Channing Hamlet - Common Mistakes Business Owners Make That Impact The Sale of Their Company

Time is precious and so are our pets, so time with our pets is extra precious. That's why we started Dutch. Dutch provides 24/7 access to licensed vets with unlimited virtual visits and follow-ups for up to 5 pets. You can message a vet at any time and schedule a video visit the same day. Our vets can even prescribe medication for many ailments, and shipping is always free. With Dutch, you'll get more time with your pets and year-round peace of mind when it comes to their vet care. Hi everyone, it's Bill Black, the exit coach from the Exit Coach Radio show. You know, one of the biggest questions I get on the show is what exactly goes into a business exit plan and when should I start creating mine? Well, I always tell people that the best time to start was 5 years ago, but the next best time is now because you never know when you might need it. So we put together a free report that describes what an exit plan is and what you should know. You can get it free by texting exit plan with no spaces to 442-22. That's exit plan to 44222. Again, text exit plan to 44222. Welcome to the Exit Coach Radio show, the show for baby boomer business owners who are looking for cutting edge information as they plan their 3 to 10 year business succession and exit. Every week we interview top professional advisors for their best tips, strategies, and precautions so you can be well planned. And now here's your host, the exit coach Bill Black. Thank you for, for listening out there today. I really appreciate you being with me today and. As promised, we have a great lineup of guests, and my next guest is Channing Hamlet, and we're going to talk about common mistakes that business owners make that impact the sale of their company, both the evaluation and success of the sale. Channing Hamlet is a is managing director of Objective, a leading investment banking and evaluation firm, and he oversees the robust appraisal practice which conducts more than 200 appraisals per year and leads execution for investment banking transactions. And he will rely on experience and case studies today to highlight areas that business owners should consider when selling their business in order to improve the saleability and valuation of their business. Channing, welcome to the show. Thanks so much for joining me today. Hey, thanks so much for having me. I really appreciate it. My pleasure. I'm interested in hearing about this. One of the, you know, big questions these days is, you know, how do I make my business more attractive and more salable to a buyer because there's a lot of competition out there. So tell us more about objective and what you do and how you all help folks. Yeah, um, objective is a firm we primarily offer two services. One service that we provide is business appraisal, and that includes a whole combination of compliance activities whether it's uh stock option valuations, estate and gift tax planning, or other valuations that support tax. We do a fair amount of valuation for financial reporting including purchase price allocations. Um, asset impairment and other fair value to support, uh, balance sheets. And the third thing we do in appraisal is work with business owners to help them understand the value of their business. Uh, to either prepare for a transaction or to begin thinking about how to improve their value. And so the appraisal service is, is one element of what we do. The second element of what we do is sell side investment banking where we represent business owners beginning to end through the sale of their company from. Doing our own due diligence and homework up front, creating the materials, creating the list of buyers that we want to go to and really positioning the company to achieve maximum value and then running a competitive auction process in terms of engaging multiple buyers and getting them to compete with each other to get our clients not only the best price, but the best terms. Well boy, are you in the right place. We're we're fascinated about this topic, of course. I always wanted to learn more about how to make our businesses more salable, attractive to a buyer. Can you talk a little bit before we get into the meat of the matter about what the environment is like now? Is it a seller's market or a buyer's market, and how, how strong is the competition out there for people like you? Uh, and maybe tell us, you know, tell us a little bit in terms of how many, how many deals you look at before you say yes, we'll we'll take you on. Yeah, that's a, that's a good question. And you know, in the, in the heat of battle of COVID, the M&A market is a little bit tricky. And as you know, there have been sort of winners and losers in terms of how COVID and some of the economic challenges have impacted, have impacted different companies. Um, and so in, in representing a seller and looking to sell a business in the current economic environment, I think having a keen awareness and understanding of how the business was impacted by COVID either positively or negatively and having a opinion and view and outlook on where the business is going as the economy, economy and society normalizes from COVID is kind of a key element. But what we've seen over the last couple of years is there's an enormous amount of capital that's come into the market, you know, strategic buyers have sort of more cash than they've ever had. The growth rates have been lower, uh given the lower economic growth during this expansion cycle, and so strategic buyers are aggressively looking for acquisitions to drive growth. The second thing that we've seen, and this is a. This is a long term trend and it's occurred over the 25 years that I've been doing investment banking work is that the amount of money that's gone into private equity has um continued to expand and expand and expand. And, and so, you know, what, what we're seeing is that during COVID, the, the number of companies that are actively looking to sell has come down a little bit. You know, particularly driven by companies that were impacted by COVID, not either wanting to sell during a time when their financials are down or not being able to because their business and industry has uncertainty. And so what we're seeing right now is there's a supply and demand imbalance of good deals. And so good companies, um, good companies are, it's definitely a seller's market because the capital, both on the strategic side and the private equity side is still there. And there are fewer transactions and so for companies that are in good shape, in good shape to sell right now, it's, it's definitely a seller's market. Good. That's, that's good to hear and that's really good insight and makes a lot of sense. I mean, it makes a lot of sense on the, on the financial side because, you know, let's face it, it's hard to make a buck in traditional investments out there, so a lot more people are saying, well, I'm going to see if we can buy a business and improve our ROI. And then on the other side of things, like you said, a lot of business owners have maybe thought, well, my, there's not as much e in my ebida, so I'm not going to get enough to make. You know, it worthwhile and maybe they're shying away in a strategic market that might be a mistake. Exactly. Love it. So let's talk about what is the most common factor that impacts the saleability of a company. We have a lot of owners out there that say, you know, I, I, I, I'm only going to, I might just get one shot at this. I want to make sure that I win the beauty contest. What makes me salable and attractive to a buyer? Yeah, when we, when we look at companies we really look uh at a couple of different elements. One thing we look at is what is the company worth in terms of value drivers and then the second thing that we look for is, is the company salable. Um, and so the, the, the thing that we've seen over the years is oftentimes business owners that run private companies have gotten comfortable with some kind of systemic risk or concentration in their business, whether it's Um, whether it's concentration and reliance on a key vendor, reliance on, you know, a key employee reliance on a key customer where there's a concentration of risk, uh, or there are sloppy processes and procedures and so a, a, a, a business owner in a smaller private company. That can get comfortable. Operating a successful company with one or more of these kind of risks, but uh, a buyer, whether it's a public company or a private equity firm that manages institutional capital, is not really in a position to take these types of risks and so oftentimes we see great businesses but they have one or more kind of quote fatal flaws that um create Created um an obstacle to a sale. Just a quick example we we worked with uh. Uh, a family owned company that um was very successful and they had an offer on the table from a public company into the You know, into the high 8 figures and as the buyer as the buyer got into due diligence, it became clear that there was, there were some questions about the ownership of the intellectual property and who actually owned and had rights to the intellectual property and this is a family owned business that had been operating for multiple generations, very successful, making a lot of money, etc. etc. etc. The, the buyer that was engaged was a public company. The board of directors of a public company in looking at making an investment in this private company isn't able to take sort of a, a large risk on the integrity of the intellectual property. And so the company, the public company was sort of forced to walk away from this deal. It wasn't a matter of value, it wasn't a matter of price. It was just a matter of a risk that they couldn't accept. And so often we see companies that have Some kind of very significant systemic risk, uh, that really make, creates an impact or creates an obstacle to a sale and that's, that's sort of You know, to, to sum up the answer to the question, it's really, you know, encouraging business owners to think through where they have concentrations of risk in their business and work on um putting risk mitigation strategies in place. Yeah, really good point. It could be, it could be suppliers. It could be customer concentration. It could be employees that know everything and could, you know, leave and leave the company without a lot of its key knowledge. It could be the owner is too, you know, is too important to the day to day operation. That happens a lot right in smaller businesses. The owner. It has not decentralized what they do enough, so that's a, that's a great category with a lot of tentacles in it throughout a business. What are the biggest risks? How do you de-risk your business? and you hit on one really big one. What else comes to mind when you think about the saleability of the company and another common factor that might impact the sale? You know, you, you hit on a lot of, you hit on a lot of important, uh, a lot of important elements there. There's two other things that, that really come to mind. Often small companies can get by with cutting corners as far as employment law or licensing in their licensing in their industry or having every T crossed and every I dotted as far as um compliance because they, they fly under. The radar screen of regulatory agencies, etc. etc. etc. Um, however, in selling to a private equity firm or a public company, um, you know, those types of companies can't afford to take those types of risks. And so I think a lot of times business owners of private companies underestimate the, the level of compliance, uh, the level of compliance and really The elements of following the rules and so really taking a hard look at that and, and knowing, knowing that private equity firms and strategic buyers really hold a high bar in terms of compliance with all the rules and regulations. We've seen issues with that, um, time and time again. And the other thing you brought up is, is really worth emphasizing. Um many times business owners are Really key individuals in the operation of a business. It's hard for a buyer to buy their business for 100% cash upfront, knowing that the key individual um could have significantly less motivation to keep working hard because they can now afford to be on the golf course or on their yacht or on their private island, or what have you. And so there's this a little bit of a misconception among business owners that we see where They think their business is easy to run. They think the buyer is gonna show up with a new management team and have a seamless transition, etc. etc. etc. Buyers look at management transitions as very, very risky. And so one of the things that makes the company salable is really having a, a strong management succession plan in place. So that the, the, the owner or owners that are selling can point to the operating management team that's gonna be excited about working with the new buyer and continuing to, you know, grow and build the business under new ownership and, and really getting that formula right is a key, is a key factor in having a company that can be sold and can be sold for cash upfront or upfront consideration. And it sounds like that, you know, that comes down to, yeah, not only are your, do you have key people in place, but you have their process your processes and systems in place so that if a new management team does have to come in, they can pick up and you know, hit the ground running with a good detailed set of systems and processes to work from, right? So if in case the key people do end up leaving, they're not hampered by that. A really, really good points. Good points. So how do you guys identify key value drivers of a company? Yeah, that, that's a great question and there isn't necessarily a one size fits all answer. And you know, you don't need to interview someone to tell you that, you know, having more revenue or more profit makes the business more valuable. And so what we've learned over the years is that every industry and every company is unique in what truly drives the value of a company. And so we try to step back and look at Who are the buyers of a company? Uh, who are the buyers of a company? What, what have, what acquisitions have they made in the past? How are those valued and, and what are the sort of strategic elements of those deals and to try to identify value drivers beyond just uh revenue. And profit and so for example in the software in the software space. Um, Buyers are looking at a series of factors around the cost of customer acquisition, the, the level of recurring revenue, and the, the lifetime value of customers. And so the software companies that really manage to those three metrics and look at and pay attention and optimize the business around those three metrics would command more value than a software company that's not really optimized around those metrics. In the, in the, early in my career, the security alarm industry was going through um consolidation, and when we were working with security alarm companies and doing research in that space, it turned out that the buyers were buying companies that had Um, and client retention and the buyers weren't so concerned about. Um, profitability, operations, etc. and so two security alarm companies with the same revenue. One that was profitable, well run, and very stable. The other that was kind of rapidly growing and had a strong client acquisition capability but wasn't necessarily well run and wasn't necessarily profitable, would actually be worth more in that environment because of, because of what the strategic buyers are looking for and what the buyers are looking for and so we, we really try to identify. You know, beyond sort of the fundamentals of the financials, what is it the buyers are looking for and what is it that is gonna make the company valuable and you know look at the next layer, the next two layers um to to work on that. And one of the things, um, early in my career I worked for a private equity firm and we bought about 25 companies while I worked there and one of the things that we would do right after we made an investment in a company or an acquisition is we would sit down with the management team and map out with them what we thought the key 3 to 5 value drivers of the company were and then we would ask management to report on those monthly. And we'd look at them with the management team on a regular basis. And one of the things that happened as we worked with the companies and, and got them to sort of focus on a few of the key value drivers, um, those companies focused on building value and built value and our investments turned out well. It's a rare private company that I go to where I could sit down with the owner or the CEO and say hey what do you think the key value drivers of your company are and uh are you managing to those um often they just don't they don't sort of they don't sort of think that way um they're not managing to the value drivers, etc. etc. etc. and so really taking the time to think through, you know, what are the 2 or 3 or 5 value drivers in my business. And you know mapping them out, putting goals in place with the management team and getting the whole company aligned around this can make a huge difference and it's almost a crime that most private business owners aren't really looking at, aren't really looking at that and aren't really focused on that. It's huge lost opportunity. Good point. You need to really think about, well, what's your target buyer really looking for and how do you look like that as opposed to maybe being a jack of all trades really focusing on those key things that are going to make you really attractive to that strategic buyer. Great, great points, Channing. We've got about a minute left. Tell us a little bit about when should a business owner begin planning their exit, how far in advance? Yeah, I mean, I, I think the, the short answer is it's never, it's never too early to begin planning. Um, and planning for an exit is a very complex, is a, it's a very complex process and it's a very complex And personal decision and there are um a number of uh, you know, personal elements. Family elements, financial elements, and business elements that all really need to come together to create a successful exit and so advanced planning um advanced planning takes time and um building a team of advisers, you know, including a wealth manager, CPA attorney. You know, investment banker, etc. well in advance of the exit and really putting the pieces in place can be um can be a significant Um, a significant ingredient in building the foundation of having a successful exit. And then when you do get a call one day and someone knocks on your door that wants to acquire your business, you know, you're ready and you can capitalize on the opportunity rather than being kind of caught flat-footed and scrambling. Channing, really, really great points, really interesting information that you've shared with us today, and you offer a consultation with the managing director of Objective to assist with planning and execution. Of an exit strategy or development of business evaluation, I think you can tell by listening to Channing that even even if you just have a call with someone there, you're going to be in a better place understanding what you need to be doing to get ready for your exit. What's the best way? I know your website is objective CP objective C as in Charlie, P as in Patrick.com. Is that the best way for people to start learning about you and get in touch? Yeah, exactly the contact information including phone number and email address for all of our managing directors is, is on the website, and any of us would be happy to talk to business owners that have questions about the sale process or or are thinking about advanced planning, you know, we, we love to create relationships with great companies early and be helpful uh along the way and along their path to an ultimate exit and sale. Well, I really appreciate you taking the time to come on today and share your great tips with us. Thank you so much. Hey, thank you so much I really appreciate you having me. Thank you for listening to Exit Coach Radio. Time is precious and so are our pets, so time with our pets is extra precious. That's why we started Dutch. Dutch provides 24/7 access to licensed vets with unlimited virtual visits and follow-ups for up to 5 pets. You can message a vet at any time and schedule a video visit the same day. Our vets can even prescribe medication for many ailments, and shipping is always free. With Dutch, you'll get more time with your pets and year-round peace of mind when it comes to their vet care.