Selling A Business: The Portage Way

Selling a business is a much more complex undertaking than most entrepreneurs realize. Join us for a peek into our proprietary, in-depth process which helps us ensure the successful sale of your business.

Guest: Ryan Buist | Portage M&A Advisory Partner & Head of Valuations.
ryan.buist@portagemaadvisory.com

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Transcript

This is Jim from Portage m&a advisory and you're listening to the selling successfully podcast the show that simplifies selling your business. For those thinking about moving into the next chapter of life. If you like what you hear, please follow or subscribe to find us easily. And listen again. We're here when you need us. Hi, everybody. Today, I've got my partner Ryan Buist back in the hot seat to talk all about the things and the phases involved in selling your business. So thanks for joining me, Ryan.

Thanks for having me.

So we're gonna give you listeners a sneak peek, or a more in depth look at what the phases really involved. Because there there is some significant meat involved in the sale of your business, we know that the sale of the business is complex, it can be very challenging, it oftentimes can be perceived as very daunting. But at the end of the day, what you're going to find is, it's not that scary. And if you follow the process, it is something that's very achievable for all business owners. So let's dive into things. Let's take a look at the steps involved in selling your business. So let's start with business valuation, phase one business appraisals and valuation. Can you walk us through what this looks like? And what what would folks need to be thinking about during this phase? 

Yeah, and first of those, take it back a little bit. The reason why we want to kind of highlight all this is just because we want people to know what those processes are into selling your business. And everyone always ask us the biggest question people ask, what's it going to look like to sell your business? And like you said that first step is the valuation, we want to make sure that we're aligned with you on what we think the business can sell for. So we're really going to be asking you for a lot of information from you upfront, this is going to be there really is no charge at this point. Because we want to make sure there's an alignment, right, so we'll do that valuation, we'll look at what this business is worth. And then we'll, we'll communicate that and how we got to that valuation. Again, we don't go to market with the price, but we know that the price will be somewhere in that range. And if everyone's Okay, with that back then a number we can move on to further stages.

Right. So I mean, step one is is really just understanding the business. We're obviously you know, trying to grasp what it is that you do your customers who you're selling to who your staff members are, and that sort of thing. What Why is that work?
Yeah, the really reason we need to grasp it is because we need to know, is it saleable? And we need for you to know, is it saleable? Is this business saleable? And those items will tell us that sailboat, but also tell us, what's the value of that business? So what are the risk drivers in that business? What's the story if we have to sell this business that we need to actually convey to the Market Plus, at this stage, we also like to talk to our contacts a lot of the banks and see if they'll finance this deal. So we need an understanding of what makes this business tick. So when we're talking with our bank and our contacts, we can say, you know, this is a little bit about the business. This is the rest involved in the business, is this something you would find it
right? And I guess the other key piece to at the end of it is there is an analysis that is being done. We're looking at the tangibles, the intangibles, the things that make the business tick, we're looking at, you know, competition, we're looking at sustainability moving forward, and all these sorts of things. What, tell me a little bit more about the analysis and what that will provide, folks.

Yeah, so that analysis is, like we said, it's really just digging into to everything about that business, the financials, the, you know, what you talked about the intangibles, what's the customers look like? What are the suppliers look like? What what do any of those aspects that make this business? What it is like? What are those aspects? And do they do they drive value is their worth to them? And we're also going to be looking at, you know, your hard assets, like your, your equipment, what is that worth? So sometimes that's where we have to hire an outside appraiser and say, Hey, can you value this equipment? Because a lot of times, the higher that equipment appraiser appraisal is, the more financing you get from a bank, and the higher that value that business will ultimately be.

Right. So I guess I mean, this is obviously a really key phase, in ensuring that your business is saleable. You understand what the value is, you understand, really, perhaps, and may even learn a little bit more about your business in terms of how it's viewed from a third party. What are what are people typically really surprised to hear or learn at this stage?

You get, you get two responses, usually, well, I can't believe it's worth that but before I think it's worth 10 times that and those are really usually your your two answers, and then they're just surprised at what drives the value right? Sometimes they're really surprised that you know, a high customer like that doesn't always net negatively affect the business because there's certain businesses where you made a choice to do that, but you could easily replace that customer if they left. So a lot of times there is surprises in the whole, how did you get to that value. And I like, at this point, it's also good to know if you do this early enough to say, five years ahead of time, and we do like to start our process really early, you can change that value, you can do other things that might increase that value. So I know we're saying it that the process of selling your business, but this process can start five years prior to a sale. Right?

Talk to me about the deal structure, because because I find this is probably one of the most interesting pieces to a seller, oftentimes, you know, the perception as you can get 100% of the sale price on clothes, like selling a house, but what is the reality? What are we seeing out there? 

Yeah, and yeah, we always get this concern with sellers, and they don't want to have a vendor No. But the reality is in the lower mid market, we're where we operate those business, they have a million to 5 million in EBIT a value of five to say $25 million, you're gonna have to close, you're probably going to get about 80% of the value, the bank is going to finance 60%, the buyer will give 20% And you're gonna have to have a vendor note or the other 20%. And basically, if you're not aware, a vendor, it was almost like you're a second your second bank. So you are, you will get an interest rate on that bank, and you'll have security against that vendor. No, it's not an urn out. So it's not like you have your company has to hit certain numbers, but you really are, you're there to support the purchase. And everyone always thinks, oh, this is driven by the buyers, they don't want to put money. And a lot of times it's actually driven by the bank, the banks are the ones that say I want to make sure that that seller is a little bit tight in that business after the sale. So we get a lot more comfortable if there's a vendor note. And therefore we can, we can actually lend more and or we won't even lend at all if they're not going to be tied. So if an issue does occur down the road, they know that that seller is still going to be involved as long as that vendor notes there, right. 
So really, the key takeaway at the end of the day is sellers will likely get 80% of the proceeds, perhaps a little bit more on closing. And then they've got to write out the promissory note to capture the full value of their business. All right, so let's say we've now got the upfront value, we know what the deal structure looks like. We're aligned with the seller, you as the seller, you know, feel comfortable with with the valuation. I mean, next steps is really getting the engagement agreement. Is there any fail anything else folks need to be aware of at this point?

Yeah, no, really, it is that engagement letter, and we're going to sign so we can actually start the process. People always ask, what's the, what's the commissioning going to be like? What are you charging us to on this, and we're really, we have a small upfront fee. And then we have a commission based only if we sell the business. And that price that we set the value of the business that will really determine what that commission rate is. And we use a model that is very standard in the industry. So our prices won't be shocking, because we're very competitive with everyone else is similar Lorman market, right. So at the end of the day, it's it's, you know, important that there's alignment going to market, we're sharing some of the risk in that, you know, we're obviously not charging a full amount up front, we're only making money when the business close at the end of the day. And that engagement agreement just lays out the steps we're going to take and selling the business. So once this piece is done, we're aligned, we've got the engagement agree, agreement signed, now it comes down to marketing. And can you talk a little bit about what this process looks like?

Yeah, this is probably the fun part for a seller. Really not. But this is where they're gonna have to get us a lot of information. Right. So really, we're building the information to go to market. And we genuinely take about two months for this process. And the reason we do is we want to make sure not only are we building all the information we need for marketing, but all the information will be there for due diligence, we want to make sure when we truly go to market, there's nothing that's going to change that price once an LOI is signed. So we do a lot of research and we'll have a lot of questions to the seller, and they're gonna have to we actually set it up that we generally have weekly calls with the actual seller to make sure we're getting those these key pieces of information correct. And that we're we're actually creating the market material that reflects the business correctly.

Right. So help me understand this. First, we do an appraisal we ask for information. Now you're asking for more information to put the marketing material together. Would you say this is the most onerous phase I guess, for the seller definitely
is the most onerous page for the seller. I mean, there's just gonna be a lot of information we require and generally, you know, the bookkeeper or the accountant internally don't know about the sale, right? So this is where the owner has to really do that work themselves, right. So Oh, you know, we're not expecting it overnight. But the quicker we get that information, the quicker we can truly go to market. So it does take time and it does it. It can feel like like a lot at that point. But we really do need that information. And we've noticed that if you don't get it correct, the process gets pushed even further. So you might as well get us that as quickly as you can and get it right the first time, then, us trying to piece something together. That's not correct.

Right. Let's talk about the specifics of the marketing materials. So we've got this the teaser, and we've got the sim or the confidential information memorandum? How are we going to reach out to buyers? What are they going to see? And what is this teaser and sim that we talked about? 

Yeah, great. So So really, the first piece of information at what we're building on this market, where we are creating a teaser, and sim at the same time. But really, the first thing we go to market with is the teaser. And really, it's a document that we can pass on to prospective buyers. We're not really saying the actual name of the company that's for sale, we're giving them enough on a one page document that saying, you know, there's a business in this general industry in this general location. And here's some of the financial figures, very high level, nothing that anyone could actually figure out what businesses is actually for sale. And if they're interested, they will say we want more information. And at that point, we make them sign an NDA. And then we can give them the full document. This document is like a 6070 page document. And it's really highlighting everything about the business, it actually tells the business's name, it will, it'll say, You know what the customer alliance is, it'll talk about and Loise. It'll talk about past financial results, it'll talk about things that you can do to improve the business, it'll talk about a whole list of different things. And it's really to highlight to the buyer, you know, this is everything you should need to know about the business, so that you can actually put an offer down and buy the business,
right? So going back to the teaser is the price of the business listed.
We never go to market with a price ever. We know a general idea from the valuation what we think the business are self worth, but we would never put a price out there. Our goal is to obviously get the highest price we can possibly get. Right.
So at the end of the day, you know, we're not listening to price want the market to truly determine what the value of the business is? How do you ensure and remove some of these tire kickers, if if the sale price isn't listed yet.

So really even before once you get the teaser, and they say hey, I want that extra information, we'll jump on that phone call and really start to ask them some questions might give us an idea of where their prices might give us an idea? Have they purchased the business before? Are they actually capable of purchase a business plus 90% of time they've been referred by somebody else? And we can ask those people, Hey, are these good buyers? What's the case? Can they actually do this? And so we get a lot of insight prior to actually giving them the sim. So a lot of times, you know, we might get 10 people reached out three or four of them we've picked out of the process before it even started. 
Right. So there's a lot of vetting. And there's oftentimes, oftentimes there's, there's certainly some assurance provided that, you know, we're not gonna let everyone see the pertinent details of the business.

Exactly. And what we also do is, we actually run by the lead to with the seller, so if it's a competitor, and you really don't want that person buying the business, we say, are you okay? You know, them seeing them? They say no, we're like, Okay, then we'll take them out of the picture. And so that usually gives the seller some confidence. And honestly, that the information is not going to anyone that's going to leak any information. So it really is secure. And we're really run the process to weed those people out that might cause problems down the road in the future.
So this leads us to the next section, which is probably the most common question we get where to buyers come from? How do you find them? What's the process? Ryan, let's talk about the marketing campaign. How do we go and identify buyers? And how do buyers find us? Yeah, yeah.
So we're always getting buyers reaching out to us and saying him administering the business in this industry. And if anything ever comes into your day, you want to say you're selling? Let us know, right? So we have a huge database with private equity family offices, and we've always vetted them. So we've already had that as a phone call with them. And people aren't just reaching out, we're throwing them in our database. Now we've had a phone call, make sure that they're actual buyers that we want to deal with. And so we have that massive database. Plus, we're also going to look at whatever the business is, are there is there a strategic someone in the industry that would be ideal to buy this business? Right? So we'll definitely look at that whole picture and reach out to those people that we think are appropriate. And then, you know, we also have our contact. So, you know, those are bankers, lawyers, accountants. who, you know will send that teaser to and if they have someone in their, their database, they say, Hey, I've got a client that wants to buy X Y type of business, then, you know, they're more I'll send them your way. And then we've got those in the bedded because they're vetted by that referral. And finally, I'd say one of the things that kind of differentiates as some of the other players in our market is, we're part of a an industry association called Cornerstone International. And they're 28, I believe, m&a forum, similar to us in the Lower Mid market operating very similar industries. And I'd say the majority of them are in the United States, there are some in Netherlands or some in England, there's one in Japan, but but it really does give us a lot of regret when we're when we're actually marketing and trying to find buyers, because we do share our deals throughout the network. And it gives us, you know, another place to actually find buyers. Right.
That's fantastic. And it's interesting, because we, we do talk about the most common question is, where do buyers come from? But in reality, our experience is that finding buyers isn't the most challenging piece of the equation. And I think it has to do with how we run our process. I mean, obviously, locally, we've got deep networks, folks are reaching out to us, they come to our website, folks are constantly looking for opportunities, qualified opportunities, we work closely with with many lenders, obviously, they have a vested interest in funding these transactions. And then as you mentioned, beyond just the regional borders, we're looking at a global scale. And oftentimes, you know, there's some great people in the US or, or even beyond. Exactly,
yeah, we definitely have a wide network. And like you said, it's usually finding a buyer is not the difficult part. And we know that throughout that network, you know, even the neatest industry, there's usually a buyer for that business. Right? And
for those of you who want to learn more, we did a previous episode with our VP Thomas bevilaqua. Talking about where do buyers come from? That's a great episode. He really dives into the different types of buyers, where we typically come across them what they're looking for when buying a business, but I would I would highly recommend checking out that episode as well. All right, Ryan. So we've talked about market outreach, finding buyers, qualifying them, making sure we've got quality people coming in, obviously, you know, that's an important step. But now we're entering negotiation and due diligence. Can you walk me through at a very high level what this this space looks like?
Yeah. And just to step back, you know, we've went to market with that. And we've, we've done all the marketing, and now people are actually reaching out to us, right. So again, we've vetted everybody, but now it's the point where they're, they're giving us offers, right, so we're at that loi stage where you might get five or six letters of intent. There, they've now they're meeting with the sellers, before they actually sign that letter of intent, you've got to meet with the sellers, and the buyer. So they're meeting our sellers are asking them question because they want to make sure there's a good fit between between the buyer and seller. And once they've kind of went through that little bit, they truly say, which letter of intent am I going to sign? Because once you sign that letter of intent, there's a little bit of a lockup period during due diligence. So, you know, those meetings are really crucial to make sure there's a fit between that buyer seller, because you probably are gonna have to work with each other for a little bit after the closing. So you want to make sure that works. Right. So you go through that, you sign that and then we get into the fun due diligence part, right, and a little bit of negotiations, because before that, you sign that letter of intent, you probably say, Well, here's the three people I really want to work with. Let's see if we can push a little bit on on what they've offered, right before we actually sell a lot of times. And I'll be honest, in the Lord min max is not a ton of wiggle room, right? Because a lot of it's the deal with bank financing. So where the wiggle room a lot of times is the deal structure. And we changed that deal structure, can we get terms that the seller wants the seller only wants to stay on for six months? Can we push that instead of the buyer only wanting want to net for 12 months? Are there other things that we can push and kind of negotiate and go back and forth? And this process? You may you may like, again, letter intent, we should get it signed? You know, tomorrow? No, it usually takes a little bit but back and forth, back and forth. And the lawyers like to get a little bit involved here to to make sure everything on those loi is our code here. And then when we do that, we get that little light sign, right. And
I would say this is the phase that would bring out kind of the highest emotion in the seller. I mean, they're now really coming to grips that their business is truly, you know, being valued by the market. You know, they're now moving toward that closing things are getting very real. And I think what's important to keep in mind to this world I would say where we earn our key best m&a advisors are looking at different offers, were ensuring that everyone's sharpening their pencil. I know you said there's not a lot of wiggle room in terms of sale price. But in terms of transition time to fit, how much money is a buyer putting it all of these things are being scrutinized and examined. Is there anything else that you would say is really critical? During this phase prior to signing the LOI?
Yeah, it does, it comes back to us. We're continually betting that aktuell you know, the the actual buyer. So we're saying, Hey, can we you've you've closed other deals, can we talk to them? We have some references? Can we do all the things that we think are needed? Can we, you know, talk to your bank or send you to our banker banker to make sure that you're actually can buy this business, right. So we're trying to do all the things that we can do to bet that actual buyer, before you sign on on the LOI? Because there's going to be a couple of probably ello eyes at the table. And you want to make sure that we at this point, we choose the correct one.
Right. And I would say, at this juncture, the key aspect or the key element, at the end of the day is all the planning have been done, the processes in place process the protest, and you've got a good deal team around, right. So this is where the lawyer would come in. This is where the accountant would chime in making sure that the structure of the LOI makes sense. Exactly. So right. I know, there's a lot of information that we're talking about here. You know, we talked about getting the right buyer getting an LOI, ensuring the deal team is involved, and everyone is looking at it. As a business owner, I mean, emotions hire are supposed to trust the process. Know, what should I really be fixated on? Or focused on? As the seller at this point in time? Yeah, well, we
always tell any sellers, don't take your foot off the gas, because during this whole point where there's a lot of due diligence, they're looking at all your information, if all of a sudden your numbers start to fall off, that can cause a retreat in price. So they could say, You know what your numbers aren't there, we're not trusting your numbers. And we see a lot of people, you know, sometimes they're like, Okay, I've sold the business, or they think they've sold the business. And so now I'm just gonna lighten up a bit, and all sudden, the numbers come down, right. And that's a real concern to the actual person looking at the business. So that's, if I would say that what the seller needs to do. On our side, we're doing everything, but we're that middle person. So we're worried that, you know, dealing with the accountants that are doing the due diligence, or dealing with the lawyers, we're trying to keep you as much as we can out of all that talk. We're making sure that when a buyer comes in says, well, there's this issue that we deal with that issue and say, it's not an issue, that should mean that the price should change. We, we already told you that and the same, we that's why we spent all that time in that upfront process. So at this point, we've got like, we've got all the leverage, we can say, nothing has changed. We told you everything. And it really it really is really effective. Because we have done that we've done all that legwork upfront, right. So at the
end of the day, the seller can really rely on the m&a advisor, they should really be focused on driving their business forward so that there's no material change during the closing process. And obviously, due diligence, you know, a lot of this stuff, the table has been set up front, we know what's in the data room. This is the point in time where buyers said, Okay, I've signed an LOI, we're moving into due diligence, which means just verifying the information in the sim, is there anything else that the buyers needed, or their advisors are looking at?
I wouldn't I it's not too much more like they really are making sure that that like I said, make sure that business does run and making sure that they get information in a timely manner. So So I, some of the one of the big issues is a lot of times, you know, a buyer will say I need this, whatever I need to know your inventory current inventory, and it takes two weeks for the seller to get back. Well, what does that do it? It's not going to change the price, but it's going to push that closing date. And the longer that dates pushed, the more likely that something may happen in the business, right? So you just got to get that information back in a timely manner. And that sometimes means pushing your advisors or we put your advisors and say, you know, get us that information yesterday, basically. Right.
So you're talking about the the information to load the data room prepare marketing. Exactly. Right. So Ryan, this is a very exciting time for the seller. It's also very stressful. A lot of the elements are now outside the seller's control. I call this the closing phase, the final phase, we're also nearing the end of the 12 month or nine month journey depending on how long it's taken typically nine to 12 months. What is the seller facing at this juncture? What what's going through their head and you know, what they what should they be doing? What are they thinking about?
Yeah, really, at this juncture, it's really just nerves, right? Like, is this gonna close? It's a week away all the The papers are going back and forth lawyers are talking. And you know, generally these things go on without a hitch because of where they're gonna go. We're negotiating, talking, right, making sure the process runs smoothly. But it's just nerves, like everyone gets nervous until that money is actually in their lawyers account and being distributed to everyone. Right? So you, how do you deal with it? I mean, when I say take a vacation, but you can't, because you there are papers you're gonna need to sign, but try to just distance yourself from what we know, there's going to be emotions. And a lot of times, it's not even the emotions of am I getting my funds, it's the emotions of we've talked about in a couple of times, in other episodes, I'm giving up my identity. Now it's real, right? It, it's just at that point where it's real, the company's going to be gone. And now I'm doing the next phase of my life.
Right. And oftentimes, too, I find that the seller is thinking about what the next phase looks like they're talking about, they're thinking about transition plan. They're thinking about what partnering with the buyer looks like. They're also dealing with their lawyer and getting ready to sign. You know, on the other side of the fence, they're thinking about the buyer, getting financing, making sure that gets handled, there's so much going on, but at the same time, it's exhilarating and exciting. Yeah, yeah, it's
definitely a whirlwind. Like at the near the end of that close, things are going everywhere, and communication is back and forth. Usually, at this point, not having too many pickups, it's just more, hey, we need to get these things buttoned up. And maybe there's a little bit of lawyers back and forth and saying this word needs to be changed, this needs board needs to be changed. But it's not. It's not deal killing at this point, right.
And I think this is really where, you know, the quality lawyer that you brought into the deal team earns their stripes. I mean, they're they're buffering you from, let's say, discussions that you really shouldn't be involved with, we see, you know, the uncle Bob lawyer who brought who was brought in who's really not qualified. This is where you can see things go off the rails, if you don't have the right deal team, even though the stage has been set, you've got the price. You know, oftentimes, we see people trying to retrain, they're not accepting of terms that are market. This is where the stress levels are highest. And yet, sometimes the train can come off the tracks without the right people.
Definitely, definitely, this is where the deal team that you've created makes the most sense, right? Like, we've seen deals where exactly I've used a lawyer that they've had for 20 years, and it's not specialized in m&a. And all of a sudden, they're picking at something that doesn't need to be picked up, or they're bringing something to the sellers attention that probably didn't need to be it just getting them more amped up. And sometimes that creates arguments that really don't need to be created. And really on both sides, the buyer and the seller probably don't need to hear everything until there's really a critical issue that they might need to address those really good lawyers, that was really good deal team advisors. They buffer that until the point that they have to be involved.
Right? No, that's fantastic. And, and so I guess at this point, we've discussed each stage in great detail, we've talked about some episodes that you can reference, or more in depth coverage on those issues. And in obviously, I mean, this is this kind of like the final piece, at the end of the day, you know, sellers get to sell, we believe that if they follow the process, they will get to the finish line. You know, this is where they reap the rewards of all the hard work over all the numerous years. And I want to thank you Ryan for for joining me today and and contributing to this episode. Thanks for having me. And if you want to get in touch with myself or Ryan, please feel free to check us out on LinkedIn or contact us by email. You can reach me at: Jim.friesen@Portagema advisory.com or Ryan.buist@Portagemaadvisory.com. Please remember to like or subscribe to keep this podcast handy. And we'll see you next time.