Kevin Berson - How to Increase Valuation and Maximize Deal Proceeds When Selling Your Business

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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 listening. I really appreciate you being with us today. My next guest is Kevin Burson from Connected Consulting in Encino, California. And let me tell you a little bit about them. Kevin is a mergers and acquisition advisor and strategy consultant helping lower middle market business owners. To find is between 2 and $100 million in annual revenues fundamentally improve their business as well as navigate the process of selling their business for maximum transactional value. So as an M&A adviser, Kevin serves as a deal quarterback, works closely with the owner's lawyer, CPA Bankers of the team, leveraging his MBA Big Six consulting background and 25+ years of experience as a strategic and operational adviser. So we're going to learn how to increase evaluation and maximize deal proceeds when selling your business an important topic of the day. Kevin, thanks so much for joining me. Yeah, how are you doing? It's a pleasure to be here. Doing great, doing great, thank you. um, you know, a lot of our clients are are wondering um how how they're gonna be doing, especially if they were thinking about uh selling their business or uh you know how it'll how fast it'll come back. But before we get into that, tell me a little bit about you and your background and um what Connected Consulting is all about. Sure, so, um, my background is, uh, graduated at UCLA and then I went into Big Six Consulting where we were working with a lot of middle market companies on technology and strategy projects. Uh, I worked there up until the uh until the Enron debacle in 2002, at which time I was recruited to go to Technicolor, where I led some worldwide technology initiatives and uh. Found my way onto their M&A team. They had a new CEO that was interested in growing the business through acquisition. I initially joined that team as the IT guy looking at companies that we were going to buy and thinking about how we're going to integrate their technology stacks, and I really fell in love with the M&A process and uh had a chance to join that team. So I've been involved in mergers and acquisitions ever since and I really got my start. We're working on some big corporate international deals. We sold RCA, which is a billion dollar division. We bought several companies in the digital advertising space, collectively about $400 million. So that's how I got my M&A shops and went out on my own in 2014. Good time to go out on your own. Businesses were starting to really pick up and hum. I know after 2009, a lot of business owners said there's no E in my EIA, so how am I going to sell my business if I don't have any net profits to show? And now a lot of owners are starting to say, you know, I'm, I'm older, I'm ready, I want to sell my business, but what's happening with valuations these days? So let's start with that. What what's happening as a result of COVID-19 to A lot of business, I mean, depending on the business, right? What's what's happening with evaluations these days? So it's definitely a industry by industry situation. So you know some clients talking to a guy today who owns several health clubs. I mean that's a, that's not a great situation, right? He's, he's when his business reopens, he has to uh. Social distance the members so it kind of puts a cap on what his revenue can be. He's got to space out uh the sessions so they can do cleaning in between sessions. He's got to invest in some thermometers and other safety equipment so. That business is going to look radically different by the time he reopens. So the question for that business is what do the financials look like when when he reopens and, you know, is there going to be a material shift in consumer behavior around, you know, fitness clubs? So, so that's a, that's a part of the industry that's tough on the bright side, I'm working on a very large deal right now for a e-commerce. Uh brand and they own, uh, they, they, they, they have their own brand, they provide apparel, lifestyle products, um, it's a very successful business, about $30 million in sales, very, very profitable. And this one I'm now talking to buyers and there's there's a lot of interest in this one, a lot of interest. So where a business like this may have sold for 8 to 12 times IIA 3 months ago, I think the offers will come in a little lighter than that now, and I think the sellers just need to be very flexible and be willing to accept. A larger part of the consideration based on, you know, what happens in the future, which is called an earnout. So any business that's consumer facing, you know, it's really unknown what's going to happen to the strength of the consumer going forward and other businesses, health care technology are really not affected at all. It's accelerating technology in a lot of cases. I'm working with a consulting client who's a behavioral services company. They provide in-home services to kids with autism, and his business in the short term is definitely suffering because he can't get people into the home, but he has quickly transitioned to a telemedicine model and if he does that right, he should be able to increase his profits because, you know, today he's been having to pay drive time and mileage and his therapist would get to, you know, take him out. Half in LA to get to the next appointment, you know, he could they could do more appointments per day. They could be more refreshed and then he doesn't have to pay them for mileage and drive time. So it can definitely be a great, great situation if done well. So you know, really it's industry, industry by industry to see, to see how things are shaking out. But there's still, there's there's a tremendous, tremendous appetite for deals on the buy side. I'm getting, I'd said that calls from buyers are outnumbering calls from sellers 5 to 1 right now. Yeah, I was going to say that the, the seminars and workshops that I've attended, you hear there's $2 trillion of private equity money out there. It's got to find a home. there's no good investment alternatives. It's got to be a business. The question is what they'll pay and what they'll expect. So how much leeway would say, let's say a private equity deal or a buyer that bought a business a year or two years ago and expected to to do an earn out to, you know, pay off the business in a few years now hits COVID-19. What's the Impact on the seller at this point when because usually if you know if a business goes out, the reason for an earnout is if a business goes out of business you're out, you know, you're not going to not going to get your final installments in situations where it's not like necessarily out of business in some cases it's just on pause for a lot of businesses. Were there were any of those considerations built into earnouts in the past and if not, will they be built in the future? Yeah, that's a great question. Yeah, I'm sure we're going to have a, we're going to see a lot more use of this. This, this, this clause of, you know, pandemic yeah, forced Ma exactly you'll start to see that definitely sweep across all kinds of leases and purchase agreements for sure, much more use of that um. You know, there's a well publicized case right now of the company that's trying to buy Victoria's Secret and they're trying to back out of the deal over this, and their contract is actually written in a way to prevent the buyer from walking away. So it'll be interesting to see how the courts resolve this one. But yeah, I think we'll see a lot more use of that and certainly. It it's, it's, uh, gonna be the only way that it's gonna, it's gonna require sellers to be a lot more flexible around structure to get deals done right now because we are in a very, very uncertain time. Yeah, I think, I think the big question is, will sellers and buyers be able to envision the backside of this because nobody's been through this before, so we don't know, are we looking at a V shape? We're hoping that's what the economists are saying we'll see a V shape, everything will get back to normal. If you're a restaurant, you're you're, you're toast. No pun intended because you're, you know, your food's spoiled, nobody's going to come back and eat 3 meals to make up for the meals they didn't eat over the last 3 weeks. If you're a retailer, you've got, you've got inventory. Hopefully it didn't spoil or go out of fashion. If you're in construction, then you've got a backlog you're working off and hopefully the industry that you're building for isn't isn't an auto industry or, you know, or a A hospitality, right, so you've got to adapt. So a lot of adaptation going on. In the meanwhile, are you counseling people that are considering selling their business that, hey, instead of selling businesses, maybe you should be thinking about buying businesses in the next 90 to 180 days that are that are worse off than you. Yeah, absolutely, that's definitely a discussion for sellers that are ready to kind of take a look for buyers that are really actively looking to explore opportunities and have the wherewithal to survive this and are reasonably well funded. That is definitely a discussion that I'm having, but some, some sellers are just kind of tired and they want to sell when they can, but this is definitely Time to prepare for that sale to to get your financials ready to make sure that your your policies are, are up to date and your insurance policies are, are, are well well written and what you need, it's definitely a time to kind of shore up your business so you can either, you know, thrive when you reopen or be prepared to sell. It's definitely time to kind of take inventory of your your readiness. Yeah, and unfortunately a lot of business owners were already ready to sell because they lost their opportunity from 2009 to about 2000, not too long ago, and now and they're older and so so they were this was going to be it, right? Everything's going great. Parties going, party's just getting good and all of a sudden somebody calls the cops and the party's over. So with your outlook, how what are you counseling? People to do if they were in the process of selling and now they're just kind of figuring things out. What are some of the top things you're you're counseling your clients to do. Well, you wanna really just have kind of a score a scorecard ready so you can kind of assess the business and if the business is shut down right now, you know what are all the things that have to happen for it to reopen? What are some of those indicators you want to be mindful of that and then if you already are running, uh, what kind of data can you show how the business is performing in this time? And you know this e-commerce company that I'm selling, surprisingly their sales are up about 60% since COVID hit Europe compared to the same period last year. So I think that's some fantastic data that we're able to show buyers of like, look, this is a, this is an incredibly passionate loyal customer base here that are sticking with this company. Their products are are not essential but pretty darn close to essential to see this kind of volume. So, um. It will behoove sellers to be able to be able to show data like this to buyers of how the business is reacting and if the business is closed, you know, what are the indicators to look for as soon as the business to reopens to show that it's healthy, and that's that's the kind of work that I'm really trying to do with as many, many of my clients as I can. Now, um, I've been told that you have a unique service and and model of how you run your business. Can you tell us a little bit about what's unique about your service and model? Yeah, so I, I provide an end to end service and with my consulting background I have a company called Connected Consulting where we work with companies uh several years before the time they're ready to sell. And you know, for example, that's what I'm doing with this behavioral services company where we've been revamping the business model, working towards increased profitability. This seller had a certain valuation expectation they'd like to achieve, so I've been working with him for a couple of years towards that end. And this also involves kind of restructuring the business now towards a teleservices model. So when the company is ready to transact, and then I will do my deals through a company called C Point. where we execute our transactions and with C Point I've had over an 80% success rate selling businesses that I take the market. So the industry average is between 30% and 40%, and I'm at 80%. So I feel like it's a really nice model to get to know companies very well before they're ready to sell. Take the time to prepare the business, make sure the financials are very, very tight, make sure the data room is put together, make sure that processes are in place. Make sure that job descriptions are well defined. And so when you go to market, there's really you have everything up front. There's not going to be any surprises in the process, you know, the worst thing that would happen is a buyer discovers something down the line that, you know, forces them to lose trust and walk away from the deal. The way that we design our processes, we want to surface all the, all the works of the business up front and take some time to to mitigate as much as possible before we go to market, and I think that's one of the big reasons why we've been as successful as we have been. That's great. That makes a lot of sense. We always advocate planning well in advance, as you say, finding, finding out what the buyer's going to find out well, well before they do so you can work on that now. So let's talk about a little bit what kinds of businesses are the most sellable in today's environment. Yeah, so right now, businesses that are, you know, that are continuing to thrive through COVID. So these will be, you know, the top of the list are healthcare and technology. I think we've seen a radical shift in people using technology. You can look at services like Zoom, which, you know, very few people are using 6 months ago now hundreds of millions of users. Uh, myself, I use a Peloton bike to work out. It's a really phenomenal experience and it's, you know, technology enabling things. So anything that's, that's on point with uh sheltering in place, uh, you see groceries doing incredibly well, transportation companies doing incredibly well, uh, core manufacturing of, of the central products is doing very well. Uh, so anything that is showing some resiliency in this time and uh there are pockets of consumer products that are incredibly uh successful right now, anything, you know, home workout gear, um. Grocery delivery services exactly anything that's that's kind of making the people more comfortable in their homes, those businesses are thriving, uh, bedding, housewares, those companies can be tremendously successful if they have an e-commerce business model. If they're still relying on people going to malls to shop, well, malls are closed and This is going to accelerate the shift that's been happening over the last decade towards e-commerce. I think any business that doesn't, um, e-commerce businesses should, should do very well in this time and they are very much in demand. Now I've seen economic data that showed, of course, retail, hard, hard retail, hard location retail. Tanked right during during March, but at home purchasing of goods and services spiked heavily. Some at some point that'll come back down, but the question is, and I just saw another study that said um we're we're now eating like we were in the 1990s. In the 1990s we had um ah about 70% of our food we bought at the grocery store, 30% or 25% roughly, was about takeout, and we had migrated to a point where just before COVID-19, 50% was takeout, 50% was bought at a grocery store, and now it's changed back, of course, um, so some of these trends are are temporary and some of these businesses that are out of business right now will be back. The question is, can they make it. Um, with their cash flow through this, and then can they, can they Plan for a spike in sales after that, which of course requires even more cash flow. Um, what can business owners do now to increase their valuation ahead of a sale process? So I think it's it's really about taking a look at every line item on your profit and loss statement and really looking, taking a hard look at your costs. This is a time to evaluate everything about your business, you know, do you really need some of these extra, you know, has your marketing been effective, um. Are your insurance policies up to date? Are you paying for just what you need? Are there anything else you can renegotiate? Do you need the landscaping services? This is the time to really take a look at all your costs and make some very hard decisions unfortunately about payroll as well, you know. Hopefully your businesses are in shape and they've been able to get PPP loans, but in case they haven't, then they need to really take a hard look at at staffing and who is absolutely essential right now. Um, most business owners don't regret the draconian cuts that they have to make right now to stay alive. So if you're in, it's really about how can you stay alive to see the next day, um, so, but in terms of increasing the evaluation, it's really about um. Building in automation to the business as much as possible, uh, understanding the data, cleaning up the financials, that would be the number one thing that I would say is use this time to make sure uh most most buyers want to see businesses on accrual based financials. A lot of businesses that I see are on a cash basis, so going through the conversion from cash to accrual is uh is is definitely a process for for many businesses that I would recommend they go through. Um, we also need to take a look at any, you know, major, major trends and variances to tax returns. That's part of the cleanup effort. We really want to be able to go to market with rock solid financials. If there's any personal or family expenses, those need to be highlighted and very well understood, and we need a receipts and documentation to support. Those expenses, um, any kind of buyer that's going to go through any kind of loan process is gonna basically need to provide all this documentation as well. So we want to get ahead of that process and I think cleaning up the financials is, is the single most important thing. Number 2 is shoring up your expenses and and kind of eliminating any unnecessary expenses right now would be number 2. Yeah, great tips, a really interesting discussion. And I want to point out that Kevin will share thoughts on an opinion of value, trends, deal structures common for your business in a complimentary discussion. Kevin, what's the best way for them to get in touch with you to talk about those issues? Yeah, sure. The best way to get me is on email. Kevin K E V I N at connected K I N E C T E D.com. So that's Kevin at K I N E C T E D.com and that's the website as well as connected.com. K I N E C T E D. Kevin, that's really interesting. I'm sorry we're talking, you know, these kind of unusual times, but it's, it's great to hear that there's still activity happening, that business owners again. A should be probably doing a little bit more planning. Maybe they were letting things get a little, maybe they weren't going to be attractive. Not every business that goes to sell sells right anyways. So maybe this is a good time for them to get in good shape and get ready and give you a call and see what's going on in the marketplace. Thanks so much for joining me today. It's really a pleasure to have you. Thanks Bill. I really appreciate it. Uh, stay healthy. All right, you too. You too. Well, thank you for joining us today. It's been a real pleasure and I really enjoyed all of our interviews today. Hope you did too. We'll see you next week here at Exit Coach Radio. Hey everybody, it's Bill Black, the exit coach from the Exit Coach Radio show. One of the questions I get asked the most is how do I grow the value of my business. I'm so busy working in it, I need to work on it. So we've created a special report for you on 10 tips to grow the value of your business. Just text the word drivers to 44222 to get a special free report right to your inbox. That's drivers to 44222, text drivers to 44222. Thank you for listening to Exit Coach Radio. This podcast is sponsored by TalkSpace. May is Mental Health Awareness Month, and TalkSpace, the leading virtual therapy provider is telling everyone, let's face it, in therapy by talking or texting with a supportive licensed therapist at TalkSpace, you can face whatever is holding you back, whether it's mental health symptoms, relationship drama, past trauma, bad habits, or another challenge that you need support to work through. It's easy to sign up. Just go to Talkspace.com and you'll be paired with a provider typically within 48 hours. And because you'll meet. Your therapist online, you don't have to take time off work or arrange childcare. You'll meet on your schedule. Plus, TalkSpace is in-network with most major insurers, and most insured members have a $0 co-pay. 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