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It’s commonly held that three out of four private business owners will want to transact in the next decade. Yet of the 20-30% who do, three-quarters regret their decision. Why? In part, it's because some owners don’t take the time to fully explore the most important questions they have – but don’t always address – well before a transaction occurs.

Transcript

Good afternoon. Thank you for joining us today. I'm Carey Spencer, Family Wealth Strategist at Key Family Wealth. I'm very pleased to present our next topic in our 2021, unlocking opportunity series for business owners. The top 10 questions business owners have regarding transitions. Joining me for today's discussion are Mike Ella, a Consulting Director in our Family Wealth business advisory services unit, and Joel Redmond, also a Consulting Director in BAS. Mike and Joel bring a unique blend of expertise to our business owner clients. Mike's the transaction and tax expertise. For many years, as a practicing CPA, uniquely qualifies him in his role as a director of business advisory services. Joel brings deep financial planning, analytical evaluation expertise to our business owner clients. He is a chartered financial analyst accredited in business valuation by the AICPA and who teaches corporate finance to MBA students among other things. Together, Mike and Joel integrate business and personal strategies to create the best outcome for business owners, their families, and their businesses. As Business Advisory Services Director, Mike, Joel, and the rest of the BAS team are committed to serving as owner advocates to provide unbiased advice and education well in advance of any plan, transition or transaction. Key's BAS team has 8.5 billion worth of transaction experience. And the unit's mandate is to work to help owners avoid predictable mistakes and sub-optimal business, transition outcomes. Their mission, to provide owners with an understanding of the risks that threaten their personal, financial, and business goals and shared strategies to mitigate these risks. We look forward to sharing timely, actionable information with you today. For those of you who would like to submit a question, please go to the Q&A box at the lower right of your screen, type your question, and select send. We will answer as many questions as we can in the final few minutes of our discussion. Our agenda will cover the top 10 questions business owners have regarding transitions. Mike and Joel will first state the question, the myth giving rise to the question, and then correct that misconception by discussing what actually happens in private business transitions. So Mike and Joel let's get started.

Great. Thank you, Carey. Can we have the next slide please? Cue the next slide, Michael. Great. Thank you very much. I'm a big believer in the classics and a lot of the lessons that we can learn from them. And when I think of a lot of our business owner clients, I'm really brought back to this quote from "Alice's Adventures in Wonderland." A lot of our owners are in a similar spot as Alice. They don't necessarily care where they get as long as they get somewhere. Now that's not the case for every owner, but for a lot of our owners, they're too busy just managing the operating details of their business every day to think much about getting to introspective and to take what seems to them maybe an unusual amount of time and effort to figure out where they wanna get to. It's hard to do that when you're running an operating business. The lesson from some of that is taking the time to talk with parties who are experienced in transition advice, can be indispensable. And sometimes it's just a matter of stopping to take a breath, which seems like a luxury if you're in a business running at fever pitch. And so, one of the first goals is if you take the time as a business owner to stop thinking about wanting to get somewhere and get a little closer to what we call exactly where, And that can be in a family goal, that can be a personal goal, a lifestyle goal, you name it, that helps you to get closer to that desired outcome and the place that you wanna be. So the group that we work for, Business Advisory Services, has a lot of experience with private business owners. Collectively among the directors, there's about eight and a half billion dollars of transitions that have been closed in that space. And so we're not talking really about the public spaces here, where that might be the value in one transaction. We're talking about much smaller businesses, maybe values of 5 million to a hundred million in sales or in value or EBITDA or some other metric. So, if you think about that eight and a half a billion, and you compare that five to a hundred million dollar value as an increment, that's a lot of transactions. And so as a result of that, we have a different world in many respects than what you may hear about or read about in public markets. Some owners are introverted technical types, some are pure business development people. Some are in family owned businesses and they followed their parents around on customer calls when they were kids. And there are others who are almost absentee owners who delegate a considerable amount of their responsibilities to others. One of the themes that we see that's a little bit in contrast to this quote here from Lewis Carroll is that, generally the most successful business owners or the business owners with the best transition outcomes, they take the time to figure out what they want and ask the questions that really matter. And so they get away from the fuzziness of getting somewhere to getting exactly where they wanna go. And they understand that even if opening that transition discussion just begins with a monologue or then wondering to themselves or asking themselves a few questions, it's not a lot different than asking questions like starting a new product or starting a new service or changing a direction in the business. It involves some risk. It involves some thought. Having said that and having kinda set the table for this, let's take a look at some of the questions. Cue the next slide, please, Michael.

All right. Perfect. Thanks Joel. Hi everyone, I'm Mike Ella, I'm Director of Family Wealth Consulting. I work with Joel and Carey in our BAS group. And so the first question we're gonna tackle is... Question one is, once I know my transition goals, I don't have to spend more than five to 10 hours a week on the process, right? And the myth behind it is that business owners, once they get a number in their head, they know, "Hey, this is what I need to get out of the business "or what I want to get out of the business. "It'll be easy to find someone to pay that amount. "It'll be easy to go through a transaction. "I'm not gonna need a lot of time to do it." And in reality, obviously that's not the case. Transition planning, it's very, very complicated and complex. And when you get down to time business owners, your time is very limited. You spend a lot of time working on your business. So you do the day to day, you work on the strategy of the business. And then how are you gonna find time to bring in the transaction component to it? So, when you're looking at transaction and doing a transaction, that really becomes a full-time second job. And even if you hire an investment bank, you have an MNA advisors helping you through the process, it's still gonna take a lot of time to get through a transaction and a lot of your time. And five to 10 hours a week is not really what you need. You're gonna need a lot more than that. And so, when you think about how hard it is to get on your calendars, you're busy all day long, your first one there, last one to leave at night. A lot of the time that's meant operating your business. A lot of that time spent working on your business, probably not as much as you wanted to and working on the strategy of the business. And then you bring in that transaction planning or doing the transaction. There's something that has to give throughout that process. And typically what we see gives is the operations of the business. And what happens is then you start seeing the performance of the business start to slide. So you're talking with the buyer, you sign a letter of intent, the buyer starts going through and looking at the financials and they're like, "Well, wait a minute. "Over the last four or five months. "And when we first started talking "the business was doing really well, "now it's not doing so well." They start thinking about value that they're trying to get out of the business or the price they offered. They start thinking about reducing that, the owner gets upset and the deal breaks off. And so when you think about the time commitment, it is significant and where we see business owners be able to kind of parse off some of that time to others on their team is when they have a really strong management team. And so a really strong management team can help the business owner through that process if they know what the strategy is. When we're going through transactions and spending a decent amount of time with the owner, but just as much time with the management team, that's where we see a successful owner is able to kinda reduce how much time we're spending on a transaction and fit it more into their schedule. And so, Joel, do you have anything to add on that?

No, you hit it on the head. I think one of the things we talked about in a previous webinar, we had a webinar on May 27th with Jeff Getty and myself, and one of the threads that Jeff touched on is the thread of the absentee owner, which is you almost have to get your business running so well without you that it doesn't need you anymore, then it becomes a lot easier, right?

Yeah. That makes a transaction a lot simpler from a buyer's perspective too, in the fact that they understand that the owner is only spending a bit of time and they're spending more time with the management team, the owner's obviously going away, the management team sticking around. So from a value perspective, that really helps drive the value in what a buyer potentially is willing to pay for the business.

And the buyer's buying something they can keep, right? They're not buying an owner that they can't keep. They're not buying all that intellectual capital that's inside that person's mind who's been running the business for 30 years, that person has taken the time to transfer that IP onto paper or into processes that others can execute and have executed from some time, right? Hopefully prior to sale.

Absolutely.

Great. So with the second question, this one reads, "I've heard getting a deal done successfully "takes six to 12 months." Well, okay. That's what I've been hearing. That's too long for me. I'd like to get a deal done in three months, what's stopping me? And the short answer is plenty. The myth behind here is getting a deal done is simple as long as you have an interested buyer. Well, the reality is getting a deal done quickly as possible if you have an interested buyer, but there are a lot of other things to think about, right? Let's just consider the letter of intent and probably 40 to 50% or more of the opportunities we come across in BAS are with business owners who got maybe blindsided or got surprised by a verbal offer or by even a formal letter intent that really took them for a loop. And they realized that they have an offer now for their life's work and they don't know what to do with it. We've done a talk on that in earlier days and probably will do others in times to come. But let's think about just that for a second. Some questions that arise here are, is the consideration in the letter of intent enough for that owner to meet their lifestyle requirements? What are the terms of that deal? Is it all cash? Is it mostly cash? Is it part seller note? Are there earn-outs? Are the unit targets achievable? Does the seller have any obligations post-closed? Do they have to stay on? Do they have to consult? Is that for six months? Is it for three years? Is there financing for the deal? Can the buyer execute? Is the target date for closing realistic? Is there just too much going on with the cycling of the business and the operations of the business to close on the projected close date? Are there complications with the leases, et cetera, et cetera, et cetera.

Joel, to that point is when you think about, doing a transaction typically right. We're gonna talk a little bit about confidentiality today, but as on a seller side, you have three, maybe four people or who are a part of that transaction on the sell side and not talking about your outside advisory team. When you look at buyers coming in and you're working with a sophisticated buyer, they might have 10, 15, maybe 20 people on their side. So when you're talking about slowing down a process, very, very rarely is that slow down coming from a buyer, it's always coming from the seller side. And like we're talking about from a time perspective, how much time do they have to deal with the transaction?

Sure. Here's another one, the buyers unabashedly interested, right? They're totally on board. They're not trying to knock that purchase price down during due diligence, right? Let's say that's not happening. So even in those situations, it can take two years to get the business ready for sale, right? So, it's not just a matter of having the business transaction actually close from beginning to end, it's also having the owner of the business, do the things that need to be done to get it ready so that there won't be something material that gets missed in due diligence. Or there won't be something that the buyer might think the seller was concealing from them. So there's that aspect of these things too. The preparation that the owner has to make. So there's getting the business ready for the transition, and then there's getting the owner ready for the transition. We talk a lot about this with respect to a white paper that we have that talks about a successful descent, right? Coming down from the Mount Everest is the analogy the white paper uses successfully. The skills to build the business are definitely different than skills you need to successfully transact out of the business or transition out of the business. And so we talk about things like the owner being ready in terms of financial capital. Is there enough financial capital from consideration for the owner to achieve their post-deal goals? How well does the business run without the owner? Which we talked about a little bit. How mentally ready is the owner to leave? Does the owner have a plan for life post business? If they're working 60, 70, 80 hours a week at something for decades, you don't just walk away from that and not have a plan for having something to do all that. And so we look at all of these different factors. We look at the different lenses that buyers look at the business through and how they might value it accordingly. And all of those things factor into not just the business readiness, but the owner readiness. And so one other thing to touch on kinda quickly, due diligence, right? So, the due diligence process itself is enough to give a lot of owners deal fatigue. And deal fatigue can happen when, even if both parties are completely acting in good faith, there are coaches on the seller side and there's coaches on the buyer side. And the coaches on the buyer side might be saying, "Get as many details as possible, "because what we're trying to do is get as much value "as possible for as low a price as possible, "trying to eat down that purchase price." And so if there's 200 documents that have been shared and you have a buyer is asking you for the 201st document, again, even if everything is in good faith on the up and up, and there's no animus between the buyer and seller, that can create real deal fatigue. And that can cause overreactions, especially if the seller is working very hard at the business, just keeping it afloat and that can threaten the deal. So, you have that due diligence piece, which is another kind of reality that gets entered in here. One of the final realities that has to do with this question is the difference and the distinction between the transaction itself and getting ready. So that transaction may yes, only take six, 12 months, probably not likely it'll take three. Two years probably on the due diligence side, depending on the business, give or take, just getting ready for that pre-sale due diligence. So that was kind of a lot of info on question two, but I'll transfer this to you, Mike, to address question three.

Sure. And so we're gonna actually hit three, four and five all together 'cause when you look at the concepts in the myth and reality of the next three questions, it really kind of boils down into kind of the same type of concept. And so question three is I know a buyer in my industry... Excuse me. In my industry that will buy my business, what else do I need to do? What do I need an investment banker for, my attorney account and wealth manager will help me find a buyer is question four. And five is, a friend of mine from a CEO peer group knows someone who can buy my company. Why can't I just take that route? And so when we start talking about the myth, right? The myth is as a business owner, I know my industry very well. I know every competitor in the industry. My competitors are going to wanna take me out. So it's easier to compete and they don't have to compete against me. And then they can kind of do a lot more with my business. So that's the myth. The reality is that, you spent 10, 20, 30 years as a business owner in that industry, yes, you know a lot of competitors, you know the industry well, but it's how are you gonna approach those buyers? And so in the mergers and acquisition space, really typically what happens when we see competitors working and doing transactions together is I have a competitor who is considering doing acquisitions. They've built out an MNA, or mergers and acquisition team. Now they're coming to the seller and saying, "Hey, I wanna buy your business." So it's an important thing to remember is buyer is approaching seller. When a seller or business owner we're working with, says, "I wanna approach some competitor." They're basically flipping that model around and saying, "I as a seller, I'm approaching the buyer." And so it might seem subtle, but it isn't huge difference and some of the issues that we see that when that happens, the first one is confidentiality, is how are you gonna keep that transaction confidential? Legally, at least is, what are you going to do to stop the buyer from going around town, telling everyone you're selling? Trying to go to your customers and telling them that you're looking to transact the business, going to your employees, or going to your management team and saying, "Hey, they're looking to sell, "what's gonna happen is unknown. "It's an unstable situation. "Why don't you come over and work with us?" So, confidentiality is the first issue that we typically run into. The second comes down to value, right? We've talked a little bit about value already. A seller approaches a buyer, right? The buyers automatically thinking, "Wow, I can really get this business for a discount "because they're coming to me, "there must be something wrong with the business. "There might be issues with the management team. "Maybe the owner's being forced to sell "because a health concern." So it really changes the dynamic of a transaction, as opposed to when a buyer approaches a seller and the seller has more of the leverage in the situation. And then the third part is, how do you know a buyer's really gonna be interested or a competitor in your industry is gonna be really interested in buying you? They might not be an acquisition mode. They might not have any MNA experiences at talking about financing. What Joel talked about, they're not be able to get financing. And so there's a lot of different pieces that go into making a transaction work and they might even think, "Well, why would I pay to buy those customers "when I can grow organically "and probably take those customers for you, "especially when you're reaching out to me directly?" So when we start working with clients and business owners, and they say, "Hey, I have somebody in the industry "that I know that's gonna buy my business." In reality, less than 3% of the time, they're correct. Because yes, they know a lot about their industry. They know probably more than their MNA advisor does about that industry. That buyer like we said, we don't know anything else about them other than the industry they're in. So they'll still have to figure out price. You got to figure out if they're actually going to do an acquisition, what their culture is. Is there any adjustments to the structure that needs to be happened? So there's a lot of different things that go into the transaction other than just the industry. That's a good start, but very, very rarely whoever owned the owner thinks is gonna buy the business, actually buys a business in the act.

Sure. And that's a great point you make Mike about the particularly with respect to the value, right? So it's largely a question of who called who? Who basically has that negotiating power?

And that's where it gets. And we talked about it in a couple seminars before is it's all based on leverage, right? And so working with someone in the MNA space that understands how to use that leverage, if you wanna reach out to a buyer, they can set it up in a way to keep that leverage on your side and really keep that value up. It's really important on how you get introduced that really kinda starts driving those initial conversations around value.

Sure. Can we have the next slide, please., Michael. There we go. So the next question that we hear is, is my business ready to be sold? And to be honest, it's a little bit of a, fab actually to put this in the form of a question, because as often as not owners will say, "My business is ready to be sold," which in many cases really is the misconception. And so if you need persuading that that's the case, take a good hard look at a typical due diligence list. Buyers wanna look at everything from legal, organizational, financial, tax, shareholder, employment, fixed assets, working capital, you name it. If it's a type of broad consideration for the business, it's gonna be looked at pretty closely. And again, if you have pretty straightforward explanations, and you have a narrative around something that is not a miss or something that is a miss, excuse me, then that tends to fly a lot easier than waiting until the last minute or ignoring something because the buyer won't ignore something. And there are a lot of different ways to look at this, but you not only have a deep, deep list of things that the buyer is gonna look at gradually, you have a lot of parties involved. So Mike alluded before to the number of people involved on both sides of a typical middle-market transaction,. You're gonna have your accountant involved. Your attorney's gonna be involved. Your lender's gonna be involved. Your insurer is gonna be involved, at a minimum. So the barrage of requests coming across the table from both sides can be overwhelming. And so now compound that with it's your busiest season of the year as an owner and you can barely keep a float in normal times when you're not in try to get a deal done quickly and well mode. Well now forget it. Throw that out the window because it's not possible to do that. So one of the things that we help owners do sometimes typically is we'll do a mock sale, do a presale readiness assessment where we'll help someone figure out the different steps that would occur in a transition, how they go, how the choreography works, how the flow of information is exchanged and managed between buyer and seller and their representatives. And typically the owners that go through that exercise, are a lot readier once it's time for, "That real deal," to come around. Typically most owners... Oh, go ahead, Mike.

And Joel I was gonna say, the mock sale is really simple, it's very similar to like a shark tank, right? That people are up there pitching their ideas. And they're getting questions about, what about this? What about that? And they're trying to poke holes in what that strategy is or how they could see that business being successful. A mock sale does exact same thing. And what it does is it tries to identify areas that should be addressed pre -transaction because when you get close enough to a transaction, if they were to come up, they're either going to take the transaction off the table, or there's gonna be a reduction from a price perspective.

Sure. And no matter how good you are at your business day to day, you're not someone else. So someone else can give you an objective perspective and ask pointed direct questions without being offensive that make you think about what's, that could be on your business, that you might need to fix prior to going to market. And so typically most owners focus on not just themselves and their own personal wealth goals for getting the business ready. Sometimes it's a structural standpoint they have to think about. Sometimes it's the different operating divisions and parts of the business. Sometimes there need to be changes there. We had a webinar back in mid May I think that address this with our own Jeff Getty, Francis Brown. But if there are structural changes on kinda a deeper level that need to be made prior to sale, then now you're not talking about something that needs to be done a few months before a transaction. This is probably something that's a year or two or more prior to transaction, so that the business and it's correct, or it's better structural formation has some time to build up and build kind of a track record prior to a transaction coming around. And so having talked a little bit about that, let's shift to talking about building value, Michael, to question seven.

And that's a perfect segue into the next question. So question seven is, I don't have to focus on building value. That's an investment bankers job, right? So the myth is you hire an investment bank, you get ready to transact your business. They come up with the value of the business. You agree on the value. And then they say, "Well, these items could affect the value "and reduce it when we kind of come through "to an actual transaction." And a business owner thinks that that part of that agreement is that an investment bank is going to actually do those things for them. And the reality is they're not, right? An invest in investment banker's. is their main responsibility is to transact business. And so as a business owner, you have your current advisory team, which helps you run the day-to-day of the business and helps you keep in compliance from the business perspective. They're not going away when you start doing a transaction. What happens is you start adding more and more advisors that has specialties in the MNA space and enhancing your team. And as a business owner, really what you have to do is educate yourself on what everybody's roles and responsibilities will be. And so to that point investment bank, isn't set up and they're not structured where they can help you change some of the things that Joel was mentioning before. And so a good analogy to that is if you've ever sold your house before... You hire a real estate broker that real estate brokers job or main job is to sell your house, right? To transact on your house. An investment banker there, their role is saying to the real estate broker for your business, right? They're hired to transact your business. Now you have a real estate broker come in, they look at your house. They say, "Well, to get it really ready to be sold, "you need to paint the outside. "You have to change the carpet. "You gotta do some landscaping. "Your real estate broker's not gonna do that for you, right? They're gonna tell you get a contract to do that. Same holds true in the business world from an investment banking standpoint, they might say X, Y, and Z needs to be addressed before we take it to market. They're not gonna do that. You need to be working with a valuable advisor to Joel's point about maybe there's changes in structures. Maybe we have to look at customer concentration. You have to look at those pieces. 1, 2, 3 years out and work with the value of the advisor in advance of actually hiring an investment bank. Because an investment bank, when you sign an agreement with them, the next day you're gonna start providing information. And the focus is to sell that business. in the the next six to nine months. So the value advisors should be working with them three bringing in the investment bank.

In other words, Mike, it almost sounds like the value should be built by the time the investment banker arrives on the scene. Is that what you're saying?

Yeah. How we look at it is in the year you're transacting, you're protecting the current value. You're not trying to build value, that's difficult. Years, one, two, three, four, before you transact, that's when you're really building value. So that's where we differentiate between building and protecting value.

Sure. Great point. Question is why should I transact before I have to? And it might seem strange that we even hear this question, but it's surprisingly common. A lot of owners, they realize how good they have it, with operating and owning their business. They've got a great tax shelter. And in their mind, the logic is why would I ever sell? If things are going well, why would I ever sell? And so that's kind of the question and the myth, the myth maybe is I don't need to sell, or I don't have to sell before I really need to sell. The reality is, first, the transfer channels that the owner has in mind may not be realistic. And this is most common where you have a situation where you've got an owner of a business who has kids that are of age, are coming of age, and would be suitable because of their own talents or abilities or inclinations, would be suitable to work in the business. But the owner has never admitted to themselves or even taken the trouble to dig too deeply into whether or not that's in the kids' minds, whether or not the kids are thinking about that. And so if the kids don't want to be involved in the business now or ever, and the owner is laboring under the impression that they do, that's dangerous because now this owner might be turning away valuable offers from people who are perfectly able and willing to buy the business from a third party in order to keep it for a family transition that's never going to happen. So that's one example why this transact before I have to, that can be a misconception behind how the business will transfer can be one reason behind it. Another reality, or another thing that we see that occurs in real life is this question, why should I transact before I have to? Depends on what the have to involves, right? If you get physically ill, or your health begins to suffer because you worked so hard or you get burnout and you just can't do the job anymore, you just can't have the expend, the energy to run the business the way you want to, and you're not replaceable, you can't be replaced because of what appear that hasn't been committed to paper or to a management team that's strong. That makes your business either one, unsellable in its current form, or two, heavily discounted to a buyer who knows and understands they have to go and extract what's in your head as the one running the business and committed to paper and figure it out how to incorporate it into their own systems so that they could run the business as well as you could run the business. So if you're in that situation, the first situation where maybe the kids are what you're thinking about, but you haven't had that discussion with the kids, or haven't talked to them about what their own plans and goals are, and maybe what the three or four or five things that are most interesting to them in life are, and it turns out that the business isn't one of them, that's something to begin thinking about. And we work with a lot of owners along those lines. So those are a couple of reasons. Again, the transfer channel, the reason why that the have to occurs, right? Sickness or health concerns,. Another reason or two why owners put off transacting until after they should is sometimes they don't realize how much risk their business has in it. So when you're very, very close to something and you have this kind of, they call it an illusion of control bias, right? You think you have more control over the outcome of something than you really do. Well, if you're working really, really hard at a business every single day, that's very natural to have that feeling. And it's true that probably a lot of your successful performance is directly due to your own efforts. But if you ask a lot of people who are very successful, many of them admit that kind of luck played a role. And in some cases, as much as overall as skill did in them building that value. And so that risk element is definitely another reason why it can be a very good thing for owners to consider transacting before they have to. And to underscore something Mike alluded to earlier, the owners that are the most successful in general at maximizing the value of their businesses on transition, they've got a strong management team. The management team knows the strategy that the owner has kind of laid out and the life post owner and the owner is not that involved in the day-to-day operations. So that's kind of the magic trifecta for getting a business ready to sell, where you don't have to, right? The owner's already been practicing. Again, to take the phrase from the May 27th event, the absentee owner avenue. So huge, huge benefits to doing that and planning before necessity becomes the reason for the transfer to occur. And Mike, that maybe brings us into the question of timing. So, can you talk about timing a little bit? The question nine.

So getting around and Joel talked about control, right? The next question number nine is about the market. So if the market will be better next year, why would I sell now? And the myth is, as it was kind of stated as well, things are gonna be better next year, why would I sell now? I might as well wait. And the reality is that an owner is basically trying to predict what's gonna happen in the market, which is a recipe for disaster. And so when we start thinking about that from a reality standpoint and say, "Okay, hypothetically, "the business owners, right, the market is better next year. "And that's when I wanna sell "because the business will be doing better." So, market's better next year, revenues are higher. Profits are better. Cashflow is better. Owner is super excited. Now they don't want to sell, right? They're like, "Why would I sell my business "when it's completely on fire right now?" And so when you think about that from a buyer or an owner's perspective, what makes an owner happy about their business makes a buyer happy, right? A growing business, a real strong cashflow business, very attractive to a buyer. So, the other issue that we get into with business owners is that, all right, now market's doing really well, say their businesses worth $15 million. Now, instead of 15 million, they want 20 million, right? Because they want above and beyond what it's worth, just because it's doing so great right now. That's the only they would transact on the business. So from a buyer's perspective, they're only gonna pay what it's worth. So it's worth 15 million, they're gonna pay 15 million. They think it's worth 20, they're gonna pay 20. They're not gonna pay you 25 if they think is worth 20. So that's really not how that return on investment works from their perspective. So, that's what we see from a good strong market. If you take the other avenue and say, "All right, the business owner was wrong "and now there's a downmarket. "Now revenues are down. "The cash flows are down." Now, the business owners, like, "You know what? "There's a lot more stress in the business. "I wanna transact the business now "now that we're in a down market." The bad part is the value's likely depressed. And on a buyer side, same as on one on the side, when the market was strong, is buyers aren't gonna be too interested in buying businesses when the values down. And so where it gets difficult as a buyer is as an owner, they want the value from last year because it's higher and they think that's what it's worth. And the buyer's only willing to pay something less than that because the profitability of the company has gone down. So you get odds and ends on that side. The other thing to remember is, when you're in a down market, only strong companies really really are get good offers and are able to find buyers because they're able to show that the business is doing really, really well, even through difficult times. So they're still able to drive profitability. They're still able to maintain revenue or increase revenue. So strong companies in down times really still thrive from a transactional standpoint. So as an owner, trying to time the market, if that's your strategy, really what you have to do is what we talked a little bit about is really integrate that business and personal strategy together and in doing that, really what you do is you've got a baseline of what the value is today, understand what the value of your company is today. And then you tie that into the personal side saying, "Well, how much do I need out of the business "when I transact the business "from my post-transition lifestyle?" So assuming you get enough money to lead the life you want to after you sell the business, great. Then you look at the market question, right? If market goes up from where it is today, fantastic. You already had enough money to live off of when the market when it was on the average spot. Now the difficult part is when the market goes down, how does that affect your post-transition lifestyle? Do you have to adjust it? Are you comfortable with that? And looking at how sensitive that analysis is, what if you lost 10% of the value? What if you lost 20% of the value? Could you still transact that business or is that gonna affect when you can sell your business? Back to what Joel was talking about, what type of transition option are you looking for and how are you going to let the market dictate how you transact your business? Joel, I'll turn it back to the last one. I appreciate that. And we're coming up on 3:40, so hopefully we'll have some time for some other questions that pop in. So I'll go through this one quickly. I just became very liquid. Why would I ever regret the decision to sell? That's the question? And the myth behind that is money and selling out will make me happy, enough money will make me happy. And so the reality is in the MNA community in that ecosystem, it's kind of a commonly known fact that three out of four business owners who have sold profoundly regretted their decision to sell within 12 months of the transaction. And there's more than one reason for that. Basically one of them is, fore planning on the lifestyle/psychological side. So you can take the owner out of the business, sometimes you can't take the business out of the owner. And so someone who has spent 5, 10, 20, even 40 years building a business, getting it to the pinnacle of success, and then just making an exit and feeling like there's nothing else to live for in some respects, right? I've done everything. I've seen the heights. I've scaled them. I won against all odds. What have you. And now I just sell, I get a huge check and I'm consigned to the golf course or the country club for the rest of my life. So, part of this is that psychological need to have meaning, to have some activity that you succeed at and have a tie in with your talents and abilities and kind of your own psychological makeup and have that aspect of your life to give you meaning. So there's that piece, which is probably frankly, one of the largest pieces to this. And then a lot of business owners will actually look to buy another business after a sale like this, for that very reason, they just can't give it up. They might not do it to the same extent that they did it prior to the transaction but, they can't imagine their life without having that activity in it. That rush and fury of dealing with customers, dealing with suppliers, dealing with complex problems, managing personnel, all those things. So one of the things that we see is a lot of people who take a second crack at things. And Mike, I think you probably have a thought or two on that as well, I imagine.

So what we typically see five years ago when we're doing transactions, right? A lot of owners were looking just, "I'm gonna transact and I'm gonna be done "and go into retirement." That typically isn't the case anymore. We have an owners that are selling next week. They have kids in the business, they got a really good offer, they decided to take it. And their ultimate goal is wait until their non-compete ends. And then they're gonna get back into their business with their kids. So, what we're seeing a lot of when we're talking about the lifestyle planning that Joel alluded to is carving out a piece for starting a new business or carving out a piece to buy another business, maybe in a different industry, try something different. So, there is a lot of different dynamics that are changing over not just in the MNA space, but from the family standpoint, business owners perspective of what they're doing after they've transacted their business.

Fantastic. And so with that in mind, that really ends I think our kind of prepared remarks. So maybe Carey, we'll turn it over to you to see if we have any questions.

Joel, thank you. Yes, we do have several questions here. Lemme get to the first one. I get calls constantly from investing firms wanting to buy my business. Should I not respond to them until my business is ready to be sold?

So I think the key there is, is one of the things that we've talked about is from a value standpoint, right? Owners are always interested in the value of their business. And so when you hear about business owners getting calls from private equity firms, and I'm sure they get calls from a whole bunch of people, you really gotta look at the timing of when you're looking to transact. And so if you're looking to transact in two to three years, those private equity firms can give you a good sense of what that value is. And so the first thing I will say is, do not have those conversations alone, make sure you are well-represented from an MNA perspective, but they can help you identify what that potential value is, and kind of set that benchmark for you in advance. And more importantly is to what Joel was talking about is we go and we'll do mock sales for business owners to help them understand what the value is and what potential red flags are. Private equity firm can do the same thing, right? They'll walk you through how they got to their value, but they will also kinda show you how that value could potentially be higher. And you can use that as a baseline for what you look at on how you build value over the next one, two, three years. So, you don't have to respond to all of them. You don't have to respond to any of them, but if you do, they can give you a good sense of value, but make sure you're doing it with an advisor that knows the MNA space and how to work with the private equity firm.

Thank you, Mike.

So to tackle that a little bit. Just one other point on that, there's an inverse relationship, right? Between the amount of information you share and the amount of leverage you have in a given deal, or a given transaction. And so one of the common threads that we sometimes see is people that have already gone too far and given away all their cards shared the financial, shared everything, and they've kind of given away most of the leverage that they have, and they might not even arrived kind of at an LOI or at a definitive purchase agreement. Getting that call first, it's true, it's better that that group called you instead of you calling them. But it's very, very easy to get into a situation where you're giving away more than you should be. And so, to Mike's point, I just wanted to get a reason for kind of underscoring that point.

Joel, thank you. This question has come up a couple of times, how long do most owners have to stick around post transaction?

That's a great question. So, it really depends on one the industry, how much work the owner has done beforehand in basically stepping away or not stepping away from their business. And it also depends on just the terms of the deal. And sometimes the sellers desires. If the seller wants to iron out an arrangement where maybe the purchase price or the other terms of the deal are good for them, sweet for them, attractive for them. But part of the deal is, some consideration for the next two, three or five years, because of interest that they have, or because of additional consideration, that might be something that they want to work into the deal. It's not uncommon for an owner who's getting close to burnout or who is been involved for a long, long time, or as a highly profitable business to want most of the deal, or even 100% of the deal to be in cash. The stars don't always align. The short answer is the better prepared the business is, the shorter that time is, if it's not so well-prepared, and there's more kind of work to do on the absentee owner front and getting the business ready, that number can go up pretty dramatically, right? I would say sometimes three years, Mike, right? Sometimes more.

At least what we see the average is six, 18 months. Some are longer, some are shorter. In reality, you sign the purchase agreement, don't expect that you're walking out the door the next day, unless you really do nothing in the business, right? So if you're in that real true absentee owner where you're not there, that will be evident to them, and that will help you, but typically your 6 to 18 months, sometimes there's a two year agreement, you only stay there for a year, year and a half. But I'd say on average, you're probably around that 12 to 15 months in the middle, but the span is really six to 18 months. It's not like a lot of our owners sign the papers and they're gone the next day. So that's an important part to remember.

Thank you. Gentlemen, I think we have time for one more question. with regard for your comments on, is your business ready to be sold? What are common issues that you need to address?

So what Joel was talking about before is some of the bigger ones that we see that take more time is new customer concentration. You see dependency on owner management or a lack of management depth. There's a lot of owner unrealistic expectation of value. So that one sometimes takes a long time to get through and really understand. And so, those are some of the bigger things that we see that, if you come to a transaction, you come to an LOI and those things are still haven't been addressed. They can be pushing out a transaction. They need more time to adjust another one's structure. If they're not optimized from a structure standpoint, let's take a little more than a couple months to get addressed.

Joel, do you have anything to add? I do. So the only thing I would add to that is probably the personal planning on the owner side. Again, when we kind of begin to address this with owners who we'll say they're just kind of exploring the possibilities, right? They've got a little time and they've got some perspectives and they think they might like to be out. Doing that work on the personal side upfront and vetting that pretty closely, not only in terms of whether or not the capital will be enough to fund their lifestyle, but also with who the likeliest parties are or what the likeliest transfer channel is for them, gives them a great perspective on basically making sure that their expectations are in alignment with the market and with the choice of transfer channel they're making for that market. And then the older dependency piece and their own mental readiness are huge parts of it too. But I think all of those things, the more those are in alignment, the higher the likelihood is that an owner will be successful to basically get again from that somewhere and switch it to exactly where that owner wants to be.

Well, I thank you both for taking the questions. And I guess I'd just like to say in closing that we found that business owners we work with tend to fall into one of three categories. Those who make things happen, those who wait for things to happen, and those that wonder what the heck just happened? And obviously we don't want you to fall into the third category. We wanna provide you with advice and guidance you need to begin to work with your transition team, including your legal and tax advisors. Well, before you consider transitioning your business. If you'd like to have a follow-up call to discuss your particular business and situation, please reach out to your key bank personal or commercial relationship manager, or you may reach out directly to Mike and or Joel to schedule a call. Thank you so much for participating in today's call. We hope you will join us on July 15th at 3:00, for our next topic in unlocking opportunity series, asset protection planning for business owners. Thank you and have a good afternoon.

Bye everybody.

Bye-bye.

Thanks everyone.

Watch this episode of the Unlocking Opportunity Series as Directors of Family Wealth Consulting Joel Redmond and Mike Ella discuss the top ten questions they receive from owners regarding transition. Don't miss this in-depth discussion, guided by real-world case studies, to discover what you can do to drive up value and prepare for the due diligence ahead.

For more guidance on responding to and negotiating unsolicited offers for your business, contact our Business Advisory Services team.

Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice.

KeyBank does not provide legal advice.

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