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So, you were approached, spontaneously and unsolicited, with a compelling offer for your business. Maybe it was more than you expected. What comes next? Should it be considered more than you expected?

Transcript

All right, let get us started. Good afternoon, everyone. And thank you for joining us today. We are super excited to continue our business owner series with this topic. I have an unsolicited offer, now what. We actually got the idea of doing this presentation as we heard one of our clients share the following exchange. He was talking to an advisor that was representing a buyer who had approached him unsolicited, and said to him, "sellers, get a better price" "if they negotiate directly with the buyers, MNA advisor," "rather than getting represented" A big red flag and fortunately that client was smart enough to reach out and get someone involved and pull together a team to help him in this process. For those of you who don't know our team, we are the business advisory services group at Key Private Bank. I am Jeff Getty. I am the managing director of that group. And with me today is Mike Ella and Francis Brown. Both directors in that group. And between the three of us, we cover among a couple other colleagues the majority of the entire United States actually, for Key Bank with our business advisory services. For those of you who don't know our team very well, we were created in staff to build long-term wealth management relationships by serving as owner advocates. That shepherd owners and other advisors through a transition or transaction process. Our backgrounds are somewhat similar. They're a little bit diverse, degrees in law, CPAs. And amongst our entire group, we have over a hundred year of transactional experience including pre-sale, post-sale tax and advisory services. Some MNA advisory, business growth strategies, things like that. So, we really do soup to nuts business advisory services for privately held businesses. We don't do anything in the public sector. We pride ourselves on offering gnostic advice and owner education to drive owner outcome business transactions. So, we are all about getting clients, owners the best possible outcome. Specifically the issues we solve, we avoid what we call predictable pre-tax business transition mistakes and sub optimal transition outcomes. We avoid the need to become an expert or serve as a general contractor, managing the business transition process. We come in and help you and free you up to run your business and allow us to help you shepherd through a process which sometimes can go on for quite a long period of time. It can be very distracting. We also help clients work through what we generally see as a lack of awareness around some latent risks that threaten the owner's personal financial and business goals. And then we also come up with and help them navigate through strategies to mitigate them. Today's topic has two major threads behind it. First, is sizable number of our consulting work comes from clients who may or may not have a timeline in selling their business and approach out of blue with a fat offer. However, as we go through our discussion, keep in mind you don't have to respond to that unsolicited offer, out of greed, fear, family pressure, et cetera. It's perfectly acceptable to take a pass. Because if you have a good business that buyers are interested today, they're almost certainly gonna be interested again in the future. So, first threshold question, do I have to talk to someone? The answer is no. We're gonna hit this a couple of times today as we go through these materials or this discussion. It's perfectly acceptable to say, thank you. I appreciate it, I'm flattered. I'm just not ready to have this conversation yet. I'm perfectly happy or a thread of, hey, call me in six months, six years, whatever your timeline is. And that's certainly a lot of the conversations we have our clients at the outset. I had someone call me, how do I respond. Are in certificate well, what is it you're thinking about? What's your timeline and things like that. And that'll dictate a very specific series of responses. The second thread of our discussion point today, We were born and crystallized out of this actual client case, I referenced at the very beginning. This was about a year ago. We were introduced to this client who was approached by a strategic buyer, whom he knew inside the industry, through an MNA intermediary, or someone this buyer had hired to go out and find businesses to acquire. Our client, knew the buyer and trusted that they could work with that individual's MNA advisor, who said things like, one, we are the major strategic buyer in this field and no one will ever give you more money than us. Second thing, our experience is that sellers should negotiate directly with the buyers. MNA advisor got a better price than if they're represented by their own MNA advisor. Pretty much what I'd said at the beginning. Third one was, if you don't deal with us, we will buy someone else, and there will be no one left to buy you and your marketplace. And the fourth major issue that was shared with this client before we got involved was providing financials, customer lists and other information is absolutely necessary for us as the buyers to make you an offer. And we will make any necessary adjustments after we make the offer to your financials and things like that. So, real quick, before we get to the middle of this, what was the buyer doing? They were playing on multiple layers of fears. We're the only ones, we'll give you the best offer. You have to give this information. You have to give this information to anybody. I argued they were being relatively misleading as to the process. We will get into that a little bit as we go through the talking points today with Mike and Francis about some of these back and forth discussions and negotiations. And I would argue they were abusing a lack of experience to achieve a one-sided process and outcome. The good news is out of this scenario, the client had sense enough or time enough to contact us and to help them negotiate with the potential buyer on their behalf and get them a better outcome and headed down the right path. And this deal did close successfully, in excess of the price, the client anticipated. And certainly in excess of the initial offer price that came across the transom. A little bit of backdrop and what's driving this unsolicited offer behavior, before we get into the meat of the presentation. If you've been paying attention in the marketplace generally, people talk a lot about how much is going on, in the sale side and buy-side, MNA advisory space. There's all sorts of deals going on. Highs multiples ever, investment banks are super busy. What's really driving this, and what's driving the strategic buyers and financial buyers to put people out in the marketplace to pick up the phone and talk to business owners and make them kind of unsolicited offers? One is the private equity group model. There's a couple of things going on here. There's a ton of these out there. There's a lot of money they have to deploy that's on the sidelines. But what's not as well known is there is some significant changes in the prudent investor rules, that allows private equity groups to make investments outside of the stock market. And that's what's really driving the growth of these groups and the money they have to deploy. So, there's a lot of people out there that historically would not have made interest in investments in businesses like yours. And now they have the legal and financial wherewithal to do so. In the strategic buyer space, organic growth is not sufficient to drive value. They need to grow by acquisition. And because of that, strategics are constantly on the hunt and widening their geographic or product scope or capabilities, scope as are going through things. And what's really allowing this to go on steroids, is money super cheap. Interest rates borrowing is very inexpensive to historical norms. There's a ton of cash in the silence. I've mentioned already. There is a lot of money that has to be deployed under these funds or under strategics. And the third piece what's really driving this conversation, it is a sellers market very much and that's fairly consistently. Most people see it that way. We certainly do, but understand it is a sellers market for this sophisticated well-prepared sellers, who can avoid being taken advantage of by the buyers. Buyers are trying to even out that playing ground by going direct to business centers. Historically they didn't do as much of that. But because it's such a sellers market, they're trying to get in first, fast and furious before owners have the time to stop, set and think about what it is they wanna do, how to pull together a deal team, how to evaluate that offer, how to get their business ready for things like due diligence. Those are really the drivers that are going on here today. And we expect this trend to continue. One other factor, I'm gonna mention that's driving some of this or this is more seller based than buyer based is, there's been a change in administration and the change in control of the Senate. And that is perceived to be, and I happen to agree. It's probably true. We're gonna see some tax law changes. That are going to make it more expensive from a tax perspective, to sell a business here in the near future. As such, a lot of haunts that we deal with, who have been kind of putting off a process are definitely more in tuned today than they were even six, eight months ago, to get something rolling. So, therefore, today's market, there's so much more money available. It's an almost inevitable that a profitable business will get noticed and an offer to sell, may not be easy to discern the good from the bad and how you respond to that offer will have consequences. It'll set the stage for the rest of that process. Business owners are motivated to respond, sometimes out of fear, just sometimes out of what they perceive to be polite, that this is a once in a lifetime event. But it's typically not the case that you can't negotiate and you can't take control of this process as the seller. And I know Mike and Francis are gonna get in this a little bit. You have the ability to control how that process works and how you flow information and things like that. So, goal today is to walk you through the MNA process and what you need to know before going into it. Discern why you need to have a sales strategy. We're gonna go through a bunch of mistakes you'd wanna avoid when responding to an offer. Learn there's a difference between an appraisal, and how buyers price companies. And seeing limited business owners with limited experience selling a business will make predictable mistakes. And we're gonna walk through some of the ones that stick in our minds more than others. If things we've seen and things we've been able to adjust. In some cases, some cases not. But to really help people get out of that suboptimal outcome box. So, with that backdrop, I'm gonna be quiet. I'm gonna pass it off to my colleagues. And we're gonna get Francis started to talk about sales strategy. So, Francis take us away.

Thanks, Jeff, so we're gonna talk about six different issues. I'm gonna start out with sales strategy. Talking about the issue, give a little story and then give you a call to action. So, how you respond to an unsolicited offer is in part dependent upon your sales strategy. It really starts with your mindset. You're either selling or preparing to go to market or not. In other words, you have both feet in the water or both feet out, having one foot in one foot out just doesn't really work. Because it leads to people taking what I'll call a half-hearted approach, where they're cut out really, but head down the path and they end up not doing a good job. So, we recommend squarely categorizing yourself into one of two camps. You're ready to transition or transact to mean you're actually marketing your business or getting ready to market your business, or you're not. And that could be, say a two or three-year time window. I'll be the first one to admit that that advice is great in theory, but the problem crops up when you get this crazy stupid offer from Mr. Moneybags. You went from thinking that you had a five-year plan, and then you went to having a five month plan or five week plan because you're like, oh, I should sit up and pay attention. And Jeff mentioned this before. This is an offer I'm never, ever gonna get again. Sales strategy issue starts with both strategic and tactical perspectives, going to market. So, the strategy, how you as a seller approach, interacting with buyers and how professional or experienced you come across will make it significant difference in the approach that you get from the perspective buyers. There's serious money at stake and people will use that inexperience to their advantage. It's not personal, it's just business. But this is especially true. If you're talking with people from a corporate development office or a private equity firm. Most unsolicited offers are sent out by professional buyers. They may just send out 3000 letters seeing what will hit. But the first question that they're expecting to be asked is what was your interest in this specific company? Why did you send an offer to Mr. Jones? How they respond to that question will determine, again, whether it's a fishing expedition or whether there's any specific interest in your company. One thing you can do to come across professionally, is to have somebody else ask the question. Why did you send this offer to the client? We find that a lot of business owners who respond to their own don't have the experience, and it almost feels like they're swimming in a river against the current or they're out of the comfort zone. They become frustrated, discouraged, then ended up bailing on the process. This leads to procrastination in terms of any business transition decisions and a void developing a sort of a plan. This is all avoidable. So, if I respond...

Francis, do you mind if I jump in here for a second?

Yeah, go ahead.

So when you talk about a sales process and not going so well, and we had a client three years ago, go through this where they had an unsolicited offer come in, and they started to go out it themselves and didn't get anybody else brought into the process. And so they started sharing information. They got to a point where there was a letter of intent was signed and they started doing due diligence. Well, when they start going through due diligence, they realized that the financial statements didn't tie, the owner wasn't really being upfront with the different, some things that they said before the LOI was signed. And in the end, the buyer was the one who ended up walking away after 30 or 40 days. So, fast forward into this year, when the owner came and engaged, just to kind of run a more systematic process, we reached back out to that buyer from three years ago, who was, they were really good buyer and would have been a real good fit. They wouldn't even return our calls. They would not sign an NDA or non-disclosure agreement which we'll get into in a little bit, because they just lost all credibility in the owner and how they portrayed the process, that they wouldn't even engage with us at all.

Thanks Mike, so one of the things I wanna mention here, so, if you do respond to an offer, you should expect that the buyer will send over a data request. Because they wanna start gathering information on your company. You should be ready to respond to that information requests pretty quickly. This not only sends a clear signal that you've taken the process seriously, but you're acting professionally. Mike we will little later on on what type of information to share, but just just wanted to get that out there. We're also gonna share stories that'll help drive home some points that we hope you'll learn from mistakes that we've seen others make, so that you hopefully won't repeat them. So, an example, we recently worked with some owners who shared how they completely botched their interactions with the prospective buyer and how they ended up bailing on the process. They were unprepared. They didn't have a sales strategy. They really didn't know what they were doing, but they went ahead and accepted the invitation to come meet with the buyers. As they got in that meeting, they realized immediately that they were out of their depth, setting in the conference room with the corporate development officers, and they couldn't even answer basic questions. They realized that if they proceeded down that path, that the buyers were probably gonna take advantage of them, so, they decided to hope for whole process. They were headed towards the suboptimal outcome and a disaster. Unfortunately for them, they were smart enough to realize they were out of their depth and decided to call it quits. So, what's the call to action. So, there's two things. If you're seriously interested in transacting, find someone who will help you to respond to inquiries. We do that for clients all the time. You may wanna have your CPA, your attorney, MNA advisor do it, but you don't wanna be the one to respond to that request. Second, be prepared to respond to the information request right after you get that request. Because again, it'll help you become a cross a lot more professionally. So, with that, I'm gonna turn it over to Mike. Who's gonna talk about the value of a second buyer.

All right, so, when we talk about the value of a second buyer, there's a couple of different ways that you can go about an MNA transaction. And so we're gonna spend a lot of time on unsolicited offers today. So, that's one avenue to go dealing directly with one business owner. Another avenue you can go is a more formal process where you have certain steps in place, and you have a bunch of buyers that are in the mix. And then depending on your situation, you could have kind of a hybrid of the two. And we're gonna talk a little bit more about the unsolicited offer but there is other strategies that you can put into place. So, in the MNA space, we have a saying that when you have one buyer, you really have no buyers. And the reason behind that is because the other, when a buyer comes and gives you an unsolicited offer, they automatically know that there's no other buyers in the process. There could potentially be one, but they're pretty confident that they're not. So, there's really no competition. So, odds are you're not gonna get their best offer when they come and bring a letter of intent or a formal letter of intent to you. So, there's various tactics that you can use to kind of create that secondary market. And what we've seen is when business owners try and do that themselves, and kind of create that secondary market, and aren't able to back it up, it really creates a lot of friction between the buyer. So, what works well is when you have an MNA advisor kind of being the middleman between the buyer and the seller, if there's friction, when you get to the point where you have to bring an attack about creating a secondary market with another buyer, then that friction is typically between the buyer and the seller or between the buyer and the MNA advisor, and not between the buyer and the seller. So, a good example of this is we have, we were working with a business owner middle of last year. They had an unsolicited offer. Weren't sure what to do with it. So, we got brought in to negotiate with the buyers. The buyers presented that offer. It was okay. It wasn't bad. But then when we started going back and looking at some different information, looking at industry statistics, looking at how good the company was, the management team was strong and all these other factors. And then we looked at the buyer's company as well and said, you know what, when they bring this company in to their business, it's going to be worth a lot more than it is from what they're trying to argue the value is. So, we presented our case to the buyer. We go back and forth and we're going back and forth about a month or two. And they kept ratcheting their offer up but really never got up to where we wanted them to be or where the owner wanted them to be when they're looking to transition the business. So, at this time we were under an agreement that we could not go and talk to another buyer at that time. So, what we did is we went to them and said, listen, we obviously aren't gonna come to terms on a value. We wanna kind of get out of this the exclusivity that we're gonna talk about in a little bit too. And we wanna go talk to some other buyers because really the business owner, they're motivated to sell and they wanna push this thing forward. A couple of weeks, go by. They finally get up to the value that we're looking for. And over, we signed a letter of intent with them. And then with the 60 days we had the transaction closed. So, the key takeaways from that is saying you have another buyer and being able to substantiate that, it's two completely different things. As a business owner in your industry, you know a lot of different people, you know a lot of different potential buyers. But knowing how to confidentially use that information, bring them into the process to drive purchase price up, is something we see that typically doesn't work well for a business owner. And that's why bringing in an MNA advisor that knows how to use that, create that secondary market, or be that middleman really adds a lot of value to the business owner. So, next up, we're gonna talk about avoiding or falling into the meaningless multiple trap.

Okay, thanks Mike. So, it's a running joke that most business owners cannot accurately value their company. Most overvalue the company but we also run into situations where people will undervalue their company as well. A few years ago, we crunched some numbers out of a database called GF data which collects closed results for private company purchases. And what we found is that there was a 71% variance between one standard deviation to the right and one standard deviation to the left. And what that means. So, that if you thought your company was worth $10 million, somebody might offer 7 million for it or somebody might offer 13 million for it. And what was surprising about that is that these are companies that were bought by private equity firms. And there was that much variance between it. These are not the drags. These were well-run companies that private equity firms bought. So that that's pretty telling. Professional buyers will price the target company based on their expected rate of return. They wanna generate given the riskiness and profitability that they expect to generate or anticipate from owning and running your company. One of the most common approaches in valuing intermittent transactions is relying upon company multiples. It's easy to understand. It's easy to apply the defensible to colleagues and to investors. So, a popular benchmark is to use multiple of historical EBITDA, which EBITDA stands for earnings before interest, taxes, depreciation, and amortization. But in other varieties include multiples of sales, EBIT which is earnings before interest in taxes and net earnings. The simple approach is to begin with an average multiple calculated off of a comparable group, public or private companies, and apply it to the target company consideration and voila, you have a number, or do you. Using this approach is how and why people fall into what we call the meaningless multiple trap. There's no adjustments made for any operations or synergies. So, a lot of people say, well, what's the average multiple? And Mike, my profit for EBITDA is this number. So, while I have a number and that's, that will lead to erroneous results. So, selecting a comparable group of companies to come up with the multiple, is highly subjective and open to manipulation. The inclusion or exclusion of even one or two companies can have a material impact on the group's average multiples and a result, evaluation. So, even if you believe a group of companies was selected carefully without bias, there are many factors which could distort the results when applied to a company. So, it's not really comparable.

Francis, can I jump in real quick?

Yeah, Mike.

So, Francis talking a lot about your company, as a business owner, and what you wanna remember is don't forget as well about the buyer's business, right? 'Cause they're the one coming up with the value for your business. You have to look at things like, are you gonna be a standalone? Or are you going to get integrated into their company? That's gonna have a big impact. What factors are you really good at? They're not not really good at? How is that gonna drive value? And then looking at, when they look at your company, what risks and opportunities could they potentially see that you're not seeing? Or vice versa, which ones are you seeing that they aren't seeing? And we had a client that was going through and they're going through a transition right now where the buyer came back and said, we see this, this and this as a really good opportunity for us to partner together, right? In that pre LOI phase. And what the business owner did, was they said, well, yes those are all great things. They went back and looked at their website. They looked at other things that they do really well and said, well, these factors would be very good for you as well. And we can help you grow in this area and that area. And that's ultimately gonna help them drive that value as well. By them taking the time to really understand the buyer and the buyer's business and how they're looking at their transaction or merger to grow their company.

Yeah, I'm gonna jump in here with a quick point. 'Cause I think it's important to delve to with what Mike and Francis are saying. It's always, I think a surprise to a lot of business owners, the first time. And typically the only time they go through this process. At this stage, how open buyers are, with how they see the business fitting in with their business on their platform, whatever it is. It's surprising because people think that this is like some big secret and they're not sharing what they see. For the most part, they are particularly if they see it as a competitive environment, and they see it as being a creative to the process, from the sense of, hey, we're gonna take your baby, your business and grow it into something this much better, right? It's almost, it's sometimes even an ego play. So, it's always a surprise to people how open this dialogue typically is at a certain point and people start to see these, what they call synergies and start to really look at this and say, wow, this could be really interesting, really cool. I didn't see my business that way. Or we as the buyers didn't see your business fitting in that way. So, it's kind of an interesting dynamic to watch when you're in the negotiations where this light bulb goes off and it's no longer kind of a traffic cop thing. It's almost like allowing the information to flow a little more freely. The second thing I want to hit and I apologize for not getting this out initially, I just forgot, if you have any questions, we're gonna leave some time at the end to handle some Q and A. And I got some already from people who had registered and knew me and said, hey, I got a question. Can you put this into the queue. At the bottom of your screen, there should be a Q and A box. So, if anything's on your mind, it's anonymous. I'm not gonna certainly quote who said it, but we'd love to take your questions at the end and we'll get to as many as possible. So, if you have any, just put them in that Q and A box. So, I'm sorry back to you. I think Francis.

So, Jeff, one of the things you were saying here, resonates really well. It's surprising, it surprises a lot of people, how open buyers will be about what the synergistic effect would be, when two companies are combined. They can't help themselves of telling what, telling a buyer, excuse me, telling a seller why they want that company. They'll just go and yeah, we'll be great. We'll be great. We'll be great. Feeding the seller with all that information. So, they know what the synergistic effect will be. So, the coming back to multiples. So, when you're evaluating, when you've come up with a multiple, one of the things you need to do to evaluate whether the group is truly comparable or there are some questions to ask and one could be, does the group have the same expected growth rate as your company? And how would you know that, right? Are there investment opportunities the same as yours? Does it have a similar customer base or product lines? What about customer concentration risks? What about capital cost, structure and cost of capital? Are they similar or different than yours? What about accounting policies, effective tax rates, DIP in policies? Are they all the same? Because multiples are generally applied to some level of operating results. They naturally exclude components of value, like, does the company own its own real estate? Does the company have upcoming large capital expenditures or working capital requirements? Does the company have any assets, say intellectual property that will begin to contribute to revenue, heightened revenue and profitability that just weren't factored into historical growth rates. So, I hope this explains why using average industry multiples might not be or would yield an incomplete analysis and unreliable estimate of your company's value. So, as an example of a story, I worked with a mature company that had a flat to modest year over year growth, but had built up a sizeable cash reserves. So, they had been around for a really long time and they'd gotten an appraisal years ago. And figured now that the owner was getting older, it was time to think about transitioning. So, they were one of the leading companies in their geographic area, in their industry. And they started to reach out to MNA advisors. And they were shocked to find out that there wasn't much interest. The company, what it used to be, wasn't what new buyers would be looking for. So, all the MNA advisors declined to represent this company. The company's future, too, wasn't as bright as it had been in the past. The MNA adviser said that buyers would be wary of hitting the rate of return targets they had for making that sizable purchase. You might think that that's a unique problem or story, but it's not, most MNA advisors will turn away seven out of seven to eight out of every 10 people who show up asking what that advisor helps sell them. It's a classic example of an owner getting stuck with a meaningless, multiple trap. And the other case on the other end of the spectrum, we heard about was where a business owner got an appraisal, was pleased with the number. He knew that he could retire on that amount. So, he ended up selling to a competitor for that price. And what was amazing is that he later found out that this was a strategic buyer. He knew it, but he had gone. Sold based on the multiple that he got and found out that the strategic buyer would have paid 50% more than what he ended up paying. So, this guy left a lot on the table. And with a strategic buyer, it's not where two plus two equals four, it's where it equals six or eight. And as a seller, you should be able to get some of them value into your pocket. So, most appraisers will value a company using quote unquote average multiples because it's safe and it puts you in the, it shows you what the median is. They're not gonna be able to help you understand what a strategic buyer would pay for your company. Call to action. Before you start accepting unsolicited offers, get some outside perspective on how a buyer might view your company rather than relying upon an appraisal. This'll give you some additional perspective on where your company is possibly doing well and possibly not doing well. And with that, I'm gonna turn it over to Mike to talk about incorrectly using leverage.

All right, thanks Francis. Yes, so the leverage we're talking about incorrectly using it is really focused around negotiating leverage. And so a lot of people think we're talking about debt or leverage on a balance sheet. That's not what we're talking about. It's really around negotiation leverage. And what that means, is talking about who has control over the pace and direction of a negotiation. So, what's important to realize is when you're going through a transaction, that leverage is going to shift between the seller and the buyer. And typically where we see that that shift is around the letter of intent or LOI, and once it's signed. And the reason it starts to shift is because in the LOI you're going to have a whole bunch of different terms and clauses in there. And one of the more important ones is around exclusivity. And so exclusivity is basically saying this, when you sign that LOI, is that for a certain period of time, and it's usually 90 to 120 days as a typical is you will not talk with any other buyers at that time. So, when you think about leverage and negotiations is if you can't talk to anybody else for a 90 days or 120 days, then that leverage goes from you to the buyer as soon as you sign that LOI. So, taking a step back, you get an unsolicited offer, automatically the seller is one that has a leverage in the transaction. Because like Jeff said before, you don't have to respond to them, you can just walk away and say, you're not interested. But if you are interested and you start moving forward, you're going to control the information. You're gonna control the speed, the process and how you go through that unsolicited offer, and when you move towards a transaction. So, you sign an LOI. Then once you sign that LOI, that negotiation leverage starts to shift to the buyer. And what we see and how owners don't use that leverage correctly, is that when you're negotiating with the buyer, free LOI, okay, nothing's been signed, you have all the leverage. But what you do and as you're making the story of the business seem much better than it is. Like, there's no risks in the business. I know everyone's doing great. We're on a great growth projection and the owner or the buyers listen to you. They go through, they make a very attractive offer and you sign LOI, start moving into due diligence. Get into due diligence, then they start finding the buyer, starts finding some skeletons in the closet. The financials aren't as good or they don't tie and you'll go on and on, We need to be the management team. So, the management team's looking to turn over. And so the buyers left with, all they can do is reduce the purchase price. So, a good example of this is we had a business owner that we were working with and she got an unsolicited offer. She started sharing some information with the buyers and there was a certain designation on the business that allowed them to get some contracts in place. And so when the buyer went through, and started doing their analysis and gave an offer, the amount of work getting from a certain designation was kind of diminished. And then it wasn't really seen as a big item. So, we've got a very attractive offer. Then we started to go through due diligence and all of a sudden, every week, the amount of revenue that came from this designation, started to increase and the buyer was left with all we could do is offer a price adjustment because I can't buy the business at this. 'Cause a lot of this revenue is gonna go away after you sell it to us. Owner got very upset, did not like the price they came up with, and they basically walked away. Fast forward to this year, and there was another buyer that came out of the woodwork that wanted to buy our business, we sat down and we said, okay, this is how much revenue potentially could be going away after a potential sale because of a certain designation that potentially is gonna go away. And that was set up in advance. So, we knew when we got the offer that we knew that they knew that this issue potentially could arise when you got into due diligence. Yeah, I'm sorry.

I wasn't gonna interject, finish your thought.

No, go ahead, Francis.

I was gonna say, this kind of relates back to the sales strategy. So, wanna be clear that there's really three numbers we're talking about. It's the LOI number, it's the closing number. And then there's always a number of what you walk away from the table with, but you don't want the number between the LOI and the closing to be diminished. And so, I think there's stats out there that say that typically the LOI price drops 20 to 30% based on having gone through due diligence. So, when you get an offer upfront, LOI may look great. But to Mike's example, you wanna be able to get to the closing number. That's relatively close to what you received in the LOI as opposed to just getting brandished by due diligence. Because that's where a lot of buyers, or excuse me, sellers who go to the market, end up dropping out.

Yeah, thanks Francis. And so the call to action is risks identified by a buyer, reduce purchase price. Risks identified by owners, are opportunities. So, work with an MNA advisor that understands how to use leverage in a transaction, because identifying the risk by a buyer, or by an owner in advance with an MNA advisor can be portrayed into opportunities, pre LOI. And I'm gonna turn it over to Francis to talk about not knowing your number.

Okay, thanks, so one of the most important issues any business transition and owner faces is if he or she has accumulated enough wealth and financial resources to maintain his or her lifestyle after selling the business. This opens up two issues. One is coming to grips with the fact that you no longer have a cash cow that produces consistent and reliable distributions. And two, most people have adapted their lifestyle to the level of income, they've been accustomed to generating. So, in other words, people who sell businesses for tens of millions of dollars, usually have lifestyles that befit that level of income and are just as much risk of not being able to afford a lifestyle to which the family has been accustomed, as the guy who sells for just a few million bucks. We always suggest everyone put pen to paper or actually fingers to keyboard and figure out what their bottom up number is. That's by definition, how much do you need to live on based on your spending habits, regardless of what the business is worth. Don't forget to include the value of expenses that you might run through the business. And for some owners, this is a lot. And for some it's not as much, but it's a sizeable amount for people who particularly travel a lot, not so much today but in the past, if you spent significant amount of your travel budget came from the business where you flew to a particular city, because you had relatives there, and had your business pay for it, you need to factor all that in if that's what you wanna be doing post-transaction. So, the bottom up approach is different question than what your company worth. That's kind of the top down approach and that asks what your company is worth. If you can't get a number that will allow the family to sustain itself, post-transaction then you're faced between choosing two suboptimal outcomes. Deciding to reduce your net spending or continuing to work and run the business for a few more years to increase its value. We found a lot of owners appreciated the opportunity to think about these issues before going to market. And that's because if there's a shortfall, they still had time to do something about it rather than waiting to ponder those issues, sitting in the attorney's office, waiting to sign documents.

When Francis we're talking about knowing your number, right? Is that's not for just small companies. It's not for medium-sized companies or big companies, it's for everybody. And we were working with the business owner right now that their value of their business is about $100 million. And it's a fair value. And when we start looking through into Francis' point is looking at, okay, know your number and what you need to get out of the transaction to be successful post-transition. If this owner sold for $100 million, they would not be successful. They need to be able to sell their business for 140 to 150 million to meet what they're actually taking out of the business. And it's a significant amount to Francis' point a lot of personal stuff, but they just weren't really aware of. So, $100 million value business, can't sell the business because it's too small. It's too, it's not gonna create enough cashflow post-transition. They really need to get that value up to 140, 150 million if they're willing, if they wanna sell.

Thanks, Mike, one of the things I want to mention is a lot of financial planners will ask a business owner, what is his or her business worth? And if they say 10 million, they'll take that number and put that into the financial plan without any verification of whether that number makes sense or not. So, the plan works because the owner came up with the numbers. So, I wanted to tie that back to the meaning was multiple conversation, and I forgot. I should also mention that GIL structure is just as important in determining the net amount, excuse me, that you're gonna walk away from the table with. so again, you've got the letter of intent number, you've got the closing number, and then you've got the after-tax, that number. And that's really what we're talking about. As a side note, GIL structure in tax planning will take on even more significance based on the tax proposals being discussed in Washington. Jeff mentioned that earlier, it may not come as a surprise, but most effective tax planning usually takes years to take effect and produce maximum results. It isn't something that works effectively after just a few months. I remember last year I had a guy call me up and say, hey, I sold my business last year. Is there any tax planning I can do? And I'm just like, well, no, you have to actually do the tax planning ahead of time. Or in that same tax year. As a young attorney, I worked with a business owner who thought he knew his number but underestimated it by a lot. In an effort to reduce his taxes, he ran a lot of his personal expenses through the company and honestly just didn't have a good sense of his numbers, personal financials. So, fortunately his wealth advisor, financial planner helped set him straight and the business owner ended up rejecting a lot of lower bids that he would have otherwise accepted. He was completely burnt out, ready to be done and thought that the offers that he was getting, although not top of the market, would be enough for him to be able to retire. By going through the exercise, he should realize that he needed a lot more from the business. So, he held onto the company for a few more years. Worked on cleaning up his financials and building out a senior management team. So, in the end, he was able to avoid a disaster. You may not be as clueless as that guy was, but I found that most business owners will run the numbers in their head without any input from a spouse or financial advisor. And as you can imagine, this creates angst in the spouse because he or she doesn't know what's in your head. And in one case, it actually created a disaster because the business owner died and everybody was scrambling around trying to figure out what was the game plan and how would the spouse have enough income to live off of? So, call to action, whether you're building a nest egg, as the primary factor in selling your company, we recommend crunching the numbers. We call this type of effort, a capital sufficiency analysis. Again, it's essentially a bottom up approach that takes into account how much you and your family spend. Other sources of income, say you have real estate that produces a monthly income. But we put all that together with what you're gonna need to earn off any portfolio. To be able to say, here's what you need to net. You may think it's a foregone conclusion that despite that, whether you have a very very profitable business, you're gonna have enough to retire. It's still worth running the numbers just to make sure that your back of the envelope calculations or whatever's in your head is actually doable. Your spouse, at a minimum, your spouse will appreciate that rather than hearing you say, I got it covered. Don't worry about it. So, with that, I'm gonna turn it over to Mike to talk about information sharing.

All right, so, for information sharing, you were talking about unsolicited offers and we don't mean someone's gonna come up to you and say, hey, I wanna buy your business. I'm gonna pay $15 million for it. Is that a good number for you? What we mean by unsolicited offer, which we talked about, is that they're gonna be, hey, I wanna, I'm interested in buying your business. Can I get some information for me yet? And then I'll give you an offer of what I think it's, what it's worth. So, you're gonna give them some information and confidentiality is key, right? Similar to anywhere when you're, as a business owner you're trying to keep your information private and confidential just as you're running your business. When you're going through a transaction, that that does not change. So, when you start thinking about talking to a buyer, the first thing you wanna do, is sign an nondisclosure agreement, NDA that we talked about before. And what that basically says is what a buyer can and cannot do with your information. Now, just because you have an NDA does not mean you can just give them everything that you want. There's still, you still really have to be careful at what information you're giving to the buyer. So, a lot of times when we get into situations like this, where an offer's coming, or has been delivered, the first thing we ask the business owner is, what information did you provide to them? For them to come up with the offer that they gave you. In almost all the time, there are certain information in there, there's confidential information that shouldn't have been shared. There's information that should have just been shared maybe as you get closer to the close of a transaction, that's already been given to the buyer. And a good example of that is customer information. It's getting given to the buyer because they asked for it. But the owner doesn't know that they shouldn't be sharing that maybe to later on in the process.

Hey Mike, may I interject for a sec?

Yeah.

So, I wanna tie this back to the sales strategy piece earlier. It's in term of knowing how much information to release and when. So, to get a good number and another why, you have to release certain kinds of information so that the prospective buyer can put together a good offer. But it's in terms of how you package that, how you prepare it, makes a significant difference, thanks, Mike.

Yeah, so another example, our last example is that we had a business owner, got an unsolicited offer and they started sharing their historical financial statements. So, when we got engaged, they were already sharing information back and they were getting an offer, the buyer was getting ready to provide an offer. And so I asked them, I'm like what information did you send to them? And they said, we sent them the historical financials. And I said, okay, well, did you recast or normalize the financial statements? And they said, no, we didn't. We didn't take out any of the personal or add back any of the personal stuff. Because what we wanna do, is when we get the first offer, is if it's not bad, then what we're gonna do is add those in, so we can jack the price up. And it was a bad mistake. It was a bad mistake because, basically what we were doing were we were replacing one schedule that we gave them with another one, literally two weeks later. And the buyer just lost all credibility with us and they just didn't trust what numbers were coming next. And so when you're talking about adding and recasting the financial statements, it's much much easier to go into an offer and say, here's my financial statements that have been adjusted because then the buyer has to go through, do their analysis and basically negotiate those back out. Instead of in the situation I said is we basically had an offer, got an offer, and then we had to go in and negotiate back in these normalizing adjustments. So, a call to action and what you should be thinking about when you're sharing information is talk to an MNA advisor before you send any. And, really understand what you should be sending to a buyer and what you shouldn't be. The biggest mistake we see is don't send your historical financial statements just as it's because you pay your CPA a lot of money to basically show the company as little profit as possible, because you're trying to minimize your taxes. In the MNA space, in the unsolicited offer space, that's the complete opposite. You wanna show the company as profitable as you can because you wanna drive that purchase price up as much as you can. And Jeff, if we got any questions from the attendees, we wanna go through those now.

Yeah, so we've got a few minutes left. I'm gonna hit as many of these as I can. Thank you for your questions. And of course, if we don't get to your question, you have when you thought of that after the fact, reach out to your local, Key Bank contact and we're more than happy. They'll be more than happy to get you in touch with one of us. And we'll answer that one-off. So first question. When do you bring in an MNA advisor and how do I get the process started? So, couple of sub-parts of this question, the first part of the question, when do I bring in an MNA advisor? Well, MNA advisor has somewhat of a wide connotation attached to it, right? So, if you're someone who's just starting to explore what are my strategic options on the table? Should I think about selling and giving to the kids, et cetera. Kind of you're on the highway looking at exit options right now. You need to find somebody who knows the different areas, who knows what different things mean and can come in and advise you across the board among the seven, eight different exit strategies that are out there and available and what they would mean to you to get the best optimal outcome. If you're say, if the question is behind, hey, I'm ready to go to market. I wanna sell tomorrow. You still need somebody to help shepherd you through the process, but you're probably closer than not to hiring an intermediary, a business broker, an investment banker, to start an auction process for you, help you start an auction process. Which comes to the second part of the question. How do I get a process started? Again, it depends on where you are and what you're trying to do. If you're literally at the point of, hey, I want to go to market right now. I know the price I need for whatever reason. And I pretty much know what that business is worth. You need to find somebody who can help that you trust, that can help you find the right partner to take you through that process. If it's gonna be a full-blown auction, you're gonna need an intermediary. Like I said, a broker or an investment banker. We do some of that work for people. We do help interview investment bankers to help people find the right fit. I mean, we deal with investment bankers and burgers all the time. We know a ton of them. It's not the first time we're having the conversation. And we know the tough questions to ask that aren't that obvious, the obvious ones, what do you charge? What's my business worth? How long does this take? I mean, those are obvious softball questions for a good intermediary. There's a lot of other very tough ones we ask, to get to the meat of the situation. To see if they really can add value to the process or are they just along for the ride to get a fee. Another question, great information. How do I get started? And how do I hire a broker or ibanker? I kind of answered this already. But again, who to get started with. Most clients in our experience don't know the right person to get started. And a little cautionary tale, if you, and this is nothing against lawyers in private practice or accountants that are in private practice, if you pick up the phone and call your friendly long-term accountant or lawyer, more often than not they're gonna give you an honest objective advice. Once in a while we do see professionals who correctly advise you and get paid a lot more to advise you as a business owner that has an individual, or try to push you out of a strategic thorough process because they know that's cutting off some level of fees. So, just understand how people get paid around your advisory table, and what their vested interest is. Even if it's not on purpose, sometimes people will take you down a path or take you on a path they would find more attractive for themselves, even if they don't mean to do it. So, find somebody who's gonna be a little more objective. Who's perhaps agnostic to access trails, who's agnostic and really is concerned what's the best option for you, and a pretty good indicator, in asking those questions is, when you ask somebody, well, what do you do expressly? And how do you get paid? Is usually a pretty good indicator as to what their vested interest is. So, if I, for example, I'll pick on ESOP firms. If I work for an ESOP firm, and all I do is ESOP's, and all I get paid for is ESOP's, it's more likely than not I'm gonna try to talk you into doing an ESOP, right? So, you just need to understand who you're speaking to and what their access to grind.

Hey Jeff, do you mind if I jump in. So, the advisory issue. What also happened is they'd get conflicting advice from different advisors So, the owner is saying, do I do this first? Do I do that first? I'm not sure what to do. And they'd all, might all be great advice. But they don't know what to do first or in what order.

Yeah, so this issue of how to get started is one of the most difficult I will put in a quick plug here, we've kind of danced around this issue with a couple areas. We offer what we call baseline assessment for clients. That is is a relatively speaking limited time commitment with a high value prop attached to it. What that means is, if we get 90 minutes with a business owner, we typically, we do an interview process called our baseline assessment. We take some information back to our office. We do an assessment and we come back with a written report. That's like 22 to 26 pages long that kind of marches through answering some very specific questions for owners to help them get started. To help us start to narrow down the process. Am I really ready to transact or transition? And if I am, what's kind of the right strategy or what's aligning the right way. It's not designed to be the final answer. It's designed to get people thinking about taking things to the next step, right? It's pretty rare. Even when someone comes to us and says, I am ready to transact and I wanna do this yesterday, they actually are. And they actually will. It happens, and we do it. But more often than not, it's the entry point. It's the starting point to have a real conversation or dialogue going. Next question, when should one get an appraisal? There's some terms of art. They're gonna come up in this answer. So, I'm gonna think we have Francis run with this one but you have an appraisal, a valuation, different types of valuation. So, I'm gonna try to expand the question just a little bit and talk about, and pose this to Francis. Francis, when you talk about, or think about valuation, how does that work? Who does it, and where is it relevant in this process?

Okay, well kind of tying back to the meeting with multiple conversation. It's about being able to, an appraiser is gonna tell you in a point in time, here's what your company was worth based on the different assumptions the appraiser uses, which is as much art as science. What I think you really want is somebody who's gonna tell you, how would a buyer view your company? An appraiser is gonna put you in, here's the medium, and you might be a little ahead below based on some profitability numbers. But what you really want is somebody to come in and help you understand what your company's gonna look like in the eyes of a particular financial or a strategic buyer. Mike, did you wanna add anything to that?

Francis to that point is, so a lot of times too is when to start getting started with someone looking to sell a business or business owner, is they always typically say, well, I had a valuation done a couple of years ago. And what you wanna make sure you're using is you're using current information. Because when you're starting to look, especially if the business is growing, you wanna be using information and valuing the business based on how, what financial data you're gonna be giving to a buyer to do the same thing. So, you can kind of compare apples to apples. And then also looking too at what was the reason for the valuation done in prior. Was it for tax purposes or it was for state tax purposes. Was it for gifting? What was the reason? Because if it wasn't for MNA related, then it probably doesn't make sense to be using that. And it's better off getting something newer done. That's more relevant with the information given to a buyer.

Great, so we have a couple other questions here. I'm sorry, we can't get to them all. We're at the top of the hour. I really do appreciate your time, interest and attention. Hopefully, this is a series, we're doing one at least one of these a month throughout 2021. And it's really designed to provide impactful, discussion for all of you on, what should you be thinking about, how does this process work? How different things in different nuances. We're gonna expand on some of the things you heard today in the future. Focus on some new ideas, some new things to help get you starting through this process in a meaningful way. And the takeaways here, I'm not gonna regurgitate everything you've heard. I would, I kind of analogize a sales process of your business is kind of like driving on the highway looking for the right exit without a GPS or a map. Because there is no perfect exit option for any of you. Everybody has their own, that's gonna work best for them. So, what you really need is not a set roadmap. You get a good co-pilot, riding short gun with you to help navigate to the right destination. And quite frankly, to protect you from getting from outsiders, robbing you. And I like to think that's the role we play best. Being a co-pilot riding short gun with our business and our clients, to help them navigate through this, this jungle, this highway, this world that they're really not used to, and probably never dealt with it before and will most likely not ever deal with it again. So, again, thank you for your time and interest in this session. This is recorded. So, we can happy to send you the link as a follow-up, so you can listen to it again. And we're happy to take phone calls with additional questions. One last point, our next session is May 13th, at three o'clock Eastern time. We will be talking about tax strategies to consider and implement in 2021, in anticipation of the most likely tax law outcomes. So, this is not gonna be a discussion of, well, here's what was proposed by this person or that person. We took all the common threads we're seeing, gave our best guests look inside the crystal ball what this tax act is gonna look like, and what are the types of things you can start evaluating right now with an eye towards actioning on them before the third quarter. Because quite frankly, some of the tax strategy work takes a little bit of time. And if you don't have the analysis done by that point, it's probably going to be too late. So again, that's May 13th at three o'clock Eastern time and we will be going through kind of, hitting the big points that will help you navigate through what we believe will be the next series of tax laws. So, once again, thanks for your time and attention. And we look forward to seeing you on a future call.

Thanks.

Take care.

In this first installment of our Unlocking Opportunity workshop series, Managing Director of Family Wealth Consulting, Jeffrey Getty, is joined by Family Office Directors Francis Brown and Michael Ella. Watch this video as they guide us through an in-depth discussion of what to consider after receiving that compelling offer. Watch this webinar as our team of experts outlines the pros and cons of the seven business transaction types, focusing on sales to a third party. Hear about real-world case studies that illustrate critical learnings around business function, value, the owner’s importance to business success, and the practical steps you can take to be prepared for the right deal.

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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