Exiting Your Business – Key Considerations When It’s Time to Sell

HOST Clinton Laron

GUEST Amber Ferrie Partner Eide Bailly

The Transcript

Clinton Larson: Hello and welcome to EB & Flow. I'm your host, Clinton Larson. And today we're going to be talking about everything you need to know when it comes to exiting your business. And joining me on the podcast to talk about that is Amber Ferrie, a partner in the transaction practice of Eide Bailly. Welcome to the podcast Amber.

Amber Ferrie: Thanks for having me, Clinton, and I'm excited to talk about this.

Clinton Larson: Yeah, exit planning is something that all business owners need to think about, but I think it's fair to say it's become a bit of a hot topic lately, right? Like what are the market forces sort of affecting that?

Amber Ferrie: Yeah, absolutely. We've been super busy. It is a hot topic right now and it'll continue to be if we think about the baby boomers, those folks right now are between, you know, let's say 57 and 75 on average. There's something like 70 million baby boomers, I believe, and not all boomers are going to retire at the same time. And certainly not all of those folks own or manage a business. But just by numbers alone, if we think about average retirement age, I think we'll continue to see a steady flow of boomers exiting their business in some fashion, and that is really driving kind of the market and the sheer number of deals that we're seeing now. Additionally, there's also people that just lived through their first pandemic. Hopefully they're their last as well.

Clinton Larson: Right.

Amber Ferrie: And, you know, they said, okay, that was fun, but I never want to do anything like that again. And so they're looking to take some chips off the table and potentially diversify their own portfolios. And they look to, you know, or other strategies as an option to do that.

Clinton Larson: Maybe say, you mean private equity, is that correct?

Amber Ferrie: Correct. Yeah.

Clinton Larson: Okay, great. And now that's a good that's a good point, because I wanted to ask you, like, are the business owners that you've been meeting with, have they been thinking about selling or transitioning for a while? Or is this something that, you know, many people are just kind of seeing? There's an opportunity right now. I mean, what's sort of the pulse that you're getting from a lot of business owners you talk to?

Amber Ferrie: You know, I've been in the transaction advisory world for about 15 years now and almost 100% across the board, we hear business owners are constantly thinking about how they're going to exit. They might not know where to start, but it's certainly something that they're thinking about. So regardless of if they're two years out or ten years out, they're definitely thinking about it. Some thought that, you know, perhaps the next generation was going to be their answer. And for whatever reason, that isn't shaping up to be the right answer for their business or for that next generation. So they're looking for another plan at this point.

You know, that said, there are market factors that are make selling your business fruitful in today's economy. There are healthy balance sheets out there. There are well-funded groups out there who are looking to invest in these companies. So the access to capital has been good for the last few years and it's still strong today. There's still a lot of fundraising that's been done. Groups and private companies that have money to spend that has created a situation where multiples have been aggressive in some industries. So thinking about all of those factors, certainly you could say some owners are taking advantage of an opportunity.

Clinton Larson: And you said business owners are obviously thinking about this and that's obviously a good thing. But I guess I'm curious, how ready are they when they come to you to talk to you about these kind of transactions or their thoughts on something like this? Are they just because they're thinking about it? Does that mean they're ready? I guess is my question.

Amber Ferrie: Well, are we talking emotionally or operationally here?

Clinton Larson: I guess both. See, I mean, I yeah, no, I mean, that's a good point. I'm sure there's a lot of emotions that go into this kind of decision.

Amber Ferrie: Yeah. So I would say emotionally there's a huge value that an owner needs to cross. You can read about deal fatigue and the emotional toll that's selling, especially a family owned business can take on a person. But until you see that firsthand, I don't think you appreciate it. I know. I know. I certainly didn't. These businesses are in a lot of ways like family members. They've been around for generations. There's blood, sweat and tears that have been shed. There's a huge pride factor for most owners, too. So the emotional readiness cannot be overlooked, in my opinion.

I think that comes as a surprise, just like it did to me as an advisor. That comes as a surprise to most business owners. If we think about operationally, that really varies across the board. You know, just because you own a business, doesn't mean you work in that business day to day. So a hands-on operator might be ahead of the curve in a lot of ways. They're also working in the business full time, so they may not have a lot of time to devote to a process which is where advisors can help. Some folks just stepped away from the business, but they still own it. They may have time to devote to the process, but oftentimes they can benefit from some outside analysis. So it really varies across the board as to, you know, have they had an audit? Have they done any internal kind of SWOT analysis to prepare for this? There's a pretty wide range of readiness, I would say.

Clinton Larson: Okay. And so in terms of that, you know, the thinking about it, the getting ready for it, maybe we should start with just like how far in advance should you start thinking to start planning a transaction? You know, like you said, you can think about it for a long time and you can be ready in different stages. But like if we if you were, it made the decision that you want. Start down that process. What kind of runway should you give yourself?

Amber Ferrie: Yeah, that's a great question. You know, if you want to do take advantage of any gifting to the next generation or to charity or things like that, you can start years in advance. You should start years in advance. A lot of factors come into play there. Do you have a taxable estate? What other assets do you have outside of this closely held business that we're talking about? That advice is on a very specific case by case basis. But if you are interested in doing any gifting or estate planning, that should be done, you know, can be done years in advance. We say that a sell side process from the time that we kind of hit go is a six month process typically. And so that that part is, you know, relatively smooth. And, you know, six months out of the entire life line of your business doesn't seem like a whole lot, but there could be some planning on the front end that will make that whole transition more tax efficient and that can be done years in advance.

Clinton Larson: Great. And so what are some of the different considerations that people need to have in mind when they're considering a transaction? So what if you were, you know, starting the process with someone? What were some of the things you would explain to them? What are some of the things that you would have them think about when it comes to this this exit of their business?

Amber Ferrie: Yeah. If we're in contact with them, you know, well in advance of the kind of six month start time to do a deal, we like to talk about things that really drive value. Those things can kind of take some time to put into place. So if we think about things like having contracts in place, which gives the new owner peace of mind, that the cash flows will stay steady, making sure those contracts are transferable to the new owner is also helpful. Looking at customer concentration and doing whatever you can do to kind of create a diverse client or customer base is a benefit.

Grooming a management team is another big one we see. If you want to exit your business and you hold all the cards, you hold the keys to kind of everything. It's really hard for a buyer to get on board and be excited about that and pay the top end of the multiple range versus if you have a management team in place where you can kind of exit left and maybe you've even been practicing that taking a couple of months off here or there, or really giving the management team below you the responsibility to be the decision makers. That creates a lot of value for an incoming buyer. And so just reducing that key independence and then, you know, things like having a scalable model. Those things take time to implement and create that value, but they're definitely worth your time and effort if you can do those things.

Clinton Larson: What about some other considerations from tax or accounting perspectives?

Amber Ferrie: Yeah. So when you're thinking about selling your business, typically we try to get gap financials. So if you don't have a review or an audit, you may not have your financials on a gap basis, they might be on a tax basis. And so making sure that we understand any adjustments that are needed to get them to gap and then, you know, maybe that results in equality of earnings report.

Quality of earnings report is something we can do on the sell side pre process to kind of flush out any issues and make sure that we really understand our numbers before we get into a process with potential buyers. Some of the things that the quality of earnings report will look at, our revenue recognition, working capital turnover ratios, EBIDTA adjustments, things like that that a lot of business owners don't necessarily track that or have the ability to move from a cash basis to a gap basis on their own. And so we could help with that.

Clinton Larson: Certainly that phrase you you mentioned the EBIDTA, that one. Could you explain that to me? I'm not sure I know what that is.

Amber Ferrie: Yeah. So EBITA is a commonly used acronym. It stands for earnings before interest, taxes, depreciation and amortization. It sometimes is synonymous with cash flow. So if you have your net income that you're starting with on, let's say, your financial statements or your tax returns, getting that to an even a number is typically what we use in the M&A world. When you hear about multiples, you typically hear about multiples on revenue or multiples on EBITA.

And so if it's a five times multiple for a deal, that's your EBIDTA times five is the enterprise value for that deal. And so that's a that's a good point Clinton. When you think about, hey, what maybe you hear a multiple in your industry, what does that mean? It's not necessarily your net income on the bottom of your financial statement that you're probably used to looking at. There's a few adjustments that we want to make to get that to EBITDA.

Other things to think about just from a structuring standpoint, ah, you know, there's a stock deal and there's an asset deal and depending on the basis you have in your assets, those numbers can be wildly different. So let's say you have a $25 million sale. The check that you're actually going to walk to the bank with is going to be different depending. It's typically going to be different depending on if you do a stock deal or an asset deal. And so getting together with your tax advisor and really running through those scenarios and understanding, hey, this is what a stock deal means to me and this is what an asset deal means to me from a cash flow basis are incredibly important and we want to do that early in the process so that we understand what the delta is there and we can potentially negotiate around that.

Clinton Larson: So based on everything that you're saying, it sounds like there's a lot of complexity, a lot of factors to consider when it comes to exiting your business. So I'm guessing that must mean that there's no such thing as like a cookie cutter transaction in this kind of area, right?

Amber Ferrie: Yeah, that's exactly right. And that's one of the reasons why, you know, in my past life, I was an auditor. I did business valuation for a while. That's why this area transaction advisory is so fun to work in is because every deal really is different. I mean, every owner wants something different or they envision something different for the next phase of their business. And so that yeah, that you're right, there's not a cookie cutter approach.

I mean, some people want to be involved going forward, some people don't want to be involved going forward, and some people think they want to retire and then they realize they're really terrible at retirement. So, you know, I always offer for those people, I'm happy to switch spots with you. I think I could dominate retirement. So I'm happy to do that if nobody's taking me up on that. Yes.

You know, some people have other reasons to continue to be involved. Maybe they're consultants, maybe their role is just changed in the business. There's a ton of different things to think about. Sometimes the business is going to stay as it is. Sometimes it's going to grow by tenfold. You know, that's the buyer's kind of vision for it and plan. And so those things just look very different on the from a post transaction standpoint. But certainly during the transaction, there's, you know, there's a lot of different level levers to pull. You have we talked about the emotional, we talked about the operation, we talked about the tax piece, the pre planning piece. You know, do you do equality of earnings? Do you need to get an audit? All of those things come into play. So it's really an open slate. And you know, the game plan, the strategy is something that the advisor and the business owner talk about and then just kind of put an action plan together and you know, it ends up being a great it's really fun, obviously, when you're successful.

I joke that, you know, we get invited to Christmas and Thanksgiving now, right. For our clients because you kind of went to war together and you got through it. And when you're on the other side of it, it's a really great feeling. So it's a really fun place to spend your time.

Clinton Larson: I bet. And you know, you've have a good point. When I when I think of exiting my mind automatically goes to retirement for that kind of that kind of exiting. But I suppose you also deal with people who are exiting to start another. It's like, you know, someone who has just got an entrepreneurial spirit, you know, that kind of thing. Do you find that there's a difference in terms of like those kind of transactions versus people who are thinking about exit because they are thinking of maybe like a final chapter in their life. But what about the people who are just like switching businesses are just like they just want they love the start part, so they just want to get out and do that again. Is there is there differences in those kind of transactions?

Amber Ferrie: Yeah. I mean, if you're a serial entrepreneur, you're typically doing it for kind of the rush of starting something new. You love the building grow kind of strategy, and oftentimes that lends itself to someone that's less attached to the business. So that's not your profile of the third generation business. You know, we have a lot of those clients that Eide Bailly where they're in the third generation and maybe the fourth generation is not going to take it over. And so there's a lot of different issues with the multi-generational family business than there are with the serial entrepreneurs. The serial entrepreneurs view this as a stepping stone to get to the next thing. And so they view it very differently. And they've built the business to be sold, which is not how a lot of business owners kind of attack the day to day operations of their business. If you're building it to sell it, that's a little bit different mindset.

Clinton Larson: I bet. That's good perspective. And for those multi-generational businesses, when you're meeting with those families, I imagine that that's going to be like you're just doing your job, but, you know, getting to go to Thanksgiving or Christmas with them. But I guess I'm guessing you get to know these families pretty well at a process like this, right?

Amber Ferrie: Yeah. So like I said, from start to finish, we hope that we can do this in six months. You're talking to these people every day for six months. If you think about your friends and family. I mean, I don't even always talk to my spouse every day for six months. Right. And so you're talking to these people for six months straight. You're digging into a lot of the whys and kind of what motivates them and what their goals are. And so when you have those kind of conversations with clients, absolutely, you it's on a different level.

But that's another reason why, you know, I came from a compliance world is my background with being a CPA. That's why this work is so much fun for me, is that, you know, you do get to know your clients on a different level. And it's not just a compliance report that they're going to file in their file. And, you know, from year to year, it's done and not really looked at. This is going to be life changing for most of our business owners.

Clinton Larson: And I imagine that makes it also important that when you're when you're looking at getting an advisor for something like this, well, number one, you would want an advisor for this. But then to like you really want to make sure that that advisor, somebody you can trust and that you can have a good rapport with, I would imagine, too.

Amber Ferrie: Yeah, absolutely. Like I said, we're going to we're going to be in contact most days for six months. If the communication doesn't work or for some other reason, you know, there's not a connection. It's going to be a pretty painful six months and it's already going to be a stressful six months because this is a huge deal. Most business owners only sell their business once. And so you talked about the serial entrepreneurs a minute ago. There are those people out there that's not the majority of the Eide Bailly client base. So we're dealing with people for the most part that will sell a business once, maybe twice in their life. So it is going to be a stressful and emotional situation and having, you know, open lines of communication and an advisor that understands the process and can hold your hand through that process is what our clients tell us is very helpful.

Clinton Larson: That's a really good perspective on who you should have with you when you're considering exiting your business. But what about on the other side of the transaction, the buyer? Like, what are some of the typical buyers that you see in this process?

Amber Ferrie: Yeah. So like I said, you know, we work on a customized process, so we really work with the business owner on who they think the best buyer is going to be. And then we add to that based on our knowledge of the market, you have two main groups of buyers for businesses. You have financial buyers which typically include private equity groups and family offices, and then you have strategic buyers. So a strategic buyer is somebody that's already in your industry. Maybe they're looking to eliminate competition, maybe they're looking to add a line to their existing portfolio of products. It could be a, you know, a market share grab based on geography. Something like that would qualify as a strategic buyer. And then there's hybrid buyers, which are they look like a strategic buyer, but they're backed by private equity. So it's a little bit of a hybrid is what we call that buyer group.

Clinton Larson: Can you also go back and explain when you said family office, what exactly is a family office?

Amber Ferrie: Yeah, so a family office operates pretty similar to a private equity group. It's typically managed by a family that has a significant net worth and they want to invest in businesses. And the different the main difference in that is a private equity group is typically going to hold a business for 5 to 7 years and then they're going to sell it. And a family office has a much broader view on whole time. And so some of them hold. Businesses into perpetuity. Some of them hold businesses for ten or 15 years. So it's they're much more patient capital than typical private equity. That's the main difference.

Clinton Larson: And I imagine some of those buyers fit better with the seller's goals, right. For that, as we talked about previously, whether they're looking to be a part of the business still or whether just to complete the exit. Does the buyer play a role in that sort of scenario as well?

Amber Ferrie: They can, depending on what they're bringing to the table and kind of what their nuances are with their capital and what their goals are with their capital. You know, sometimes we talk to people and they say, I will never sell to X, Y, Z competition. Absolutely not. And then we have had a couple of examples where, you know, X, Y competition ends up being a pretty lucrative or attractive offer or, you know, kind of wrap their heads around that. Something that, you know, if you've competed with another business for most of your career, joining forces with them isn't always the most obvious or, you know, something that you think is the best plan for your business. Sometimes it's not, but sometimes it is. And we kind of walk through what that might look like with the client.

So I think what's important to remember is if you're thinking about this for your business, all of these potential buyer groups, private equity, family offices or private companies, they're all well-funded right now. They all have a healthy balance sheet. So if this is something that you think is in your near-term goals for your company, I think now's a great time to start.

Clinton Larson: Right. And we'll have lots more on the podcast about this topic. We're planning some more episodes about exit planning because as we've just discussed, it is it is a complex thing. It is a big thing and it's important thing for business owners to approach it proactively and with a careful eye to what their goals are for the future. So with that, Amber, I think it's been a great conversation today and I look forward to having more conversations about this. And thanks for being on the podcast.

Amber Ferrie: Yeah, thanks for having me. Clinton, it was great to meet with you.