Strategic Thinking Podcast: Bryan Pearce Interviews Stephen Rusch of Gray Strategic Partners

About the Episode: Host Bryan Pearce, Director of Strategic Business Planning at Gray, Gray & Gray, interviews Stephen Rusch, Managing Director of Gray Strategic Partners. During this episode, Bryan and Stephen discuss a variety of important topics related to navigating the sale of a business, from when to consider a sale or “recapitalization,” to preparing for a sale and maximizing value of the business, to personal business owner considerations of time and finances beyond the sale. 

About the Guest: Stephen Rusch has nearly 30 years of investment banking experience and leads the charge for Gray Strategic Partners, LLC. As a boutique investment banking firm and part of the Gray, Gray & Gray family of companies, Gray Strategic Partners is focused on providing holistic financial advice on mergers & acquisitions and raising institutional capital to help clients achieve their liquidity and growth objectives.  Learn more about our Stephen Rusch and Gray Strategic Partners here. 

Stephen Rusch is a Registered Representative of BA Securities, LLC. Member FINRA SIPC.

Securities Products and Investment Banking Services are offered through BA Securities, LLC. Member FINRA SIPC.  Gray Strategic Partners, LLC and BA Securities, LLC are separate, unaffiliated entities.

Transcript

Bryan Pearce  0:00  
Well, hello, it's Bryan Pearce. And this is the next in our series of Strategic Thinking Podcasts brought to you by Gray, Gray & Gray. And today, we're going to be having a good conversation with Steve Rusch, who brings nearly 30 years of experience and is currently working with Gray Strategic Partners, which is an important part of the G3 family of companies. So Steve, thank you for joining me today.

Steve Rusch  0:27  
Thank you.

Bryan Pearce  0:29  
So you know, at Gray, Gray & Gray, we work with many clients whom at some point reached that important stage in their life of deciding whether to sell their business and move on to the next stage of life, or to continue to operate the business perhaps, but de-risk some of the business and the wealth concentration in the business by partnering with an investor for a liquidity event. So Steve, what are some of the key considerations that a business owner should take as they consider a sale or a recap of their business?

Steve Rusch  1:02  
Well, I think really, some of the first things you need to do is, is think about preparation. A lot of entrepreneurs don't necessarily do traditional budgets, they don't do strategic business plans. They don't do projections, there's nothing wrong with that, of course, but when you're talking to institutional investors, they really need to see all of those things. So if you haven't done that, it's important to do that. And when you hire an advisor, they certainly can help you. But I know even within our business, Bryan, we have people that can step in and help do all those things to prepare a company. Other thing, it turns out, is that some companies don't have audits, they don't necessarily have reviews. And to go back and do that can be important. Also, it just gives investors confidence, or buyers for that matter of confidence that they can believe in all the numbers in the business. A couple other quick things I'll note is that you probably want to do tax planning upfront. And know the know that the tax bases of the business understand what the what it means for you personally, and prepare for it. Because obviously, we need to pay all the taxes we do. But it's important not to overpay if you don't have to. 

Bryan Pearce  2:20  
Right. Right. No, I think that's good. Steve. You know, I think another thing that we often hear about and don't always understand, you know, looking at the quality of earnings of a business, and what is the repeatable earnings that a buyer might be able to expect to see going forward? Obviously, you know, everybody treats their business a little bit differently, and what are some of the things that you might expect to to try and draw out when you're presenting the business to a buyer? And also, you know, understanding how you replace those earnings if you're the seller?

Steve Rusch  3:01  
Well, right. I mean, I guess first of all, that's an important point, when you think about preparation, quality of earnings, has become, I suppose an important part of the overall business years ago, sellers didn't typically do a quality of earnings review within outside accounting firm, but buyers did when they were going through a due diligence process. And what ended up happening typically is that buyers knew more about the numbers in the business than you did as a seller. And that became a negotiating issue. So now, sellers often do quality of earnings reviews, so you don't have a surprise at the 11th hour, because obviously when he goes through negotiating process, if somebody finds out that something feels untrue, or didn't turn out to be what they expected, that becomes an opportunity to renegotiate a deal. And so you don't want that to happen. So doing a quality of earnings review, or Q of E can be an important step to really kind of keeping your negotiating leverage through a process. But the other thing you mentioned was earnings replacement. So if you're drawing as an individual or a business owner, a lot of earnings out of the business, and you're gonna get proceeds from the sale or an investment. You want to think about how to how to not only do the tax planning, as we talked about, but how are you going to continue to earn the money you need to earn in retirement or, or whatever it is you plan to do? And so it's important to talk to even a wealth advisor. I think about that in advance.

Bryan Pearce  4:23  
Yes, very much. So. Yeah. And I think, you know, there's always the analogy on preparing for a business much like you would if you were selling a home, right, it's, you know, paint the fence and make sure that everything is clean and not cluttered and and you're going to optimize your value. And at a minimum, you're going to reduce the delay. Exactly. A buyer finds something that they're uncomfortable with or uncertain about. And as you said, it may even be worse than that it may lead to a reduction in price or an opportunity that the buyer insists on re-negotiating deals. So a lot of good reasons by the sounds of it to do that upfront preparation.

Steve Rusch  5:07  
Well, I would I would make a quick comment. And this is I can't take credit for this quote, but it was one of my early bosses in the investment banking business used to say make it easy for somebody to buy the business and everything but price. 

Bryan Pearce  5:20  
Yeah. Well, so. So one of the things that occurs to me is that, you know, for most business owners, they only go through a sale process perhaps once or twice in their lifetime, certainly not in every day, or every year occurrence. But yet, the buyers are typically either, you know, private equity or venture capital type investors, or other individuals that are, you know, serial purchasers, or their corporate acquirers. strategics, if you will, that are trying to buy the business. And both of those groups, whether it's financial investors, or strategic buyers, typically do multiple deals over the course of a year or over a few years. So there is a bit of an imbalance there between the experience level of the business owner and the buyer, how do you advise clients to kind of make the balance a little bit more equivalent? 

Steve Rusch  6:16  
Well, I mean, that's, that's a great point, because you've been very sophisticated acquirers and investors out there. And you've got plenty of sophisticated investors, but typically not in that world, because they're, they have their heads down running their business. And they haven't done 20 deals, or 100 deals, or however many, a lot of the other people in the industry that do it professionally have done. And so by hiring an experienced advisor, and frankly, also an experienced M&A attorney, or a securities attorney, you can, you can balance out that asymmetry of experience.

Bryan Pearce  6:50  
Yeah, I think that's, that's good advice. And, and then you know, that advisor, that group of advisors on the team can really help you to prepare some of the things that you talked about before and business plans, projections, you know, audited financial statements, it really takes a team of professionals to get well prepared for optimizing the value of the sale. So once you've got that team assembled, what's your advice in terms of, you know, the dealer, or the buyers rather dealing with potential or the sellers dealing with potential buyers and, and, you know, keeping things moving along, and part of the challenge is, you know, you've got sort of two hats that you're wearing as an owner, you want to sell the business. But on the other hand, you got to keep the business up and running, keep the trains running on time, as I sometimes referred to it. So how do you best use your your team of advisors?

Steve Rusch  7:46  
Well, the first thing is, I think that often the, the M&A adviser or investment banker is the quarterback, and helps coordinate everything in the in the process, if you will, including sometimes interacting with the accountants, the attorneys, et cetera. And can kind of be the person that will keep all the people coordinated and moving forward at the right pace. And that becomes an important issue. Because once you were in the market, talking to buyers, pacing becomes important, because fundamentally, the way to create value is to create competition among various investors or buyers that are interested in your business. And so typically, what happens is, once you've gone through that preparation process, you have your bankers have helped create what's known as an offering memorandum or a confidential information memorandum. And after somebody signs a nondisclosure agreement, maybe they get a, a non-confidential political teaser describing the business. And that goes out to multiple parties. And then the confidential information memo goes out to describing the business. And the idea there is to create competition. So that sometimes there's this perception among business owners that there's a group across town I know or there, I know them from my country club. And if I just have a one-on-one discussion with them, I can get something done quickly. I think, typically, by having multiple conversations. And knowing that there's a process going on, it gets people to focus in on a timeline in a way they wouldn't otherwise. And I and I, it's not to cast aspersions on it, but that's human nature. If there's a deadline and a pace and competition, you might think differently about how to proceed or not. Yeah, other thing I would say as part of that is, you probably want to engage with those buyers, or investors only through your advisors, because your advisors should be the repository for all the information and know every discussion that's been had. And typically, the experienced ones can kind of read the tea leaves understand what people are saying in a way that you might not because you haven't experienced it before, and make sure that they're the focal point of all the information because the information flow ultimately is power, because they may have knowledge asymmetry, because they've done 100 deals, you have information asymmetry. And that's helpful.

Bryan Pearce  10:10  
So Steve, you mentioned, you know, pacing in a process that keeps everything moving along, what is sort of the range of time that someone should consider having, before they actually start into the sale process? How long does it take to get the typical company? If there is such a thing? You know, ready for primetime? And then how long does that sale process ordinarily take?

Steve Rusch  10:35  
It's usually a six month process. And maybe the first month, that's all the upfront preparation. Yeah. And then from there, you're in the market with the materials we just talked about. And then often, after investors have had the materials for a few weeks, they're asking questions. You asked them to make a what's called an indication of interest, which is a preliminary non-binding proposal. And from there, you decide with whom to engage. And your advisors will help walk you through all of that, ask the right questions, because ultimately, it's not simply just the purchase price, there's usually a range of value that somebody will indicate one of those. But you also want to be thinking about contract terms. Because there's a, I'll come back to that a little bit, but there's a trade-off sometimes between speed and contract terms, you can get people to move quickly, maybe get to the price you want. But if they haven't had the time to do the proper diligence in the business, you may have a contract that has a lot of ways for them to claw back purchase price in the future. The balance between maintaining the pace of the process and the speed, as well as getting the right price and the right contract terms in a purchase agreement, or sale. Really.

Bryan Pearce  11:53  
Yeah know, again, we've seen that in recent years in the home buying market, right? If you want to sell your house have a few possible conditions as possible. And if you're a buyer, you know, be prepared to think about whether you have to waive the home inspection and things like that, to speed it up or to get the price that you need. And I guess similar principles sound like they apply in the sale of a business.

Steve Rusch  12:18  
They do. I would say the one difference, though, is that not the one I mean, there are multiple differences. But you sent you generally set a price when you're selling your home. And your realtor helps you understand what that is. When you're in an M&A sale or you're you're raising capital from an investor. Sometimes you have to guide them to a price or evaluation. Often you're out there doing price discovery. And your advisors will generally have a sense of what the range of value is for the for the business. And in fact, as part of any discussion, they'll probably give you what they think the range of value is upfront. But you want to be careful because if you set a price, you could set it too high and scare people away. If you set it too low, then you've left money on the table. So by having multiple people make multiple proposals, you know what the ranges of value are out there. And again, information asymmetry, they don't know what other people have proposed. 

Bryan Pearce  13:14  
Right. Yeah, I guess beauty is in the eye of the beholder sometimes, but it's also in the in the eye of the buyer, I guess.

Steve Rusch  13:24  
It is. And what's interesting is that you could get multiple proposals. And sometimes there's one that's very high in terms of valuation, or one that's very low. But nobody knows that. So if somebody's super interested in the business under the highest bidder, you might still be able to get better terms and a better price, because they just don't know what else is out there. Sure, unless they've been gossiping. And most people don't violate NDAs. But some do. 

Bryan Pearce  13:48  
Human nature

Steve Rusch  13:49  
Human nature. Right.

Bryan Pearce  13:51  
Steve, a related question, I guess, on this whole sale process is, is what you see is best practices between the owner who may also be the president and CEO, you know, trying to run the business at the same time, as they're, you know, heavily involved in the sale process. How does one bring in other members of the team to that sale process to spread the load a little bit? And how do you keep the trains running on time, do you think?

Steve Rusch  14:19  
Well, that's an important point, because you have to continue running the business like you're going to own it. And particularly during a period where you're going through a sale process, because you want to perform against what you convey to people how you're going to perform. Because that, again, builds confidence that what they're what they're buying or investing in, is going to perform exactly as they've been told it's going to perform. And so at that level, it's important to bring in some of the team, maybe not the whole team, or the whole firm, but the key managers in the business because also investors you're going to hear from the key managers in the in the business because they're important. So if you're the owner You've got a CIO or CFO, you'll probably want to bring them into the fold and let them know what's going on. And in fact, you might even incentivize them saying, you might be a little bit worried about your job going forward. And I totally understand that. But if we, if we get the transaction closed, you get a deal bonus. Other thing that's important is the due diligence process is intense, often. And that often falls on the Chief Financial Officer, there's simply no way a business owner or a president or a COO CEO, rather, can continue to run and manage the business, manage talking to investors plus manage due diligence, it's just a recipe for disaster.

Bryan Pearce  15:42  
So having that good CFO controller brought into your confidence on this, offering some kind of incentive, and then really making sure that they're aware of what we're saying, so that they can back that up with with good financial information, good budgets, and so on.

Steve Rusch  16:00  
It is. I think one of the other things that might be important to note is that it's probably important to have a communications plan. Because at some point, you'll have investor groups, or whomever walking through the plant or the office or whatever, whatever it is you're doing. And people will start to gossip in the in the firm. And you'll want to be prepared to tell them what it is you're doing in some fashion. And it might be that we're refinancing the business, which may be true. It's, you want to take control the communication before people gossip about it. So yeah. And then maybe outside advisors, you can talk to about that as well.

Bryan Pearce  16:42  
Yeah, you don't want it to be the watercooler conversation you want people don't understand what's going on to the extent that it makes sense for their particular position in the company.

Steve Rusch  16:55  
Exactly. And like I said, you have NDAs out there, but it's almost inevitable that after you talk to the first group of investors, something's going to start to percolate in the discussion, or in the gossip.

Bryan Pearce  17:08  
Yeah, because typically, diligence could include talking to customers, the circle gets fairly wide fairly quickly, right?

Steve Rusch  17:17  
It does although say customers are typically the last thing you would do, that's almost when you're, you're at the 11th hour, the deal you've agreed to work together, the last thing you have to do is talk to customers, and you'd probably approach it as less diligence, and more. Here's my new financial partner, or what have you, we want to inform you as a customer. 

Bryan Pearce  17:40  
Yeah, sure. So I'd like to, you know, just talk for the last few minutes here about, you know, the business owners perspective, then, you know, people don't always know that this is the right time to sell their, buying these things off in their own mind, I guess they know, perhaps that they want to slow down or that they want to retire. But they wonder whether you know, doing that as an option and still owning the business? Or do they just sell it outright? And, you know, go play golf or go to the beach? How do you counsel owners to think about that? Or what, what do you see as best practices to help people work through that? And then I guess the related question, which is, if I sell, or if I, you know, just step back and bring somebody else in? How do I make sure that I've got enough funding there to allow me to enjoy the lifestyle that I've enjoyed in my retirement or in my life? 

Steve Rusch  18:42  
I think it really depends on your objectives. If your objective is to get some liquidity, maybe de-risk, so to speak, because most of your personal wealth is tied up in the business, but you're not ready to retire, then private equity makes a ton of sense, actually. Because they'll buy usually a majority of the business, there are some minority investors out there, but usually a majority of the business, you'll get a big liquidity event. But through the magic of leverage, you can continue to own a significant portion of the business. So private equity funds typically put debt on the business. And of course, just fundamentally, from an accounting perspective, that reduces the size of the equity account. So traditionally, when you roll equity, you can take put a lot of money in your pocket and continue to own a significant portion of the business. 

Bryan Pearce  19:35  
Yep. 

Steve Rusch  19:36  
And then in three, four or five years time, you can sell it again. And maybe during that period, you've developed a group of managers beneath you that can take over and at that point, you can kind of roll your equity again and do it or you can leave and move on. Maybe stay for a year as a consultant or on the board. So you get to sell your company twice. Yeah. That's the private equity world. If you're ready to go and say I just want to retire, then often, you can do that with a PE fund if you've got a group beneath you that can that's ready to take over. Or you can sell to a strategic acquirer, but they'll probably require you to sign a non compete for a period of time, and also, maybe to stay around for a year as a transition consultant of some sort. But it all depends upon what your objectives are. But that also goes back to what we talked about earlier, the whole earnings replacement concept, if you're no longer drawing an income out of the business, you want to make sure that the proceeds you've you've got are enough to live on or more fundamentally, maybe you don't want to touch the principal, you want somebody that can invest it for income.

Bryan Pearce  20:43  
Yeah, no, those are all great points. And the other thing that, you know, I think you've referenced here is the importance of having a good team, good bench underneath you. And if you don't have that, that may be part of what you want to spend a year or two kind of building before you start into the sale process so that you've got people to help run the business while you're going through the sale process and also make it more attractive to certain potential buyers anyway, that are looking for somebody that was the relationships with customers, somebody that knows the culture and knows the process of manufacturing. It's a manufacturing company.

Steve Rusch  21:25  
No, that's That's exactly right.

Bryan Pearce  21:28  
So how do we get started on this? If I'm a business owner, and I say, I really would like to, you know, understand more about what my options might be? How does it typically begin?

Steve Rusch  21:39  
Often it begins with the conversation like we just had, what are your objectives? Yeah. Do you want to do you want to maximize value give us as much as we can add proceeds and go to the beach, so to speak? Or do you want to de-risk the business and so those can be two separate valuations. Now, historically, corporate buyers paid the highest prices. And PE buyers did often pay lower prices, although in recent years, sometimes that's changed sometimes because there's so much private equity capital out there, they've they've paid higher prices than even corporate buyers have been willing to do. But it really depends on your objectives. And an investment banker who's familiar with the market will kind of help you do what I'll call a valuation, not an academic valuation, but a market based valuation for what he or she thinks they can they can achieve in the market for valuation perspective. 

Bryan Pearce  22:38  
And that's really, the first step is, is have a clear understanding of what your objectives might look like, and then begin the discussions with a well-experienced investment banker.

Steve Rusch  22:50  
Right. And at that point, you might say, Well, gee, the current market conditions evaluation just isn't right. So I'll wait a year, or fantastic, I'm ready to go. And it's at that point, at that point, you go into the whole preparation process we talked about?

Bryan Pearce  23:05  
Yeah, and presumably, you know, with a good strategic plan and good preparation, you can always increase the value of the business. Not always, but 99 times out of 100, you can increase the value of the business with a little bit more time. Yes, objectives.

Steve Rusch  23:21  
You know, the one other point we didn't touch on, which I want to mention is the importance of a good securities attorney, or an M&A attorney. And I know this can get maybe frustrating for business owners who want to sell, they start paying all these public, they start paying all these professional fees. But having a good lawyer is important. And often when you're in a sale process, you want to take control of the document and draft it and send it to the investor and have them mark it up. It's just better. Again, for information flows we talked about. Just better to take control of the documentation. And I just throw that out there because sometimes people get sticker shock at all the professional fees they have to pay, but it can be worth it.

Bryan Pearce  24:08  
Yeah, and you can't always assume that the you know, your your golf club buddy that we've been working with as your sole practitioner lawyer for the last 20 years is going to be the one that has the resident expertise to handle a sales transaction. So you may need to bring in additional outside counsel that is particularly experienced in M&A.

Steve Rusch  24:30  
Exactly. In similarily. It's, it's when we talked about earnings replacement, and you might want to talk to a professional wealth manager who can help talk you through that. 

Bryan Pearce  24:41  
Yes. Well, Steve, thank you very much for your time today and for these excellent insights into the process. I know you've been through it many times with many different types of sellers and buyers and different industries. So you've seen a lot and I appreciate your your insight. It's on that and certainly if we have people listening to the podcast that are interested in taking this next step and beginning to explore then Gray, Gray & Gray would be more than happy to make the introduction over to Gray Strategic Partners and get the ball rolling. So thanks for joining us today.

Steve Rusch  25:19  
Well, thank you much appreciate it.

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