Selling Your Business with David King
Selling Your Business with David King
M&A Investment Banking with Channing Hamlett
Today we are joined by M&A investment banker Channing Hamlet with Objective Capital Partners. He serves as an execution leader for the firm’s M&A and Valuation Practice and leads the firm’s Business Services Practice. He brings more than 25 years experiences with investment banking and business valuation. Prior to joining Objective, Mr. Hamlet served as a Managing Director of Cabrillo Advisors, where he was instrumental in both leading their M&A execution and growing the valuation practice from inception into a national entity serving more than 700 clients in five years. Previously, he served as a Principal at LLR Partners, a $260 million private equity firm; and member of Legg Mason’s Investment Banking group. He has a master’s degree in Operations Research and a Bachelor of Science in Mechanical Engineering from Cornell University.
Channing is a Registered Representative of and Securities and Investment Banking Services offered through BA Securities, LLC Member FINRA SIPC. Objective Capital Partners, LLC and BA Securities, LLC are separate and independent entities.
Selling a business is the American dream, the pot of gold at the end of the rainbow, the reward for years of hard work. Successful entrepreneurs make countless sacrifices in hopes that they would someday reap the benefits of their labor and live a new life of vacations, recreation, and prosperity.
You only exit your business once, so you should feel confident passing this milestone. A successful business exit reflects the preparation done beforehand. Failing to plan is planning to fail.
The owner of a privately held company has several alternatives on how to exit their business. In the absence of an exit strategy, events will inexorably dictate the final exit plan. A costly involuntary exit may be caused by death, disability, divorce, disagreement, or distress.
Selling Your Business with David King will help you take control of the sale process and make it positive one.
eaker 1: Welcome back to Selling Your Business with David King. I'm David King. I'm the author of Selling Your Business. Begin with the End in Mind. It's available on Amazon, Please, like this podcast and this YouTube channel. Today we have the pleasure of being joined by Channing Hamlet with Objective Capital Partners. Morning Channing. Hey,
Speaker 2: Good morning. Thanks for having me. I really appreciate it.
Speaker 1: Channing is an investment banker and does business valuations, and he works in Southern California and both Los Angeles and San Diego. So, Channing, why don't you tell us a little bit more about yourself, about your practice, uh, how you got to be where you are?
Speaker 2: Yeah. The short version of the story is I started doing investment banking in the mid 1990s in Philadelphia at a large firm called Leg Mason. And I had the opportunity to work on a whole host of different corporate finance activities from public offerings to, to debt placements, fairness, opinions, et cetera, and really specialize in doing mergers and acquisitions work. Um, and the group I worked for in Philadelphia had a really strong kind of lower middle market family held sell side practice. And so I learned, uh, right at the beginning of my career to, to work with and represent entrepreneurs and families going through a sale process. And, you know, fast forward, um, I guess over 25 years now, which makes me feel like an antique, um, still do, still kind of, you know, moved across the country. I've done a stint in private equity, and then I've been doing investment banking and business valuation, you know, in San Diego for about 20 years now, and still kind of still doing business appraisal work and, you know, representing families and entrepreneurs as they look to exit and sell their companies.
Speaker 1: Well then that you're one of the fortunate ones then because your, your big firm experience [00:02:00] is, is relevant to what you do today. I I personally, I started on Wall Street, big firm activity there, and it kind of, the work that I was doing for investment banks, your Merrill Lynch and, and derivative securities, it's, it's transactional and it, and it was good experience, but not so relevant to what Main Street businesses and, and what middle market companies are doing with their exit strategies. Um, got a little bit more of [00:02:30] that when I worked, uh, in Silicon Valley with a firm there. But, uh, sounds like your experience from day one has been relevant to what you're doing now, uh, with, with middle market companies doing mergers and acquisitions and others forms of transactions.
Speaker 2: Yeah, you know, it's, it's actually interesting you ask that question. I, my first job outta college was working for a strategy consulting firm, and our clients were Fortune 50 or Fortune 100 companies. And so we [00:03:00] worked with people, uh, executive teams and boards of directors at these companies on their most pressing strategic issues. And the people we worked with were very, very sophisticated, and they hired us for a very narrow task. And then, um, I shifted gears in my career after doing that for a couple years and got involved in investment banking. And, you know, part of my experience at Lake Mason was working with larger, you know, larger public companies. And I certainly worked on billion dollar deals. Um, but I also [00:03:30] got exposed to working with entrepreneurs and family businesses. And, you know, the, the, the second transaction I closed, we represented a third generation family business in their sale.
Speaker 2: Mm-hmm. <affirmative>, and I, I remember vividly at the closing dinner, you know, in my late twenties, the patriarch of the family pulled me aside and, you know, basically said something like, Hey, Channing, like, really appreciate all the hard work and persistence, you know, you changed our family's life, and I really, you know, I really appreciate that. And you [00:04:00] know, that that really, um, very memorable and, you know, really kind of fell in love with, you know, working with these smaller companies, less sophisticated where we could come in and really add a lot of value. Um, and so it's kind of, it's kind of stuck with me, um, ever since that, you know, working with the smaller companies that need help, um, and, and making a real difference for, you know, individuals that have a stake in the outcome is, is really important as opposed to working for some large public company where, [00:04:30] you know, you make money for some nameless, faceless shareholder, You know, we're actually, you know, using the skills and expertise we have to impact, you know, individuals and families and, uh, it's really meaningful and rewarding work.
Speaker 1: So your, uh, sweet spot today, um, uh, is it a, a mix of both mergers and acquisition and, and business valuation? Any particular size? Uh, yeah.
Speaker 2: Our, um, our firm has, uh, we have two [00:05:00] distinct practices. We have a business appraisal practice, and it's a, it's a full service practice. We have teams in Dallas, Denver, Los Angeles, and San Diego. Our clients are nationwide, and we're, we're doing all of the typical valuation work from, you know, basic 4 9 4 9 a evaluations and tax compliance, financial reporting, so purchase price allocations and other balance sheet valuations, estate and gift tax valuations, um, from, you know, fairly simple small gifts up through, you know, billionaire families [00:05:30] that have very, you know, very complex master limited partnerships where they're doing complex gifting and trust strategies mm-hmm. <affirmative>. And then we also do a fair amount of advisory work where we help companies understand what they're worth and what the value drivers are to, to either to prepare for a transaction that's our appraisal business. Okay. And then we have a second business, which is investment banking, where, um, 95 plus percent of what we do is work with business owners that wanna sell their companies.
Speaker 2: And we help help them run a, you know, run a process so that they get [00:06:00] the best price. In terms, um, most of our transactions are valued between 10 and a hundred million. Our, uh, firm, you know, our, our firm, our investment banking group is about 15 people, and we're closing typically more than 10 transactions a year. Um, the largest transaction we've closed over the last couple years is north of 300 million, but you know, most of them are in that 10 to hundred million, you know, 10 to hundred million range. And that's really the market we focus on. And those are the types of companies that we really enjoy. Mm-hmm. <affirmative>, you know, working with. Cause like I said earlier, we can make a really big impact
Speaker 1: [00:06:30] All different industries, or do you have any specialties?
Speaker 2: You know, it's, that's a, that's an interesting question. You know, we have formalized industry groups. We do quite a bit of work in bus, in business services, and that's a group that I spend a lot of time in, uh, working with companies that provides services and software into the pharma and life science space. We also do a lot in manufacturing and distribution, um, direct to consumer e-commerce and SAS software. Um, so we, we definitely have a lot of expertise [00:07:00] in each of those spaces, Um, mm-hmm. <affirmative>, and then, you know, there's a little bit of a generalist element, um, a generalist element to our business where what we found is a lot of the smaller, a lot of the smaller companies that are overlooked by the larger investment banks, um, don't necessarily fit into an industry. And so what they really need is a firm like ours with, you know, senior people that were trained at larger firms that could come in and roll up their sleeves and work their transaction, um, really hard. So there, you know, there still is a little bit of [00:07:30] a gen generalist element. Uh, however we do have very significant expertise in the industries that I mentioned.
Speaker 1: Help me, uh, do, is there much of a nexus between the appraisal work you do and, uh, and the, um, the m and a work? I mean, obviously you, you want the owners to have a realistic expectation of what their business is worth, but do they necessarily need the full blown appraisal? [00:08:00] What, what do you typically do if be a one stop shop for that sort of thing? Or, or, uh, you know, give them the, the amount of support they need on, um, on a reasonable expectation for what they should be able to fetch?
Speaker 2: Yeah. You know, that, that's an interesting question. The, a lot of the appraisal work we do is, is driven by, uh, regulatory or compliance purposes for tax, for tax or financial reporting. And so there are, you know, very specific guidelines, whether it's IRS [00:08:30] rule 59 60 or, or use P or something like that mm-hmm. <affirmative> that need to be followed, um, that need to be followed. And so we, we have a team of experts that really know that stuff and know it well. Mm-hmm. <affirmative>. And then on the investment banking and transaction side, I would say that work is probably a little bit more, um, a little bit more pragmatic mm-hmm. <affirmative>. And so I think what, what I found is that having, um, both areas of expertise under the same roof provides a ton of value for our clients. When we get hired to do [00:09:00] a business appraisal, um, you know, we have the, the really in depth technical valuation expertise that most investment bankers don't have mm-hmm.
Speaker 2: <affirmative>. Um, we can also combine that with the real world, you know, real world feed on the street, practical deal expertise to to, to add a little bit of a practicality to it. And then on the investment banking side, when we're, when we're working with clients that that need kind of, as part of a negotiation, we're often doing pretty detailed valuation [00:09:30] work to negotiate with a buyer. You know, we have a, we have a team of experts that can really help with that, that brings some expertise that the typical investment bank doesn't have. So the, the two practices, um, the two practices work pretty well, um, work pretty well together in terms of, um, you know, sharing knowledge, uh, sharing knowledge and expertise mm-hmm. <affirmative>. Um, so that's kind of, that's kind of what I've seen and how it works.
Speaker 1: Now, correct me if I'm wrong here, I understand with most investment banking transactions [00:10:00] on the sell side, you, you don't really wanna put a a a price, you don't want an ask for, for your company, your, your client, because that'll serve more as a ceiling rather than a floor. If you got a main street company that's gonna be, you know, sold, say by a business broker or something, they've gotta come up with a price or they'd never, you know, be able to generate much of a market, but you're going out, you know, directly to buyers and, and [00:10:30] kind of blind auction sort of thing. Is it true, and, um, kind, obviously have a leading question here, but feel free to correct me.
Speaker 2: Yeah. You know, um, in a, in a typical kind of middle market, I'm not super familiar with the business broker world, although different,
Speaker 1: That's a different,
Speaker 2: I do understand that in asking price gets set similar to selling a house right. In, in our world, you know, for a typical little middle market transaction, you know, that's 50 million, 75 million or whatever, you know, we, [00:11:00] we work with a client up front to understand their value expectations mm-hmm. <affirmative>, um, because it's, it's very labor, it's very labor intensive to sell a company for a premium valuation uhhuh. And so we wanna make sure, we wanna make sure it's worth our time and worth our client's time before we start a process. So we do a fair amount of work with our clients to understand what their expectations and make sure that we're all confident that the market will deliver mm-hmm. <affirmative>. Um, so that's some work that we do up front just to make sure it's a good use of everybody's [00:11:30] time before we take on the engagement.
Speaker 2: Yeah. But when we run the process mm-hmm. <affirmative>, um, what we've, what we've found is the best practice typically is to let the market set the price. So what we would do is work with the client, and work with the client and, and really do all of the positioning and create the materials to, to tell the best story possible on why the company's worth a lot and why it's worth the premium. And then we go and market the company to, you know, to the right buyer [00:12:00] universe and ask them to make offers. And, you know, the, we run sort of a typical two step auction process where we would, you know, share some materials and ask for initial indications of interest, get offers, then narrow down to a smaller group of buyers that appear to be a good fit and appear to be interested at a high value mm-hmm.
Speaker 2: <affirmative>, and then work with them to, you know, kind of create, uh, create an auction process where we can negotiate and push the price up. That would be the typical, that would be the typical envi the typical [00:12:30] process mm-hmm. <affirmative>. And so we're not, we're not necessarily setting a price, we're letting the market set the price, and then we're, Yeah, we're using a competitive process to drive the price up. And so what we've found, what we've found over time is that that process typically, you know, typically by setting that process up and getting multiple buyers really interested, gives you the tools to push the price up. And then on the, if you're in the seller's shoes, now you're sitting there, um, and you're in a position to [00:13:00] make a really good decision because you, you've gone to all of the right buyers, Right. You know who's in, who isn't.
Speaker 2: You have feedback from the market and you know that you're getting, you know, you know that you're getting the best price in the market available today mm-hmm. <affirmative>. And so that's a ty that's would be a, that would be a more typical process. Mm-hmm. <affirmative> a more typical kind of standard investment banking process. And, you know, and then there's lots of different nuances and flavors and twists and turns depending on the particular facts and circumstances. But, you know, generally [00:13:30] speaking, you're right. We wouldn't, we wouldn't necessarily set a price and try to go get it. We would let the market, We would let the market determine. Yeah. And then use, you know, use clever negotiation to push the price up as high as possible.
Speaker 1: Your sim doesn't have an asking price. It's correct business and summarizes the fact. Do most of, do most of the companies you take to the market, do most of them have audited financial statements or just reviews or,
Speaker 2: You know, [00:14:00] um, just one thing on the last question you asked Uhhuh. I think one of the, one of the mistakes that we see entrepreneurs and business owners do when they try to sell a company themselves is they set a price too early. Oh yeah. Um, and so what, what happens is they're like, Hey, I don't wanna waste my time dealing with this buyer. I only want to, I only wanna do a deal if they're gonna pay a high price. And so they put a high price out and then it turns the buyer off. Mm-hmm. <affirmative> cause a buyer, a company that's making acquisitions, um, you know, they don't have to make the acquisition. [00:14:30] They have plenty of other alternatives to work on. And so they're sitting there trying to figure out which opportunities they wanna pursue and which ones they don't. And if, if you show up with what on the surface looks like unrealistic expectations, typically that would turn them off and they'll spend time on something else.
Speaker 2: And so the way we run the process is we bring people along one step at a time. We educate 'em on the company, we get them interested, you know, they make an initial offer that might be lower than what we want then, but, and we tell 'em, Hey, you know, you're the right fit. This is a good fit for [00:15:00] the following reasons, blah, blah, blah. And we, we drag them along in the process, um, and get them interested and invested. And as they've put more and more energy into it and fall in love with our client, that's when you can start to negotiate a price higher. So there's a real, um, there's a real art to it mm-hmm. <affirmative> that I think a lot of, I've seen a lot of business owners, you know, try to shortcut the process and, and either turn buyers off or short change themselves.
Speaker 2: Um, so that's just, just a observation or a thought that came up when you said that. Yeah. As to your question about audited [00:15:30] financials, um, one of the, most of our clients don't have audited financials. And, um, you know, it, it definitely is easier to sell a company when they have audited mm-hmm. <affirmative>, they have audited financials cuz a buyer can have a lot more confidence, a lot more confidence in the numbers. And so it is a best practice to have, um, financial audits done for several years leading up to a sale. One of the things that we've started to see more and more of in the market today is, [00:16:00] um, a buyer typically does like seven or eight streams of due diligence. One of the streams is this thing called quality of earnings, where they bring in accounting firm where they bring an accounting firm in to do due diligence on the numbers and make sure they're real. And so a lot of companies are now hiring an accounting firm to come in and do what's called a presale quality of earnings, where you do all of that work front and then you present those numbers to the buyer, and now you're, now you're very confident that the numbers you presented are [00:16:30] gonna stand up and do diligence mm-hmm. <affirmative>. And that eliminates the, you know, that eliminates, um, the, you know, quote unquote retrade that you often, you know, hear about at cocktail parties and on the golf course and stuff like that.
Speaker 1: Yeah. So talk a little bit more about, and, and just to kind of throw a little color onto what you're saying about the expectations and and, and that sort of thing that can de deter somebody and the, that, uh, this selling a business, I mean, [00:17:00] after my years of experience, it's, it's more like being able to make a marriage come together than it is like selling a, a, a piece of real estate or another investment of that sort of thing. It's gotta be a good match. And having these unreasonable just must haves are kind of as much of a turnoff as when you're looking for that, that magical combination. Anybody who's got an absolutes on what they really need, well, you're likely to just push the other person to keep going [00:17:30] down the road. And you said fall in love. It, it, they are, the buyer is gonna have to fall in love and b, before you close the deal, the buyer is going to discover all the flaws that the deal's not gonna happen.
Speaker 1: But, and, you know, without an adequate amount of, of due diligence to see, uh, what's out there, but you need to make 'em fall in love before they find the flaws. And you play all these things in the right direction here. [00:18:00] Don't, don't turn 'em off by having just all these unreasonable expectations for what it must haves. Make them love your business. And over time through the due diligence process, you're gonna have to share with them at the right time and place all of these things that, that are probably the last thing that you're gonna want to share that consistent with your experience.
Speaker 2: Yeah. You know, it's, it's interesting that, that you bring this up and, you know, typically running a, you know, running a sale process, [00:18:30] you, you get to a point where you sign a letter of intent mm-hmm. <affirmative>, that's the turning point in the transaction before you sign the letter of intent. Um, there, there are multiple buyers interested and the negotiation leverage is on the seller side. Right. And after you sign in the lower middle market, um, in the lower middle market, almost all buyers want you to sign a letter of intent and grant exclusivity for 60, 90 days mm-hmm. <affirmative>, and then that's when they start to spend money and do their due diligence. And so as soon as you sign the [00:19:00] letter of intent and you've given one buyer or exclusivity, the negotiation leverage at some level shifts mm-hmm. <affirmative> to the buyer. Right.
Speaker 2: And so, and so what we, there's an art to this, but what we, what we try to do is share as much information as possible before signing the letter of intent so that we minimize the chance of, um, we minimize the chance of new issues coming up after the letter of intent to sign. Right. Given the buyer negotiation leverage. Yeah. [00:19:30] And so the example I often use is I sold a house a couple years ago mm-hmm. <affirmative>, and, um, when we were getting offers from buyers, I, I filled out the seller disclosure statement and I put all the stuff that was wrong with my house on it, and I sent it to all the buyers. Well, we were still getting multiple offers and it was competitive. And then, you know, we signed an offer, the buyer comes in and does the inspection, and the inspection report has all the things that I had already told them about. Right. And I was like, Hey, I told you all [00:20:00] about all that stuff before the offer. Like, I'm not giving you credit for any of that. That was already, that was already baked into your offer.
Speaker 1: Yeah.
Speaker 2: And so what we, what we try to do, what we try to do is make sure the buyer has like really good clarity on what the business is, what it isn't. Mm-hmm. <affirmative> and the, and the good and the bad and the ugly. And obviously if you're in a sales role, you try to put the most positive spin on it possible mm-hmm. <affirmative>. But the, the reality is, in the world we're in now, um, a buyer does, um, seven streams [00:20:30] of due diligence and, you know, they're not gonna write you as a seller a big check until they're com very comfortable with everything about the business. And so it's, and, and so it's in your best interest to disclose the good, the bad and the ugly mm-hmm. <affirmative> before you sign a letter of intent so that you don't, so that you have a lower opportunity to get nickel and dime during due diligence. And that's something that, you know, that, that we work really hard on, um, really hard on with our clients.
Speaker 1: Right. You don't wanna have sign [00:21:00] a letter of intent and then have a bomb drop and have to go back and reprice the deal, start all over again. And then you've, everybody's kind of wasted their time and they're pretty frustrated. So, uh, you definitely got a prudent
Speaker 2: Practice. And the other thing, uh, the other thing is, uh, getting a deal done is largely based on trust. And if the buyer feels like you intentionally hidden something mm-hmm. <affirmative>, um, it's much harder to get a, it's much harder to get to the finish line. Right. So, you know, we work really hard on, [00:21:30] you know, create, you know, still negotiating, still selling obviously, but, you know, creating transparency and trust as well.
Speaker 1: That's the whole, uh, marriage analogy too. They are going to find out better find out from you than from their friends. You already
Speaker 2: Tell em about all your ex-girlfriends first.
Speaker 1: Right. Yeah. Well, at least most of them. Yeah.
Speaker 2: Some of them, Yeah.
Speaker 1: <laugh>. So, uh, quality of earnings, that's a good thing to hit upon here. Can you, if, if somebody [00:22:00] who hasn't, you know, spent through the sale process before and you're trying to prep them for this, and the buyer's gonna wanna look at quality of earnings stickiness, uh, what, what sorts of things are we looking at with quality of earnings?
Speaker 2: Yeah. Um, the, the, I think the, the short version of it is many companies, not all, but many companies are sold on a multiple of ebida mm-hmm. <affirmative>. And so as a seller, as a seller, you go through and look at the financials and, and, and, [00:22:30] you know, and do create kind of an adjusted or perform a ebitda. So if the buyer and the business, you know, they wouldn't pay for the country club and this discretionary expense in that, um, there was a move in the last year. There was this, there was that like, what's the normal EBITDA the buyer could expect mm-hmm. <affirmative> from this business. And so as a seller, you present that number to the buyer, um, and then the, the buyer values the company based on that number, and then the buyer would hire an accounting firm [00:23:00] to come in and test the quality of that number.
Speaker 2: So they, they go and look at the accounting and they make sure all the accruals are done correctly. They understand all the adjustments you made. They may audit, uh, they may audit various general ledger accounts that, that are large, um, et cetera. And then they, they come up with their view on what they come up with, their view on whether the EBIDA you presented is correct, is correct or not. Um, through the quality, through the quality of our rings process. And so a company [00:23:30] that has sloppy accounting processes, um, or doesn't necessarily follow proper accrual or gap accounting, has a risk that when an accounting firm comes in to do the quality of earnings, they, they find, they find places where the company is not in compliance with Gap, or didn't account for this Right. Or didn't accrue this expense. Right. Or has this liability that wasn't disclosed, et cetera.
Speaker 2: And that, you know, creates an opportunity for the buyer to potentially renegotiate, you know, renegotiate the deal. Um, so that's [00:24:00] really what the quality of earnings is. And then the second thing a quality of earnings firm does is they look at where the earnings are coming from. Mm-hmm. <affirmative>, so they'll do, they'll do work on, um, revenue and margins by customer revenue, margins by service line or product line. Um, they'll, they'll look at where there may be reliance on certain special relationships with vendors or, or relationships with key people mm-hmm. <affirmative> and point out a number of the risk points with a company mm-hmm. [00:24:30] <affirmative>. Um, and so, you know, we've, we've, we've seen situations where, you know, a company may not necessarily have a customer concentration when you look at a revenue, uh, a revenue by customer. But if you look at a margin by customer, one customer maybe has, you know, 30 or 40% of a company's total margin.
Speaker 2: Oh. And so, you know, we've seen issues like that, like that come up. And so a quality of earnings firm is gonna come in and look at the key risk look for and understand some of the key risk points in a business as well. And [00:25:00] so it's really, um, it's really valuable for a seller to have done a lot of that work up front. Um, so, you know, so you truly know all of the, you truly know you've got your numbers right. And your accounting correct. And then, you know, the risk points in terms of revenue by customer margin by customer service lines, um, et cetera, et cetera, cetera. It allows, it allows you to be more confident in the numbers that you're presenting and tell a better story, you know, tell a better story to the buyer. Right. And so that, that's sort of [00:25:30] in a nutshell, is kind of how I look at and think about quality earnings mm-hmm.
Speaker 2: <affirmative>. And then over the last 25 years, what we've seen is, um, it's often hard to convince, uh, our clients that, you know, ha run smaller companies to, to spend money preparing for a transaction. A lot of, a lot of entrepreneurs and business owners are like, Hey, once it's real, I'll, I'll, I'll start spending money, but I wanna know it's real first. Um, so there's always, there's always a tension between, you know, how much do [00:26:00] you invest to be Yeah. Truly prepared versus how much do you wait until a deal is real and then, and then be prepared. Um, so there's always a tension, but what, what we've seen over the last five to 10 years is more and more sellers are, are investing in doing, you know, formal presale quality of earnings work and it makes a huge difference in the process. The, the numbers that are presented are accurate.
Speaker 2: The, the insights that you get from understanding a lot of those things around [00:26:30] margins by customer, margins, by product line and, and things like that are invaluable in marketing and positioning the company. And then in the due diligence process, the due diligence process is much more streamlined cuz you can hand over the work that the seller's accounting firm is already done mm-hmm. <affirmative>. And it makes it a lot smoother for the buyer to go through that process. And, you know, the fact, like you've heard the old adage, time kills all deals Mm. So faster you can get through due diligence the better.
Speaker 1: Right. [00:27:00] It's a little bit late to start your diet and working out when you show up at your, uh, honeymoon hotel. You kind of need to, if you're gonna get any advantage out of that, you wanna start pumping iron, uh, years in advance. So there's, there's some work you can do well in advance.
Speaker 2: That's a, that's a a fair analogy.
Speaker 1: <laugh>. So, um, today, 2022 here, September, and I can't believe these years are just flying by here. September 8th, 2022, [00:27:30] the market spent just white hot last year. Um, the capital markets have been choppy. What do you see in these days with this market right now? And it, you know, people looking to go, Wow, there's always gonna be m and a, but is it, um, is it a little bit more uncertainty in today's market?
Speaker 2: Yeah, you know, it's, it's been, uh, it's been a roller coaster over the last couple years. You know, our, our firm from in, in 2020 [00:28:00] when Covid hit, you know, from February, which was before Covid to May, you know, the, the business dropped by 50%. And then, um, the, and then there was the government stimulus and the, the Biden administration started talking about raising capital gains tax. And so that the combination of the government stimulus and fear about taxes increasing created a very significant wave of m and a. And so most [00:28:30] investment banking firms that I'm aware of had record years in 2021 mm-hmm. <affirmative>, um, in terms of number of deals, fees they earned. Um, all the professionals in and around the deal environment were just crazy busy during 2021. Valuations, valuations across the board were as high as they've ever been. And so we all came into this year 2022, um, a tired and b expecting the same thing cuz the environment was, uh, very, very strong in January [00:29:00] and February.
Speaker 2: Then we, then we had the issues with stock market volatility, a very significant stock market drop, um, you know, in, in the march through May and June timeframe, which I think caused a lot of people to take a pause. And, you know, frankly, if you own a good business, um, it would not be wise to start a sale process in the, in that timeframe cuz you mm-hmm. <affirmative>, you know, it's a six to nine month process to sell a company and you're selling into an uncertain market mm-hmm. <affirmative>. And so it caused a lot of people [00:29:30] to wait. Then we've had the summer, and I think this is the first summer vacation people have had in three years, you know, the, the COVID summer and the 2021 summer weren't really real summers because of covid and the pandemic. So Right. There's been a lot of pent up demand for people taking vacations, traveling, et cetera, et cetera, et cetera.
Speaker 2: Um, and so we've seen the m and a market slow a bit over the summer mm-hmm. <affirmative> just in the last couple weeks as kids are going back to school, the stock market starting to recover, you know, people starting [00:30:00] getting, get used to, um, you know, the, the new interest rates and inflation numbers mm-hmm. <affirmative>, we're starting to see a lot of, a lot of interest in inquiries in m and a transactions. And so I, I don't think we're gonna go back to the record year we had in 2021 mm-hmm. <affirmative>, but we're, we're, we're seeing things just sort of generally across the board, you know, stabilize and it's feeling like a more normal environment. Mm-hmm. <affirmative>. And then the second thing I'm seeing, and you know, I was in Dallas last week at a, uh, [00:30:30] um, ACG conference where there were 700 people, um, tons of private equity firms and, and lenders.
Speaker 2: And, and what, what I'm hearing from the market is that it's now very, very sector specific. There are a number of sectors, um, a lot of B2B sectors, um, software technology, et cetera, where the, the, the valuations remain robust, the market remain strong, m and a activity is high. And then there are some other sectors, um, [00:31:00] in particular, um, consumer facing sectors where, um, there are concerns about interest rates, inflation, supply chain issues, some of the consumer privacy issues with, you know, Facebook and Google and marketing where, um, growth in those companies is less certain and investors are, are either pairing back or valuations are coming down mm-hmm. <affirmative>. And so the m and a, the m and a market, I think now, um, there's a little bit of a flight quality and it, it's a little bit [00:31:30] choppier, um, you know, it's a little bit choppy sector by sector, but generally speaking, like sitting today, we're feeling like it's kind of a, a more normalized, you know, ty typical, um, typical market. And we're ver you know, we're very optimistic about the rest of this year going into next year based on what we're seeing.
Speaker 1: Okay. How much time do you typically need to properly from the moment you first meet a client, sign 'em up, then get 'em ready and, you know, target a sale within [00:32:00] X number of how much time do you need from being retained to, uh, closing a sale?
Speaker 2: You know, I, I think if you, um, if there's a couple different scenarios here, A lot of times we have clients come to us where they have one or more buyers that are already a little bit interested.
Speaker 1: Yeah.
Speaker 2: And so that, that can be an accelerated, that can be an accelerated process. But, you know, for, for a company that comes to us that, that's pretty well prepared, that's pretty well prepared and kind of ready to [00:32:30] go. Mm-hmm. <affirmative>, um, I, I always coach people that it's kind of a nine month process plus or minus. Mm-hmm. <affirmative>, we take, we take two, you know, we take eight weeks, six to eight weeks to put a CIM confidential information memorandum together, you know, work on their financial models and financial projections, uhhuh, figure out which buyers we're gonna go to and just get all the materials and the process set up. And then, and then the next phase would be going out to market. [00:33:00] And, you know, in a, in a typical process, we would go to both strategic buyers and we would go to private equity firms, probably calling more than a, more than a hundred total buyers.
Speaker 2: So to really make sure we're getting a good gauge of the market that takes time. And so that's kind of another eight to 12 weeks. And then we get initial offers, and then from those initial offers we down select to a smaller group and get them, you know, do more due diligence with a smaller group, typically up to 10 buyers, [00:33:30] um, sometimes more, sometimes less. Uh, and, and push them for a letter of intent and then, you know, sign a letter of intent and close a deal. And, and that's typically, you know, it can be as short as six months. It can be long as long as 12 months depending on factors that are kind of out of our control. But, you know, typically we work with clients and say it's a nine month, you know, it's a nine month process. Okay. A lot of companies that come to us aren't necessarily fully ready mm-hmm.
Speaker 2: <affirmative>. And so there's some clean, there's some clean up and [00:34:00] other work that, you know, that needs to be done before we can, you know, really formally engage and, and you know, we work with companies on an informal basis kind of helping them and on a formalized basis kind of helping them, um, helping them sort of be sure they're ready mm-hmm. <affirmative> and, you know, our firm spends a lot of time with clients like understanding what their expectations are and making sure that the market can meet them. Cuz it, it is a very distracting and labor intensive process to sell a company. Yeah. So we try to make sure there's a very, [00:34:30] very high probability of success before we get started.
Speaker 1: So the deals that you're working on, there's not, you don't come to closing and have one big check rolling across the table and that's it. We're done. See you next year. It's, we, we've got multiple components. You're gonna have some money held back in an escrow. You may have an earn out, you may have a seller carry note. You, you may, uh, you may, you're probably gonna have some rolled equity if there's, if there's a more sophisticated buyer, you wanna talk [00:35:00] about the various components of the, uh, of the purchase price.
Speaker 2: Yeah. Um, it, it's, um, it's interesting and, you know, I think, um, a a a really attractive company that's an attractive asset that has strategic buyers really interested, you know, in, in that scenario you have a, a higher probability of getting like a hundred percent cash at closed type deal.
Speaker 1: Okay.
Speaker 2: However, there, you know, to your point, the a a deal, um, a [00:35:30] deal is partly the price and then it's partly the terms mm-hmm. <affirmative>. And so there the, you know, every deal has representations and warranties and there's, you know, sometimes there's insurance policy, sometimes there isn't, there's money held back to secure indemnification obligations, um, et cetera. Most of the companies that we work with in the middle market also would have money, um, held back in some way to make sure that key people are retained or key milestones are hit. Um, so that, that's kind of what we're seeing on strategic deals. [00:36:00] Okay. And then for priv, for private equity deals, um, that can be a really nice solution for business owners that want to take one step towards an exit but not have a full exit. Mm-hmm. <affirmative>, So typically they're selling a portion of their company, typically 60.
Speaker 2: Typically they would retain between 20 and 40% ownership. Yes. Uhhuh, <affirmative>. And so, so they're getting some, they're, they're turning over control and they're, they're getting some, they're getting a decent amount of liquidity at closing and then [00:36:30] they retain equity and, you know, tip, typically the understanding is that the seller is gonna remain involved and help the private equity firm continue to grow and build the business mm-hmm. <affirmative> and have a true partnership so that they can continue to build and grow the value over time and then sell. Um, one of the things that we've seen a lot in the last couple years, um, and it's, it's largely driven by, largely driven by Covid. Mm-hmm. <affirmative>, where every company was in fact was impacted one way or another by Covid. Some [00:37:00] companies had, um, you know, some companies had a decline in business, some companies had an increase in business. Um, so one of the things that we're seeing is it's hard to look at the last couple years of financial history for a company and understand truly what the financials are. So we we're often seeing, um, earnouts of some sort used to bridge that gap as a result of the pandemic. And that's more common now.