Episode 47: Selling a Privately Held Small Business

Welcome to this week's episode of Wisdom and Wealth. If you have ever wondered what a Small Privately Held Business should consider as it approaches a merger or acquisition, You will want to listen in today.  Matt Gilbert, a Founding Partner of Gilbert & Pardue Advisors, joins us to share his perspective for business owners thinking about an exit. Matt went through this same process three times himself and decided to create a company to serve business owners in the same situation. 

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JOSH KLOOZ, CFP®, MBA
SENIOR WEALTH PLANNER

Phone 281.719.0036
Text 281.699.8691
Fax 281.719.0156
 jklooz@carsonwealth.com

1780 Hughes Landing | Suite 570
The Woodlands, TX 77380


Music by bensound.com

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JOSH KLOOZ, CFP®, MBA
WEALTH ADVISOR

Phone 281.719.0036
Text 281.699.8691
Fax 281.719.0156
jklooz@carsonwealth.com

1780 Hughes Landing | Suite 570
The Woodlands, TX 77380

Music by bensound.com

Transcript

Welcome in again to this episode of wisdom and wealth. I'm Josh Klooz, the senior wealth planner for Carson wealth here in The Woodlands, Texas.

Many of you listening may be a business owner, a small business owner or know someone who is into that. And I've invited Matt Gilbert, to our conversation today. He's the founding partner of Gilbert and party transaction advisors. And he is helping folks just like you navigate the mergers and acquisition space. But without further long introduction. Welcome in Matt, how are you today? Thanks. Fantastic, actually appreciate you having me. It's our pleasure. So Matt, we can go ahead and dive right in. What What about you just tell us a little bit about yourself and why you're passionate about this industry. super passionate about the industry. So I am 54 years old, my my business partner is 10 years older than I am. And when I was a teenager,

Matt Gilbert  1:56  
I wasn't mature enough to understand it and keep it and you know, those kinds of things. So, but I thought at the time, I thought what money is really easy to make, I'll just go do it again. And so over the span of about 20 years, I have been a founder or co founder of six different companies. Most of them started in my garage, most of them grew to a couple 100 employees and multiple locations, some of them multiple states.

And we made acquisitions of vendors and and geographically strategic competitors and things like that along the way to grow our businesses. And, and all of those were exited. Well, we sold another one to a different public company. We've sold to private equity firms. And we've we've also sold to kind of a friendly competitor. And so all those experiences of founding, growing, acquiring, ultimately selling businesses, by the way, 100% with our own capital, we never borrowed outside money. So you can include financing in there as well. All of that with my own livelihood at stake. My partners and stakeholders livelihoods at stake, taught us a lot about the m&a space for companies in what we would call the lower middle market, which is five to 20 million in revenue. And the middle market, which is 20 to 100 million in revenue. We operated in those spaces constantly for over 20 years. And And 2015 I guess this is a long answer. I'll I'll make it more brief. Then in 2015, we had a couple of exits. For the first time and in Breton eyes lives. We were able to think about what do we want to do next, in a way where we didn't have baggage from the previous stuff. And, and this firm was instantly at the front of both of our minds. We've been thinking about it for a few years, that the representation that was available to us as business owners. Throughout that that process just didn't we didn't feel like it served as well. We didn't feel like the goals were aligned between us and our advisors and consultants and brokers. We worked with over 30 firms during those times and we really analyze those processes and decided that we really didn't want a second process with any of those 30 firms and so there might be an opportunity to start a firm that kind of fit who we were. We thought there'd be a lot of business owners out there in our shoes. And so we did that. Our firm. Our processes are different. We're staffed differently. We're lumped in with business brokers, transaction advisors, investment bankers, you know, we get called all those things. But we built kind of a different mousetrap. Using different techniques and personnel. For instance, we have CPAs on staff. You know, very few if any of our peers have that. We have an analytics department, we have data research department, we have marketing department, all those things in house where we could control everything that happens in our transactions. And that's just pretty rare in our space. And it's turned out to be a wonderful thing. So here we are seven or eight years later, we've really been a disrupter, we've won all kinds of awards and got accolades. We've been studied nationwide, you know, by magazines and stuff. And all that's really just validation that we found a niche that we're good at. An industry statistic is about 80% of the companies that get listed for sale in this space, never transact. And through our process and screening, consultative approach that we have with business owners, we have an over 90% success rate. So we're clearly doing something different than the rest of the market. And that's where the passion comes from. Most people get one shot to get this right. If I could go back to my transactions, and apply what we know now to what what happened then. Cumulatively, I think that's an eight figure change in our results. I wouldn't be talking to you today. Representation I'd be in St. Thomas or something. But yeah, so So we're passionate about just bringing all that knowledge to somebody who gets one chance to get this right. And help them through that. And because of that, we you know, we're we like that we're a boutique firm. We, we only take enough clients to work in a team, we don't have a big team, we don't have interns or anything like that. It's just too important to to our client, and they're in their, you know, big final one payout exit for the rest of their life. And so that's important. Sorry, it was a long answer.

Joshua Klooz  7:39  
No, not at all. I really appreciate that. And I know, in previous conversations, we talked about, you know, in a previous career of mine, I had encountered a lot of small business owners, and it was their life's work, you know, everything that they had accomplished and achieved in life and, you know, had put into at risk, it was to your point, it just made it that much more poignant, a transaction. And so I'd be curious, just for that introduction, after the introduction, who do you feel that you're best equipped to serve in the marketplace? What are some of those characteristics that that you're looking for? If somebody's listening to this and says, I wonder what the next step might be for their business? Or where to start? Yeah, it's

Matt Gilbert  8:23  
a great answer. You know, our, our core client is a privately held family owned business, probably 20 to 50 million in revenue. A strong leader, probably a little bit less capable, senior management team. You know, they're probably broken up in departments. So they have finance, and they have sales, and they have operations or warehousing or whatever. And the heads over those departments do a pretty good job. So they have data. You know, they have decent books, in their mind, they're good. And in our mind, we'll take a look and see. And, you know, the end that describes, most business owners think they're a little bit better than that their organization is a little bit better than that, but But in truth, that's most of who we see. And, and the reason that I focus in on a profile like that is we can we can come up with all of our services to help them where if you get, you know, I'm working with a company right now that's owned by private equity. I got a board of directors, they got a really solid management team, they got analytic consultants, they got an inventory consultant, and all this stuff. So they only need a sliver of what we do, instead of the whole gamut of of, you know what we're prepared to offer so for that family owned or privately held, businesses will come in and slide up next to their controller with our CFO will slide up next to their operations people and their salespeople will really, you know, will get to know the business, as well as they do will help them prepare, maybe pick some low hanging fruit, fix a few things, where we go to market to make them more attractive. We do pre sale diligence, which is an eye opener for every business owner, kind of a glimpse into what the process looks like how complex it is, but it's also go into the state check in UCC forms and go into the IRS and make sure grandma doesn't have a lien on the property that the guy who's operating the business didn't even know about. You know, we talked about legal things. We talked about lawsuits in HR and to 90 nines. And, you know, are you a cash business? Are you recording all that, and, you know, all that, those lots of companies in the size range that I've been talking about operate in those worlds. And so we built an organization, we were like that we were one Oh, so we built an organization that serves that type of business owner and a poor shareholder group really, really well and thorough. And so that's, those are the engagements that that really kind of bring it up, bring

Joshua Klooz  11:27  
it home. There's been so much that you've mentioned that stands out, this could probably be a four part or even five part podcast. The accounting piece to me is probably what I just in my previous experience, even current experience, see is the is the missing link. Can you give us just an idea of why that's such an important part and maybe spell that out? And in clear terms? And why that's important part of what you guys do?

Matt Gilbert  11:56  
Yeah, absolutely. I literally have had a client with a shoebox, who's running about $6 million margins really good business, and his accounting was in a shoebox. And, and then I've had the other end of the spectrum where we've got, you know, private equity owned businesses, their accounting is really professional, and they've got audited financials and all that. And the thing about everybody in that spectrum, is they all believe their stuff is good. It's accurate, I'm on it. Because the smaller you are, you're like, my CPA hasn't said anything to me. So I'm good. We're all your CPAs guys compiling your taxes, they don't know anything about your business. And so literally, we found that every single person we talked to will try to convince us how sound and accurate and trustworthy their accounting is. And we have learned the hard way over the years. Just not to not to trust that but to get under the tent ourselves, and really decide for ourselves in what kind of shape it is. And we've never found 100% of the time, we've never found a client that we felt was ready for m&a from an accounting standpoint. And the guys who have paid big money for reviewed and audited financials, they get upset when they hear that. But reviewed and audited financials don't help us those those aren't the m&a metrics. It brings a little you know, it brings a little comfort to a buyer that, that they're going through those processes, and so they're responsible operator and that kind of thing. But the metrics aren't in there that we need to perform m&a. So. So we have to get under the tune. And that is that it's a two part thing for us. And it's the first two things we do.

Joshua Klooz  13:49  
And if I'm hearing you correctly, it's the accounting combined with the analytics this year, you're providing that that is that key piece, correct? Yeah,

Matt Gilbert  13:59  
that is the accounting usually. So we will recast the last five years most of the time. And into an m&a format, I'll call it then we'll sit with the company or their controller or their or their CPA, if they have him involved. And make sure that they all agree with the way we've recast it and make sure you know, we're going for add backs and things like that, that aren't found in reviews and audits. And, you know, make sure we have an accurate picture of it. And then we take that and then we go Player Analytics and start studying the market start studying what their peer group does, you know, ratios and trends and things like that to see where they stack up. And that's private company information. People can't find that. I mean, they're their databases that cost 100 grand a year you subscribe to their, you know, they have some of that information but you Most of it is really organic. And we've developed it in house over, you know all the valuations and financial reporting that we've done. And so it's a pretty valuable database that we're setting on to.

Joshua Klooz  15:13  
Maybe we've already answered this, but could you talk through some common pitfalls, maybe even common mistakes that are made as people approach the m&a process? Just from your experience that you've seen? You know, let let the let the guilty remain anonymous. But

Matt Gilbert  15:35  
yeah, so I see. A probably talked to a business owner every week, who was thinking about selling, they called their banker, their attorney, or their accountant or somebody they really trust in one of those professions. And they said, Hey, do you know anybody can help me? And they said, Yeah, I got a buddy that sells businesses, let me hook you up. And so without much research, they end up signing up with the buddy because of the trust. And, and there's usually an exclusivity period, and you know, all kinds of stuff like that. And they'll come to me, very distraught, 18 months, two years later, saying, it's been a waste of my time, I've dumped a bunch of money into, I've gotten no offers, or I've gotten nothing that like what was promised to me, you know, and now they're going around doing what they should have done before, which is interviewing really professionals. And those might have been professional, there's a lot of business models out there that are not, there's probably four business models in the space for m&a. And one of them's better for you than all the other three, right. And so if you don't go explore those four, and then when you're in one of those lanes, there's good operators, and there's lousy operators. And so, you know, what we spend, probably 50% of our just conversational time with business owners doing is helping them understand which lane they ought to be in, in the m&a space, and what kind of quality of operation they can expect in price and attention. And, for instance, most, I'm going to be careful what I say. There are a lot of business brokers whose business model says something like if you spend more than 80, or 100 hours on a client's case, that's our breakeven point, there's a there's a step up. And then there's a good, there's a few good brokers in the next level. And their business model is about 300, intercompany hours, helping a business owner get to a sale. And as far as I know, there's nobody like us in this space, we're different. We studied this during COVID. And we spent an average of 1400 hours getting our client prepared into closing. It's also why we have a 90% closing ratio. It's also why our deals have been studied and proven to be above market. I think it takes that level of attention to achieve that kind of outcome. And, and so we're structured differently, we charge differently, we align our sales with our client differently than then than most. And so the question was, what do people do that are a mistake, they don't go shopping around and find the right business model in m&a that fits their scenario, number one, their company and then number two, their personal goals. And then once they get in the right lane, they're still finding the right operator that aligns with them. You know, in our case, all of my friends are people we've done business with over the past, because when you spend 1400 hours a year with them, it gets pretty intimate. And it shouldn't be it's the largest transaction of their life. So we take it that serious, but the mistake is not doing your homework and just trusting a referral or something like that. These guys are good. I mean, the the sales pitch is strong. The golf game is good, you know, those kinds of things. But that's that's not what's gonna get it done for you.

Joshua Klooz  19:32  
Expensive golf game if you if you ever Yeah. Yeah. So it's been really helpful. And again, I think we've got probably some more conversations to be had in the future. But I promise to get you out at a reasonable time here for this first introductory conversation. So

Matt Gilbert  19:50  
whatever.

Joshua Klooz  19:51  
Can you walk us through probably what your most meaningful engagement has been or maybe elements of your most meaningful engagements.

Matt Gilbert  20:03  
Wow. Love the question. This can sound a little corny, but here's the truth. We spend a ton of time with a business owner before we ever send them a bill before we ever tried to engage with them. And, and so, and we just don't really do business with people we don't like so. So when we take that on, and then we spend 1400 hours with them. It's personal. And it's, it's as personal to us as it is to them. So they're all meaningful for that reason. I'll give you two quick examples, one, the guy with a shoebox. Now not going to come on doing that, oh, God, Oklahoma calls a CPA says, hey, I want to sell my business. CPA says as he should not my area of expertise, I think you should get a valuation. Okay, well, how do I do that? Well, he sends him to an industry valuation firm in California, which was a smart move, if he was doing tax planning or getting a divorce or wealth planning or something like that. This is m&a, wrong kind of valuation. Anyways, valuation comes back, your company's worth 1,000,007. So the guy shops around, he's got 93% Customer concentration with one big old company. And a no m&a firm will take him on. So he calls back the accountant and he's kind of complaining. And the accountant gives him my phone number. So it calls me up. Long story short, we ended up selling that company for $6.6 million, to somebody who was desperate to get into that one oil company. He had about 80 employees, you know, I love making sure that employees are taken care of at the next level. And so we saved 80 jobs in a small town in Oklahoma. You know, things like that. And those are very satisfying outcomes. Another very satisfying outcome is somebody that, that we've known in our marketplace for decades. And he called and he said a another one of his competitors that we all know, offered him 18 million for his company. And he called him he's like, I want to take it. But I don't know if that's a good deal. So I said, Well, let's get under the hood, let's figure this out. I think we came back and said we believe your company's worth 30 to 35 million. And he was like, let's do that. So we took him through the process. It and as we get into it, we learn more. And so we ended up drawing offers from the highest offer was 66 million from a public company. And most of the offers were around 40 million. But the best deal for their goals and their employees and their kids were working in the business and all that I think we ended up around 40 it's 47 or 49 million is what we settled on that deal. So he was interested in taking $18 million for his company had no idea what it was worth. And going through the right process with the right people and having the patience and the trust in the process. You know, we brought in 30 more million dollars and then he thought he was gonna get and so that's very satisfying story. Another story a guy called probably a year ago now. And in he's been trapped in an engagement with a very reputable, high profile business selling firm for three years, and I've never brought him a single offer. And, and so he calls me and he's, you know, distraught and wanting to get out of it and want to change horses and wants us to represent them. And we can't they're under exclusivity and I don't want that lawsuit. So I declined, but offered to analyze it and help him and, you know, give him his options and things like that we don't charge for things like that. It's just we're passionate about people finding the right thing for them. And he ended up and I think his business would have sold for 10 or $11 million. And and I know without a shadow of a doubt. I have five or six buyers that would have paid that and want a business like that. I mean, there's no doubt in my mind, I could have sold it. But because of this entanglement with the other firms And, and the way that agreement was structured, he ended up just closing the business and gave his clients to other firms that were, you know, friendly with him and, and just shut it down. Now he had made a lot of money over the course of his career and 10 or $11 million. It's nice to have, but it wasn't critical for him. And so that was sad, you know, all those jobs went away, a company evaporated, and it was all unnecessary. But as because he didn't do his research upfront. And he got, he got in with he got hooked into the sales pitch and the golf game and, you know, a really high profile, m&a firm that just didn't do it. They also told him that they I think they had the company listed at 18 million, which is why anybody that looked at financials would say, well, there's no sense in pursuing that. So you're just having it positioned wrong and all of that? I'm not sure I'm being an answering your question.

Joshua Klooz  26:05  
Absolutely. That's what I was what I was looking for. There's

Matt Gilbert  26:09  
these stories. And they're all they all have their their morals, right. Some are good, some are bad. But yeah, we are I, you know, my team is, we're like the Navy SEALs, or Green Berets or whatever, we're one of the things that that, I know, we're almost out of time, but one of the things that really frustrates me is business owners don't understand what they're getting into. Right. And if, if you're a $25 million revenue company, there's a good chance that a PE firm is your buyer, okay, pe firm is going to show up to due diligence, but about nine people on the other side of the table. If you and your broker sitting here on this table, it's you two against those nine, you're gonna lose. That's just the way it works. And so you've got to build a team around you, that can go toe to toe with the buyers team. They're professionals, they buy businesses every day, that's what they do for a living, they will spend on a $25 million deal I've seen this countless times, they will spend between 600 mil or 600,000, and a million dollars in due diligence, on HR consulting on legal on preparing the documents to protect them on employment agreements and leases, transaction inventory, and valuations of equipment. And if you don't have a team that can get up there and talk with each one of those people on those topics, you're gonna get beat. And, and so that's something that business owners because most business owners have navigated the world successfully, kind of on their own their whole career, they think they can go into this and do the same thing. And they looked, I just watched it happen a lot. So the reason I said Our team looks different is because we built a team that accounting, I'm gonna put my CFO who's CPA who's done hundreds of transactions up against their, you know, business management, my guy against their deal control my guy against their inventory, my guy against there. And, and that way, you know, we're giving us the selling entity, the best opportunity to, to go out on top. So thoughts.

Joshua Klooz  28:42  
Absolutely. But, Matt, thank you so much for your time today. Again, it's learned a ton as always, obviously, if anybody wants to get your contact info, they can get it through me as well. But what's the easiest way for folks to reach out to you? On a in any any given day?

Matt Gilbert  29:02  
Email product, can I just say my email address? Absolutely. So it's mgilbert@gap-advisors.com

Joshua Klooz  29:16  
Excellent. Thank you again, Matt. Wish you your team and your family? Nothing but the best and year to come and thank you for stopping by.

Matt Gilbert  29:24  
Hey, Josh, I appreciate you man. Happy New Year. You as well. All right.

Transcribed by https://otter.ai