:07

Stephanie this has been really interesting. We will get right back to this after this message from our sponsor.

Stephanie Chambliss Gaffin : 12:18

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 in capturing growth opportunities through focused and effective organic growth and 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 and capital. Find us at SLSCapitalAdvisors.com to learn more about how we can help you.

Mark Gaffin : 13:30

Welcome back. We're going to dive right back into this exciting topic M&A process with Stephanie Chambliss Gaffin. So I think there's a great construct to the right story and it seems to me, that the risk could be if you're with an advisor that's treating it more like a plain vanilla, grind it out and get it out, kind of thing, is the story really getting its due. I think that that's crafting something that's compelling to people and that they can connect the dots, right? Then the right people, how do you keep in front of buyers when you don't have a deal out there? How often do you talk to private equity folks?

Stephanie Chambliss Gaffin : 14:10

Well, so I think this is something where it is important to be building those relationships. And again, it can be tried to say that relationships matter, but they do. So we get emails, and I know other advisors do as well, all the time, we're going to conferences using organizations like the Association for Corporate Growth, or, you know, other really good institutions that are out there, as well as just the personal relationships that we build over time. I got an outreach email again this morning from a private equity firm that I hadn't talked to before, but who said hey, we're actively looking for investments in these types of companies. Do you have anything? We'd love to connect. And my response is always yes. And so I'm having those conversations, Mark I know you're having those conversations all the time. Beacuse that way we have an understanding of what they're looking for. They have an understanding of the kinds of clients that we are bringing to market. So that then when we have a client that we're in the process of developing that right story and right people, we have kind of in the back of our mind, oh, gosh, you know, I know people who are looking for a company like this. I know of people who will be really interested in this kind of an opportunity. And that can help to expedite that process.

Mark Gaffin : 15:28

That's great. So you come in, you learn about the company, we get a model built, we do projections, we get that into a one page, we call it teaser or marketing material, one pager, and then you work on a more intensive investor deck, right? It talks through all the different, you know, this is the background of the company. This is a competitor set of the company. So that's all really interesting and sounds like a lot of work and I'm sure the advisory helps a lot there. So, as you start to think about getting this down to a usable amount of people to talk to, how does that work?

Stephanie Chambliss Gaffin : 16:05

So I think the first thing, again, is it can be an iterative process. And a lot of this will depend on again, if you have a company that is a little bit larger, right, which is just the truth is that there are more buyers out there for where it is easier to find buyers, particularly institutional buyers, for companies that are a little bit larger. And in the small to medium sized market, what I'm talking about is something with at least two to 3 million of EBITDA, you'll often hear 5 million of EBITDA as a common threshold. There's a pretty good buyer set even starting at two to 3 million and EBITDA. So you can go out to a number of people, and then you're starting to get responses back. So often then it's the advisor is sending that out, they're sending out emails or making phone calls to potential buyers that they know, they're doing research to augment their personal relationships. I think any good advisor is not relying just on their personal relationships. And quite frankly, especially if you're thinking about a strategic buyer, you're also in good dialogue with the seller who knows their market very, very well. And it can be a very good conversation to say, what does that we call it a buyer universe? What does that buyer universe look like? So then there's an initial outreach, again, done by the advisor. So that number one, it's like the same reason that you use a realtor, right? It creates a little bit of distance between the seller and the buyer, which can be a good thing. And it also can allow the seller to remain anonymous if that's something that they're looking to do. Then people will respond, and again, particularly with what we call a sophisticated buyer, which is going to be someone like a private equity firm, who then is responding and saying, gosh, yes, that looks interesting. You at that point would typically execute an NDA a non disclosure agreement. So really, it's a confidentiality agreement saying we're going to share more information with you, and you agree to keep it confidential. At that point, then you share that longer deck, Mark, the one that you were talking about. And often at that point we're getting on the phone, we're having a quick conversation telling them a little bit more about the company, saying is this something that may be of interest, and at each point, you're sharing a little bit more information, and they're validating whether or not this is of interest. And so it's a little bit of a dance back and forth. And the goal is to get to a point where now we've shared that investor deck, we've probably shared financials, there's probably been an initial phone call with management, and you're eventually going to get to something that is called an indication of interest and IOI. In some processes, you may go straight to an LOI or a letter of intent. So it depends a little bit on the process, and we don't need to go into it today, but there are nuances about whether you would use an IOI or an LOI. But you're getting to something that is non binding, but you're actually starting to put down on paper. This is the price or the the range that we're willing to pay for the company. This is the general terms at a high level. And so it gives the seller something to react to. If there are a number of buyers, if you're able to run a number of buyers and process potential buyers in what can be called an auction process, then hopefully you have a number of those coming in at at the same time, so that you have everybody kind of on the same timeframe. There are reasons particularly with various small companies where that can be harder to do. But ideally, you have a number of those coming in at the same time. The seller is looking at those evaluating those and then is able to actually start to move towards an actual agreement once they've identified who they'd like to move forward with.

Mark Gaffin : 19:53

So it sounds like there's a lot of work in this, and you raised company sizes, a couple different times, I think that's really important. In my experience as well, I'm curious as to you hear the term business broker, and then you think about large investment banks. And then you think about where you are in the middle market. What is it that you think you bring and this is not to disrespect anybody else that's doing what they do, but, how do you pick where you're working? And then how do you differentiate yourself from maybe a business broker, versus what might be a significantly bigger bank?

Stephanie Chambliss Gaffin : 20:33

So the first thing that I want to say, is that, there are a number of great professionals working in all different segments of the industry. I think the key is to match the needs of the seller with the advisor that you're selecting. So if this is a small business, it's maybe something that has a million dollars of revenue, it's a relatively straightforward business, might even be under a million in revenue. And it's something that, think of a hair salon or a restaurant or something that's a relatively straightforward business, for which you're likely going to find another operator, you're not looking for a financial buyer. And so in that case, where you just need to get that word out to a number of people, the straightforward process that's offered by a business broker can be a very good choice. At the other end of the spectrum, if you're talking about a company that has, you know, usually the threshold is about $5 million in EBITDA and up. So now you're talking about still part of the middle market but getting into the upper end of the middle market, maybe some might call it the core middle market. But at that point, you have some of the larger investment banks, very good regional investment banks, we work with a number of them, and they're able to come in at this point, very good chance that you're talking about an institutional or a financial buyer or a large strategic that is going to be, again, very sophisticated, probably has a fairly sophisticated corporate development function. And so that's a different kind of a process and a different kind of group in the middle, which is where I'm guessing a lot of our listeners may live, and quite frankly, it's where we live, is it's kind of that between a million dollars in EBITDA and $5 million in EBITDA, it's a company that may have more complexity to it, than what would be appropriate for a business broker. Because a business broker is just not set up to really dive in, tell the story, do that extensive market analysis and put together a customized set of marketing materials. And so in that segment of the market, so which is often called the lower end of the middle market, and again, it's that one to 5 million and EBITDA. And I think, first of all, I think it's a really fun place to work. Because you've got companies that are big enough that they're interesting, their some complexity there, which often also means there's real opportunity. There's real upside. And so to figure out how do you best portray that to a buyer, and then find that buyer, so that you're really making the right match, of a buyer who can carry on the legacy of the person who created this company, and also, very importantly, allow the seller to recognize the economic value of what they've created.

Mark Gaffin : 23:26

No, I think that's great picture of what you guys bring to that sector of the market, and I think the middle market, there's a lot of us out there that have been working in the middle market for a long, long time. And believe that that's super important. So that's a great I think, breaking point, to start in part two of this series about the sales process. We've got people circling, we've had the marketing material out there. People are excited about the company. And I think now we're going to try and evaluate these buyers. Are there tire kickers? Are there really people interested? How much information should I give when? How do I handle customer lists and those kinds of things. So I think there's a lot of really interesting things here that we don't want to share too much information too soon. How do we get people to bid? How do we get the best price? And really the best deal, because oftentimes, the best deal is not the highest price. Right? And so I'm looking forward to talking to you about that in the very next episode. Before I let you go, though, Stephanie, I would like to ask you, what are two things that either surprise you about or surprise sellers, about this first part of the process, keeping where we are now? And what are things that they should be looking for when they talk to an advisor?

Stephanie Chambliss Gaffin : 24:43

Yeah, so I think the first thing that often surprises people is how much work it takes to actually get ready to go to market. When they start to look at their company with different eyes, again, I keep using that house analogy, but I think many people have bought or sold a house. And so it's an easy one for a mental construct. It's, you've gotten used to that crickety stair that really needs to be fixed. But if your buyer is going to come in and look at it, you really need to get that fixed. So, you know, I'd say, under estimating the ability to pull out the right information and a few of the things that you really do want to clean up in the company before you get ready to sell. And I think the second thing to your second question about what advisors or what company owners should be looking for in a potential advisor. I think finding somebody that they feel really comfortable with for and this is one of the places where I think the middle market is different than larger companies. In larger companies, yes, you know, the executive has been very invested in it, but it isn't their baby in the same way that it is in the middle market where somebody likely founded this company, grew this company. It has been their life for however many years. And so, it can feel like a very vulnerable process to now take this out to market, and you're gonna have people reacting to it. So having an advisor that you feel really comfortable with that is going to be your guide through this process, I think is really important. And so, all of the things that everybody else would tell you about looking at what they do and looking at their expertise and credentials. But I would also say it's important to find somebody that you're comfortable with.

Mark Gaffin : 26:26

Well, Stephanie, it sounds like there's a lot of teamwork involved between the advisor and the seller, and even the sellers team- of the management team is there included in that process, and it sounds like that's everybody's driving to the right goal. Well this has been part one of the M&A sales process at the sell side. Very exciting and looking forward to part two. We'll take it from kind of this negotiation, on to the completion and all the interesting things that go on in that part of the deal. Thank you very much and look forward to talking to you the next podcast. Please reach out to us at podcast@gaffingroup.com Please subscribe and we'll make sure that you get the next podcast. Look forward to talking to you soon.