Are You Prepared?

Good afternoon.

My name is Matt Gilbert and I'm a partner in the M&A firm Gilbert in part. Do you guys have heard of us as Gap? That's what we go back. And today I want to talk to CPA guys and financial guys a little bit about just how are you prepared to have an important conversation with your clients, especially after this year where we've had a bunch of crazy lockdowns and coronavirus and all kinds of stuff. Many of your clients may be thinking that, you know, this is the time that they want to exit their business, so they want to transition it to somebody else. And we have found, I'll tell you in a few minutes that we have found that most business owners really confide in their CPA before they confide in anybody else. And we've also learned a few things and [00:01:00] having discussions like that with those business owners. So today, I want to just take a few minutes of your time and talk to you about being prepared to have those conversations with your business owner clients when the time starts coming to think about transitioning the business to the next generation or to a third party buyer or to some other shareholder group other than the one that you're dealing with. So my name's Matt Gilbert and I appreciate you being here today. You know, one of the things that we have learned in our practice is that the CPA to a business owner anyway, is kind of like the most trusted advisor.

And if you guys are on just a tax relationship with your business owner client, you may not feel that way on your side of the fence. But we talk to business owners every single day and every single day, literally. We hear [00:02:00] that the CPA is the first person that they would go to, the most trusted person above, the attorney above, the banker by the insurance guy, wealth planner and other people like that. So today we're just going to talk a little bit about the exit process. We're going to talk about the the journey to getting a business and an individual prepared to make that exit. And and then we'll talk a little bit about best practices and what to watch for and things like that. So I hope it'll be worth your time and let's dive right in. So as we said before, this is advice to you guys about advising your business owner clients and what are the things that I really want to start with. This is just kind of why this topic? Why now and what what where are we going with this? So, as I mentioned, we talk to business owners on a daily basis. My firm is part of a nationwide group called Value Builder, and [00:03:00] invaluable that we have a tool called a salability assessment. And we have business owners take this assessment and it gives us feedback into what they're thinking and are they ready to transact and really sets us up for a really nice conversation about this topic.

And one of the things that we have found in the salability assessment is that that that business owners really confide in their CPA. They really have this this high level of trust, an instinctual level that you guys are as in tune to their business as they are. And then when we turn around and we talk to the accounting professionals, we talk to the CPA, we find that they tell us. So that's not true. I barely know the guy or I just do their taxes and I'm not that involved. And so there's a little bit of a disconnect there. And I kind of wanted to to introduce you guys to that and maybe make you aware that that disconnect is going on, especially the tax season coming up, where you [00:04:00] can maybe change the way you have these conversations with your with your business owner clients a little bit, because they really do look to you as a source of wisdom, as a source for referrals and things like that. When it comes to this critical stage in their career. They often tell us also in hindsight, bullet number two here, that their CPA wasn't really prepared to have that conversation with their CPA kind of instinctively said, well, first thing we need to do is get a valuation and and maybe steer them to the wrong type of valuation.

And in that, you know, we'll have some discussion about it in a few slides from now. But there are certain types of valuations that the business owner can have and really, you know, one for an exit event and one for exit strategy and planning really has to be pretty unique in [00:05:00] the valuation. World in order to to to really do his job, and then the one thing that's great about that is valuations can be super expensive. There's three or four different types out there. And really the M&A valuation, in our experience has been the least expensive of all those. So there's not so much sticker shock when when you're talking to your client about that as well. But, you know, all this is kind of centering around being really prepared to have a conversation with your business owner client being compared to, you know, pick up on keywords, certainly their age, how the business is functioning, whether or not they've got somebody that they're training to take over their position. You know, all these things are going to be telltale signs that we'll talk about today. So and then the absolute craziest thing that we hear every single time consistently, it doesn't matter who we're talking to, they always tell us, you know, my [00:06:00] accounting guys help us with our books. And so our books are perfect. They're clean and they're pristine.

They're in great shape. There's no need to worry about that. And when I tell you, the size of our client is typically five to seventy five million privately held businesses. Those are revenue. So five to seventy five million in revenue, probably old businesses. These are, you know, Middle America, Main Street type hometown companies. You know as well as I do that they struggle in keeping really transparent, really clean sets of books. And in most cases, they're not involved in Gap accounting. They've morphed their ideas to put books and kind of come up with different ways of doing things. Certainly there's a lot of construction and cost to complete with and things like going on. So when when a business owner who's not a trained accountant gets involved [00:07:00] with that and they start morphing their books to suit their needs, to help them manage the business and manage cash flow and do what they've got to do, oftentimes their idea of very clean, transparent and trustworthy books doesn't match up with Industry's idea of clean, transparent and trustworthy books. So we're going to to talk about all that. We're going to talk about how it affects the decision to sell your business or transition your business. We're going to talk about that, the CPA and the accounting professionals role in this and other people's roles and just kind of how to get your mind ready to have a conversation like that with the client and steer them and really be there and be a great adviser for them in this in this time in their life.

So one of the things that we we like to talk about is why do business owners sell? You know, most of the business owner clients that we have been working in their company for decades, they're [00:08:00] very comfortable there. It's become a lifestyle. But certainly age is playing in with the baby boomer wave coming. You know, we have a lot of 60 and 70 and even 80 year old business owner clients that should be thinking about what is going to happen when they transition out. Maybe they're not, but they shouldn't be based on your age. And then when there's a triggering event and that's really what happens in most cases we've found is there's a triggering event like a health change, maybe a health change in their spouse. Maybe, you know, the grandkids are born and they get transferred to Minneapolis and they move off. And so the lifestyle changes where the spouse wants to travel or something like that, certainly these triggering events are what caused the majority of of very otherwise very comfortable business owners to start thinking about selling and how to transition their shareholder misalignment. That happens all the time with their partners and they're aging. At [00:09:00] some point they begin to kind of diverge in their paths in life. And that really comes into play.

And then right now, with covid and vaccines and a presidential election and the mistrust that's going on there and all that's going on with shutdowns and the government changing over, and we don't even know what the new rules are going to be. There's a lot of burnt out business owners, a lot of business owners that just have a really low energy right now to continue fighting that fight. And so we find that this year early, those doubts about how do we set up for the coming year budgets and planning. And, you know, business owners oftentimes will begin to think, and I'm just not up for this fight anymore. I would rather look into transitioning away. That's when, you know, you guys are talking to them generally around [00:10:00] tax season. Generally around, you know, making quarterly payments and things like that, you can watch for these signals and really be a great adviser to that client who thinks you're a great adviser already. But a lot of times we find that the the accounting profession is tuned in to that. So, you know, when you're talking to a business owner about that transition and what's left of my presentation here is going to be centered around an M&A event where we're we're taking a family owned business or a privately owned business. You say it's got one hundred employees and 40 million in revenue and we're looking for a third party buyer.

That's really where most of this is going to be from a presentation standpoint. However, it's not that different when you're transitioning to a family member succession to a child or turn it over to a management team or something like that. So really, you know, it's pretty fundamental. [00:11:00] But most of the business owners that we talked to have they got this this blackbox feeling about this part of the their career, and they really haven't planned their statistics out there. That said, eighty three percent of the business owners that have a business between five and 50 million in revenue have never thought about or never sat down with a professional and never put transition planning or exit planning in the paper. So their teams don't know. Their attorney doesn't know, their CPA doesn't know that their spouse and their children don't know what to do with the business or how to transition if something goes on. And so we really know that that's a problem. And most of the time you guys are going to be at the tip of the spear there when a business owner wants to start talking about it. Right. They're going to turn to the accounting professional and they're going to have that really private, really confidential first or second or third conversation [00:12:00] with you guys. And, you know, like anything else, you guys just need to be prepared for a conversation like that, because success really is a byproduct of preparation.

And in this case, owners, you know, most of our owners are Type A personalities. They built a business and they've shouldered that responsibility for a long time. And they really have strong feelings about how to do certain things or what their business is worth or who the best buyer is and those type of things. And so, you know, it's pretty important to bring in a transaction specialist. That's what we are. That's what this talk is about in. And let that specialist really help them deal in the best way to specifically put together a plan and a process for taking the business that they have and moving it through this, because we really only get one shot at getting [00:13:00] it right. If you mess it up, you've messed up probably the largest asset in that person's life. And none of us want to see a business owner go through this process and then turn around and have regrets about the way it turned out, you know, being prepared for quality of earnings, being prepared for Delford to being prepared for, you know, the emotions and the whims of an unsophisticated buyer, focusing on cultural things that hadn't been prepared to, you know, possibly look at something that's a little bit outside the box because it ends up being a better fit. You know, all these things kind of have to come at that business owner from a third party in order to settle in and be turned into a process that can be successful and misalignment with the owners, with the advisors, with the attorney, the banker, the lender, key [00:14:00] customers, key employees, all of that stuff.

You know, this is a place where we just can't afford any of those mistakes. Right. And so preparing for success means that you guys are probably going to have the very first conversation with this business owner who's thinking this. And in that conversation, they're going to be looking for clues that, hey, you you know how this goes. You know, somebody who can help. You want to be part of the process of determining how this is going to play out and that because they trust you so much that you'll be there on the inside the whole time with them. So that's kind of what we're talking about there. And honestly, what a business seller needs is pretty scripted, right? They need to be taught how to transition and exit. Well, right. I have a friend who calls me a Sherpa. Right. And our company is a Sherpa in this process. [00:15:00] Is we understand where the pitfalls are, we understand where the challenges will be. We know what to look for in the buyers and their teams and what they're going on and how all that meshes together to have a great deal since statistics are we'll hit these again at the end of the presentation.

But the majority of businesses in this space that go to transact to third parties, they end up failing. Right. And so what this really talking about is how do we make sure that our client, our firm, is entering a process that has the best chance for success. Right. And so it's got to be preplanned. We've got to have advisers, you know, attorneys and H.R. consultants and certainly you guys on the accounting in a quarterback to lead the show. Everybody's got to understand. And they're all they've got to play their role. Well, we've got to collaborate in order to help this business [00:16:00] owner get there. And then while all that's going on over an eight or nine month period, sometimes the business owner really has to have the ability to maintain focus on the business because operating results need to be trending up and backlog if if there is such a thing in their business, needs to be trending in a positive direction. And we need to give all these trail signs to our buyer to bring comfort. Derice, the deal so that we can actually close. So, you know, to leverage in this deal always needs to stay in our camp. We find that very often business owners don't want to spend a lot of money on their advisors or kind of like they do when they come to you in taxes. And they said, here's my stuff. Do everything you can to drive my taxes down this year.

Well, in a in a sale environment, it's it's kind of the opposite thinking, right. A couple of years leading into the sale, the strategies that you use to drive taxes down really aren't strategies that [00:17:00] drive, you know, the take in a sale, then they kind of conflict. And the same thing is true with a bunch of things. So we've got to kind of train this business owner and take them along a journey to make sure that we always maintain the leverage that we always have control a situation. We don't need to be in a hurry. We need to have patience. And if there's a good process in place and there's a good plan in place and a great team work in that process, then together we can just trust that process that we can allow it to play out. And so, you know, what the business seller needs is, is they need a group of advisors and generally that starts with you to to kind of hold their hand and say, look, you're not the first one to go through this. We're going to tell you some things that may seem counterintuitive at first. Let's talk about those instead of just outright rejecting them at the beginning and let's see if we can help you get to the place where we're all comfortable that we can move forward and help you transact. And that's really the goal [00:18:00] here, right? The roadmap to success for business owners in our space.

Five to fifty million in revenue. We have we have done this enough times to know right from the get go kind of who has a great team, who has the right attitude, which owners are going to be successful. And we really want to kind of convey some of those best practices as some of those learnings to you guys so you can have better conversations with your clients. Valuation we talked about just a minute ago is a big deal right in our space. We'll call the lower middle market. It's pretty uncommon to have a formal valuation before jumping in to M&A with the business broker or somebody like that. And it's more common that a business owner calls around to the banker and whatever somebody [00:19:00] has a friend who's a business broker friend comes over, signs the company and the business owner and the broker decide on a value arbitrarily and they go out and they list that business for sale. We think that that method of going about this really is the first step and setting the whole process up for failure. Right. And so if you want to be successful, one of the things to do is to kind of look up to investment banking and pull some of those really best practices down to this level of the proud of the help business. And and one of those best practices is don't do anything until you know what the fair market value is of the business.

What what is this street? What are the buyers going to see this thing and for in terms of valuation? And then they're going to go out and they're going to have financial backers, they're going to have lenders, they're going to have portfolio companies that that are going to come in here. And and those lenders and those financial backers [00:20:00] are. All going to have to agree on this opinion of fair market value before you have a successful transaction, right. And so from the get go, what we need to do with our client is to say, hey, we need to get a valuation. But it's not a valuation for divorce or IRS defense. It's not a valuation that that works well for estate planning. Those are the most common types of valuation. They're almost always looking in the rearview mirror. They rarely look forward. They rarely take in to account things like the quality of the management team or the backlog or certain contracts that are going to really deliver performance to the business in the future. And so an M&A focused and M&A style valuation is is really where you need to steer your clients. And in this case, you know, the IRS defense and divorce [00:21:00] and wealth planning valuations, they have ASTM standards that they have to follow. And they're they're they're pretty pricey.

So on the other day, that was sixty thousand dollars that, you know, somebody came to us had in hand. And typically these valuations from an M&A standpoint, we don't have to follow those ASTM standards. We're doing this for a very narrow scope, a very narrow reason. And we're looking at seventy five hundred to fifteen thousand dollars in most cases. So it's going to be the least expensive valuation that that that your client could get. And it's also far more valuable in an M&A environment, because what we're trying to do is we're trying to determine how a buyer would view this business. Where are the risks? Where where's the low hanging fruit? What's the real estate worth? Are there any compliance issues, you know, if they own their property? Is there environmental stuff? Talk to me about the age of the inventory. [00:22:00] You know what? What's the quality of that inventory? A lot of times valuations will value all the inventory the same, some of it maybe three or five years old. Some of it may maybe 30 days old. And the speed of which inventory turns and things like that, all that plays into I don't want to get derailed here in valuations, but, you know, I definitely have an opinion that an imminent valuation is the way to go. And it's, you know, the value of business in the marketplace is around. Right, because there are different types of buyers.

The different types of buyers are going to see this thing a little differently. And so a range from low to high, you know, twelve point seven billion to sixteen point three million might be the type of fair market value range that your business owner hears at the end of this valuation. If you're wondering in our business, it takes about four or five weeks in most cases to put that together. So we'll be working a lot with with [00:23:00] the business owner to gather information and then do our thing and comps that. And you mentioned comps. You know, one of the things that no other valuation does is to go out in the marketplace. M&A valuation is the only one that says, hey, what have sold that look like you in the last little while, just like pulling comps when you sell a house? We do that in our valuations as well. So what happens when we get that valuation in our hand? So we've created a report. We've studied the company. We created a valuation. Hopefully the materials have come to us in such a way. We've got a backup copy of their books. We've we've interfaced with you, the accounting professional. We understand their business pretty well. We've really peaked under the hood. And so we put together a report. And in this report, the valuation really has to be defended. Right. If you can't defend evaluation, how are you going to defend it to a buyer six months from now when you're entertaining [00:24:00] an offer to sell the business because the buyer is going to hire an entire team, you may have been on some of those teams before.

You're looking under the hood as well, and you're looking for ways to chip away at and create some risk. You want to reduce the amount that the buyer is paying for the business or or maybe move some of that money from the guaranteed cash at closing bucket over into the contingent. This isn't as ironclad as we thought, Bucket. And so our job on the front end of this, if we're helping our business owner client prepare for that event in the future, is to go through this valuation in such a way that we can defend it all the way through why we have this number in our mind for this range of numbers? And then what's the probability of transacting in the high end of the range and the low end of the range or anywhere in the middle? Sometimes [00:25:00] that range could be four or five, six, seven million dollars. And a buyer says, well, you know, I only want to sell my business if I can get a number at the upper end of the range. OK, so, you know, is your business compared to your peers at the upper end of the value proposition? And and so a lot of those conversations kind of come out in this roundtable event.

We like to have the accountant, the attorney, any shareholders in the business, any key stakeholders at the business at this conversation when we're talking about the valuation so that that business owner is kind of surrounded with the people that they trust to give them good advice, steer them while help them make a decision, because we call this a go no go event. And meaning if we move forward from here, we're on the path to sell the company. If we decide not to move forward from here, there should be some [00:26:00] very concrete reasons why. And those will turn into an action list of things to work on. And so this go no go meeting when we can say, hey, the market views your company in a value between here and here. If we went out and we brought offers in that range, would you accept them? And that's really how it goes. We defend the range and then we look at the attorney, we look at the accountant, others. What are we going to clear when this is all over? How will the officers come in? And, you know, how much will be cash and how much will be contingent? How much is involved in real estate and what does that do to my taxes? And all those kind of things really kind of come out and culminate in this roundtable event.

So we won all those key advisers there. And this is the time when we tell that business owner either get you can move forward and confidently expect to achieve your financial goal in selling your business or. Nope, you know, there are some obstacles [00:27:00] to achieving your financial goal. And maybe some of those have to do with title of the real estate or risk of customer concentration. It could be a myriad of things, you know, HRR lawsuits or whatever. And it's this group of people helps this business owner decide today is not the time to transact and go spend all that money and spend that effort and energy looking for a buyer, then what should we do? Right. And out of this should come a list of, well, these are the obstacles to closing a great transaction and we should go away as a group helping this business owner chip away at those obstacles so they can come back to this point in the future when the business is ready to be sold and start the M&A process. And I find that very few people, very few companies in our space, our peers will will take this first step and take it as seriously [00:28:00] as we do and draw everybody and have this conversation. But I believe this is the point. This is the key place where you can predict failure or success in an M&A event. Is understanding the street market value, understanding that the security of closed, what the risks are we have to overcome with the buyer in order to make this happen.

So helping your client get to this point, helping them find a valuation company or expert to get them here and it's sitting down with them and going through this very kind of get real moment is something that the business owner inevitably turns to the CPA and every chance and and just kind of makes that. Like, are we doing this or should we wait? And so you guys, you know, I just want you to know that you're in that seat, whether [00:29:00] you want to be or not, whether you think your relationship with that business owner is that strong or it isn't. We find that when when it really gets to this point, you're the go to person. I was telling you about our salability assessment earlier, and we've had about 60 thousand business owners take that assessment. And the overwhelming majority of those business owners, there's there's kind of a checklist that says, you know, who's your most trusted advisor to rank them in this gut accounting professional and the attorney banker and the insurance person, you know, all the way down to a preacher, a religious leader, and far and away, probably well over 85 percent of our business owners put the CPA or their accounting professional as their top adviser. And when I talk to the accounting guys and gals about that, it just blows them away because and most of those [00:30:00] cases, these this could be smaller businesses.

The accounting profession says, look, I only talk to them a couple of times a year. This is a this is a tax return relationship. And I'm just telling you, when they reach a certain age, there's a triggering event. That relationship is going to turn from a tax return relationship to one where you become somebody that they really confide in and are looking for guidance from looking for steering somebody that they can trust. And so hopefully today we're helping you understand a little better and you can be a little more prepared next time it happens. There's a partner process, right? We've been talking about all these other professionals. There certainly are real estate, legal and other things that they go on. And, you know, we act as the quarterback, as the transaction advisor to to to these deals. And, you know, it's kind of our job at my [00:31:00] firm to put together a data room to put together DocuSign to make sure that there's secure portals for transferring information and building a marketing book and building the kind of defense materials to market. And then if in value and we do that in coordination with you guys and everybody else listed on this this page and others. And what we found is that, you know, communication is huge, right? It's everything in the business.

Owner thinks that you're their only client. He's he's your only client. He thinks he's my only client. They think that there's no other priority in our lives most of the time, especially when it gets serious. And so one of the things that we found, as you know, is just to make sure that this team really collaborates, really communicates. Well, we've got all the tools [00:32:00] in place to help us do that. And if you're not able you know, if you're entering tax season, you're short staffed and, you know, please tell us we may delay this thing six weeks and to wait on you, we may draw on somebody else to to kind of do the heavy lifting for you, where you can just review their work and still be an effective adviser. So, you know, it's it's all about the team communicating in order to pull this off. Well, and and you will certainly be I talked to all these other folks and a lot of them are kind of bit players on the team. But you were one of the key players on this team for sure. So we want to make sure that we're able to work together really well and travel the just this of year. We're a deal. Tomorrow we're closing a deal. And we've got hot on the heels of that and through the holidays and other stuff, you know, [00:33:00] we've had to put together a shared calendar and really make sure that our content is there and that we're able to, you know, just just coordinate this for for our client, make sure that none of us dropped the ball so.

Well, we do this. You know, this is kind of I'm going to move a little faster now, but we jump in after the go no go decision. We've got a fair market value opinion that we're targeting. And at our firm, it's it's it's our job to think of all the buyers out there in the universe and figure out how to go attract them to this business, give them a good look at the company maintaining as much confidentiality as we can and allow them to look under the hood and make a determination whether or not they would be in. And acquiring this business, and so we do that. You guys have probably seen a system or a pitch book in [00:34:00] our firm that's a that's a 30, 40 page book telling the history of the company what type of corporation it is. It's got certainly an entire section dedicated to the numbers and the balance sheet and the trailing 12 months. We calculate everything and then we adjust for things like the owner pay themselves and above market salary or having a lake house that it was run through the company that doesn't serve the business at all. And so in most of the transactions in this space are going to be the offer is going to be initiated on multiple of adjusted Aveda.

And so we'll work very closely with you on our team. We have CPAs, we have several CFOs. And so Will, we'll be working very closely with you to define and adjust to that. But that's defendable [00:35:00] and it kind of fits with the industry standard of that particular industry will start to produce monthly financial packages that look different than what the company has been using so that we can show every month and update our our community on the performance of the business.

There's certainly real estate appraisals, environmental assessments, you know, cash flow statements and all kinds of stuff that goes into creating data sets that we can put in a data room.

And then as buyers kind of work themselves through the process, they either opt in deeper or they say, no, this deal isn't for me and they fall away and we keep dropping more and more precise and confidential information all the way to the point where we call for indications of interest. Right. An indication of interest is going to [00:36:00] come from one of these five different types of buyers. Right.

And like I said before, most of what we deal with in our firm is when a business owner wants to sell their company to somebody who they have yet to be identified. So it's on us to go and identify potential candidates, to buy the company market to them and bring them in. But there's really five different buyer types, right? There's a there's an insider buyer type that's a management team. Somebody who knows the company. Everybody knows them is very low risk. It's also one of the two that will yield, in most cases, the business owner, the smallest sale number for their company. The other one would be a family succession type transition. So if you're selling your business to management team, you're transitioning to a family member or child, you're not going to really pound them for the highest [00:37:00] price. And so the other three, they're in the middle of the strategic buyer. That's somebody who's in their business, a competitor, a vendor, somebody who's got a similar operation in a different geography that wants to to grow in this part of the world. The financial buyer is going to be a private equity group. They're going to be pension funds. They're going to be sometimes public companies, but buyers who have really deep pockets, really strong kind of white collar management skills. But they're they're buying this as an investment more than they are as something to operate. It's part of their strategic plan or part of their lifestyle. Excuse me. And then a foreign buyer where we've seen waves of those. We're seeing a lot of them now. A lot of the world doesn't have a stable [00:38:00] place to put their money. And so a lot of foreign family offices, individuals and companies are looking to make acquisitions in the US and diversify and get a part of that. And so what we do, which is pretty atypical, but we think it's critical to success, is we don't list a business for sale.

We don't throw it up on the Internet and hope the phone rings with somebody who's interested in buying this thing.

We believe that, again, kind of like an investment bank would do in a in a billion dollar transaction is we believe in curating a list of the most probable acquirers who would be willing to meet the terms of our honor and pay the best price. And that's going to be somebody with a strategic reason to make the acquisition, somebody who's really motivated [00:39:00] to make the acquisition. And so we'll usually put together a list of those folks and then we'll go out and we'll individually pursue them as buyers. We found that that's a much more successful way of going about finding a buyer, finding somebody as motivated, as financially qualified, who's willing to look over some of the things like nepotism or customer concentration or whatever it might be that makes this business a little tricky to transact. And so that's kind of how we go through the marketing process. We're going to we're going to really focus on what those buyers what what drives the right cultural fit is a big deal. If you don't get cultural fit, you usually have a thin transaction. Right? Return on investment is a big deal. We go ahead and calculate that form. We show them. We tell them in their own terms and in their own words why this would make a good investment [00:40:00] or a good time for them. A lot of times we find businesses that want to be in our customers geography.

And so we may. We did a transaction with a business in Michigan earlier this summer during Corona. We did a transaction in the Houston area where the buyer was from North Carolina, doing another one where the buyers from Atlanta.

So doing one right now that closes next week where the buyer is in Colorado, wants to be in the Texas market. So this is a big deal. And and and so having kind of a transaction adviser, an investment banker that understands the importance of that, understands that this this buyer's looking for an investment. They get a return on their equity. They've got to convince a lender, financial institution, all those things really play out. So, you know, when when we do all this, we're doing it for one reason. And we have found that through [00:41:00] the process, you know, we might be six months into the process right now where we're at that a lot of our our clients, other advisors, the kind of professional, the attorney, the banker, H.R. people, they tend to kind of lose focus. Right. And and so it's our job to really say, hey, this particular client has this criteria, these are their goals and we're here. We're all exist in this deal to help them achieve their personal goals, their objectives for this organization. And so really keeping that paramount and and in creating an offer process where we can get the best fitting, most qualified buyers to fit those goals, come to the table and then we short list and. Right. We'll narrow one hundred down to 50 and 50 down to 20 and 20 down to 10. And then we'll we'll try to get to three or five buyers that just can't live without this business and really turn [00:42:00] the heat up on those buyers to compete to to win this prize.

And our our process involves the accounting professional quite a bit in that we're creating reports, we're running models, we're doing different scenarios. So you guys are going to get a lot of billable time through this. But, you know, to keep in mind through the whole thing that we've got a set of criteria that our client has asked us to meet in this deal. And so we're out there trying to find a buyer who's going to give their employees the tenure with their company that they've they've earned in the selling company. We're going to find a buyer who's going to not fire, you know, a whole division of the company because they've got overlapping interests. We're going to find a buyer who's willing to put more cash at closing than they are in contingency. We're going to find a buyer. There's a seller not involved who's willing to secure that seller was something of value, things like that. And so this [00:43:00] process is take time and and and we get very involved with the accounting professional to do that. So kind of want you guys to just understand all these nuances and be ready for that. A lot of times we find that the accounting group isn't well prepared to to hear that we were leaning on them for all these things. And then what makes the deal great for a client is, is a deal that kind of checks all their boxes.

Right. A good deal for the client is is one where there's buyer alignment. There's a deal structure there very often. Most often, in fact, deal structure is is more important than sales price to our sellers. And we've got to get them through due diligence and documentation and transit and and as a group of advisors. A good deal, the client is one that's successful, No one. That's a rare event. And then number two is one, that two, [00:44:00] three, five, seven years later, they look back on with pride. And we're really happy that they did that deal. When they did, it got about five minutes left. And so I'm going to talk to you a little bit about statistics, Main Street businesses, which which we will say are below a million and abida below five million in revenue. A lot of times these are restaurants and franchises and donut shops and car washes and things like that. Main Street businesses, national statistic have about a 90 percent failure rate when they go to be sold to a third party. So 90 out of every hundred businesses you see listed on Best Buy, Sell or some other website are never going to transact. And that's a statistic that's decades in the making. It's as true today as it ever was. And so there's a there's a lot that goes into why.

But [00:45:00] most of it is they're just not set up for success. And they're kind of running the wrong process nowadays with credit being plentiful and interest rates being cheap. And the SBA is getting very serious about helping out the national economy. Hopefully we'll see an uptick in that.

But still, if you flip that statistic over and you say, hey, if you're going to sell your company and you're in this this group of national statistics, you have about a 10 percent success rate. Most business owners would be would be really concerned walking into that that scenario, our space, which we call the lower middle market, five to seventy five million in revenue, anywhere between a million and 10 million. That space has about a twenty three percent success rate when going out to market and looking for a third party buyer to come in and buy the company again. If you flip that statistic over, that's about a 75 [00:46:00] percent failure rate. Right. And we attribute that failure to not adhering to a very strict process, not going through the valuation go no go decision at the beginning, putting together a weak team or business owners, trying to do this on their own with maybe just to help to the attorney and occasionally call in the accountant. There's a lot of reasons why that statistic is a 70 plus percent failure rate. And what we found in our practices is we have about a 90 percent success rate. And we found that that every time we adhere to the process, we don't skip any steps and we build a strong team that, you know, their their odds of success can be there for you and your client. But you've really got to be intentional about it. You've got to have control. We've got to maintain leverage. You've got to maintain confidentiality. You've got to go seek out those buyers that are going to overlook the works on your client, your client's company.

It's you know, it's not [00:47:00] an easy deal. And in the middle market and above this, one hundred million in revenue above, that's investment banking world. A lot of these same things that we've talked about applied that on a on a different scale. And and I won't even go into that. But the statistics are pretty scary when you understand them. Most business owners, most people in your shoes don't understand that in that first Main Street category, there's a 90 percent national failure rate. Right in that lower middle market category, there's a 75 percent national failure rate. So it's on us to put together a process and a team and a plan and a strategy to to help our clients be successful in this. Otherwise, there's going to be a lot of regret, a lot of wasted time, and it's not going to be pretty. What drives a great client experience? I've got about two or three minutes. You know, aligning that team is a big deal. A team that doesn't get along, doesn't work well [00:48:00] together, really frustrates a business owner maintaining control. We've talked about running processes. We've talked about we have found in a couple of case studies there's over four thousand and one in in a couple of cases, about forty six hundred hours of professional advertising going into a successful transaction. That's a that's a ton of professional hours to put into something that fails. So you want to set yourself, your client up for a great experience.

A little bit about me. I have been a founder, part of the founding group of five different companies for those companies. We built quite large hundreds of employees and sold the first one we sell to a public company, the last one we sell to a public company, multiple locations, a couple of hundred employees. The two in between, we sold one to private equity firm and we sold another to a competitor. [00:49:00] So four very successful stocks in my thirty one year business career, the fifth company, I said there were five we talked about for this company, YELVERTON per day, that gap. We are a group of professionals who have all transacted with our own net worth on the line. We've all been involved in buying and selling businesses for a long time so that we can really steer our clients well. And we've been at every seat at that table. And so we know what's coming and what to expect during these transactions. No winning firm. And so if it were based in Houston, but we've got folks in other places, so if you guys have any questions or want to reach out to me via email or through my email up somewhere, there it is. You catch me on LinkedIn, but more than happy to call my cell phone, even to help you guys work with your clients, figure out the best way for [00:50:00] your client to be successful. I hope this has been informative. And I thank you very much for your time.

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