The Third Growth Option with Benno Duenkelsbuehler and Guests

Preparing to Sell Your Business, with Sally Anne Hughes

• Benno Duenkelsbuehler • Season 2 • Episode 23

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Are you looking for a Third Growth Option ℠ ?

Understanding the complexities of selling a business can be daunting for entrepreneurs, but this episode dives deep into M&A processes, from initial evaluations to closing the deal. With actionable insights and real-world success stories, this discussion illuminates the journey of preparing your business for sale.

• Importance of understanding motivations behind selling 
• Basics of initial evaluations and financial assessments 
• The role of branding and culture in business value 
• Identifying and managing potential risk factors 
• Key components of business valuation and EBITDA overview 
• Steps to prepare for an effective sales process 
• Crafting targeted marketing materials for prospective buyers 
• Insights on Letters of Intent and due diligence 
• Strategies for improving business readiness for sale 
• Success stories that demonstrate transformative outcomes

Always growing.

Benno Duenkelsbuehler

CEO & Chief Sherpa of (re)ALIGN

reALIGNforResults.com

benno@realignforresults.com

Benno:

Hey, welcome to the Third Growth Officer podcast, where we talk about all things growth, yes, even and especially those hard parts where you shed some skin and pick yourself up by the bootstraps. Hey, I'm Benno Dunkelspüler, growth sherpa and OG hashtag growth nerd. We're on a mission to redefine success inside and outside the business, one TGO episode at a time.

Sally Anne:

Hi, benno, thank you for having me on your podcast. I am Sally Ann Hughes, I am an investment banker and today I am in my home office in Summit, new Jersey.

Benno:

Anchor and today I am in my home office in Summit, new Jersey. All right, sally Ann, I'm excited to have you on here. I'm Benno Third Growth Option Podcast host and, sally Ann, you hung out your M&A shingle about 16 years ago. Before that, you spent eight years with Citibank yeah, at the end at the VP level, finance strategy roles. You have an MBA from the University of Virginia Darden School and you know a thing or two about a thing or two about M&A.

Benno:

So you and I met each other a couple different GHTA conferences, the last one a couple months ago in Charleston, south Carolina and you work a lot with mid-sized businesses, often family-owned business, sometimes PE-owned and I want you to just share with our listeners and our viewers sort of five different topics. Initial evaluation you know the things. Sort of five different topics. Initial evaluation what are some evaluation basics? How, what do you do when the company is not quite ready for sale, when the baby is not quite pretty enough, right? And then how do you move through the selling process, sales process, once all signs are green and go, and then maybe, hopefully, we'll have time for a favorite success story at the end, but I'll just kind of kick it back to you Initial evaluation. Somebody calls you and says hey, I'm thinking about selling my company.

Benno:

You have to kind of determine is it a pretty baby or an ugly baby, and you don't want to call the ugly baby ugly and all of that.

Sally Anne:

I mean we get a lot of those phone calls right. We work with entrepreneurs who are looking to sell their businesses, and that really is the first step that people take when they're thinking about selling their business is calling somebody like me and saying, hey, you know, I'd like to sell my business. And I guess you know what we respond initially is not you know, tell us about your business, but why? What are your goals and why are you looking to sell your business? And I think that's, you know, that's really important. And sometimes it's for retirement and sometimes it is because somebody wants to take some money off the table right there, a lot of entrepreneurs have all of their money invested in their business.

Sally Anne:

Sure, and sometimes people come to us and say, hey, you know, I've reached a point in my business where I think it needs, you know, a partner or more money or more professional management, and I'm interested in finding a partner to help me do that. I'm interested in finding a partner to help me do that. So that's kind of the first question. I'm like, okay, why and what are you looking for out of a transaction? And then I think the second thing that we always talk about is like well, what are the financials looking like in your business? Right, because you know what does the P&L look like, what does the balance sheet look like? And you know, fundamentally, buyers are looking for profitable businesses that are growing.

Sally Anne:

And if you know that the story is always told in the P&L, both in that information and then in kind of like more subjective things like is this a well run company? You know, do you? Do you have great margins? Are your margins better than your competitors? Have your sales been growing over time? You know all the things that you can learn from taking a look at somebody's financial statements. I think another thing that's important that we would always ask somebody to discuss is kind of like a little bit about the brand and their culture is kind of like a little bit about the brand and their culture. We have found that companies that really do have a brand and that are differentiated sell more easily than those that are just kind of like product-based businesses.

Benno:

Right, and when you say brand and culture, it's interesting you put the two together. Yeah, juxtapose the two, because I think they're actually flip sides of the same coin, right? Brand is sort of what the promise is to the outside stakeholders, the customers, and culture is sort of what is the promise to the inside employees and team members.

Sally Anne:

Yeah, no, that's a good point. It is, I mean, from the perspective of a buyer. Right, a buyer looks at those types of things in terms of will this company continue to grow? Right, and if you have a good team and a good culture and you have a brand, the answers to those questions are more likely to be yes than no, and they do help value in the business. But another important thing that we always have on those initial conversations is like hey, are there any major risk factors in your business? And that's another thing buyers are going to be looking at. Right, Is there something in this business that could potentially cause it to falter?

Sally Anne:

That's something that we always want to know.

Benno:

And I bet that your answer to that question and the owner's answers to that question are probably different, because you're coming in as an outsider asking things and seeing things that the insider is not going to see the same way, or at all in some cases. Is that true?

Sally Anne:

Yeah, although I think you know most entrepreneurs are pretty astute and can know, kind of like, what are the upsides and what are the downside risks of this business. I mean, like some of the things that we would ask about in terms of risk. Right is customer concentration. Yeah, you know what percentage of your business is attributable to. You know one or two customers, and if it's over like 30 or 40 percent, it doesn't mean that you can't sell the business, but it's something that's going to give a buyer pause.

Benno:

When those two customers get a cold, the company gets pneumonia yeah, yeah, yeah, that's true, absolutely.

Sally Anne:

Um, you know another thing, sorry, go ahead, benno no, no, I, I was wondering if it might.

Benno:

uh, so we're kind of getting into the valuation basics now already, aren't we? So? First phone call, you're evaluating the company from a financial perspective, from a sales mix, customer perspective, from an internal processes and culture perspective, and then you're getting into valuation basics. What are the main drivers there?

Sally Anne:

Yeah, that is always a question that comes up from the buyer, from the sellers, right After we've had a conversation about hey, you know, can your business be sold? That's. The next question is like well, what do you think is the potential value of my business? And most businesses are sold as a multiple of EBITDA. So what does EBITDA mean? That's obviously earnings, net income plus interest, depreciation and amortization. And then the most important question is what is the multiple that you would apply to any particular business? And that always depends, right, and it depends on a lot of factors. Size is very important. You know, the bigger the business, the higher the multiple. Industry, you know, software businesses tend to get the highest multiples ever because they have very strong recurring business and generally low overhead. Most businesses would have a range in a particular industry and then any one business would fall somewhere either towards the top of that range or towards the bottom of the range, depending on specific factors in that particular business, depending on specific factors in that particular business.

Benno:

So we work with mid-sized manufacturers and distributors, and by mid-sized we're talking anywhere from, say, $5 million to $500 million of revenue.

Sally Anne:

Can you give a range of multiple and EBITDA in that size company and that type of company? Well, it depends. I mean it depends on the profitability, more so right, but if you have a company that has say I don't know, $10 million of EBITDA that is either a well. Manufacturers and distributors are going to get different types of multiples right. A manufacturer would typically get a higher multiple. If you have a manufacturer that has $8 to $10 million of EBITDA, they're going to be high single digit multiples, generally A distributor-.

Benno:

High single digit 789. 789.

Sally Anne:

Yeah, exactly, yeah, but there's always factors that would drive that up or pull it down. Right, if it was in a particular industry that was a low growth industry say it was a printing company right, that would get a much lower valuation than if it was in a higher growth business. Yeah, a smaller company you're going to be looking at four, five, six.

Benno:

Got you, got you, okay. A smaller company you're going to be looking at four, five, six, got you, got you, okay. What other? So size of company or uh ebita size yeah type of company are driving uh, the ebita, multiple uh, and then obviously the health of the company, right?

Sally Anne:

Yeah, exactly.

Benno:

Which are some of the things that you talked about that you look at on the first date with a yeah, yeah, yeah.

Sally Anne:

I mean, how does that particular company compare to others in its space? Right, if the company has better margins and is more efficient in generating cash for the same amount of revenue, that's going to drive up valuation. If the company is growing really quickly, right, I mean, what a buyer wants is to see great margins and strong growth and the closer you get to those, the higher the valuation is going to be within reason, right? I mean, you know most companies will sell within that type of range. But I think you know a lot of entrepreneurs think very carefully about, like, what is this multiple of EBITDA? But there's a lot of other things to consider, right, not just the multiple. Oftentimes, when a company is sold, you might not get 100% cash at closing. Right, you might not get 100% cash at closing.

Benno:

So the terms that you get, are just as important as what the multiple is Right. So you might get eight times $10 million of EBITDA and $80 million, but not get that $80 million in a check on the day of the sale, but over three or five years.

Sally Anne:

Yeah, I mean that wouldn't be ideal. Right, Like entrepreneurs are.

Benno:

You know, I don't think there's ever been an entrepreneur that doesn't want 100% cash of closing.

Sally Anne:

But generally, what happens if you run a successful process and you have multiple buyers that come to the table is you're going to be comparing apples to oranges, right? Would you rather get I don't know $60 million cash at closing or would you rather have an $80 million transaction where you're getting 50 cash and the other 30 paid out over time? That's a really difficult decision for a lot of people to make and of course, it would depend on what is the function of the buyer, what is the buyer going to bring and how involved is the seller going to continue to be in the business, and a lot of other factors. But I mean okay, so terms are important, the multiple is important. The way the deal is structured will impact taxes, right? So you always want to make sure that there's minimal taxes that you're going to pay, because in any transaction, taxes will take up a big chunk.

Sally Anne:

And you know we, when we're talking to a prospective client, right, about the multiple, we will generally give them some guidance. But the actual multiple that a buyer will get is not going to be the exact same thing that we give as guidance, right, if we're selling a company and we have five offers. Those offers can range significantly. I mean, like we have had companies where one buyer comes with a five times multiple and then you get a better buyer and they have a seven times multiple Right. So you know the process that you run and the ability to reach out to and find the best buyers also, you know, significantly impacts the valuation at the end of the day get ready for the process, but let's jump into running a successful sale process.

Benno:

Right, you've already mentioned multiple offices better than one offer. But talk a little bit about setting up an ideal sale process.

Sally Anne:

Well, I always think of breaking down the process to sell a business into three phases, right, the first phase is getting ready and getting marketing materials put together that you're going to use to reach out to prospective buyers and putting together a good buyer list, understanding the business and understanding who the potential best buyers are going to be. The marketing materials that we generally put together to sell a company is a deck Sometimes it's called a SIM or a confidential information memorandum, and that will typically have an overview of the company and the financials and some growth projections and also a one-page teaser which doesn't identify the company but it can be used to send out to buyers and then if buyers are interested in the particular company, they will sign an NDA and at that point they get the SIM. So, getting all of that kind of put together and arranged as phase one, getting everything ready to go. Phase two is reaching out and talking to prospective buyers, which is obviously something that the investment banker does and we like to approach that kind of like on a consultative sales basis.

Sally Anne:

Ok, you reach out to the buyers, you really understand what the buyer is looking for and then, if there is a fit with our particular client, it's a very easy sale to kind of sell that particular business to the prospective buyer.

Sally Anne:

It's a very easy sale to kind of sell that particular business to the prospective buyer After they've had a couple of conversations with us and seen the, the SIM. Generally, they also want to talk to the seller right and in this day of zoom it's so much easier and most of the initial conversations with a buyer and a seller are over zoom and generally a, an entrepreneur, would have multiple conversations with potential buyers and our goal in those conversations is to keep multiple buyers all kind of in the same timing so that we can solicit multiple offers from multiple buyers. And what generally a buyer puts forth is a letter of intent, which is a term sheet which will outline all of the specifics of the transaction, including everything like rate, what is the overall valuation, what are the terms that they're going to pay, how fast do they expect to be able to close the transaction and what role do they expect the buyer to take on post-closing.

Benno:

And in the LOI letter of intent are also some you know I call them sort of emergency exit loopholes, where it's sort of pending this outcome, we will pay X multiple Pending that outcome. You know we expect the terms to be such and such. But because after the LOI comes the deep dive, the, what is the word? Due diligence? Due diligence, that was a DD deep dive, due diligence.

Sally Anne:

Yeah, yeah, right.

Benno:

Because then comes the due diligence, where the buyer, the potential buyer, gets to really, you know, sort of check under the hood. I mean more than kick the tires, yeah.

Sally Anne:

Yeah, yeah, no, I mean there's different approaches to letters of intent. Right, I want the letter of intent to be very specific and not leave any room for ambiguity, because one of the things that a letter of intent usually includes is something that's called a no-shot provision. That means that once you sign a letter of intent usually includes is something that's called a no-shop provision. That means that once you sign a letter of intent with one buyer and you embark on this next phase, which is the third phase of getting to closing, you're basically going to tell all the other buyers hey, we're under a letter of intent, we can't talk to you anymore.

Benno:

It's exclusive dating before you get married.

Sally Anne:

Exactly. Yes, it is.

Benno:

It is. We're not going to date other people, we're just checking each other out.

Sally Anne:

Yeah, yeah, yeah.

Sally Anne:

But I mean from the seller's perspective, you obviously have a lot more leverage while the buyer is wanting you to sign that Right. Right, but you know, once that letter of intent does get signed, you're right. The next phase is kind of like there's two things that are happening simultaneously. The buyer is doing a deep dive into the company and if we have done our upfront preparation work properly and carefully, most of the time that is just the buyer confirming the things that we have already told them are accurate and true right. A buyer wants to know do you make the money that you say you make? And they're going to obviously check the financials. And they want to know do you own the things that you say you own right? Is your factory in good working order? Do you have intellectual property and all of the other types of things that go into adding to the value of the business?

Benno:

And how confident are they in the five-year forecast?

Sally Anne:

Yeah.

Benno:

Which is really what they're buying, right? Yeah, yeah, because a company is not buying last year's P&L, they're buying next year's P&L.

Sally Anne:

Exactly Five years from now. P&l yeah you know five years from now you know, yeah, I mean, but it brings up an interesting comment, right, because you do not want the buyer discovering things during due diligence that are, you know, not ideal, right? So every company has one or two things right that they've done. Maybe they skipped things here or there, or some forms are not properly filled out, or there's a weakness or potential client that might be problematic, or something, right?

Benno:

just like in dating. Just like in dating, all of us have like troublesome childhood stories that come out, you know, not on the first date but before marriage, hopefully exactly.

Sally Anne:

Yes, no, that's really true. But you you're better off getting that up front, right? You need to have that conversation with your prospective spouse before you get married, not like kind of three weeks before the wedding.

Benno:

That's right.

Sally Anne:

So you definitely want to disclose anything like that up front before the letter of intent is signed, because otherwise you know some buyers will use things like that that come up in order to kind of renegotiate on a transaction will use things like that that come up in order to kind of renegotiate on a transaction.

Benno:

And it's interesting what you say about the letter of intent, because I have been involved in a multitude of different M&A sales and you know selling and buying side situations and sometimes the letter of intent is more loosey-goosey, like you know, kind of a fancy and you know basically a fancy NDA, but what you're talking about is pretty tight, airtight. I'm supposing that you like to have non-refundable deposits as part of LOIs.

Sally Anne:

Actually, no, that is not with a larger transaction. I mean, if you're selling a very small business, I think you know people do kind of want deposits, but with a large company it is not typical to provide a deposit.

Sally Anne:

Okay, it is not typical to provide a deposit Okay, but I mean we want to know that the buyer has money right and that is one of the most important things in terms of thinking about who is a buyer and will this buyer get to closing and where is the money that they are going to use to fund this transaction coming from, right, that they are going to use to fund this transaction coming from?

Sally Anne:

You know, in the private equity world there's two different types of private equity firms. One is a private equity firm that has a fund that has already gone out and raised money and has it basically sitting in the bank account. The other type of private equity firm is something that is called an independent sponsor. The other type of private equity firm is something that is called an independent sponsor. Those private equity firms will go out and raise money on a deal-by-deal basis. So if you're looking at two different buyers, right, obviously the PE firm with a fund is more attractive than somebody that comes to you and says, hey, I love your business, but I've got to go find some money, right, right, right, let's talk a little bit about when a company is not ready.

Benno:

When you do the initial evaluation, you go through the valuation and you come up with a number that the seller says, with a number that the seller says, no, I was hoping to get doubled or quintupled that right. And you say, well, if you do X, y and Z, it could probably be worth double or quintuple that. But you think you have a pretty baby, but I think it's not pretty enough to get five times what. Yeah, I think it's worth. How do you help put? How do you help, uh, prospective sellers get ready for a sale?

Sally Anne:

that is that hits goals yeah, um, I mean, I think one of the most important things is is helping entrepreneurs understand what the drivers are that go into valuation right, because sometimes people come to us and they just don't know what a reasonable valuation is. But, as you said, a lot of people you know find out what the valuation is and it's not going to meet their goals, it's not what they need or it doesn't provide a return for them that they think is, you know, worth the time and the effort and the tremendous amount of effort they've put into building the business. So in that scenario, I mean, basically, the entrepreneur has to increase sales or increase profitability. Nine out of 10 times, right.

Sally Anne:

Sometimes there's something else for the business that needs to be fixed, but the most important, the number one reason, is like, hey, the EBITDA is not where you want it to be, given the type of multiple that this company is likely to get.

Sally Anne:

So what can you do to increase the EBITDA? And we have lots of conversations with clients on this and I know that's something kind of. This is a, you know, an area that you are definitely an expert in, right In terms of how do you drive sales, an area that you are definitely an expert in right In terms of how do you drive sales and how do you improve profitability, and I would say that many of the businesses that come to us say time and time again hey, we don't have a strong sales team, right, if, well, this business could be bigger, but we just don't have the salespeople in place. And I think that's one key thing that a lot of people take away is like okay, you have to bolster up your sales team in order to drive sales, in order to drive profitability, in order to be able to sell your business.

Benno:

So you bring in cats like my Sherpas right when we look at. You know this is the third growth option podcast and we call it that because in my day job I run a company called Realign that helps companies grow faster than internal organic growth, less risky than acquisition, by doing one of these three things. One we help companies add new adjacent product categories as one way to. You know, they're selling apples but not oranges, so we help them add new adjacent categories to drive profitable top line growth. Or we help them access new channels of distribution right, they're selling in this type of brick and mortar store but not that type. Or online but not offline, or vice versa. Or number three just fix the go-to-market, which comes back to branding or product or culture or internal processes.

Sally Anne:

Obviously, it's a lot easier said than done, right.

Benno:

That takes time. All that gray hair Not so easy to do.

Sally Anne:

Yeah, no, it's not easy at all. And you know what? If it was easy, the entrepreneur would already have done it Right. It is challenging and it does take time, and in some circumstances people come back to us after a couple of years and say, okay, we've moved the needle now already. And other times they come back and say we, you know now, we know what the valuation is. We tried, but we did not move the needle. And you know, can we still sell a business?

Benno:

Give me a favorite success story. You know, can we still sell the business? Give me a favorite success story because I know that you've been doing this for 16 years and you know there, I think the reason we all do what we do, what gets us up in the morning, is because, at the end of the day, we have these stories where we really made a difference in somebody's life, right, I mean yeah, yeah, like. My favorite one is a $5 million company is now doing 30 plus million dollars and the owner came to me two or three years into.

Sally Anne:

It's like I don't.

Benno:

I've never worked this little and made this much money.

Sally Anne:

Yeah, I mean, yeah, I mean I don't know that I have a favorite transaction, right, because it is just like what you said, right, the transactions that we work on, we are helping somebody make a significant change in their lives.

Sally Anne:

It's a big financial change and a big personal change change and a big personal change and it's really kind of like it's an amazing privilege for us to help somebody through that transition and to know that we did it well and to get to the end point where somebody has, you know, received all this money in their bank account and they are retiring or they're embarking on a new phase in their business.

Sally Anne:

It's amazing and that is what kind of like I appreciate. And we have seen that a couple of years ago we sold a business that had been started by a very young husband and wife and they built the company over the course of four years, very quickly, grew it and sold it for tens of millions of dollars and they're set for the rest of their life, right. Or we've worked with last year we sold a business that was a couple that were in their 70s and they were selling their business to retire and, you know, after the deal closed, they worked for the buyer for, you know, in a transition period. But after that they went to India for a couple of months and it's really kind of amazing to see that and to know that we played a part in that.

Benno:

And whether they flew first class or coach was something that you could take credit for right I hope it was first class.

Sally Anne:

That's a long flight. Um no, but that's kind of. That's kind of like where we come from. Right it is we are, I mean, the finance side and the marketing side and and the working with attorneys and getting you know things like reps and warranties. All all of that is the technical side of getting these deals closed, but the I don't know if emotional side is the right word, but it is somebody's business that they have built over 20, 30 years or sometimes less.

Benno:

But that to me is is I guess that's not a favorite transaction, but that is my favorite part of working and doing this I completely understand that how you think about it and to me, just like you said at the very beginning, you want to know, um, in the initial evaluation, why do you want to sell it right, not just how much do you want to sell it for? And yeah, but why? Your answer to my question what's been your favorite transaction having emotionally satisfying elements? And it is also sort of the why you know it's not just. You know the most profitable transaction was my favorite. No, I mean like to me, this client that we still work with nine, ten years into it. Having said that to me, right, that?

Benno:

I've never worked this little to make this much, I thought, oh, this is all worth it.

Sally Anne:

Yeah, yeah, yeah.

Benno:

Not my biggest client, not my biggest project, but that was sort of you know. I'll take that statement to the grave.

Sally Anne:

Yeah, no, it's really, really important. And yeah, it's nice to feel that you have made a change in people's lives. I mean, the money is important for everybody, right? Don't get me wrong. Like there's never been a client who said, oh, you know, I'm more interested in the transition than the money. The money is super important, but to have both is really amazing.

Benno:

Sally Ann, if folks wanted to reach out to you, where is a good place to find you? If folks wanted to reach out to you, where's a good place to find you? Maybe feel free to give your email address or your website address, or maybe people just reach out to you on LinkedIn.

Sally Anne:

however, Sure, no, all of the above. I'm on LinkedIn, Sallyann Hughes. My email is shughes at hughesclivercom. Or you can go to our website and send us a message through the website, or you can call my cell, which is 917-568-4185 look at you.

Benno:

Now it's out there in cyberspace your cell number terrific. Yeah, sallyann, this was a lot of fun. By the way. Uh, the hughesclivercom cliber is ai, not ei, is that?

Sally Anne:

yes, that's right. Yep K-L-A-I-B-E-R Looking out for you.

Benno:

Sally Ann, thank you. All right, this was great. Thank you so much for jumping on this episode with me and look forward to more conversations, and actually I have something that I'm going to reach out to you right after this.

Sally Anne:

Great.

Benno:

You and I are going to create some more content. All right, thank you so much, everybody.

Sally Anne:

Thank you, benno, it's great.

Benno:

Thank you for listening to this episode of TGO Podcast. For listening to this episode of TGO podcast. You can find all episodes on our podcast page at wwwrealign4resultscom. You can find me, Benno, host of TGO podcast, there as well. Just email Benno B-E-N-N-O at realign4resultscom. Let's keep growing.

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