BẢN CHÉP ÂM THANH 🔗
1
00:00:00,375 --> 00:00:04,963
One of the real bad experiences
that I've had with the deal
2
00:00:05,005 --> 00:00:07,966
breaking is for
3
00:00:07,966 --> 00:00:12,345
information
that was discovered during due diligence.
4
00:00:13,013 --> 00:00:16,766
That were not that was not disclosed. So,
5
00:00:18,309 --> 00:00:22,272
you know, that's
why it's really important to give clients
6
00:00:22,480 --> 00:00:27,027
buyers information, including the good,
the bad, the ugly, all of that.
7
00:00:27,027 --> 00:00:27,777
Right.
8
00:00:27,777 --> 00:00:31,448
So, you know, one deal
that, you know, I was working
9
00:00:31,448 --> 00:00:34,451
on, the,
10
00:00:34,576 --> 00:00:37,579
the Q of that, the that the buyer,
11
00:00:37,746 --> 00:00:40,415
hired an accounting firm
to do a quality of earnings.
12
00:00:40,415 --> 00:00:44,335
Bolivar earnings, of course, as you know,
is in kind of a light audit
13
00:00:44,377 --> 00:00:46,421
type, more or less.
14
00:00:46,421 --> 00:00:50,300
And they found, discrepancies in that,
15
00:00:51,051 --> 00:00:54,387
and they uncovered a whole bunch of stuff.
16
00:00:54,763 --> 00:00:58,725
So very difficult sometime
even though we do a good job,
17
00:00:59,267 --> 00:01:01,895
I think we do a good job
with all the upfront due
18
00:01:01,895 --> 00:01:05,482
diligence
that we do in the financial analysis.
19
00:01:06,066 --> 00:01:11,154
Sometimes there are just things
that we can't quite get to, and,
20
00:01:12,072 --> 00:01:15,867
and the few of the people do sometimes.
21
00:01:15,950 --> 00:01:17,243
Okay. So.
22
00:01:18,244 --> 00:01:18,703
Yeah.
23
00:01:18,703 --> 00:01:22,707
And and
then that leads to retraining many times.
24
00:01:22,749 --> 00:01:26,753
So the EBITDA calculation, for example,
25
00:01:26,795 --> 00:01:30,340
may not be what was presented.
26
00:01:31,216 --> 00:01:35,762
And the Q of, you know,
will uncover things things like that.
27
00:01:35,970 --> 00:01:38,973
And then the buyer in many cases will,
28
00:01:39,682 --> 00:01:40,975
you know, want to retrain.
29
00:01:40,975 --> 00:01:45,146
And that becomes a problem
because the expectation of the,
30
00:01:46,648 --> 00:01:48,441
of the client, of our seller
31
00:01:48,441 --> 00:01:51,402
is that the deal had certain economics
32
00:01:51,402 --> 00:01:54,405
that is not supported right now.
33
00:01:54,614 --> 00:01:55,824
So he'd have to.
34
00:01:55,824 --> 00:01:58,910
Either accept the retrain or not. Yeah.
35
00:01:59,327 --> 00:02:01,287
So for those of you that are joining us,
36
00:02:01,287 --> 00:02:04,415
we have Steve Pappas from Touchstone
Advisors.
37
00:02:05,208 --> 00:02:08,378
And today we're going to have
a conversation about pitfalls
38
00:02:08,378 --> 00:02:11,381
that happen in a transaction.
39
00:02:18,680 --> 00:02:21,683
So thank you for thank you for joining us
on Touchstone Talks.
40
00:02:21,850 --> 00:02:23,226
Thanks. So pitfalls.
41
00:02:23,226 --> 00:02:24,686
There's there's quite a few.
42
00:02:24,686 --> 00:02:27,480
I mean there's
there's all kinds of things.
43
00:02:27,480 --> 00:02:28,273
Well let's talk.
44
00:02:28,273 --> 00:02:32,402
About the biggest one
that that touchstone works to prevent.
45
00:02:32,485 --> 00:02:36,364
Let's talk about the pitfall
of a one on one negotiation.
46
00:02:37,991 --> 00:02:38,491
Okay.
47
00:02:38,491 --> 00:02:41,286
Well, one on one to,
48
00:02:41,286 --> 00:02:42,537
I think you,
49
00:02:42,537 --> 00:02:46,082
if I understand you correctly,
you're talking about one where
50
00:02:47,083 --> 00:02:52,172
the buyer or I mean, the seller,
the business owner has only attracted
51
00:02:52,172 --> 00:02:57,886
and has find and found a buyer who's
knocked on their door and wants to buy.
52
00:02:58,011 --> 00:02:58,469
Right.
53
00:02:58,469 --> 00:03:03,683
And so thus, there's not a whole bunch
of competitors looking and so on.
54
00:03:03,683 --> 00:03:08,605
So that puts the that's puts
the business owner in a very tough spot
55
00:03:08,646 --> 00:03:11,649
because number one, he doesn't know
56
00:03:12,483 --> 00:03:15,111
whether that offer is good or not.
57
00:03:15,111 --> 00:03:18,698
I mean, I just went through this recently
last week with a
58
00:03:18,948 --> 00:03:24,662
with someone who a business owner
who called me, had an unsolicited offer
59
00:03:24,704 --> 00:03:29,792
lo I presented to him
and he's like, hey, it's just a good deal.
60
00:03:30,877 --> 00:03:32,045
Well,
61
00:03:32,045 --> 00:03:35,256
two things that he needs to understand,
which I told him
62
00:03:35,256 --> 00:03:38,927
was we're happy to do a valuation,
which we did for him.
63
00:03:39,677 --> 00:03:44,140
And, it turns out that
this offer was not bad.
64
00:03:44,641 --> 00:03:46,559
It was kind of in line
65
00:03:46,559 --> 00:03:50,480
with the ballpark of what
the business would probably be worth.
66
00:03:50,480 --> 00:03:55,985
The problem is, all the terms on that
offer were very unsupported by the market.
67
00:03:56,152 --> 00:04:00,281
So, you know,
he wanted lots of seller financing.
68
00:04:00,740 --> 00:04:05,286
He wanted inventory to be paid
over two year period.
69
00:04:05,662 --> 00:04:08,665
Oh my goodness. Yeah yeah yeah.
70
00:04:08,748 --> 00:04:11,751
You know,
like kind of consignment type of thing.
71
00:04:12,543 --> 00:04:15,463
As he sold it, he would pay the seller.
72
00:04:15,463 --> 00:04:18,466
It was really a a bad deal.
73
00:04:19,092 --> 00:04:23,972
And what I usually say is one
buyer is no buyer.
74
00:04:24,013 --> 00:04:24,305
Right.
75
00:04:24,305 --> 00:04:27,475
You really need to compare it
to something.
76
00:04:27,517 --> 00:04:31,020
So that's
why running a full process is critical.
77
00:04:31,354 --> 00:04:32,146
Right.
78
00:04:32,146 --> 00:04:36,067
It gives you the ability
to put some pressure on your your buyers.
79
00:04:36,442 -->
Load full transcript
00:04:37,026
Yeah.
80
00:04:37,026 --> 00:04:43,366
I mean, you have to have alternate buyers
and one as a backup or 2 or 3.
81
00:04:44,284 --> 00:04:47,578
And, you know,
so some of the things that turn,
82
00:04:47,578 --> 00:04:51,249
let's assume you have a
you let's assume you run a process
83
00:04:51,249 --> 00:04:55,003
and you have a number of interested
parties.
84
00:04:55,003 --> 00:04:56,879
They've submitted lies.
85
00:04:56,879 --> 00:05:00,216
And now we have three
or 4 or 5 to compare to,
86
00:05:01,426 --> 00:05:02,510
many times
87
00:05:02,510 --> 00:05:06,139
the things that, you know,
let's assume you negotiate.
88
00:05:07,015 --> 00:05:08,599
You pick one that's the best.
89
00:05:08,599 --> 00:05:11,602
And the seller,
the owner loves them the best
90
00:05:11,686 --> 00:05:15,106
because of maybe price in terms
and all those good things.
91
00:05:15,398 --> 00:05:20,278
I think we're a lot of other M&A
firms might do or not do,
92
00:05:20,486 --> 00:05:23,489
and we spent a lot of time doing is,
93
00:05:24,073 --> 00:05:27,410
the digging in on the law and making sure
94
00:05:28,411 --> 00:05:31,581
all aspects are negotiated.
95
00:05:31,748 --> 00:05:34,709
You know, kicking
the can on items down the road and like,
96
00:05:34,709 --> 00:05:37,962
worry about it later is really convenient.
97
00:05:37,962 --> 00:05:43,676
But it's not good for our client
and it turns out to be problematic.
98
00:05:43,760 --> 00:05:44,302
No matter.
99
00:05:44,302 --> 00:05:47,347
What your leverage when you you get back.
100
00:05:47,430 --> 00:05:52,060
So when you sign the law, you give up
your, you know, your under exclusivity.
101
00:05:52,101 --> 00:05:55,104
You're back to that
one on one negotiation.
102
00:05:55,146 --> 00:05:57,774
Exactly. So now you you're right.
103
00:05:57,774 --> 00:06:02,111
As soon as that signed,
the leverage switches to the buyer.
104
00:06:02,153 --> 00:06:05,239
Now they have you're tied up as an owner.
105
00:06:05,239 --> 00:06:07,241
Can't shop it to anyone else.
106
00:06:07,241 --> 00:06:11,204
You can't talk about it to anyone else
during the exclusivity period,
107
00:06:11,204 --> 00:06:15,833
which is typically 60,
75 days, maybe even 90.
108
00:06:15,958 --> 00:06:19,504
And that's now the ball's in their court.
109
00:06:19,504 --> 00:06:23,383
So all those things that need
110
00:06:23,424 --> 00:06:27,804
to be negotiated, Earnhardt's,
for example, that should all be done up
111
00:06:27,804 --> 00:06:31,265
front and shouldn't be like,
hey, or now we'll be determined.
112
00:06:31,265 --> 00:06:33,434
No, that's a bad move.
113
00:06:33,434 --> 00:06:35,269
Also, things like,
114
00:06:36,229 --> 00:06:39,315
networking, capital calculation, who
what's included?
115
00:06:39,315 --> 00:06:41,943
What's not included.
116
00:06:41,943 --> 00:06:44,821
Are they doing the average
12 trailing 12 months?
117
00:06:44,821 --> 00:06:47,824
Do they
want 24?
Are they asking for three?
118
00:06:47,865 --> 00:06:52,537
And you could tell by the offer
of its market driven or not.
119
00:06:52,537 --> 00:06:55,748
And you have to be experienced person
to know that.
120
00:06:55,915 --> 00:06:58,709
And if it's not market driven,
there should be a reason for it.
121
00:06:58,709 --> 00:06:59,085
Right.
122
00:06:59,085 --> 00:07:03,172
Like looking at one
and they have a lot of,
123
00:07:04,215 --> 00:07:07,927
of government type payers
which are slow, slow payers.
124
00:07:08,094 --> 00:07:11,305
So if we did a true up at 90 days
125
00:07:11,639 --> 00:07:14,350
for networking capital,
they might not have gotten
126
00:07:14,350 --> 00:07:17,353
all those receivables
collected in that amount of time.
127
00:07:17,395 --> 00:07:18,354
Right.
128
00:07:18,354 --> 00:07:20,815
It's case by case really is what it is.
129
00:07:20,815 --> 00:07:21,649
Depending on the.
130
00:07:21,649 --> 00:07:22,817
We need to push it out
131
00:07:22,817 --> 00:07:27,280
so that it's not it's not 90 days,
which is pretty industry standard.
132
00:07:27,530 --> 00:07:29,824
There's going to be a reason for it. Yeah.
133
00:07:29,824 --> 00:07:31,409
There's got to be a reason.
134
00:07:31,409 --> 00:07:36,205
And another reason that, back to
why deals fall apart
135
00:07:36,497 --> 00:07:40,168
is during once an alloy is signed.
136
00:07:42,420 --> 00:07:44,505
You know,
you and I, Deborah, have at touchstone.
137
00:07:44,505 --> 00:07:46,757
You know, we have a
138
00:07:46,757 --> 00:07:50,887
saying that nothing good happens
between low and closing, okay?
139
00:07:50,928 --> 00:07:53,431
Because that's an open period.
140
00:07:53,431 --> 00:07:56,309
That bad, bad stuff can happen.
141
00:07:56,309 --> 00:08:01,105
And, you know, the business owner
can lose their number one client.
142
00:08:01,564 --> 00:08:03,441
They can lose their key employees.
143
00:08:03,441 --> 00:08:05,860
All things can happen. So you want to.
144
00:08:05,860 --> 00:08:10,615
So our goal is to shorten that time
frame from low to closing.
145
00:08:11,574 --> 00:08:14,577
So that, you know, you don't have that,
146
00:08:14,785 --> 00:08:17,747
you know,
kind of option for these unknowns.
147
00:08:17,747 --> 00:08:21,918
And you want to make sure that's really,
you know, that's really as close.
148
00:08:21,918 --> 00:08:25,129
But one thing that's out of our control,
but in the control
149
00:08:25,171 --> 00:08:29,342
many times of the client is business
performance.
150
00:08:29,383 --> 00:08:31,928
You know, we I've seen deals just.
151
00:08:31,928 --> 00:08:33,095
Fall apart.
152
00:08:33,095 --> 00:08:35,973
Oh yeah. Yeah they. They are.
153
00:08:35,973 --> 00:08:40,102
And it's unfortunately
not always even in the owner's control.
154
00:08:40,144 --> 00:08:40,436
Right.
155
00:08:40,436 --> 00:08:41,270
Not all.
156
00:08:41,270 --> 00:08:45,024
Pro situations
impact business performances.
157
00:08:45,316 --> 00:08:49,987
And if a macro situation occurs
that can cause a problem.
158
00:08:50,905 --> 00:08:53,032
And and but that's true.
159
00:08:53,032 --> 00:08:57,745
I agree there is certainly, you know,
you know, the economy
160
00:08:57,745 --> 00:09:01,290
and other things
that can affect the client's business.
161
00:09:01,707 --> 00:09:04,377
On the flip side, putting the pedal
162
00:09:04,377 --> 00:09:09,757
to the metal type of attitude needs to be
the owner needs to understand that
163
00:09:09,799 --> 00:09:13,427
if if they can go and land
another new account or
164
00:09:13,594 --> 00:09:17,723
bring in some other, you know, let's say,
I don't know, they just push harder.
165
00:09:18,099 --> 00:09:21,686
If you push harder
during that three month period
166
00:09:21,727 --> 00:09:25,565
and you have good news
to report to the buyer, like, hey,
167
00:09:25,606 --> 00:09:29,527
we just landed,
we just landed a great new customer.
168
00:09:30,403 --> 00:09:34,198
They do, you know,
even if the revenue isn't in yet, like,
169
00:09:34,407 --> 00:09:38,244
we just signed a contract
with some new client.
170
00:09:38,286 --> 00:09:42,206
Boy, that boosts the confidence
171
00:09:42,206 --> 00:09:46,210
so much from the,
you know, in the from the buyer's,
172
00:09:47,503 --> 00:09:50,506
perspective,
it's just it's a psychological thing.
173
00:09:50,548 --> 00:09:51,507
Like, they don't they.
174
00:09:51,507 --> 00:09:53,217
Because they're paranoid, right?
175
00:09:53,217 --> 00:09:55,428
They sign an
176
00:09:55,428 --> 00:09:58,806
now they're looking for stuff like,
what is wrong here?
177
00:09:58,806 --> 00:10:00,266
I want to uncover something
178
00:10:00,266 --> 00:10:04,061
that's bad, and that's the job
of all the people they hire.
179
00:10:04,103 --> 00:10:07,106
Like whether it's the attorney
or the accountant or whoever,
180
00:10:07,648 --> 00:10:09,775
they want to find something, right?
181
00:10:09,775 --> 00:10:12,278
And to give them a reason not to buy.
182
00:10:12,278 --> 00:10:17,283
And a good news counteracts
that, you know, I had well, I had.
183
00:10:17,283 --> 00:10:18,367
A time.
184
00:10:18,367 --> 00:10:19,910
Time is so important.
185
00:10:19,910 --> 00:10:22,997
And I'm always amazed that,
186
00:10:25,166 --> 00:10:28,044
there's a certain subset of owners
187
00:10:28,044 --> 00:10:31,047
that think we signed the yellow I.
188
00:10:31,380 --> 00:10:34,216
I'm about to sell my company.
189
00:10:34,216 --> 00:10:37,219
I'm going on vacation now.
190
00:10:37,845 --> 00:10:38,346
Yeah.
191
00:10:38,346 --> 00:10:40,473
No, that's always bad.
192
00:10:40,473 --> 00:10:43,726
Response time is so important, and, well.
193
00:10:43,768 --> 00:10:44,644
Response time.
194
00:10:44,644 --> 00:10:48,105
It's also because what does it turn into?
195
00:10:48,147 --> 00:10:52,401
It turns into deal fatigue for for a.
196
00:10:52,401 --> 00:10:54,862
Buyer and seller. And seller.
197
00:10:54,862 --> 00:10:58,240
Like after a while it's like,
oh, we've been working on this for so long
198
00:10:59,033 --> 00:11:03,162
and buyers lose, you know, they
lose patience and they want to move ahead.
199
00:11:03,162 --> 00:11:07,416
And all of a sudden
they're no longer that hot on buying it
200
00:11:07,416 --> 00:11:11,504
because you've delayed it
by two weeks or three weeks or more
201
00:11:11,504 --> 00:11:17,093
because the client is in Italy
on some big tour of Europe or something.
202
00:11:17,134 --> 00:11:18,928
And that's that's bad.
203
00:11:18,928 --> 00:11:21,514
You don't want to
you don't want to do that.
204
00:11:21,514 --> 00:11:23,599
If you're a business owner, you know,
and you want to give.
205
00:11:23,599 --> 00:11:26,769
And another reason for giving
a lot of this due diligence, please.
206
00:11:26,811 --> 00:11:29,063
Due diligence items up front.
207
00:11:29,063 --> 00:11:32,316
As we collect a new client
as an onboarding process,
208
00:11:32,358 --> 00:11:36,696
we want to get as much as we can
from financials and legal and so on
209
00:11:36,737 --> 00:11:41,992
so that when it comes to to post low,
we have a lot of it already.
210
00:11:42,118 --> 00:11:43,744
And that helps.
211
00:11:43,744 --> 00:11:46,706
That helps with the timing,
the timing issue.
212
00:11:46,831 --> 00:11:47,707
It really does.
213
00:11:49,041 --> 00:11:52,128
So when we're looking at other large
pitfalls, right.
214
00:11:52,169 --> 00:11:54,630
Time kills all deals,
215
00:11:54,630 --> 00:11:57,633
every deal dies three deaths.
216
00:11:58,175 --> 00:11:59,552
That's that's a term.
217
00:11:59,552 --> 00:12:03,764
And it's,
you know, anytime we get close to a close,
218
00:12:03,764 --> 00:12:07,017
if there hasn't been some moment at least.
219
00:12:07,435 --> 00:12:08,185
Least one.
220
00:12:08,185 --> 00:12:09,729
Have felt broken.
221
00:12:09,729 --> 00:12:11,814
Right. Like that.
This is never going to happen.
222
00:12:11,814 --> 00:12:15,735
If that hasn't happened, I'm always on
pins and needles waiting for it.
223
00:12:16,110 --> 00:12:17,611
You know, it's it's true.
224
00:12:17,611 --> 00:12:22,658
And and I had one deal close recently
that had none, which was such a rarity.
225
00:12:22,867 --> 00:12:26,412
And I was so nervous because like,
what is this going
226
00:12:26,454 --> 00:12:29,457
to smooth like there.
227
00:12:29,582 --> 00:12:31,792
You know, as a M&A person,
228
00:12:31,792 --> 00:12:35,087
you know,
we get used to resurrecting deals
229
00:12:35,087 --> 00:12:39,008
as they have, you know, all the
as they run to an issue here and there.
230
00:12:39,258 --> 00:12:41,385
But this one was special.
231
00:12:41,385 --> 00:12:45,097
And every once in a while
you run into a buyer
232
00:12:45,097 --> 00:12:50,561
who's really fair
and well balanced and a seller
233
00:12:50,561 --> 00:12:54,857
who's really fair and well balanced,
and it's like a breath.
234
00:12:54,899 --> 00:12:56,233
It's like a breath of fresh air.
235
00:12:56,233 --> 00:12:59,820
You don't see it often
because it's the world we live in.
236
00:13:01,197 --> 00:13:02,615
But yeah, you're right.
237
00:13:02,615 --> 00:13:05,618
They also do fall apart or
238
00:13:05,659 --> 00:13:08,662
seem to at certain points in time.
239
00:13:09,246 --> 00:13:12,500
And also it's part of a negotiation tactic
240
00:13:12,500 --> 00:13:15,503
sometimes for the buyer, you know,
they maybe.
241
00:13:15,586 --> 00:13:16,253
They.
242
00:13:16,253 --> 00:13:19,548
You know, they,
they are going to walk away
243
00:13:19,548 --> 00:13:23,844
because they didn't get a concession
they wanted or something like that. And,
244
00:13:24,970 --> 00:13:27,640
and, but, but in the end,
245
00:13:27,640 --> 00:13:30,059
what I found after doing this for 20
246
00:13:30,059 --> 00:13:34,480
some odd years
is if they really want the deal to happen,
247
00:13:34,522 --> 00:13:38,067
they'll find a way
and and the seller the same thing.
248
00:13:38,317 --> 00:13:41,362
I had a, I had a, a transaction.
249
00:13:41,362 --> 00:13:46,867
We had a transaction about a year ago
and the buyer
250
00:13:47,284 --> 00:13:49,870
large company,
251
00:13:49,870 --> 00:13:52,873
strategic but owned by a private equity,
252
00:13:53,082 --> 00:13:57,795
made a, you know, kind of a handshake deal
at our meetings with the seller
253
00:13:58,003 --> 00:14:01,924
that said, you know, due
diligence is not going to get out of hand.
254
00:14:02,258 --> 00:14:04,969
And I'm I'll make sure of that.
255
00:14:04,969 --> 00:14:07,513
And guess
what? Do diligence got out of hand.
256
00:14:07,513 --> 00:14:10,516
They were hiring,
you know, these big giant,
257
00:14:10,599 --> 00:14:12,893
the PE firm hired as big giant,
258
00:14:14,103 --> 00:14:14,979
accounting firm.
259
00:14:14,979 --> 00:14:19,942
And before you know it, my, our client
just ran into a situation where he's like,
260
00:14:19,984 --> 00:14:20,693
I'm running.
261
00:14:20,693 --> 00:14:22,236
He he ran out of patience.
262
00:14:22,236 --> 00:14:24,530
It was just it was outrageous.
263
00:14:24,530 --> 00:14:27,783
And then so I called that buyer
264
00:14:27,825 --> 00:14:31,078
CEO and said, you could save this
265
00:14:31,120 --> 00:14:34,456
if you want, but my client, our client's
going to walk away.
266
00:14:34,540 --> 00:14:35,541
You just.
267
00:14:35,541 --> 00:14:40,254
Everything you promised him with
the handshake is not happening.
268
00:14:40,337 --> 00:14:42,506
And and he did the right thing.
He called his.
269
00:14:42,506 --> 00:14:46,510
He told all of his people
to step, to stand down.
270
00:14:47,094 --> 00:14:49,346
And they moved to closing.
271
00:14:49,346 --> 00:14:50,389
And he stopped it all.
272
00:14:50,389 --> 00:14:53,225
He just said, we've done enough.
273
00:14:53,225 --> 00:14:56,186
I'm not going to lose this deal because of
274
00:14:56,395 --> 00:14:59,440
over anxious accounting
firms or something.
275
00:14:59,481 --> 00:15:02,484
Right, right, right. Or attorneys.
276
00:15:02,776 --> 00:15:03,903
And he did.
277
00:15:03,903 --> 00:15:05,446
And there are right.
278
00:15:05,446 --> 00:15:08,866
A purchase agreement is 50, 60,
279
00:15:08,866 --> 00:15:11,911
70 pages long and over a hundred.
280
00:15:11,952 --> 00:15:14,163
Once you add in all the schedules.
281
00:15:14,163 --> 00:15:17,124
Oh, Yeah, there's a lot of terms
282
00:15:17,124 --> 00:15:20,085
that can break a deal within that.
283
00:15:20,085 --> 00:15:22,004
Yeah. It's really about
284
00:15:23,047 --> 00:15:23,756
finding a
285
00:15:23,756 --> 00:15:27,009
creative path forward
that works for everybody.
286
00:15:27,676 --> 00:15:29,386
And it's also about trust.
287
00:15:29,386 --> 00:15:35,434
You build trust, but seller has to have
some trust of the buyer and vice versa.
288
00:15:35,476 --> 00:15:38,729
Buyer needs to trust the seller
because there are some
289
00:15:38,729 --> 00:15:41,732
leaps of faith in the process.
290
00:15:41,857 --> 00:15:45,986
You could only protect so much
with pieces of paper and legal things,
291
00:15:45,986 --> 00:15:49,865
but at some point,
if they don't trust each other anymore,
292
00:15:50,491 --> 00:15:53,911
the deal is never going to happen
at that point, because it doesn't matter
293
00:15:53,911 --> 00:15:56,747
what the attorneys say or whatever,
they just lost that.
294
00:15:56,747 --> 00:15:58,791
So it's really important to be.
295
00:15:58,791 --> 00:16:00,000
That's the truthfulness.
296
00:16:00,000 --> 00:16:01,585
Like you need to be able to be honest.
297
00:16:01,585 --> 00:16:03,629
But there's a little, you know,
298
00:16:03,629 --> 00:16:07,466
I don't know what's on the deal
or on the business itself.
299
00:16:08,175 --> 00:16:12,429
You need to kind of be honest
and bring those little deficiencies
300
00:16:12,429 --> 00:16:16,350
to the buyer's attention right up front,
301
00:16:16,350 --> 00:16:19,353
rather than they self discover them later.
302
00:16:19,478 --> 00:16:21,981
And they're like,
why didn't you tell me this?
303
00:16:21,981 --> 00:16:24,149
And now you broken the trust.
304
00:16:24,149 --> 00:16:24,525
Yeah.
305
00:16:24,525 --> 00:16:29,780
Businesses build and grow over years
and years and years to think that there's
306
00:16:29,947 --> 00:16:32,825
no no skeleton in the closet or
307
00:16:32,825 --> 00:16:36,370
a little dust under the rug is unlikely.
308
00:16:36,412 --> 00:16:41,834
So buyers generally understand
that what they want to know
309
00:16:41,875 --> 00:16:46,755
is how you're going to work around that,
or how you're going to make sure
310
00:16:46,755 --> 00:16:50,009
that they don't end up in trouble
for something that you did.
311
00:16:50,384 --> 00:16:50,801
Yeah.
312
00:16:50,801 --> 00:16:54,763
And and some of those
are just opportunities for the buyer.
313
00:16:54,805 --> 00:16:58,017
Like, like they didn't do this very well.
314
00:16:58,100 --> 00:17:02,396
Whether it was a lack of,
you know, marketing or whether they did
315
00:17:02,396 --> 00:17:07,943
something that was, you know, short
sighted with the client and whatever.
316
00:17:07,943 --> 00:17:14,158
The thing is, the is being 100%
transparent and,
317
00:17:14,908 --> 00:17:20,039
honest during the whole process is really,
you know, is really critical.
318
00:17:20,414 --> 00:17:21,832
Everything's going to come out.
319
00:17:21,832 --> 00:17:25,169
In other words, you know,
you're not going to hide something like,
320
00:17:25,169 --> 00:17:29,715
hey, oh, yeah, no,
I was sued by a, an employee.
321
00:17:29,715 --> 00:17:31,633
I didn't think that was important
322
00:17:31,633 --> 00:17:35,679
because it happened five years ago
or something like, yes, that's important.
323
00:17:35,721 --> 00:17:39,683
People that you know, we're going to find,
they're going to find out.
324
00:17:40,100 --> 00:17:40,601
Right.
325
00:17:40,601 --> 00:17:44,521
And and they're going to say,
why didn't you tell me so?
326
00:17:44,646 --> 00:17:45,230
Well.
327
00:17:45,230 --> 00:17:48,984
And not only are they going to find out,
like you're signing a document
328
00:17:49,193 --> 00:17:53,363
that says
all of those things that have happened,
329
00:17:53,697 --> 00:17:58,911
and if you haven't disclosed
something that should have been disclosed,
330
00:17:59,036 --> 00:18:02,873
that's a liability on you post
transaction.
331
00:18:03,248 --> 00:18:04,833
Exactly. You know.
332
00:18:04,833 --> 00:18:06,418
Nobody wants that.
333
00:18:06,418 --> 00:18:09,254
No. No, no, no post closing litigation.
334
00:18:09,254 --> 00:18:12,257
That's not the goal. No no no.
335
00:18:12,508 --> 00:18:15,886
In other area
that is, I think, critical in
336
00:18:15,969 --> 00:18:19,681
like what what is a kind of an item
that's fought
337
00:18:19,681 --> 00:18:23,018
a lot is networking capital,
you know, that comes up.
338
00:18:23,018 --> 00:18:25,312
It's always a negotiation thing.
339
00:18:25,312 --> 00:18:27,606
And it's always tough because
340
00:18:27,606 --> 00:18:31,902
and business owners don't I've got many
that we've talked to.
341
00:18:31,944 --> 00:18:35,405
I'm sure you have Deborah as well
that that think oh I get to
342
00:18:35,531 --> 00:18:39,243
I get to keep all the accounts
receivable coming in.
343
00:18:39,243 --> 00:18:39,535
Right?
344
00:18:39,535 --> 00:18:43,163
I mean, I just get all
I just get all that and it's like, no,
345
00:18:44,623 --> 00:18:46,542
you know, cash free, debt free.
346
00:18:46,542 --> 00:18:47,042
Fine.
347
00:18:47,042 --> 00:18:51,630
You keep all the cash in a transaction
and you got to pay off
348
00:18:51,630 --> 00:18:53,132
your lines of credit, whatever.
349
00:18:53,132 --> 00:18:57,553
But you know, what's normally included,
which a lot of businesses don't understand
350
00:18:57,594 --> 00:19:01,265
is normal inventory
number one, the standard
351
00:19:01,598 --> 00:19:06,562
historical inventory that's acceptable
for running the business.
352
00:19:06,812 --> 00:19:11,400
And then, you know, kind of a difference
between accounts receivable and counts
353
00:19:11,441 --> 00:19:17,406
payable, that is a, you know,
a target number that buyers expect to get.
354
00:19:17,406 --> 00:19:18,866
That's what they get at closing.
355
00:19:18,866 --> 00:19:24,037
And if sellers don't understand
that they need to do a little reading.
356
00:19:24,037 --> 00:19:25,539
And, you know.
357
00:19:25,539 --> 00:19:29,209
And that's hard because when that falls
into the negotiation
358
00:19:29,209 --> 00:19:33,088
period is not generally before law.
359
00:19:33,922 --> 00:19:34,548
Yeah.
360
00:19:34,548 --> 00:19:38,385
It's almost always
one of those punted items.
361
00:19:39,303 --> 00:19:41,471
And then you, you don't have
362
00:19:41,471 --> 00:19:45,058
the leverage and people are done
being happy friendly meeting.
363
00:19:45,100 --> 00:19:48,020
They're right. There in the trenches now.
364
00:19:49,062 --> 00:19:49,646
They've gotten
365
00:19:49,646 --> 00:19:52,649
their their accounting firm involved.
366
00:19:52,816 --> 00:19:54,109
Yeah. Yeah.
367
00:19:54,109 --> 00:19:54,943
So you're right.
368
00:19:54,943 --> 00:19:57,905
And we went. There to do it better.
369
00:19:57,905 --> 00:19:59,865
Yeah, we're going through it
currently with one.
370
00:19:59,865 --> 00:20:01,658
They're like,
371
00:20:01,658 --> 00:20:05,078
the the buyer is concerned about off
372
00:20:05,162 --> 00:20:09,666
balance sheet liabilities,
which technically there shouldn't be any.
373
00:20:10,125 --> 00:20:11,585
That's really hard to prove.
374
00:20:11,585 --> 00:20:14,755
Like actually the balance sheet
at this particular company,
375
00:20:14,838 --> 00:20:18,217
they accrue for bonuses, they accrue
for PTO.
376
00:20:18,342 --> 00:20:22,512
Like they've done a great job with their
their everything's on the balance sheet.
377
00:20:24,014 --> 00:20:26,475
But proving then that you don't have off
378
00:20:26,475 --> 00:20:29,853
balance sheet
liabilities is not very easy.
379
00:20:29,895 --> 00:20:32,898
Well that's trying to prove a negative too
I mean so you really
380
00:20:32,940 --> 00:20:34,900
you really have to have a statement
381
00:20:34,900 --> 00:20:39,613
that you would test to write that
that is a that's a, you know, disclosure
382
00:20:39,655 --> 00:20:44,284
item more or less like, hey,
I've told, you know, and we don't have to.
383
00:20:44,326 --> 00:20:46,787
So there are some things that,
384
00:20:46,787 --> 00:20:50,249
you know, you can't, you know, can't prove
you don't have any.
385
00:20:50,249 --> 00:20:53,502
Because if you don't have any that's,
you know, that's you don't
386
00:20:54,127 --> 00:20:56,088
what's on the balance
sheet is on the balance sheet.
387
00:20:56,088 --> 00:20:59,925
So, you know, again
back to a little bit of the,
388
00:21:00,092 --> 00:21:04,346
you know, the buyer,
the buyer needs to at some point
389
00:21:05,389 --> 00:21:06,682
tell the
390
00:21:06,682 --> 00:21:09,726
legal team, their legal team
and their accounting team
391
00:21:10,185 --> 00:21:13,730
that they are satisfied
and they want to move forward.
392
00:21:13,730 --> 00:21:18,068
There's a little bit you have to get
to a point in time and every deal.
393
00:21:18,235 --> 00:21:23,198
There's one deal I'm working on right now
or the where the deal fell apart prior.
394
00:21:23,365 --> 00:21:28,036
This is going back a couple of years ago
before touchstone, before we were engaged.
395
00:21:28,078 --> 00:21:31,081
But there was a you know, there was a,
396
00:21:31,665 --> 00:21:35,002
you know, a lot of legal
going back and forth.
397
00:21:35,002 --> 00:21:37,170
And evidently
that just was never resolved.
398
00:21:37,170 --> 00:21:38,797
Couldn't get beyond.
399
00:21:38,797 --> 00:21:42,384
So the point is,
you have to get to a point
400
00:21:42,384 --> 00:21:46,805
as the buyer
to be reasonable with your demands.
401
00:21:46,805 --> 00:21:50,559
And sometimes attorneys
not here to bash attorneys,
402
00:21:50,767 --> 00:21:53,770
but sometimes the attorney,
if they're not, if they're a deal,
403
00:21:53,812 --> 00:21:56,023
I mean, you've won them to deal
breaker attorneys.
404
00:21:56,023 --> 00:21:57,274
I've run into them.
405
00:21:57,274 --> 00:21:58,483
I don't know what.
406
00:21:58,483 --> 00:22:03,071
To remember just to to advocate
for our attorney friends for a minute,
407
00:22:03,113 --> 00:22:08,076
that the attorneys job is to point out
408
00:22:08,243 --> 00:22:11,913
anything that could be problematic. Yes.
409
00:22:12,039 --> 00:22:15,125
And then the seller and the buyer both
410
00:22:15,125 --> 00:22:18,503
need to hear their attorneys
advice and decide.
411
00:22:18,920 --> 00:22:20,088
And make a decision.
412
00:22:20,088 --> 00:22:24,384
If it's is this a risk
that I'm actually concerned about.
413
00:22:24,551 --> 00:22:25,677
That is true.
414
00:22:25,677 --> 00:22:26,928
You're absolutely it is.
415
00:22:26,928 --> 00:22:29,639
It's the rest part then.
416
00:22:29,639 --> 00:22:33,810
Then you just need to tell your attorney,
yes, I know in a world
417
00:22:34,353 --> 00:22:38,482
it is a possibility, but
it is not a possibility I see happening.
418
00:22:38,482 --> 00:22:40,650
So I am not worried about that.
419
00:22:40,650 --> 00:22:43,070
Please. No, you're. Right worrying.
420
00:22:43,070 --> 00:22:45,781
You're right. You and and and,
421
00:22:47,240 --> 00:22:49,284
So there's many times that
422
00:22:49,284 --> 00:22:52,287
along those lines that a buyer will,
423
00:22:53,372 -->
00:22:55,874
kind of just stand behind
424
00:22:55,874 --> 00:23:00,003
or usually use the legal as the excuse
425
00:23:00,003 --> 00:23:03,131
more or less, oh, my attorney
won't let me do that or this or that.
426
00:23:03,173 --> 00:23:07,052
And, and you know, my attitude
is, listen, that's fine.
427
00:23:07,094 --> 00:23:08,553
And but you don't need to do that.
428
00:23:08,553 --> 00:23:11,306
You could simply say you're
you don't want to do the deal anymore.
429
00:23:11,306 --> 00:23:12,891
In other words, you don't. Right.
430
00:23:12,891 --> 00:23:16,186
They it's almost like they feel
they have got to blame.
431
00:23:16,186 --> 00:23:20,357
You know, buyer might wants to blame
all other people that are like,
432
00:23:20,399 --> 00:23:22,109
I can't do this because they won't let me.
433
00:23:22,109 --> 00:23:25,779
Well, in the end, you're the their client
like you're the buyer.
434
00:23:25,862 --> 00:23:30,158
You hire an attorney, he's
working for he or she's working for you.
435
00:23:30,534 --> 00:23:34,538
So like you just said, there's a point
in time where if you're accepting the risk
436
00:23:34,579 --> 00:23:39,167
of whatever that item is, you,
they just have they have the control
437
00:23:39,167 --> 00:23:44,214
and the ability to say to the attorney,
hey, listen, I'm okay with that scenario.
438
00:23:44,381 --> 00:23:46,258
You are in charge of the attorney.
439
00:23:46,258 --> 00:23:47,676
You're paying him.
440
00:23:47,676 --> 00:23:49,136
Yeah, yeah.
441
00:23:49,136 --> 00:23:50,053
And they're doing it, you know.
442
00:23:50,053 --> 00:23:54,683
And again, most of them, you know, that
I know do a really good job.
443
00:23:54,683 --> 00:23:57,227
And they want the
they want the deal to happen.
444
00:23:57,227 --> 00:24:02,399
And they will work resolutions
and make suggestions
445
00:24:02,399 --> 00:24:07,112
and offer all kinds of ways
to solve a problem.
446
00:24:07,446 --> 00:24:10,824
And because every problem, quite honestly,
447
00:24:10,866 --> 00:24:14,911
could be solved
if you have a reasonable buyer and seller.
448
00:24:14,953 --> 00:24:17,873
Yep. It really can. It really can.
449
00:24:17,873 --> 00:24:18,832
They just get
450
00:24:20,041 --> 00:24:21,209
little, like
451
00:24:21,209 --> 00:24:24,713
they get personal
and they think it's their
452
00:24:24,963 --> 00:24:27,966
their ego gets in the way or whatever.
453
00:24:27,966 --> 00:24:29,759
You know, sometimes that that happens.
454
00:24:29,759 --> 00:24:35,098
I had a deal like days before closing
and we were talking
455
00:24:35,223 --> 00:24:39,269
through the escrow documents
and the escrow fee.
456
00:24:39,769 --> 00:24:40,145
Right.
457
00:24:40,145 --> 00:24:45,567
Like millions of dollars on the deal,
the escrow fee for the two year period,
458
00:24:45,567 --> 00:24:48,570
because it was tied to the earned out,
459
00:24:49,362 --> 00:24:52,365
was $2,000.
460
00:24:53,825 --> 00:24:57,537
I was like, you guys are really arguing.
461
00:24:57,787 --> 00:25:01,917
Just so you know, you're refusing
to split to that.
462
00:25:01,958 --> 00:25:05,712
You're now arguing over $1,000.
463
00:25:06,129 --> 00:25:07,422
That's crazy.
464
00:25:07,422 --> 00:25:10,175
That's just nuts. And they were like.
465
00:25:10,175 --> 00:25:14,012
Oh, I'm like, split the the fee.
466
00:25:14,054 --> 00:25:15,055
Split the fee.
467
00:25:15,055 --> 00:25:16,932
Have it drawn out of the escrow.
468
00:25:16,932 --> 00:25:18,600
Any of these are options.
469
00:25:18,600 --> 00:25:21,603
And they were like,
oh yeah, let's just put the fee.
470
00:25:21,937 --> 00:25:23,146
Yeah. Yeah.
471
00:25:23,146 --> 00:25:26,650
They I mean, again, it becomes, you know,
listen, let's face it,
472
00:25:26,691 --> 00:25:29,653
it's an emotional time
473
00:25:29,653 --> 00:25:32,656
for most business owners.
474
00:25:34,282 --> 00:25:36,284
So they get,
475
00:25:36,284 --> 00:25:38,995
you know, they get, you know, very anxious
476
00:25:38,995 --> 00:25:42,249
at different times in the transaction.
477
00:25:42,249 --> 00:25:43,333
It's their baby.
478
00:25:43,333 --> 00:25:48,129
They many times it's their founder
or their second or third generation
479
00:25:48,129 --> 00:25:49,089
or whatever.
480
00:25:49,089 --> 00:25:52,551
And they don't want to be
taken advantage of.
481
00:25:52,592 --> 00:25:57,889
They feel that, you know,
and that's the job of an M&A advisor.
482
00:25:57,889 --> 00:26:00,934
A good one is to hold their hand
through the process.
483
00:26:01,810 --> 00:26:04,980
You do a lot of hand-holding
and I do a lot of hand-holding.
484
00:26:05,230 --> 00:26:05,772
Absolutely.
485
00:26:05,772 --> 00:26:10,235
And it's it's critical
because they've never done it before.
486
00:26:10,527 --> 00:26:12,195
And I don't blame them. Right.
487
00:26:12,195 --> 00:26:14,823
As you know, as
we would expect that they wouldn't have.
488
00:26:14,823 --> 00:26:16,616
Right. They just haven't.
489
00:26:16,616 --> 00:26:21,121
They are, you know, and many times
this is their identity.
490
00:26:21,121 --> 00:26:25,458
So getting, you know, kind of
getting to that closing table is scary.
491
00:26:25,500 --> 00:26:29,170
Even if everything goes right,
they're still scared.
492
00:26:29,462 --> 00:26:32,340
So it is a it's a very emotional thing.
493
00:26:32,340 --> 00:26:36,595
And if you have buyers that are reasonable
and understand that and many do,
494
00:26:38,346 --> 00:26:41,349
they could
work through a lot of these issues.
495
00:26:41,516 --> 00:26:44,519
So that's, you know,
496
00:26:44,728 --> 00:26:45,645
that's good.
497
00:26:45,645 --> 00:26:48,648
Well, Steve,
thank you for joining us today.
498
00:26:48,690 --> 00:26:49,357
You're welcome.
499
00:26:49,357 --> 00:26:52,777
I feel like we could sit here
and tell stories for a novel.
500
00:26:53,486 --> 00:26:54,571
A long time.
501
00:26:54,571 --> 00:26:56,448
Absolutely. Absolutely.
502
00:26:56,448 --> 00:26:57,949
So thank you for joining us.
503
00:26:57,949 --> 00:27:00,869
And if you have not previously
liked, subscribed
504
00:27:00,869 --> 00:27:04,539
and follow Touchstone Talks, please
click the button at the bottom.
505
00:27:04,706 --> 00:27:07,626
And I'm sure that Steve will continue
506
00:27:07,626 --> 00:27:11,129
to entertain you with stories
if anybody wants to reach out to him.
507
00:27:12,297 --> 00:27:14,924
To see how touchstone can help avoid
508
00:27:14,924 --> 00:27:17,927
certain pitfalls for you.
509
00:27:18,887 --> 00:27:24,184
Meet. Him.
510
00:27:25,852 --> 00:27:28,855
Maybe it.
511
00:27:30,315 --> 00:27:31,775
Means we.