speaker-0: I think my perspective is a profitable business feeds the current owner. A sellable business feeds the next owner. So if you do not have your minute books organized, if you don't have your legal documents organized, if you don't have your financial statements at the ready and clear, precise and transparent, you're in big trouble.
speaker-1: The beware of people that look like me that want to sell your business, that say, can sell your business in 90 days. That is utter crap. And the process is going to take six to eight months to do.
speaker-0: should be selling your business because you're working towards something, not running away from something.
speaker-1: If you're not over 5 million in revenue, they won't buy you. So you've just taken like almost 65 % of the market of your buyers away by not yet being at 5 million.
speaker-2: Let's just do a in a headline, who you are, how you're showing up and how you're thinking about today in terms of the focus on Inside M &A, opening the playbook. Jackie, let's start with you.
speaker-0: Sure. My name is Jackie Dinsmore. I am a recovering lawyer, I like to say. Started on Bay Street, worked in-house at the Toronto Star, and then became more of an entrepreneur, to be honest with you. So, I successfully sold a consumer products company and two professional services firms. I'm now the managing partner of one of those firms. We have about 130 or 120 lawyers across Canada. I wanted to disrupt the legal world to make it more accessible to entrepreneurs, having gone through that experience myself. Really had a lot of fun, I'd like to say, with the bowl of spaghetti. People think success is kind of, you know, a straight arrow, but really it ended up being a bowl of spaghetti that I wouldn't have changed for the world. And really excited to still be working in the business that I sold and with a great team. So thank you for having me.
speaker-2: Awesome. Welcome. Brent, what about you? You have the other side of the table.
speaker-1: Yeah, well, I've been on a few sides of the table. Brent Holliday, founder and CEO of Garibaldi Capital Advisors. We are a tech-focused M &A advisor and have been since we started in 2013 as Canada's first tech-focused investment bank, if you will. I have been around a long time in the tech and finance world since 1994. I was an operator in the internet 1.0 days. I became a venture capitalist. That was about 15 years of my career. So I been there doing the early stage investments, sitting on the boards, seeing successes and seeing failures from that side. And then got into this part of the business around 2007, 2008, and worked for a firm that had a bunch of excellent ⁓ &A professionals that worked for businesses across the entire spectrum of businesses. But I was the tech guy in the corner. So I decided to start GearBaldi. We're now seven, sorry, eight professionals. two in the San Francisco Bay Area, three in Vancouver, and three in Toronto, where I'm currently sitting despite the fact that I have a mountain behind me. That's Mount Garibaldi, which helps explain our name. It's on the way up to Whistler in Vancouver, but none of us are Italian, even though Giuseppe was a great person.
speaker-2: Awesome. And it's such a simple too, to every founder here, like we are always looking for our next mountain. I'm a little cheesy also as a person, but thank you both for, joining us. And I think one of the questions that I'm going to throw out there as a poll, and this is a little interactive as we kind of go through this, but I'd love to know a question that we ask our folks that we work with, which is really, do you know your end game? What are you playing? Right? Like, what does this asset, this business actually mean to you? So throwing that up there because it helps us kind of frame where you're coming at this from. so we're looking at, you know, optionality is something we talk a lot about. so building a business typically starts because you're looking to really build something for yourself. Sometimes you build yourself a job and you're wearing all of the hats and you're looking to sort of figure out how to turn that job into more of an asset. And then what we're talking about today is how do you take that asset, understand what it's worth and figure out how to, what to do with it. And that might mean you want to hold it forever, generationally. might also mean you want to sell. And so we're going to dig into all of that and pull it apart and hopefully leave you with some actions you can take today to start being a little more ready for what that next step is. looks like a lot of folks are kind of exploring, which is exactly the purpose of these sessions to really help you build your knowledge. And then everyone else is kind of thinking like, I have intent. I want to start working towards this. So we'll dig into all of that. That really helps us get a sense of where folks are coming from. So thank you. Let's get into it. Let's start with the overall view of what I think a lot of folks kind of get wrong, let's say. Brent, from your perspective, what's the difference between a business that's profitable producing cash and a business that's actually sellable? What's your view on that?
speaker-1: Well, again, my lens is technology and technology is a little bit different than most industries. lot of technology, the number one driver of value in technology is growth. Sometimes we're in cycles where it's growth at all costs, which means it's okay to be losing money as you're growing. We have been out of that cycle for a couple of years now where buyers prefer in the technology industry to buy companies that are at least breakeven, if not profitable. And it's kind of this... demand that's put on the technology entrepreneur. I want you to grow faster and I want you to be profitable. So that those two things don't square up because you've got to spend money, presumably to grow. So, you know, I think from, from my perspective, profitable growing business gives you optionality. It gives you all sorts of, you have your own destiny in front of you. You're not beholden to the lender, beholden to the next round of equity. You are. basically can do and make decisions with your board or if you don't have a board by yourself to grow the business or not or make it more profitable. So it's always a better position to be in to be profitable, but sometimes you just can't be if you want to grow. And as I said earlier in the tech industry, at least that growth is very important to your overall value.
speaker-2: Yeah. So, so critical also to know where you're coming from, where revenue is typically how tech companies are going to be valued. lot of folks in the audience are from services businesses, for example, or even in kind of trades and home services, for example. And we do have some tech as well. But Jackie, from your perspective, what makes a business sellable, not just profitable? You had sold an e-commerce business. We actually have a few founders here who are in the DTC retail space, but you've also served and sold on the professional services side. What do you see? What does that look like?
speaker-0: I love this question. I think my perspective is a profitable business feeds the current owner, a sellable business feeds the next owner. And let's break that down a little bit. So I think you have to kind of look at, that's great. Your business is profitable. You love it. Customers love it. You everybody's like, yeehaw. But, you know, can this business run without you as an owner? Okay. Are there clear opportunities for growth for the new owner? Right? Like no new owner wants to come in. to something that they can't run, that they can't be profitable in, right? Are the customers loyal to only the owner? Are they gonna be loyal to the new owner, right? Are they gonna see that new owner as somebody that can run it? I see a lot of breakdown in systems, procedures, processes. So if you don't have those in place and everything is in your head, and as soon as you walk out the door, the business isn't worth very much, well, who's gonna wanna buy that? That business isn't sellable, right? And we can talk a little bit later about kind of... know, clean and well organized financial statements and clean and well organized legal documents. That's really important as well. Like, are you really planning for the next owner? Are you just really planning for you? And at the end of the day, a profitable business is someone that gives me a job, but a sellable business is an asset that works for anyone, not just me, if that makes
speaker-2: Totally. And thinking of your business as an asset. And when I was, built a tech company, I was all about the mission, rallying the team, the product, you know, that part of the ride. And I hadn't looked at it like an asset. I just sort of felt like this thing has to exist. I'm going to will it into existence. But then you kind of, and I jumped into private equity as, you know, as a PE backed CEO. And I learned the private equity way of looking at a business, which is truly like, what is the current value? What could we do at exit? Which is typically three to five years hold. And how are we going to actually go and enhance its value, which is kind of the playbook we want to bring to founders to even the playing field. But I'm curious in terms of the, you talk about the house, Jackie, thinking of your business like a house and you're thinking of like, do I remodel the kitchen before I sell it? I'd love to get a take on, on that analogy. And also Brent, just from your perspective, deals fall apart. lot of things kill deals, but I'm curious if there are things that are more, if there was more preparation. what those items might be. So we'll come back to you, but Jackie, over to you. What's the house analogy?
speaker-0: Very topical because I'm selling my house right now. So if anyone would have to buy a house in Oakville, I have a great deal. It's not on Swamp Land, I promise you. But no, it is a good analogy, right? Because you're never going to sell your house with clothes all over the floor and dirty dishes in the sink, right? People will automatically think, OK, OK, so this homeowner is a little sloppy and doesn't do the dishes and cleans up the laundry. But then what's behind how they maintain this house? Is there going to be a problem with the electrical? Have they done stuff with the roof? If they're that dirty and messy on its face, what's behind closed doors? And we all know that buyers walk into closets too, right? I'm currently in that situation. I was told that I had to take 70 % of the clothes out of my closet, which was very hurtful to me. But they open up the closet, and if all this stuff falls out, including the skeletons, it's gonna be really, really hard to sell the house. And the same is with the business. So if you do not have your minute books organized, if you don't have your legal documents organized, if you don't have your financial statements at the ready and clear, precise and transparent, you're in big trouble. I once had, I'm kind of on the investor side now, and I once had a potential company say to me, I said, okay, please show me your data room. And they're like, well, we don't have a data room. You just tell me what you wanna see from us. Well, that's a huge red flag because if I'm not asking the right questions, you know, they might not provide me the right thing. And then years down the road, because I didn't ask for it, they didn't disclose it. And that's a real problem. I want to see a company that has a fantastic data room that's at the ready that I can just click through all the documents that are properly named and there's full transparency. Open up your command as they say.
speaker-2: And that drives speed. as I have learned, time really does kill deals. This is a science, but it's more of an art. And I'm curious, Brent, from your perspective, what are the blind spots that you see when founders start a process?
speaker-1: ⁓ So, I like the analogy of the host, the way, Jackie, and what we primarily sell, we raise growth equity for companies, technology companies as well, but what we primarily sell are entrepreneur owned or bootstrapped or maybe lightly capitalized like angel friends and family, technology businesses. So, these are not VC backed businesses typically. so, equating VC backed with private equity in what you went through, Kristin. It's all about governance and structure and reporting and all of the stuff that goes into that proper governance of a company leads to proper document keeping leads to there being the minute books and et cetera. But what we see is entrepreneurs that are grown their businesses and have never reported to a board, have never had a board, don't have any governance, might have an advisor or two, but generally speaking have just grown this business any which way they can. And so the... The deal killers are, well, time, so we want to prepare them ahead of time by getting them to think like they have a board and have that governance because the new ownership is likely to have that, whether it be private equity or a bigger company. They're going to have that. So you've got to get your house in order. You've got to get your financials in. I mean, the other thing that entrepreneurs do, and I've done it myself in my own business here, is kind of skip a couple corners. on accounting, on legal, because you don't want to pay all those bills. So certainly not every business needs to be audited, but you probably should go a little deeper with your accountant into how your financial should be presented. According to GAP or IFRS, you need to have a well-organized set of metrics that you drive your business by and evidence that those metrics are being hit and met and that you follow them. whether they're your KPIs or what have you, just that ability to show that your company isn't kind of fly by the seat of your pants. Because buyers will see through it. Buyers will... the thing that kills deals is when you don't have certain types of information or you've never kept this type of information. Or because in most of your cases, when your company gets bought, you're going to go through a hellish thing called a Q of E. which is a quality of earnings. And it means that on the other side, they're going to hire a big firm that's going to come and tear apart your expenses and your revenue and your earnings to inevitably reduce what you say is your EBITDA so that that would reduce the overall price because you're being bought on a multiple EBITDA. So you've got to be prepared and know what that's, you've got to know what's coming.
speaker-2: Well, and let's talk about that. just in terms of trust can be harmed, let's say, and trust is everything. This is a relational game at the end of the day, people still buy from people and that's true in businesses as well and acquisitions. so financials, getting those in order, making sure those are trustworthy really comes down to what we tell our clients, the three things buyers look for. What were your results historically looking backwards? Do I feel confident that I can actually achieve those results if you were no longer here? which goes back to the SOPs, like how do you run the thing? Are you the number one salesperson? If you are, that sounds not very scalable beyond yourself. And thirdly, do I believe I can achieve those myself and actually put that into motion? Do I have what I need? And so from the financial prep, one thing that I'm curious about, normalizations, adjustments to EBITDA. This is ⁓ a blind spot that I didn't know existed. And when I talked to folks on the private equity side, I worked in that space. There's a clear purpose for it. It's a great acquisitive source if founders are looking for a potential path or partner. But they were like, Kristen, that's my arbitrage opportunity. I don't want founders to know actually that they can normalize things and kind of adjust. So walk us through in grade three English, what is a normalization? What are the adjustments? And what does that mean that comes to valuation?
speaker-1: So again, most of the majority of the businesses, the people that are watching this are going to be bought by on multiples of EBITDA. In tech, we do multiples of revenue, but that's another discussion. And the reason that normalization is important is because the buyer is going to buy you based on what kind of cash your business is generating. And it's going to be cash that the business is generating. So there, that's the grade three English. The normalization is the expenses that aren't normal. they're not normally there and are artificially driving down your EBITDA. So that can be you hired a consultant this year that you've hired in no other years to do a specific project. It can be something that happens just once you had to, there was an emergency in your business and you had to fix something. So the expenses spiked up, but it's not going to happen again. These are the non-normal items that you have to extract. from your expense side to show the actual EBITDA that the business generates. So that's the easiest way to explain it. And the buyers, they want to pay for what the business is generating. They don't want to pay for multiples of EBITDA that can be skewed one way or the other for them or against them by normalizing items.
speaker-2: And so this is a great example. Can you give a practical example? So for example, we had a client who was paying for a nanny through the business. Well, that's of course not an expense that a buyer is going to incur. What have you seen that are some common buckets that founders can start to take note of? this does literally, if you think about how businesses are valued, it's a multiplier on that number could mean the difference in a positive swing. to your valuation. could add millions depending on how large that expense bucket is and whether they're defensible.
speaker-1: Yeah. So in a lot of entrepreneurial organizations, you mentioned the nanny, there's things like the car or whatever the accountants allow, travel that might not be exactly related to your business. You've got to start thinking, once again, go back to that governance idea. What if you had a board? Would a board have said, this is probably not a great expense for you to have in the company? That's what's going to happen when the buyer comes along. The new buyer is going to operate it and it's going to be very, very you know, strict and narrowly defined to be what is, is this a business expense that is helping drive the business? So that's how we commonly see it as items that you have conveniently put into the company for whatever reason, tax reasons, et cetera. And, or is another big one. You've been bonusing yourself $800,000 a year and your EBITDA has been very low. Well, imagine now If your salary should have been 200,000, like normal salary for what you do, take that 600,000 and multiply it, say, times five, that's $3 million of value. So, voila. Hang on. you would then say, well, then I'm going to go on and only make 200,000. Hold on. They're going to buy your business for millions of dollars. And that's how they're going to view that. You should be paid as an employee going forward if you're staying on with the business. the market would pay.
speaker-2: And that's a great example too, when you're making decisions in your business, something we talked about is if it wasn't you running the sales team, what would that market salary be? And then make a decision based on that as well. Thinking kind of sustainably, thinking like a buyer actually is a mindset shift for a lot of folks. Jackie, from your perspective, one of the things the audience asks, and I ask folks to submit stuff in advance, and if you did it, that's okay, there'll be space for that towards the end, anonymously. In the professional services world, for example, You know, it's fairly high touch. It's high value. There's a lot of client relations. It's a very relational business. And I come from that space as well. How risky or how do buyers look at the loss of the founder in those relationships as it relates to the risk around how much more predictable is growth going to be when Jackie leaves? How does that kind of show up? And what did you experience or see that you can speak to related to that?
speaker-0: Well, think it comes, in professional services, it comes down to sales, right? And so as much as I like to think that I'm a good sales person and, you know, people like to buy from me, it's really about the brand has to be stronger than the owner, right? People are buying the brand. They're not buying the person because the person, even if you have a contract that says that the person's gonna stay six months, a year or two years, you never know what's gonna happen. So you can't, you can't kind of peg your horse to that. You have to kind of think about. what am I, what the buyer has to think about, what am I buying? Am I buying the brand and not the owner? And I don't, I don't think it's specific to professional services, to be honest with you. I think every single company, whether it's consumer products or tech or professional services has a sales element. It has an element where you have to bring revenue in. And so I, you know, I'm biased, but I think you surround yourself with the best sales team and, you've got a great business. I mean, that's what Bill Gates did. Everybody looks at Bill Gates and says, okay, well, He was the face of Microsoft. He will say time and time again, he surrounded himself with people that did it better than he did. And I think that that's kind of the takeaway when you're gonna sell your business. just as we were talking briefly about kind of things that kill a deal and this might come later, but I would just say my two cents is surprises kill a deal. Obviously speed kills a deal, but surprises really kill a deal. You're better to have bad performance or bad financials or maybe not great financials that you are transparent and you expose, know, as opposed to the surprise that comes at the end. Nobody wants surprises unless it's
speaker-2: Let's say given this is a room where we're sharing stories here and stories really do help drive our understanding. there any stories of surprises that either of you have seen, whether on the investment side or the M &M?
speaker-1: Yeah, so definitely surprises. you're hired, in our role, we're supposed to have scrubbed the company beforehand. And we like to think that we are very good at taking the lens of the investor or the lens of the buyer and applying it so that we're looking at that business. But we can't possibly do the level of confirmatory due diligence that a buyer does at the end of the process, right? So once the LOI is signed, the confirmatory due diligence part is exhaustive. It's where you need that data room. It's so we had the 1200 questions asked 1200 questions answered public company buying a a BC based company and it all was exhausting and the team was you know having all sorts of palpitations about further asks every single corner of the company was looked at. You can't hide anything to Jackie's point. If you have bad news you tell them the bad news. But the surprise in that particular case was that the CEO who I'm his advisor was secretly texting the CEO of the other company and decided you know harmless stuff like it's going well that kind of thing but decided that he would tell the other CEO without telling me that he was going to leave right away and that wasn't part of the deal. The deal was he was going to stay on for a transition phase of over a year. I think it was like 18 months transition. And he said, no, I'm leaving. I've decided I'm out. I booked a cruise. And the deal fell apart because that was an incredible surprise that wasn't disclosed until the very end. So you can't have that. He should have been saying to me, get me out sooner. He decided that he didn't want to rock the boat and he thought he'd go directly and ask the buyer and see what they said. Well, what they said was pretty bad.
speaker-2: No kidding. And transitions are very typical. What we'll talk about after this is also just like, what should we expect? Let's do the exit timeline math. How long did these things take? What should we be prepared for? And also how much to disclose? And we'll talk about a few instances, like when the private equity firm calls you inbound and those moments. But Jackie, what's your take on this? What surprises have you seen?
speaker-0: Well, I did talk about the data room example. I'm gonna kind of like flip the narrative a little bit and talk about, there's one thing to see surprises when you're looking at a company to invest. But I think some of the problems I've had is after I've invested and then I don't hear from them. And it's like silence. that is the worst. And maybe everything's fine. But it's a huge red flag to me if I'm not getting kind of investor updates quarterly. I'm not asking for weekly updates or monthly updates. I want you to focus on the business I just invested in. But there's nothing worse than if you hear crickets for six months or a year. Because then your mind goes into that, ⁓ wow, they must be doing really poorly. And maybe they aren't. So my advice to anyone who has sold or is selling is, You know, be kind to your investors. These are people that gave you money and let them know what's going on. Again, because if you don't know what's going on, then you think the worst.
speaker-2: Totally. And if you have a board, you've already got some governance there to support that. But also if you're early stage and you've got friends and family. And actually, this is actually a really good point. Brent, what's your take from both of you on disclosure? Because there are some founders who disclosed the entire team very, very early, which presents risk versus closing it down in terms of their advisor and maybe their COO. What's best?
speaker-1: It depends on the situation really. I've seen situations where the buyer really wanted the engineering team as well as the assets of the company. And so therefore had to interview those engineers almost immediately. So there was no way, there's no way around it. You know, you're, you're, you're being teed up to be interviewed by a new company. can't pretend that they're not buying you. So there are certain situations where full disclosure is a must. If there's a decision to be made, I, and there's an option, I tend to counsel. my clients that you want to keep it as tight as possible and as close as possible. Because even with your investors and shareholders, Jackie, because the deal is not done till it's done. And we just talked about ways that deals go off the rails. The same CEO who, you know, pooched the deal by saying you didn't want to stay had already told his investors how much money they were getting. And so then he had to go back and say, well, actually, no, you're not getting anything. So it's better to keep it tight until you're right near the end. And then you... Typically the buyer will have an entire team of communication, HR, etc. depending on the size of the buyer. Private equity does this and they come in and then they, there's like three or four days before close, they sit down with your team and they say, this is about, this is what's about to happen. This is your new owner and here's how it goes. It's easier to manage a few people and keep it quiet. So yeah, I would counsel to, if you have the choice to try and keep it close just for that reason, because the deal may fall apart. fall apart and then they're none the wiser.
speaker-2: And a stat that I do have here is that around 75 % of businesses who go to market, who go to sell fail to sell for various reasons, but it is just worth keeping in mind. Preparation is often a key gap. How prepared you are, the financials, the house, all that stuff we've been talking about. But Jackie, any advice or perspective from the founder seat on disclosure and how to think about who is at your table, who was at your table when you're going through this? Because there's an emotional side of this as well, right? IQ part, but there's also an EQ part here.
speaker-0: 100%. I agree 100 % with you, Brent. You know, I keep it close, keep it tight because the number of times things fall through and then you gotta go back and explain. I would say the other side of the coin though is that employees aren't stupid. You know, all of a sudden there's closed doors and hush-hush and whispering and so you gotta be really careful they're not having those meetings in the office. That would be some advice that I would have is take it out of the conference room. Employees are not dumb and just... just try and keep it separate and apart as much as you can and involve those that are really just the key employees that need to know.
speaker-2: That's great. Let's get into the money conversation. And every founder I've ever met with, I would say on average, including myself, it's not about the money. The money is a nice kind of carrot towards the end, but value means so much more than just the enterprise value of the business. There's your employees, there's your relationships, there's your socials, there's so much tied up in the business. But let's specifically talk about the money. I'm going to pull up a poll here because I'm very curious how folks are thinking about knowing your number. And the question really is around, do you have a sense of what your business is actually worth? Most people don't. Some who've gone through a raise perhaps had a valuation set, pre-money, post-money, however you want to kind of look at it. But yeah, taking a look here at where we are, most folks don't know what their business is worth. And I think one of the things we're all passionate about here is knowing your number really does matter. Understanding at least at a high level what the business could be worth, like a rough appraisal, is a great way to understand how to optimize its value. So thinking about your house, you think about the value you add when you remodel it. What does that do? If you spend $100,000 in the kitchen remodel, do you think you're going to get that out five times when you actually go to sell? As an example. And Brent, you will probably say you don't actually know exactly what it's worth until that money is in the bank post-sale. That's right. But okay, looking at this, looks like most folks have a rough sense and most have no idea and that is totally okay. And those who do know, that's a great start because you can actually start to think through where do you want to invest to enhance its value over time? That's awesome. I'm curious from your perspective, Brent, everyone, every founder, many founders have gotten the call, which is, hey, I'd like to buy your company or I'm curious about your space. Usually it's a private equity associate. Maybe it's the CEO of the other company, but that triggers often a lot of conversations around, maybe I'll play this up. What's your perspective on that and what should founders be mindful of?
speaker-1: Well, bringing that back to sort of the money side of things, there's two different parts of the money. One is the negotiation for what you're going to end up getting, right? And the other is what is your company actually worth? And the house analogy that Jack used earlier is really, really excellent because how does a real estate agent value your house? It's on all the comparables. It's on what happened in the neighborhood, same size. houses, renovations, blah, blah. there are many, many items and layers that go into comparing your house to another house to get the values. For all those people that have no idea what their business is worth, buyers look at it first as a comparable. So they understand businesses like yours, and they understand what drives the value in those businesses. You talked about professional services earlier. When you can't see Professional services you can't see beyond six months or a year as to what your next year is going to look like because you're just getting the contracts coming in the door and that sales funnel that is very limited in visibility reduces the value of the category of professional services company because that category doesn't have a lot of visibility on growth. now once you're in the category, what is your business worth? compared to everybody else. And there's a bell curve of businesses that are in the same category. And you're either way down here because your metrics are terrible, or you're way up here because you're way better than everybody else executing on that space. And you want to be on that side of the bell curve, if you can be the good side, and argue to buyers that you have better metrics than most. What that means is you've got to know what those metrics are. You've got to know what the benchmarks are. And the people that do understand that and know that are advisors in the space like us. But there's a lot of literature out there. You can find out easier about how people value your particular category. So then to the negotiating side, when that phone call comes in, often what they're going to try and tease out of you in that first phone call, you've never done it before and they sort of recognize that you're keen but maybe naive, is they're going to try and pull a number out of you. That is absolutely the worst thing you can do. You just negotiated against yourself when they didn't tell you what you're worth. So whenever somebody calls and says, well, you know, I want to buy you what, know, what, what's your number, you just step back and say, my number is based on what the market will bear. And I better go talk to some advisors and, know, whether they be legal or business or, or MNA advisors and find out what I'm really worth before we have that conversation. so just don't, don't throw a number out because you're either going to be ridiculously, and this is the trend that all of you entrepreneurs will have, ridiculously high, like my business is worth way more than that person would ever pay, or you're going to set a low bar because you you've set a number that they actually were willing to pay more and you just took that out of the negotiation.
speaker-2: Is there another question or other kind of, yeah, a few other questions that you should have in your back pocket? For example, perhaps it's a more junior private equity associate calling you, for example. know, oftentimes what you don't know when you're on in the founder seat versus my co-founder, Matt, as you know, was an M &A advisor. He knows there's a list. There's a list of companies. It's like sales, but it's for the private equity side of the business. And they're looking, they're building their deal flow. And so one of the things we'll say is like, what? what do you know about my business versus feeling like you have to be super transparent. And I think, I don't know, it feels very flattering when you get those calls. So I'm curious, is there anything else you'd recommend?
speaker-1: Yeah, be careful. think what you're saying is you can get information out of them. most, so tell me why are you looking at my space and what do you, you know, what do you see or what do you know about my business is a great opening question, but also, well, what are you seeing out there? What are, what are the multiples? Like throw it back at them. These are other people studying your market. You're saying, know, what are you seeing? You know, what's the latest sale multiple that you've seen? What do I have to do to get on the higher end of that spectrum in your mind? You know, what would you like to see in terms of performance? And you don't have to give them your numbers. You can give them high level or single digit millions or profitable. Those kinds of things are okay. But you also just have to think for a second that they might have just invested in one of your competitors and they're calling you to get as much information as they can from you that you're willing to give up because they might buy your company. So be careful is all I would say.
speaker-2: That's really wise. And some folks have asked questions about private equity. We'll get into more of the AMA, but there's many types of buyers. There's a universe of buyers. And before we get into that, I'm thinking about the actual process. That was a moment where you're starting to think about it because it came inbound. There's also the other moment, which is more of the poll. There's also a push where you're actually preparing and starting to think through your end game and what that looks like for you. And I promise we'd go through kind of the exit timeline math. And I imagine also disclosure, how much you share starts to increase the further down you get into that process. So I'd love to hear from both sides, Brett from you first and then just in terms of your founder perspective as well as you've also been on the legal side of this stuff. What is a typical push where you decide, you know what, I'm ready. What's the timeline? Let's work it back. And then what does that look like in phases so folks understand the process?
speaker-1: So first of all, Jackie made the point earlier, be ready and have that data room ready to the extent that you can be ready, even if you don't have a board to report to and it forces you to be ready by having the metrics and all that, you should be ready for that inbound for the, cow, they want to buy my company, what do I do now? If you are not ready at all, you're going to be in trouble. So you have to be prepared. Regardless of whether you want to go sell the business or not, but then when you say, okay I'm gonna go sell the business. I'm gonna run a process You should have kept a list of all the people that ever called you That said that they're interested potentially in buying your company you should keep a make a list of all of the companies in your ecosystem that Makes sense to own you and in that list say why would they want me? Is it simply expanding? Is it geographic? Is it more revenue? Is it? I have ⁓ a particular way to do something that they don't have. And so, so you're, you're, you'd be ready when, when, when the inbound comes to go run a process takes time. You've got to prepare the materials. You've got to go out and to a target list that you have to develop with that buyer rationale that I just talked about. Why would they want to buy me? So I'm going to go and talk to them and you're going to do the outreach either yourself or you're going to hire an advisor to do it. And that takes... six to eight weeks probably of emails and phone calls and you prepare a two data rooms. You have the data room that you always prepare and is ready, which is exhaustive. It's everything. And out of it, you pull a pre-LOI or pre-term sheet data room that is simpler. It has a overview of your business. It has your financial forecast and your last three years of financials, your cap table, and that's about it. Maybe a sales document that you use to sell so that anybody who's truly interested in your business and will sign an NDA can now get a more in-depth review including the financials of your business and then they can come and ask you some really intelligent questions before you get to the point at which you're gonna get an offer the beware of People that look like me that want to sell your business that say I can sell your business in 90 days. That is utter crap. And the process is going to take six to eight months to do right. where you get, where you really get into trouble is you go out to the market aggressively and say, here's a limited amount of information. You've got two weeks to put your bid letter in and put in your bid. Do you know what you get? You get crap. You get garbage. get, because they really haven't had a chance to interview you. They don't know the business and you're going to get proposals or ranges called indications of interest that have ranges on them that are You know, they're just not based in any form of reality and you're going to get the dreaded retrade because you'll go, ⁓ they're going to pay me that I'm taking that bid. Then they come and do the real work and then they say, ⁓ they find all sorts of things out that they didn't know. And down comes the price and you've just wasted a whole bunch of time. So go through the process, let them in. Jackie, there's an amount of the kimono you show, but you've got to let them in a bit under NDA or confidentiality agreement. then they're informed and they get to meet you and talk to you and ask you questions. Then they're much more informed when they make that bid. Takes longer but you're now going to get somebody who's going to stand behind that LOI. I understand this valuation and unless I find something dramatically wrong in the confirmatory due diligence this is the price I'm paying you.
speaker-2: Yeah. Yeah. And so what I'm hearing is 12 months, kind of minimum in terms of what you should expect. Six to 12, six would be pretty good. And then you're also going to do likely a transition, call it 12 to 18 months on average. Right? So really we're talking two, three years away. And then the preparation to get your house in order, especially if you've been scaling so fast, the wheels are coming off, takes time. And to your point, you want to be ready for that inbound coming in. at any point and that's frankly it's a more valuable business if you're ready for this conversation.
speaker-1: By the way, sorry, Jackie, by the way, the, the, the service business that I run, I am very well aware that I am going to be working for at least three years after my business gets bought because they want all of the relationships that I have. If you're in a business like that, you talked about it earlier. It's not 12 months or 18 months, right? They're going to three to five years if, if you have all of the relationships. So I'm well aware when I go to sell my business, how much more I've got to give. Sorry, Jackie.
speaker-2: Jackie, over to you.
speaker-0: Yeah, no, I would like to take it back a little bit to your first question about when that firm calls and do you take the call and what do you do and not, what do you say and what do you not say? Always take the call, always take the call because you can kind of figure out what your options are, what the market's out there. Think of it as an information call and get them to talk more than you talk is ideal. But a few things that I've heard people say that I absolutely like. caused me to cringe, things like, ⁓ you know, we don't really need the money. I've heard people say that and that's so dismissive. And then it puts you in a really bad negotiation position because everybody needs some money. Let's face it, everybody wants the money or you wouldn't be having the call, right? ⁓ You know, a lot of people say, as Brent noted, this is our valuation. And ⁓ I have a psychology degree. I don't remember much from it, but I do remember in a negotiation, you should never anchor first. Right. And I think that applies here. Right. Get them to kind of show their cards and they may actually say, I think your business is worth 10 million and you thought it was worth 5 million. Right. ⁓ some people say I'm burned out. I just want to get out of this. Like I'm really interested. Like I've actually heard people say that and you should, if you're burned out and you're selling your business because you're burned out or you're exhausted, you should be selling your business because you're working towards something, not running away from something. I see that happen a lot. So don't say you're burned out. That raises red flags with buyers and they wonder about how resilient you are and how durable you are and what you're going to be like post the investment. Some people have said growth has been really easy so far. Okay, well then you haven't really been working hard, have you? Right? So there's these things that people say that I'm like, okay, you know, and they sound very common sense, but a lot of people in that moment don't apply common sense. I want to kind of talk a little bit too about So you're kind of past that and now you're at the LOI stage and people go, ⁓ it's a non-binding LOI. Be really careful. Even though it's a non-binding LOI, the stuff you put in there kind of sets the stage for the deal, right? And I see far too many people that put stuff in there or they don't get their LOI reviewed by a lawyer or they kind of just think of it as this like piece of paper that doesn't really mean anything. It sets the stage and... You can put like a no shock clause in there. I've seen that, right? And all of a sudden now you've blocked out all these other buyers for a certain amount of time. I've seen people put that in for a really considerable length of time and you've just shut the door to anything else. And sometimes it's a...
speaker-2: competitive process.
speaker-0: Sometimes it's appropriate, but sometimes it really isn't. So you have to really think these through. And in terms of like overall timeline, I mean, I've had three exits. One took two years and two took just over a year. So six months is fast. I just, even if you have your house in order, there's so many things in, and especially in private equity, you're not the only deal that they're doing. They got other stuff going on, right?
speaker-2: and they have whole team. ⁓
speaker-0: And especially if you're a smaller deal, they're going to put their energy in the $100 million deal versus the $5 million deal or $10 million deal or $20 million deal, right? So you have to remember, sometimes you're guided by their timeline and not yours.
speaker-2: And Jackie, you mentioned something about kind of knowing when to sell. I'm kind of curious just in terms of you've made three of these decisions where it made sense to sell, but inverting that, when do you think it makes sense not to sell?
speaker-0: Well, I mean, I think we can look at this in a bunch of categories. Let's talk about emotions. We talked about that right before, where if you're really selling to get away from something and not selling towards something, that's a problem. If you don't know what you're going to do after this sale, you might have to give some thoughts to whether you should sell or not, right? ⁓ I always plug my friend's book, ⁓ Kelsey Rand, and she wrote a book called The Success Hangover, and it's real. A lot of folks sell their business and the rates of depression after people sell their business are very high because they haven't planned for their future, right? So you have to kind of think about that ⁓ and that you're not selling because of burnout and panic, which I talked about. And I think, you you're ready to sell if you could walk away from your business for eight weeks and it still runs smoothly. It doesn't need you, right? ⁓ And like, are the decisions and systems set up for to run without you, you know, is that all? Could you literally walk away? Then your business sounds pretty good in terms of being able to sell. Like have you focused the key roles around other people and not just you? How many times have I had people that are the janitor to the CEO, to the COO, to the sales director, to the finance person. And the minute that person again walks out the door, you know, with their personal relationships and all their knowledge, that business isn't ready to sell.
speaker-2: Yeah. value is eroded, which is why it's a very painstaking process. But one of the tools we provide our clients is like, let's build a contingency plan. Let's build a, if Kristen was no longer here, poof, what would break? And a great way to think about it is like, think of Tom Hanks and Wilson and go to an island. If you were totally without reception or anything, what would happen? And it's a great test to go for you as a founder, how dependent is the business, but also other key roles? there single points of failure across your system that is your company? And where are they? And let's figure out another way to de-risk it. Brent, what's your take on this? When should you not sell?
speaker-1: Well, we advise all the time. Tech companies come to us and ⁓ this is specific to tech. But I call a business under $5 million in revenue subscale and five to 10, five to 12 scaling. then, you know, once you're in the teens and higher than that in the tech world, you're at scale, ⁓ meaning you're meaningful to people and businesses and, know, can drive, ⁓ you're globally meaningful, let's put it that way. So ⁓ we have all sorts of people that come to us and say, ⁓ I've grown my business to $3 million and I want to sell. And we say, here's the reason you don't want to sell. ⁓ And we go through the benchmarks, where are they vis-a-vis on that bell curve of value for their sector? And we sort of show them where they are. But the biggest thing is those private equity buyers, those ones that ⁓ actually buy If you think about it, about 65 % of tech companies are bought directly by private equity or by private equity owned businesses, right? So they're called sponsored businesses. So private equity is in there 65 % of the time somehow. And if you're not over 5 million in revenue, they won't buy you. So you're just taking like almost 65 % of the market of your buyers away by not yet being at 5 million. So there's a time not to sell. ⁓ And that's hard to hear because you've grown up, like growing something to $3 million in revenues is hard. And then you look ahead and say, I got to get this to six. That's even harder. ⁓ But the reality is you're going to dramatically increase your audience for being purchased. And also when you're under 5 million, big companies, know, every entrepreneur thinks that Google is going to buy them or Microsoft or whatnot. I guarantee you that ⁓ the corporate development person sitting at Google does not make their career by buying two, three, $4 million a year revenue companies. They make their career by buying $20 billion companies. Completely.
speaker-2: And the effort is often very similar, obviously more complexly the larger you are, but there's still quite a bit of work. And I saw that on the PE side.
speaker-1: Right. So my angle from the when not to sell is just because of where you are in the market. So then you got to be aware of that.
speaker-2: and understanding the buyer universe. I've also heard kind of a magic number, and we've heard this from buyers as well as other investment bankers, around a million, two million EBITDA starts to really open up the market to a financial buyer who also makes up quite a bit of, these are family offices, these are individuals with capital to deploy, and they're looking for a cash flowing asset. So regardless, I think what I'm hearing is increase your surface area for luck by building a great business, built on great fundamentals, get your house in order. and then increase your optionality by getting to that kind of threshold and be ready.
speaker-1: Yep, so your head down and growing the business is the best advice because you will become more attractive the more you grow.
speaker-2: And love the house that you've built. Maybe if you're feeling burnt out, it's sort of a question to go, if I step back, bring in some support, is there a way to structure this so it's a house I want to live in? And that's likely a more sellable business when you do that work.
speaker-1: And there's
speaker-0: I was going say, in one of my exits, it was the consumer products one. My partners were my parents and they were aging. They were in their seventies. It's not that we were burnt out, but we were also looking at what our life looked like for the next 10, 15 years. I either had to replace them and they were key to making me happy in my business. I wasn't burnt out and I wasn't exhausted and running away from something. But it also, there was just a new, it was a new, gonna be a new world and a new time and a new shift. And that's okay too. And I'm sure there's probably listeners here that are not necessarily burnt out, but they're at a point where their world is changing. And that's okay. It's okay to sell in that environment too. You just have to make the buyers aware that it's not that you're lying on the floor gasping for breath.
speaker-2: You are not the business. This is a platform. This is an asset that can live beyond you. So I love that. Now, we also promised AMA a lot of the questions we wove into the narrative here, but I do have Q &A open. You can submit anonymously. So feel free to throw any burning questions you have in there. And while we wait, I'm going to do a couple of rapid fire ones just because these were related to some of the questions that came in. So super fast, quick answers. You ready? Here we go. All right. Biggest? green flag in a founder you'd invest in, Jackie.
speaker-0: ⁓ coachability, execution ability, integrity, a deep understanding of the business and great leadership.
speaker-2: killer Brent biggest red flag that kills a deal. ⁓ you want
speaker-1: Yeah, I'm just gonna say that those are excellent. That's exactly what I look for go. Sorry my question is
speaker-2: Biggest red flag, biggest gotcha in a deal for a founder.
speaker-1: But you find something that they didn't disclose earlier, ⁓ they didn't share bad news. ⁓ If they've masked something in some way, that's going to come back and bite you every time.
speaker-2: Amazing. Awesome. ⁓ Andreas, love this question. Do you see any major differences between North American versus European companies, buyers, mindsets, et cetera?
speaker-1: it was not really, ⁓ European, ⁓ buyers weren't really, ⁓ and again, I'm a tech focused. They, they, were not as many European tech buyers. There are now they've really matured. ⁓ I think that there's hard nosed, ⁓ buyers, but they come from all different areas, like, you know, tough buyers, tough negotiators. ⁓ I don't think you can put it geographically, it's just like it's the people. So yeah, no, I don't see a big difference these days.
speaker-2: Awesome. All right. In one sentence, finish the sentence. The founders see that the best exits are the ones who.
speaker-1: Prepare.
speaker-0: who prepare and you can trust.
speaker-1: Yeah. Nice. Yeah. And don't forget to, you know, I'm not just weaving our flag, Jackie and Brent's flag. You got to pay advisors to help you. ⁓ you can't do it all on your own and you've got to go and get that expertise. And we haven't even talked about tax planning. Like you could do a whole series on what, what your audience doesn't know about the tax implications of selling a business.
speaker-2: I love that you just asked that. We are going to be doing a series every single month. And coming up next is one on finance and how to get that in order, because we reference that. But the next one will be on tax. And there was a question that just came in anonymously. We don't have time to answer, but I will read it. And quick reactions would be great. How do you avoid the tax burden of an asset sale when a share sale isn't an option in the deal? Canadian entity focused. This might be one to unpack later.
speaker-0: I took tax in law school and it ended there and I'm glad it did. I mean, I relied on our tax advisors considerably to Brent's point, right? Let the experts do their job, stay in your lane, right? But a lot of you have to do ahead of time of the sale, whether it's setting up a trust or things like that that people forget to do or don't think about doing.
speaker-2: Two years is the crystallization period. and we are not tax advisors either, but we will be doing a Canadian focus session on tax. So stay tuned on that one.
speaker-1: say that a share purchase usually gets you capital gains and the asset purchase does not. And that might be where they were headed with that question. again, ⁓ tax advice is very, very key.
speaker-2: Awesome. This is great. One last question, which is, from both your perspectives, what's a question that a founder should ask a potential buyer, but almost never do?
speaker-0: I mean, I think we kind of covered it. What interests you and me? know, why did you pick up the phone to call me and let them just talk and talk and talk about what they obviously took the time to call you. So why did they?
speaker-1: I think that before the deal is done, ⁓ what they forget to ask is how do you treat your ⁓ founders post transaction and can I speak to three or four of them? They almost never do that and you should. You've got to do diligence on your buyer and that almost never happens.
speaker-2: No, that's fantastic. Well, both thank you so much for jumping into this. This was the very first one. I so look forward to feedback afterwards. You're going to receive a quick little, how was it? What could we do better? What went well? We want to keep these going and we want to bring this knowledge to more founders. Thank you both for investing your time. Where can folks find you as a next step? If they're curious to kind of dig in more from your perspective expertise.
speaker-0: Yeah, I mean, ⁓ please reach out to caravallaw.com. So just so people know, a Caraval is one of those ships that has all the sails on it and it navigates smaller waters that big ships don't navigate. So it's not a knock at the big firms, but I really wanted to make legal accessible to people. for all the reasons we talked about, don't be scared to spend a little bit of money to save you a lot at the end. And we kind of have a low overhead model, which really intended to kind of make it easy to bring lawyers into the group. Yeah, I mean, ⁓ you can find me at jdinsmore at caravallalaw.com. Thanks so much.
speaker-1: And Garibaldi is on LinkedIn itself, ⁓ as am I. ⁓ And we have webinars that are focused on tech related things that we posted there, valuations, et cetera. So you can learn a little bit that way. And then I'm just Brent at garibaldicapital.com.
speaker-2: Thank you all. And I will send this out afterwards. But if you are curious about what your business is worth and where there might be room to make some moves, we have a completely free assessment you can take. takes 15 minutes. And I'll share that as a gift for you. You get the results right away. And it gives you at least a starting point to start building value. So thank you, everyone, for joining us. And ⁓ we'll see you next time. Thank you both. Thanks for having us all. Bye.
speaker-1: Thank you.
speaker-1: The beware of people that look like me that want to sell your business, that say, can sell your business in 90 days. That is utter crap. And the process is going to take six to eight months to do.
speaker-0: should be selling your business because you're working towards something, not running away from something.
speaker-1: If you're not over 5 million in revenue, they won't buy you. So you've just taken like almost 65 % of the market of your buyers away by not yet being at 5 million.
speaker-2: Let's just do a in a headline, who you are, how you're showing up and how you're thinking about today in terms of the focus on Inside M &A, opening the playbook. Jackie, let's start with you.
speaker-0: Sure. My name is Jackie Dinsmore. I am a recovering lawyer, I like to say. Started on Bay Street, worked in-house at the Toronto Star, and then became more of an entrepreneur, to be honest with you. So, I successfully sold a consumer products company and two professional services firms. I'm now the managing partner of one of those firms. We have about 130 or 120 lawyers across Canada. I wanted to disrupt the legal world to make it more accessible to entrepreneurs, having gone through that experience myself. Really had a lot of fun, I'd like to say, with the bowl of spaghetti. People think success is kind of, you know, a straight arrow, but really it ended up being a bowl of spaghetti that I wouldn't have changed for the world. And really excited to still be working in the business that I sold and with a great team. So thank you for having me.
speaker-2: Awesome. Welcome. Brent, what about you? You have the other side of the table.
speaker-1: Yeah, well, I've been on a few sides of the table. Brent Holliday, founder and CEO of Garibaldi Capital Advisors. We are a tech-focused M &A advisor and have been since we started in 2013 as Canada's first tech-focused investment bank, if you will. I have been around a long time in the tech and finance world since 1994. I was an operator in the internet 1.0 days. I became a venture capitalist. That was about 15 years of my career. So I been there doing the early stage investments, sitting on the boards, seeing successes and seeing failures from that side. And then got into this part of the business around 2007, 2008, and worked for a firm that had a bunch of excellent ⁓ &A professionals that worked for businesses across the entire spectrum of businesses. But I was the tech guy in the corner. So I decided to start GearBaldi. We're now seven, sorry, eight professionals. two in the San Francisco Bay Area, three in Vancouver, and three in Toronto, where I'm currently sitting despite the fact that I have a mountain behind me. That's Mount Garibaldi, which helps explain our name. It's on the way up to Whistler in Vancouver, but none of us are Italian, even though Giuseppe was a great person.
speaker-2: Awesome. And it's such a simple too, to every founder here, like we are always looking for our next mountain. I'm a little cheesy also as a person, but thank you both for, joining us. And I think one of the questions that I'm going to throw out there as a poll, and this is a little interactive as we kind of go through this, but I'd love to know a question that we ask our folks that we work with, which is really, do you know your end game? What are you playing? Right? Like, what does this asset, this business actually mean to you? So throwing that up there because it helps us kind of frame where you're coming at this from. so we're looking at, you know, optionality is something we talk a lot about. so building a business typically starts because you're looking to really build something for yourself. Sometimes you build yourself a job and you're wearing all of the hats and you're looking to sort of figure out how to turn that job into more of an asset. And then what we're talking about today is how do you take that asset, understand what it's worth and figure out how to, what to do with it. And that might mean you want to hold it forever, generationally. might also mean you want to sell. And so we're going to dig into all of that and pull it apart and hopefully leave you with some actions you can take today to start being a little more ready for what that next step is. looks like a lot of folks are kind of exploring, which is exactly the purpose of these sessions to really help you build your knowledge. And then everyone else is kind of thinking like, I have intent. I want to start working towards this. So we'll dig into all of that. That really helps us get a sense of where folks are coming from. So thank you. Let's get into it. Let's start with the overall view of what I think a lot of folks kind of get wrong, let's say. Brent, from your perspective, what's the difference between a business that's profitable producing cash and a business that's actually sellable? What's your view on that?
speaker-1: Well, again, my lens is technology and technology is a little bit different than most industries. lot of technology, the number one driver of value in technology is growth. Sometimes we're in cycles where it's growth at all costs, which means it's okay to be losing money as you're growing. We have been out of that cycle for a couple of years now where buyers prefer in the technology industry to buy companies that are at least breakeven, if not profitable. And it's kind of this... demand that's put on the technology entrepreneur. I want you to grow faster and I want you to be profitable. So that those two things don't square up because you've got to spend money, presumably to grow. So, you know, I think from, from my perspective, profitable growing business gives you optionality. It gives you all sorts of, you have your own destiny in front of you. You're not beholden to the lender, beholden to the next round of equity. You are. basically can do and make decisions with your board or if you don't have a board by yourself to grow the business or not or make it more profitable. So it's always a better position to be in to be profitable, but sometimes you just can't be if you want to grow. And as I said earlier in the tech industry, at least that growth is very important to your overall value.
speaker-2: Yeah. So, so critical also to know where you're coming from, where revenue is typically how tech companies are going to be valued. lot of folks in the audience are from services businesses, for example, or even in kind of trades and home services, for example. And we do have some tech as well. But Jackie, from your perspective, what makes a business sellable, not just profitable? You had sold an e-commerce business. We actually have a few founders here who are in the DTC retail space, but you've also served and sold on the professional services side. What do you see? What does that look like?
speaker-0: I love this question. I think my perspective is a profitable business feeds the current owner, a sellable business feeds the next owner. And let's break that down a little bit. So I think you have to kind of look at, that's great. Your business is profitable. You love it. Customers love it. You everybody's like, yeehaw. But, you know, can this business run without you as an owner? Okay. Are there clear opportunities for growth for the new owner? Right? Like no new owner wants to come in. to something that they can't run, that they can't be profitable in, right? Are the customers loyal to only the owner? Are they gonna be loyal to the new owner, right? Are they gonna see that new owner as somebody that can run it? I see a lot of breakdown in systems, procedures, processes. So if you don't have those in place and everything is in your head, and as soon as you walk out the door, the business isn't worth very much, well, who's gonna wanna buy that? That business isn't sellable, right? And we can talk a little bit later about kind of... know, clean and well organized financial statements and clean and well organized legal documents. That's really important as well. Like, are you really planning for the next owner? Are you just really planning for you? And at the end of the day, a profitable business is someone that gives me a job, but a sellable business is an asset that works for anyone, not just me, if that makes
speaker-2: Totally. And thinking of your business as an asset. And when I was, built a tech company, I was all about the mission, rallying the team, the product, you know, that part of the ride. And I hadn't looked at it like an asset. I just sort of felt like this thing has to exist. I'm going to will it into existence. But then you kind of, and I jumped into private equity as, you know, as a PE backed CEO. And I learned the private equity way of looking at a business, which is truly like, what is the current value? What could we do at exit? Which is typically three to five years hold. And how are we going to actually go and enhance its value, which is kind of the playbook we want to bring to founders to even the playing field. But I'm curious in terms of the, you talk about the house, Jackie, thinking of your business like a house and you're thinking of like, do I remodel the kitchen before I sell it? I'd love to get a take on, on that analogy. And also Brent, just from your perspective, deals fall apart. lot of things kill deals, but I'm curious if there are things that are more, if there was more preparation. what those items might be. So we'll come back to you, but Jackie, over to you. What's the house analogy?
speaker-0: Very topical because I'm selling my house right now. So if anyone would have to buy a house in Oakville, I have a great deal. It's not on Swamp Land, I promise you. But no, it is a good analogy, right? Because you're never going to sell your house with clothes all over the floor and dirty dishes in the sink, right? People will automatically think, OK, OK, so this homeowner is a little sloppy and doesn't do the dishes and cleans up the laundry. But then what's behind how they maintain this house? Is there going to be a problem with the electrical? Have they done stuff with the roof? If they're that dirty and messy on its face, what's behind closed doors? And we all know that buyers walk into closets too, right? I'm currently in that situation. I was told that I had to take 70 % of the clothes out of my closet, which was very hurtful to me. But they open up the closet, and if all this stuff falls out, including the skeletons, it's gonna be really, really hard to sell the house. And the same is with the business. So if you do not have your minute books organized, if you don't have your legal documents organized, if you don't have your financial statements at the ready and clear, precise and transparent, you're in big trouble. I once had, I'm kind of on the investor side now, and I once had a potential company say to me, I said, okay, please show me your data room. And they're like, well, we don't have a data room. You just tell me what you wanna see from us. Well, that's a huge red flag because if I'm not asking the right questions, you know, they might not provide me the right thing. And then years down the road, because I didn't ask for it, they didn't disclose it. And that's a real problem. I want to see a company that has a fantastic data room that's at the ready that I can just click through all the documents that are properly named and there's full transparency. Open up your command as they say.
speaker-2: And that drives speed. as I have learned, time really does kill deals. This is a science, but it's more of an art. And I'm curious, Brent, from your perspective, what are the blind spots that you see when founders start a process?
speaker-1: ⁓ So, I like the analogy of the host, the way, Jackie, and what we primarily sell, we raise growth equity for companies, technology companies as well, but what we primarily sell are entrepreneur owned or bootstrapped or maybe lightly capitalized like angel friends and family, technology businesses. So, these are not VC backed businesses typically. so, equating VC backed with private equity in what you went through, Kristin. It's all about governance and structure and reporting and all of the stuff that goes into that proper governance of a company leads to proper document keeping leads to there being the minute books and et cetera. But what we see is entrepreneurs that are grown their businesses and have never reported to a board, have never had a board, don't have any governance, might have an advisor or two, but generally speaking have just grown this business any which way they can. And so the... The deal killers are, well, time, so we want to prepare them ahead of time by getting them to think like they have a board and have that governance because the new ownership is likely to have that, whether it be private equity or a bigger company. They're going to have that. So you've got to get your house in order. You've got to get your financials in. I mean, the other thing that entrepreneurs do, and I've done it myself in my own business here, is kind of skip a couple corners. on accounting, on legal, because you don't want to pay all those bills. So certainly not every business needs to be audited, but you probably should go a little deeper with your accountant into how your financial should be presented. According to GAP or IFRS, you need to have a well-organized set of metrics that you drive your business by and evidence that those metrics are being hit and met and that you follow them. whether they're your KPIs or what have you, just that ability to show that your company isn't kind of fly by the seat of your pants. Because buyers will see through it. Buyers will... the thing that kills deals is when you don't have certain types of information or you've never kept this type of information. Or because in most of your cases, when your company gets bought, you're going to go through a hellish thing called a Q of E. which is a quality of earnings. And it means that on the other side, they're going to hire a big firm that's going to come and tear apart your expenses and your revenue and your earnings to inevitably reduce what you say is your EBITDA so that that would reduce the overall price because you're being bought on a multiple EBITDA. So you've got to be prepared and know what that's, you've got to know what's coming.
speaker-2: Well, and let's talk about that. just in terms of trust can be harmed, let's say, and trust is everything. This is a relational game at the end of the day, people still buy from people and that's true in businesses as well and acquisitions. so financials, getting those in order, making sure those are trustworthy really comes down to what we tell our clients, the three things buyers look for. What were your results historically looking backwards? Do I feel confident that I can actually achieve those results if you were no longer here? which goes back to the SOPs, like how do you run the thing? Are you the number one salesperson? If you are, that sounds not very scalable beyond yourself. And thirdly, do I believe I can achieve those myself and actually put that into motion? Do I have what I need? And so from the financial prep, one thing that I'm curious about, normalizations, adjustments to EBITDA. This is ⁓ a blind spot that I didn't know existed. And when I talked to folks on the private equity side, I worked in that space. There's a clear purpose for it. It's a great acquisitive source if founders are looking for a potential path or partner. But they were like, Kristen, that's my arbitrage opportunity. I don't want founders to know actually that they can normalize things and kind of adjust. So walk us through in grade three English, what is a normalization? What are the adjustments? And what does that mean that comes to valuation?
speaker-1: So again, most of the majority of the businesses, the people that are watching this are going to be bought by on multiples of EBITDA. In tech, we do multiples of revenue, but that's another discussion. And the reason that normalization is important is because the buyer is going to buy you based on what kind of cash your business is generating. And it's going to be cash that the business is generating. So there, that's the grade three English. The normalization is the expenses that aren't normal. they're not normally there and are artificially driving down your EBITDA. So that can be you hired a consultant this year that you've hired in no other years to do a specific project. It can be something that happens just once you had to, there was an emergency in your business and you had to fix something. So the expenses spiked up, but it's not going to happen again. These are the non-normal items that you have to extract. from your expense side to show the actual EBITDA that the business generates. So that's the easiest way to explain it. And the buyers, they want to pay for what the business is generating. They don't want to pay for multiples of EBITDA that can be skewed one way or the other for them or against them by normalizing items.
speaker-2: And so this is a great example. Can you give a practical example? So for example, we had a client who was paying for a nanny through the business. Well, that's of course not an expense that a buyer is going to incur. What have you seen that are some common buckets that founders can start to take note of? this does literally, if you think about how businesses are valued, it's a multiplier on that number could mean the difference in a positive swing. to your valuation. could add millions depending on how large that expense bucket is and whether they're defensible.
speaker-1: Yeah. So in a lot of entrepreneurial organizations, you mentioned the nanny, there's things like the car or whatever the accountants allow, travel that might not be exactly related to your business. You've got to start thinking, once again, go back to that governance idea. What if you had a board? Would a board have said, this is probably not a great expense for you to have in the company? That's what's going to happen when the buyer comes along. The new buyer is going to operate it and it's going to be very, very you know, strict and narrowly defined to be what is, is this a business expense that is helping drive the business? So that's how we commonly see it as items that you have conveniently put into the company for whatever reason, tax reasons, et cetera. And, or is another big one. You've been bonusing yourself $800,000 a year and your EBITDA has been very low. Well, imagine now If your salary should have been 200,000, like normal salary for what you do, take that 600,000 and multiply it, say, times five, that's $3 million of value. So, voila. Hang on. you would then say, well, then I'm going to go on and only make 200,000. Hold on. They're going to buy your business for millions of dollars. And that's how they're going to view that. You should be paid as an employee going forward if you're staying on with the business. the market would pay.
speaker-2: And that's a great example too, when you're making decisions in your business, something we talked about is if it wasn't you running the sales team, what would that market salary be? And then make a decision based on that as well. Thinking kind of sustainably, thinking like a buyer actually is a mindset shift for a lot of folks. Jackie, from your perspective, one of the things the audience asks, and I ask folks to submit stuff in advance, and if you did it, that's okay, there'll be space for that towards the end, anonymously. In the professional services world, for example, You know, it's fairly high touch. It's high value. There's a lot of client relations. It's a very relational business. And I come from that space as well. How risky or how do buyers look at the loss of the founder in those relationships as it relates to the risk around how much more predictable is growth going to be when Jackie leaves? How does that kind of show up? And what did you experience or see that you can speak to related to that?
speaker-0: Well, think it comes, in professional services, it comes down to sales, right? And so as much as I like to think that I'm a good sales person and, you know, people like to buy from me, it's really about the brand has to be stronger than the owner, right? People are buying the brand. They're not buying the person because the person, even if you have a contract that says that the person's gonna stay six months, a year or two years, you never know what's gonna happen. So you can't, you can't kind of peg your horse to that. You have to kind of think about. what am I, what the buyer has to think about, what am I buying? Am I buying the brand and not the owner? And I don't, I don't think it's specific to professional services, to be honest with you. I think every single company, whether it's consumer products or tech or professional services has a sales element. It has an element where you have to bring revenue in. And so I, you know, I'm biased, but I think you surround yourself with the best sales team and, you've got a great business. I mean, that's what Bill Gates did. Everybody looks at Bill Gates and says, okay, well, He was the face of Microsoft. He will say time and time again, he surrounded himself with people that did it better than he did. And I think that that's kind of the takeaway when you're gonna sell your business. just as we were talking briefly about kind of things that kill a deal and this might come later, but I would just say my two cents is surprises kill a deal. Obviously speed kills a deal, but surprises really kill a deal. You're better to have bad performance or bad financials or maybe not great financials that you are transparent and you expose, know, as opposed to the surprise that comes at the end. Nobody wants surprises unless it's
speaker-2: Let's say given this is a room where we're sharing stories here and stories really do help drive our understanding. there any stories of surprises that either of you have seen, whether on the investment side or the M &M?
speaker-1: Yeah, so definitely surprises. you're hired, in our role, we're supposed to have scrubbed the company beforehand. And we like to think that we are very good at taking the lens of the investor or the lens of the buyer and applying it so that we're looking at that business. But we can't possibly do the level of confirmatory due diligence that a buyer does at the end of the process, right? So once the LOI is signed, the confirmatory due diligence part is exhaustive. It's where you need that data room. It's so we had the 1200 questions asked 1200 questions answered public company buying a a BC based company and it all was exhausting and the team was you know having all sorts of palpitations about further asks every single corner of the company was looked at. You can't hide anything to Jackie's point. If you have bad news you tell them the bad news. But the surprise in that particular case was that the CEO who I'm his advisor was secretly texting the CEO of the other company and decided you know harmless stuff like it's going well that kind of thing but decided that he would tell the other CEO without telling me that he was going to leave right away and that wasn't part of the deal. The deal was he was going to stay on for a transition phase of over a year. I think it was like 18 months transition. And he said, no, I'm leaving. I've decided I'm out. I booked a cruise. And the deal fell apart because that was an incredible surprise that wasn't disclosed until the very end. So you can't have that. He should have been saying to me, get me out sooner. He decided that he didn't want to rock the boat and he thought he'd go directly and ask the buyer and see what they said. Well, what they said was pretty bad.
speaker-2: No kidding. And transitions are very typical. What we'll talk about after this is also just like, what should we expect? Let's do the exit timeline math. How long did these things take? What should we be prepared for? And also how much to disclose? And we'll talk about a few instances, like when the private equity firm calls you inbound and those moments. But Jackie, what's your take on this? What surprises have you seen?
speaker-0: Well, I did talk about the data room example. I'm gonna kind of like flip the narrative a little bit and talk about, there's one thing to see surprises when you're looking at a company to invest. But I think some of the problems I've had is after I've invested and then I don't hear from them. And it's like silence. that is the worst. And maybe everything's fine. But it's a huge red flag to me if I'm not getting kind of investor updates quarterly. I'm not asking for weekly updates or monthly updates. I want you to focus on the business I just invested in. But there's nothing worse than if you hear crickets for six months or a year. Because then your mind goes into that, ⁓ wow, they must be doing really poorly. And maybe they aren't. So my advice to anyone who has sold or is selling is, You know, be kind to your investors. These are people that gave you money and let them know what's going on. Again, because if you don't know what's going on, then you think the worst.
speaker-2: Totally. And if you have a board, you've already got some governance there to support that. But also if you're early stage and you've got friends and family. And actually, this is actually a really good point. Brent, what's your take from both of you on disclosure? Because there are some founders who disclosed the entire team very, very early, which presents risk versus closing it down in terms of their advisor and maybe their COO. What's best?
speaker-1: It depends on the situation really. I've seen situations where the buyer really wanted the engineering team as well as the assets of the company. And so therefore had to interview those engineers almost immediately. So there was no way, there's no way around it. You know, you're, you're, you're being teed up to be interviewed by a new company. can't pretend that they're not buying you. So there are certain situations where full disclosure is a must. If there's a decision to be made, I, and there's an option, I tend to counsel. my clients that you want to keep it as tight as possible and as close as possible. Because even with your investors and shareholders, Jackie, because the deal is not done till it's done. And we just talked about ways that deals go off the rails. The same CEO who, you know, pooched the deal by saying you didn't want to stay had already told his investors how much money they were getting. And so then he had to go back and say, well, actually, no, you're not getting anything. So it's better to keep it tight until you're right near the end. And then you... Typically the buyer will have an entire team of communication, HR, etc. depending on the size of the buyer. Private equity does this and they come in and then they, there's like three or four days before close, they sit down with your team and they say, this is about, this is what's about to happen. This is your new owner and here's how it goes. It's easier to manage a few people and keep it quiet. So yeah, I would counsel to, if you have the choice to try and keep it close just for that reason, because the deal may fall apart. fall apart and then they're none the wiser.
speaker-2: And a stat that I do have here is that around 75 % of businesses who go to market, who go to sell fail to sell for various reasons, but it is just worth keeping in mind. Preparation is often a key gap. How prepared you are, the financials, the house, all that stuff we've been talking about. But Jackie, any advice or perspective from the founder seat on disclosure and how to think about who is at your table, who was at your table when you're going through this? Because there's an emotional side of this as well, right? IQ part, but there's also an EQ part here.
speaker-0: 100%. I agree 100 % with you, Brent. You know, I keep it close, keep it tight because the number of times things fall through and then you gotta go back and explain. I would say the other side of the coin though is that employees aren't stupid. You know, all of a sudden there's closed doors and hush-hush and whispering and so you gotta be really careful they're not having those meetings in the office. That would be some advice that I would have is take it out of the conference room. Employees are not dumb and just... just try and keep it separate and apart as much as you can and involve those that are really just the key employees that need to know.
speaker-2: That's great. Let's get into the money conversation. And every founder I've ever met with, I would say on average, including myself, it's not about the money. The money is a nice kind of carrot towards the end, but value means so much more than just the enterprise value of the business. There's your employees, there's your relationships, there's your socials, there's so much tied up in the business. But let's specifically talk about the money. I'm going to pull up a poll here because I'm very curious how folks are thinking about knowing your number. And the question really is around, do you have a sense of what your business is actually worth? Most people don't. Some who've gone through a raise perhaps had a valuation set, pre-money, post-money, however you want to kind of look at it. But yeah, taking a look here at where we are, most folks don't know what their business is worth. And I think one of the things we're all passionate about here is knowing your number really does matter. Understanding at least at a high level what the business could be worth, like a rough appraisal, is a great way to understand how to optimize its value. So thinking about your house, you think about the value you add when you remodel it. What does that do? If you spend $100,000 in the kitchen remodel, do you think you're going to get that out five times when you actually go to sell? As an example. And Brent, you will probably say you don't actually know exactly what it's worth until that money is in the bank post-sale. That's right. But okay, looking at this, looks like most folks have a rough sense and most have no idea and that is totally okay. And those who do know, that's a great start because you can actually start to think through where do you want to invest to enhance its value over time? That's awesome. I'm curious from your perspective, Brent, everyone, every founder, many founders have gotten the call, which is, hey, I'd like to buy your company or I'm curious about your space. Usually it's a private equity associate. Maybe it's the CEO of the other company, but that triggers often a lot of conversations around, maybe I'll play this up. What's your perspective on that and what should founders be mindful of?
speaker-1: Well, bringing that back to sort of the money side of things, there's two different parts of the money. One is the negotiation for what you're going to end up getting, right? And the other is what is your company actually worth? And the house analogy that Jack used earlier is really, really excellent because how does a real estate agent value your house? It's on all the comparables. It's on what happened in the neighborhood, same size. houses, renovations, blah, blah. there are many, many items and layers that go into comparing your house to another house to get the values. For all those people that have no idea what their business is worth, buyers look at it first as a comparable. So they understand businesses like yours, and they understand what drives the value in those businesses. You talked about professional services earlier. When you can't see Professional services you can't see beyond six months or a year as to what your next year is going to look like because you're just getting the contracts coming in the door and that sales funnel that is very limited in visibility reduces the value of the category of professional services company because that category doesn't have a lot of visibility on growth. now once you're in the category, what is your business worth? compared to everybody else. And there's a bell curve of businesses that are in the same category. And you're either way down here because your metrics are terrible, or you're way up here because you're way better than everybody else executing on that space. And you want to be on that side of the bell curve, if you can be the good side, and argue to buyers that you have better metrics than most. What that means is you've got to know what those metrics are. You've got to know what the benchmarks are. And the people that do understand that and know that are advisors in the space like us. But there's a lot of literature out there. You can find out easier about how people value your particular category. So then to the negotiating side, when that phone call comes in, often what they're going to try and tease out of you in that first phone call, you've never done it before and they sort of recognize that you're keen but maybe naive, is they're going to try and pull a number out of you. That is absolutely the worst thing you can do. You just negotiated against yourself when they didn't tell you what you're worth. So whenever somebody calls and says, well, you know, I want to buy you what, know, what, what's your number, you just step back and say, my number is based on what the market will bear. And I better go talk to some advisors and, know, whether they be legal or business or, or MNA advisors and find out what I'm really worth before we have that conversation. so just don't, don't throw a number out because you're either going to be ridiculously, and this is the trend that all of you entrepreneurs will have, ridiculously high, like my business is worth way more than that person would ever pay, or you're going to set a low bar because you you've set a number that they actually were willing to pay more and you just took that out of the negotiation.
speaker-2: Is there another question or other kind of, yeah, a few other questions that you should have in your back pocket? For example, perhaps it's a more junior private equity associate calling you, for example. know, oftentimes what you don't know when you're on in the founder seat versus my co-founder, Matt, as you know, was an M &A advisor. He knows there's a list. There's a list of companies. It's like sales, but it's for the private equity side of the business. And they're looking, they're building their deal flow. And so one of the things we'll say is like, what? what do you know about my business versus feeling like you have to be super transparent. And I think, I don't know, it feels very flattering when you get those calls. So I'm curious, is there anything else you'd recommend?
speaker-1: Yeah, be careful. think what you're saying is you can get information out of them. most, so tell me why are you looking at my space and what do you, you know, what do you see or what do you know about my business is a great opening question, but also, well, what are you seeing out there? What are, what are the multiples? Like throw it back at them. These are other people studying your market. You're saying, know, what are you seeing? You know, what's the latest sale multiple that you've seen? What do I have to do to get on the higher end of that spectrum in your mind? You know, what would you like to see in terms of performance? And you don't have to give them your numbers. You can give them high level or single digit millions or profitable. Those kinds of things are okay. But you also just have to think for a second that they might have just invested in one of your competitors and they're calling you to get as much information as they can from you that you're willing to give up because they might buy your company. So be careful is all I would say.
speaker-2: That's really wise. And some folks have asked questions about private equity. We'll get into more of the AMA, but there's many types of buyers. There's a universe of buyers. And before we get into that, I'm thinking about the actual process. That was a moment where you're starting to think about it because it came inbound. There's also the other moment, which is more of the poll. There's also a push where you're actually preparing and starting to think through your end game and what that looks like for you. And I promise we'd go through kind of the exit timeline math. And I imagine also disclosure, how much you share starts to increase the further down you get into that process. So I'd love to hear from both sides, Brett from you first and then just in terms of your founder perspective as well as you've also been on the legal side of this stuff. What is a typical push where you decide, you know what, I'm ready. What's the timeline? Let's work it back. And then what does that look like in phases so folks understand the process?
speaker-1: So first of all, Jackie made the point earlier, be ready and have that data room ready to the extent that you can be ready, even if you don't have a board to report to and it forces you to be ready by having the metrics and all that, you should be ready for that inbound for the, cow, they want to buy my company, what do I do now? If you are not ready at all, you're going to be in trouble. So you have to be prepared. Regardless of whether you want to go sell the business or not, but then when you say, okay I'm gonna go sell the business. I'm gonna run a process You should have kept a list of all the people that ever called you That said that they're interested potentially in buying your company you should keep a make a list of all of the companies in your ecosystem that Makes sense to own you and in that list say why would they want me? Is it simply expanding? Is it geographic? Is it more revenue? Is it? I have ⁓ a particular way to do something that they don't have. And so, so you're, you're, you'd be ready when, when, when the inbound comes to go run a process takes time. You've got to prepare the materials. You've got to go out and to a target list that you have to develop with that buyer rationale that I just talked about. Why would they want to buy me? So I'm going to go and talk to them and you're going to do the outreach either yourself or you're going to hire an advisor to do it. And that takes... six to eight weeks probably of emails and phone calls and you prepare a two data rooms. You have the data room that you always prepare and is ready, which is exhaustive. It's everything. And out of it, you pull a pre-LOI or pre-term sheet data room that is simpler. It has a overview of your business. It has your financial forecast and your last three years of financials, your cap table, and that's about it. Maybe a sales document that you use to sell so that anybody who's truly interested in your business and will sign an NDA can now get a more in-depth review including the financials of your business and then they can come and ask you some really intelligent questions before you get to the point at which you're gonna get an offer the beware of People that look like me that want to sell your business that say I can sell your business in 90 days. That is utter crap. And the process is going to take six to eight months to do right. where you get, where you really get into trouble is you go out to the market aggressively and say, here's a limited amount of information. You've got two weeks to put your bid letter in and put in your bid. Do you know what you get? You get crap. You get garbage. get, because they really haven't had a chance to interview you. They don't know the business and you're going to get proposals or ranges called indications of interest that have ranges on them that are You know, they're just not based in any form of reality and you're going to get the dreaded retrade because you'll go, ⁓ they're going to pay me that I'm taking that bid. Then they come and do the real work and then they say, ⁓ they find all sorts of things out that they didn't know. And down comes the price and you've just wasted a whole bunch of time. So go through the process, let them in. Jackie, there's an amount of the kimono you show, but you've got to let them in a bit under NDA or confidentiality agreement. then they're informed and they get to meet you and talk to you and ask you questions. Then they're much more informed when they make that bid. Takes longer but you're now going to get somebody who's going to stand behind that LOI. I understand this valuation and unless I find something dramatically wrong in the confirmatory due diligence this is the price I'm paying you.
speaker-2: Yeah. Yeah. And so what I'm hearing is 12 months, kind of minimum in terms of what you should expect. Six to 12, six would be pretty good. And then you're also going to do likely a transition, call it 12 to 18 months on average. Right? So really we're talking two, three years away. And then the preparation to get your house in order, especially if you've been scaling so fast, the wheels are coming off, takes time. And to your point, you want to be ready for that inbound coming in. at any point and that's frankly it's a more valuable business if you're ready for this conversation.
speaker-1: By the way, sorry, Jackie, by the way, the, the, the service business that I run, I am very well aware that I am going to be working for at least three years after my business gets bought because they want all of the relationships that I have. If you're in a business like that, you talked about it earlier. It's not 12 months or 18 months, right? They're going to three to five years if, if you have all of the relationships. So I'm well aware when I go to sell my business, how much more I've got to give. Sorry, Jackie.
speaker-2: Jackie, over to you.
speaker-0: Yeah, no, I would like to take it back a little bit to your first question about when that firm calls and do you take the call and what do you do and not, what do you say and what do you not say? Always take the call, always take the call because you can kind of figure out what your options are, what the market's out there. Think of it as an information call and get them to talk more than you talk is ideal. But a few things that I've heard people say that I absolutely like. caused me to cringe, things like, ⁓ you know, we don't really need the money. I've heard people say that and that's so dismissive. And then it puts you in a really bad negotiation position because everybody needs some money. Let's face it, everybody wants the money or you wouldn't be having the call, right? ⁓ You know, a lot of people say, as Brent noted, this is our valuation. And ⁓ I have a psychology degree. I don't remember much from it, but I do remember in a negotiation, you should never anchor first. Right. And I think that applies here. Right. Get them to kind of show their cards and they may actually say, I think your business is worth 10 million and you thought it was worth 5 million. Right. ⁓ some people say I'm burned out. I just want to get out of this. Like I'm really interested. Like I've actually heard people say that and you should, if you're burned out and you're selling your business because you're burned out or you're exhausted, you should be selling your business because you're working towards something, not running away from something. I see that happen a lot. So don't say you're burned out. That raises red flags with buyers and they wonder about how resilient you are and how durable you are and what you're going to be like post the investment. Some people have said growth has been really easy so far. Okay, well then you haven't really been working hard, have you? Right? So there's these things that people say that I'm like, okay, you know, and they sound very common sense, but a lot of people in that moment don't apply common sense. I want to kind of talk a little bit too about So you're kind of past that and now you're at the LOI stage and people go, ⁓ it's a non-binding LOI. Be really careful. Even though it's a non-binding LOI, the stuff you put in there kind of sets the stage for the deal, right? And I see far too many people that put stuff in there or they don't get their LOI reviewed by a lawyer or they kind of just think of it as this like piece of paper that doesn't really mean anything. It sets the stage and... You can put like a no shock clause in there. I've seen that, right? And all of a sudden now you've blocked out all these other buyers for a certain amount of time. I've seen people put that in for a really considerable length of time and you've just shut the door to anything else. And sometimes it's a...
speaker-2: competitive process.
speaker-0: Sometimes it's appropriate, but sometimes it really isn't. So you have to really think these through. And in terms of like overall timeline, I mean, I've had three exits. One took two years and two took just over a year. So six months is fast. I just, even if you have your house in order, there's so many things in, and especially in private equity, you're not the only deal that they're doing. They got other stuff going on, right?
speaker-2: and they have whole team. ⁓
speaker-0: And especially if you're a smaller deal, they're going to put their energy in the $100 million deal versus the $5 million deal or $10 million deal or $20 million deal, right? So you have to remember, sometimes you're guided by their timeline and not yours.
speaker-2: And Jackie, you mentioned something about kind of knowing when to sell. I'm kind of curious just in terms of you've made three of these decisions where it made sense to sell, but inverting that, when do you think it makes sense not to sell?
speaker-0: Well, I mean, I think we can look at this in a bunch of categories. Let's talk about emotions. We talked about that right before, where if you're really selling to get away from something and not selling towards something, that's a problem. If you don't know what you're going to do after this sale, you might have to give some thoughts to whether you should sell or not, right? ⁓ I always plug my friend's book, ⁓ Kelsey Rand, and she wrote a book called The Success Hangover, and it's real. A lot of folks sell their business and the rates of depression after people sell their business are very high because they haven't planned for their future, right? So you have to kind of think about that ⁓ and that you're not selling because of burnout and panic, which I talked about. And I think, you you're ready to sell if you could walk away from your business for eight weeks and it still runs smoothly. It doesn't need you, right? ⁓ And like, are the decisions and systems set up for to run without you, you know, is that all? Could you literally walk away? Then your business sounds pretty good in terms of being able to sell. Like have you focused the key roles around other people and not just you? How many times have I had people that are the janitor to the CEO, to the COO, to the sales director, to the finance person. And the minute that person again walks out the door, you know, with their personal relationships and all their knowledge, that business isn't ready to sell.
speaker-2: Yeah. value is eroded, which is why it's a very painstaking process. But one of the tools we provide our clients is like, let's build a contingency plan. Let's build a, if Kristen was no longer here, poof, what would break? And a great way to think about it is like, think of Tom Hanks and Wilson and go to an island. If you were totally without reception or anything, what would happen? And it's a great test to go for you as a founder, how dependent is the business, but also other key roles? there single points of failure across your system that is your company? And where are they? And let's figure out another way to de-risk it. Brent, what's your take on this? When should you not sell?
speaker-1: Well, we advise all the time. Tech companies come to us and ⁓ this is specific to tech. But I call a business under $5 million in revenue subscale and five to 10, five to 12 scaling. then, you know, once you're in the teens and higher than that in the tech world, you're at scale, ⁓ meaning you're meaningful to people and businesses and, know, can drive, ⁓ you're globally meaningful, let's put it that way. So ⁓ we have all sorts of people that come to us and say, ⁓ I've grown my business to $3 million and I want to sell. And we say, here's the reason you don't want to sell. ⁓ And we go through the benchmarks, where are they vis-a-vis on that bell curve of value for their sector? And we sort of show them where they are. But the biggest thing is those private equity buyers, those ones that ⁓ actually buy If you think about it, about 65 % of tech companies are bought directly by private equity or by private equity owned businesses, right? So they're called sponsored businesses. So private equity is in there 65 % of the time somehow. And if you're not over 5 million in revenue, they won't buy you. So you're just taking like almost 65 % of the market of your buyers away by not yet being at 5 million. So there's a time not to sell. ⁓ And that's hard to hear because you've grown up, like growing something to $3 million in revenues is hard. And then you look ahead and say, I got to get this to six. That's even harder. ⁓ But the reality is you're going to dramatically increase your audience for being purchased. And also when you're under 5 million, big companies, know, every entrepreneur thinks that Google is going to buy them or Microsoft or whatnot. I guarantee you that ⁓ the corporate development person sitting at Google does not make their career by buying two, three, $4 million a year revenue companies. They make their career by buying $20 billion companies. Completely.
speaker-2: And the effort is often very similar, obviously more complexly the larger you are, but there's still quite a bit of work. And I saw that on the PE side.
speaker-1: Right. So my angle from the when not to sell is just because of where you are in the market. So then you got to be aware of that.
speaker-2: and understanding the buyer universe. I've also heard kind of a magic number, and we've heard this from buyers as well as other investment bankers, around a million, two million EBITDA starts to really open up the market to a financial buyer who also makes up quite a bit of, these are family offices, these are individuals with capital to deploy, and they're looking for a cash flowing asset. So regardless, I think what I'm hearing is increase your surface area for luck by building a great business, built on great fundamentals, get your house in order. and then increase your optionality by getting to that kind of threshold and be ready.
speaker-1: Yep, so your head down and growing the business is the best advice because you will become more attractive the more you grow.
speaker-2: And love the house that you've built. Maybe if you're feeling burnt out, it's sort of a question to go, if I step back, bring in some support, is there a way to structure this so it's a house I want to live in? And that's likely a more sellable business when you do that work.
speaker-1: And there's
speaker-0: I was going say, in one of my exits, it was the consumer products one. My partners were my parents and they were aging. They were in their seventies. It's not that we were burnt out, but we were also looking at what our life looked like for the next 10, 15 years. I either had to replace them and they were key to making me happy in my business. I wasn't burnt out and I wasn't exhausted and running away from something. But it also, there was just a new, it was a new, gonna be a new world and a new time and a new shift. And that's okay too. And I'm sure there's probably listeners here that are not necessarily burnt out, but they're at a point where their world is changing. And that's okay. It's okay to sell in that environment too. You just have to make the buyers aware that it's not that you're lying on the floor gasping for breath.
speaker-2: You are not the business. This is a platform. This is an asset that can live beyond you. So I love that. Now, we also promised AMA a lot of the questions we wove into the narrative here, but I do have Q &A open. You can submit anonymously. So feel free to throw any burning questions you have in there. And while we wait, I'm going to do a couple of rapid fire ones just because these were related to some of the questions that came in. So super fast, quick answers. You ready? Here we go. All right. Biggest? green flag in a founder you'd invest in, Jackie.
speaker-0: ⁓ coachability, execution ability, integrity, a deep understanding of the business and great leadership.
speaker-2: killer Brent biggest red flag that kills a deal. ⁓ you want
speaker-1: Yeah, I'm just gonna say that those are excellent. That's exactly what I look for go. Sorry my question is
speaker-2: Biggest red flag, biggest gotcha in a deal for a founder.
speaker-1: But you find something that they didn't disclose earlier, ⁓ they didn't share bad news. ⁓ If they've masked something in some way, that's going to come back and bite you every time.
speaker-2: Amazing. Awesome. ⁓ Andreas, love this question. Do you see any major differences between North American versus European companies, buyers, mindsets, et cetera?
speaker-1: it was not really, ⁓ European, ⁓ buyers weren't really, ⁓ and again, I'm a tech focused. They, they, were not as many European tech buyers. There are now they've really matured. ⁓ I think that there's hard nosed, ⁓ buyers, but they come from all different areas, like, you know, tough buyers, tough negotiators. ⁓ I don't think you can put it geographically, it's just like it's the people. So yeah, no, I don't see a big difference these days.
speaker-2: Awesome. All right. In one sentence, finish the sentence. The founders see that the best exits are the ones who.
speaker-1: Prepare.
speaker-0: who prepare and you can trust.
speaker-1: Yeah. Nice. Yeah. And don't forget to, you know, I'm not just weaving our flag, Jackie and Brent's flag. You got to pay advisors to help you. ⁓ you can't do it all on your own and you've got to go and get that expertise. And we haven't even talked about tax planning. Like you could do a whole series on what, what your audience doesn't know about the tax implications of selling a business.
speaker-2: I love that you just asked that. We are going to be doing a series every single month. And coming up next is one on finance and how to get that in order, because we reference that. But the next one will be on tax. And there was a question that just came in anonymously. We don't have time to answer, but I will read it. And quick reactions would be great. How do you avoid the tax burden of an asset sale when a share sale isn't an option in the deal? Canadian entity focused. This might be one to unpack later.
speaker-0: I took tax in law school and it ended there and I'm glad it did. I mean, I relied on our tax advisors considerably to Brent's point, right? Let the experts do their job, stay in your lane, right? But a lot of you have to do ahead of time of the sale, whether it's setting up a trust or things like that that people forget to do or don't think about doing.
speaker-2: Two years is the crystallization period. and we are not tax advisors either, but we will be doing a Canadian focus session on tax. So stay tuned on that one.
speaker-1: say that a share purchase usually gets you capital gains and the asset purchase does not. And that might be where they were headed with that question. again, ⁓ tax advice is very, very key.
speaker-2: Awesome. This is great. One last question, which is, from both your perspectives, what's a question that a founder should ask a potential buyer, but almost never do?
speaker-0: I mean, I think we kind of covered it. What interests you and me? know, why did you pick up the phone to call me and let them just talk and talk and talk about what they obviously took the time to call you. So why did they?
speaker-1: I think that before the deal is done, ⁓ what they forget to ask is how do you treat your ⁓ founders post transaction and can I speak to three or four of them? They almost never do that and you should. You've got to do diligence on your buyer and that almost never happens.
speaker-2: No, that's fantastic. Well, both thank you so much for jumping into this. This was the very first one. I so look forward to feedback afterwards. You're going to receive a quick little, how was it? What could we do better? What went well? We want to keep these going and we want to bring this knowledge to more founders. Thank you both for investing your time. Where can folks find you as a next step? If they're curious to kind of dig in more from your perspective expertise.
speaker-0: Yeah, I mean, ⁓ please reach out to caravallaw.com. So just so people know, a Caraval is one of those ships that has all the sails on it and it navigates smaller waters that big ships don't navigate. So it's not a knock at the big firms, but I really wanted to make legal accessible to people. for all the reasons we talked about, don't be scared to spend a little bit of money to save you a lot at the end. And we kind of have a low overhead model, which really intended to kind of make it easy to bring lawyers into the group. Yeah, I mean, ⁓ you can find me at jdinsmore at caravallalaw.com. Thanks so much.
speaker-1: And Garibaldi is on LinkedIn itself, ⁓ as am I. ⁓ And we have webinars that are focused on tech related things that we posted there, valuations, et cetera. So you can learn a little bit that way. And then I'm just Brent at garibaldicapital.com.
speaker-2: Thank you all. And I will send this out afterwards. But if you are curious about what your business is worth and where there might be room to make some moves, we have a completely free assessment you can take. takes 15 minutes. And I'll share that as a gift for you. You get the results right away. And it gives you at least a starting point to start building value. So thank you, everyone, for joining us. And ⁓ we'll see you next time. Thank you both. Thanks for having us all. Bye.
speaker-1: Thank you.
