The Emotional Rollercoaster of Selling Your Business: A Candid Conversation

welcome to the cpmt podcast I'm Scott Merlin I'm our managing partner after about 45 years in the business we really wanted to kind of put forth our knowledge expertise we've gained over those years in a more casual fun Manner and I hope this podcast series will be able to do that for you our clients our colleagues our referral sources so please if you like the videos if you like the podcast please subscribe to our YouTube channel it really helps us develop more relevant content for you thank you all right so we were just talking about several of our clients have called with letters of intent in hand already signed and then they want our representation for the deal do we think that's great timing I personally think that's a little late in the game um but talk about a little bit what you've seen on your end I mean it's been the same for me I have clients that are coming to me ready to sell their business they've identified a buyer and they have a letter of intent the letter of intent sets forth the outline of the terms of the deal it's going to specify the purchase price how and when it's going to get paid and other pertinent parts of the deal whether or not there's a lease or other thing employment agreement terms and in this situation I just wish they had come to me earlier right so I could help guide them through what they can expect through this process what terms are important what deal terms are are kind of market right instead of you know so many of the clients I think come and maybe you've seen this with what they think is a good deal and there's too much risk or right or whatever well the other thing too is they look at it and says well this is a non-binding letter of intent so whatever we'll just put the terms down on paper and it's non-binding and while that's probably true from a legal perspective that's the terms by which you're going to guide the rest of the Document Preparation right so even if the LOI is non-binding from a legal perspective that already puts you that's where your negotiation sits right so we're we the you know the other side your buyer is going to say well that's what you agreed to in the LOI yeah it's not legally binding but at the same time hard to argue when you already signed something that says you agreed to that term right right I mean there's some element of good faith in this sure and it works both ways but the seller shouldn't sign something that they're not willing to take or it's you know in theory I try to counsel the sellers it should be at the high end of your range because up next after the letter of intent or term sheet stage is going to be due diligence right and that's when the buyer is like a house inspector he's going to come in look through everything and find reasons not to pay full price right in many cases it's just just happened to me as before I walked in here was I got we the client actually came to us in time we helped negotiate the LOI we signed the LOI everybody's ecstatic they go through a quality of earnings due diligence and then the buyer comes back and wants to knock some money off the purchase price based on the quality of earnings due diligence we didn't agree with their quality of earnings due diligence review and so it was another month worth of negotiations and today we're supposed to get a new Loi based on the terms that we've agreed to so um it's always a moving Target and um like Jeff said you're exactly right go in on the high side because you know they're going to start chipping away chipping away chipping away um until they're comfortable and you just got to be comfortable with that final number I mean it have you seen where client I've frequently especially lately seen where client inexperience is evident because they think they've negotiated this deal and it has a substantial portion that's deferred or earned out and people think earn outs are great it's like oh I'm going to get that money what's your experience with earn outs it's probably 50 50 you'll get that number it's a coin flip and look it's it's all based on the terms of that earn out right you want you need to be comfortable with your Revenue thresholds the other thing that you don't understand is you're no longer the sole Runner of the business so revenues and profits and things like that are completely out of your control you have a new owner who's going to implement their policies and procedures and that could completely affect the way you're earned out you know the thresholds reaching them things like that so I think it's it's interesting too that other things we're getting is is now you know you're getting a handful of cash up front but you're getting a ton of rollover Equity into these new combined entities and that's just a complete and total variable that you don't understand because you're becoming an owner in a new business um you're just a silent partner it could be a huge windfall if they grow this but it can also be you've left a bunch of money on the table so it's important to to what I always advise and probably you too is when you get that cash component you need to be comfortable with the money that's going in your bank account at closing everything else is gravy afterwards that's right right that's right I mean so many of the deals now especially when they're when there's a private Equity buyer have a rollover Equity component where effectively instead of paying cash they're giving you stock in the entity that is buying you and then now you're along for a ride that you have no control over like I said and so you just just can't count on that to ever hit and be anything but what about so okay so this was another thing that came up recently all right we got the LOI done next stop due diligence and clients I think don't understand what the due diligence process is going to be like in the in the burden on them no and and my advice lately has been it's a second job right you you are going to spend 70 of your day answering diligence requests over the course of this due diligence period And even up until closing because honestly diligence doesn't really stop right I mean you know as you're going and negotiating the purchase agreement you're still getting due diligence requests as you go and you really need the client to help you because you only so much we can do from that perspective that's uh that's on them to help us to you know produce that information that they're wanting um but yeah it's a it's a very time consuming process I don't think that a lot of clients fully under understand the time commitment that it takes to pull all that due diligence but what I've we've started doing is when we get to that Loi stage we'll do on on I'll send our kind of if as if we were representing the buyer due diligence checklist and say they might not ask for all this but they probably will so just start pulling it together you know for when they do you'll be ready um and that is kind of got them a little bit more prepared to where it's not a total shot to the system um I do the same thing because I think like I think that they don't understand the level that buyers are going to begin to right the buyer is going to kick every Tire they want to see your I.T privacy policies and so many AR clients are smaller and they don't have some of the stuff sure or they've cut and pasted something off the internet but that's okay I just want to know about it sooner rather than later because if it comes up at the 11th Hour right we're scrambling around trying to close a deal well you know we jumped right into like this third-party buyer thing but so many of our deals are sales to employees or family members troops absolutely it's not just the third party box I mean what do you tell a client who comes to you I mean I think a lot of clients come to us with this preset idea of who who's going to buy their business or nobody might buy their business but there's there's more than just the third party buyer sure so how do you how do you figure out what what's best well I think we have to I generally just sit with the client for as long as they need and we kind of work through the different scenarios like what do you need a to retire and not do this anymore right do you need this steady stream of income do you need a large cash buyout you know to to be able to retire and do the things you want to do how involved do you want to continue to stay in the business for the next three years five years ten years um you know selling to employees is a lot tougher because you're never going to get that big check at closing right they're just not it's just not going to happen you have to come up with creative ways to get your money out of the business um so but if that's you know a lot of people are more comfortable with that too somebody that I've worked with for 20 25 years I'm comfortable handing my baby over to them to run while I'm done and I'll take you know I'll take uh kind of a salary or I'll take a just a long-term 10 15 year payout and just work with them as far as buying me out but I think it's ultimately what what they need to get to their end goal right and that's where the conversation usually starts and then if it's yeah I know I want I want 15 million dollars and I want 10 of it in cash and then I want to go lay on the beach for the rest of my life that's a third party buyer I mean that's just clear we just need to go in that direction right but if it's no you know I've worked with these same Five Guys for the Laster girls for the last 20 years and I want them to take it over for me when I'm done or I've you know my my children are coming up in the business and I want them to have it then the conversation is completely different right it's just how are we going to structure that for a you to get what you need to retire and then easily transition to the Next Generation to kind of run the business I'm sure you've seen similar yeah I mean that's what's frustrating about a client who comes to you with an Loi in hand I mean I try to slow it down a little bit because I'm you know they've seen a dollar figure right they've started spending the money oh yeah they're gonna and and part of the psychology of these transactions I think and I'm no Harvard MBA or whatever these people are but they know that once they hook the seller on this oh yeah it's all sunshine and rainbows we're gonna build take your company we're gonna pay you a ton of money and once there's some emotional investment it's hard to push the seller away away from that and I mean it's not that it's games playing it's just you know marketing and sales 101 or whatever right and so because they've come to us with a deal in hand it's hard to say all right let's just take a step back how did this come about why are you doing this right what about your business now suggest your ANSI to do this is this the best price you think you can get why do you think it's the best price you can get what other what other buyers have you talked to right why you know why this deal versus somebody else's deal or you know do you not have you know and so it's usually you can cross employees and family off the list fairly quickly unless like you said they're working in the business or they just don't have a team there that's capable of owner mentality but but yeah I I think that's a good point is a lot of is again A lot of times we get involved in the game a little too late and that they're already pot committed to doing this and then you know there that Loi says oh yeah we expect to close in two to three weeks and we're you know you're kind of like okay hold on take a step back we're never going to close in two to three weeks just take a step back don't believe that that's true buyers always want to close quicker than you possibly can uh more psychology more psycho exactly right it's just like oh it's going to be simple we'll just get this done it's just never that simple um and they're just going to keep pushing and pushing and pushing but at the end of the day you have one shot to sell your business one shot you've spent years growing this business to the point where you can sell it right and you want your one shot to go as smoothly and perfectly as possible to when you walk away You're 100 comfortable to the extent you can be 100 comfortable that you've done the right deal and you've done what you needed to do and um I think that's a balance that we have to do as advisors um in trying to just say like okay take a step back think about it this is your one shot are you comfortable is this is this what you want to do and you know I think a lot of times more times than not I would say our client ends up with a pretty successful result I would say so too however I mean I've seen this happen in several of my transactions where we're within a week or two of the final closing date and then they start asking the question you know is this is this the most I could get and I'm like I don't know we didn't shop the business around you want me to call one of my You Know M A advisor friends and see what's kind of market for this business you know we right and it would and it's not the first time I would have asked that question right as I mentioned right at the outset I'm like why are you selling what is this price how did you reach it but now they're starting to realize this is real it's very emotional the the emotional and psychological side of this is something else I think we need to talk about because so many business owners their whole Persona and identity the business is a reflection of them it's a life's work absolutely um and and letting go of that uh is a traumatic process or I don't know if that's the right word but I mean what do you I mean no it's it's it's tough on those type of people who identify with their business right the day that closes they get up in the morning the next day and they're like now what right I don't I'm going to go work for somebody else I don't know how many calls that I've gotten about people that have built their business run it sold it thought they'd be perfectly happy and they're on some six month or two-year employment agreement call me up and say can I get out of this I cannot work for these people I need out of here this is not the way it's supposed to be because they will never run the business the way you run the business ever so you need to understand that you need to be comfortable with it but a lot of times I think you know they'll come they don't like we said they don't have the family they don't have the employees they don't have much of a choice they're getting into their 60s you know 70s and they don't they don't want to keep working anymore so it's not ideal but for their psychological makeup but probably from a business perspective it's the best thing they could possibly do at the time so absolutely I think it's psychological toll I mean we we our family is a really good friend who sold his business for a lot of money and thought he was going to be super happy but he spent years just kind of like moping around and just why did I do that you know it wasn't even the money part of it it was just I don't have anything to do you know I'm I'm I still got years left to contribute and do things um and you know it just took him a little while to kind of find the groove of what am I going to do now right and you know that's part of us too is they ask us those questions well what do I do now you know right and well what are you what are you interested in what are you passionate about you know it's just go that's the stuff you can do now you have a bunch of money in the bank it doesn't matter your salary doesn't matter how much you're selling and you know profit margins don't matter anymore where's the next paycheck coming from doesn't matter anymore right go do what you love doing right and I think um that conversation does happen a lot a lot when we have these clients that have just all they've known is running this business and now that they don't have it anymore they're kind of lost is probably not the greatest word but they're a little lost as far as what do I do every day now sure I mean having having that kind of purpose in your life I mean everyone strives for that and sure that's beyond the scope of this podcast right we're not going to solve that problem but we'll do that in the next one yeah that's later it's a future episode right um but realistically um you know it gets back to what is triggering sometimes it gets back to what is triggering right there's been a health scare um they've received an unsolicited offer on the day that they lost a major customer or there's bad news that the world economy is about the tank or Russia invade Ukraine and it's like I can't go through another 2008 right or a pandemic and worry like this I need to get out and then you know like everything everything cyclical you get through you sell your business and then realize a couple leaders well maybe I could have stuck around for a little bit it's not so bad but I liked working I loved my business I loved my employees are right you know so right in my last two months we were doing really well so so they're going to get all the benefit of that too much that's right I left money on the table left money on the table and things like that and absolutely um but you're right I mean it's all it's all very cyclical I mean I think all the deals I did last year were a lot not all but most of them the clients were I don't want to go through another pandemic like I I we just got out of it that was such a toll on me I just want to be done um and then this year it's more like you know the economies really wishy-washy I don't know I don't know the bank you know the interest rates are crazy I can't borrow money if I need to borrow money um and you know these people are coming with a big truckload of cash is now the right time to go and I think that's a lot of the deals that we're getting now are you know people are kind of scared of the economy scared of a recession scared of how you know the business is going to run over the next few years and they just kind of want somebody to take it over I mean and and I get it but you know six years you know six months 10 years you know two years down the road when the economy is great back up right and you now see that your business could be doing amazing um you know there's a lot of regret in it but um I think that goes back to the first thing we were talking about is you need to be comfortable when you walk away with this one or way or the other you're not gonna be 100 comfortable because buyers going to want to be comfortable too so you just got to be comfortable you got to find that Comfort level that you're like okay no matter what happens I'm good with the money that's in my bank well we got through our first episode yep and uh you know so I think it's important for our audience here to give us a little bit of feedback so if you liked what you heard today or if you didn't like and you have some suggestions for us to do in the future or topics that you'd like us discuss like this video or follow us on YouTube follow us on LinkedIn where we put all of our content and um we look forward to seeing you next time yeah I want to see I want to hear some comments so I'd love to be able to give them exactly what they want absolutely

Channel: Cohen Pollock Merlin Turner

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Id: Gf5uoQNeABY

Length: 18min 40sec (1120 seconds)

Published: Tue Aug 01 2023