Mergers & Acquisitions for Dummies author Bill Snow

In this episode, we are joined by Bill Snow, author of Mergers & Acquisitions for Dummies and an experienced M&A professional with over 30 years of professional experience, including almost two decades as an investment banker. We talk about all aspects of mergers & acquisitions, how to properly plan for a deal and avoid the most-likely pitfalls, along with Pulp Fiction, poker, Milwaukee Cheesehead manufacturing, and the long-lost Chicago Bears. Bill's work includes business sales and capital raises for middle-market companies as well as buy-side services for acquirers seeking middle-market companies. Bill has written articles for online sources, as well as books about mergers & acquisitions, early-stage capital, and personal marketing. He has presented at universities including Northwestern University, DePaul University, IIT-Kent, and Harvard Business School, as well as the Thomson Reuters Midwestern M&A/Private Equity Forum, Chase Bank, Huntington Bank, Ice Miller, the Illinois CPA Society, and the University Club of Chicago. Bill is a Vistage speaker and has presented to groups in Chicago, New Orleans, Louisville, and Cincinnati. He has lectured internationally in Malaysia and the United Arab Emirates. Bill has an MBA and a BS in finance, both from DePaul University, and he’s a FINRA-registered Investment Banking Representative.

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.

Transcript

David King (00:10):

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. And today we have the immense pleasure of being joined by Bill Snow. Bill is the author of Mergers and Acquisitions for Dummies. Welcome, bill.

Bill Snow (00:34):

Thank you, David. Appreciate you having me on.

David King (00:36):

How are things in Chicago today?

Bill Snow (00:39):

It is absolutely beautiful. Perfect day today.

David King (00:42):

Great. I hope you got a big weekend in store for you,

Bill Snow (00:46):

<Laugh>. Always do.

David King (00:47):

Yeah. So Bill is also managing director at Jordan off, and he's an investment banker in the field of mergers and acquisitions. And Bill's book, as I mentioned, is mergers and acquisitions for Dummies. And he's gonna reach through and sign it for me right

Bill Snow (01:07):

Now. Yeah, yeah. Hold on, hold on. I'm reaching out.

David King (01:10):

Yeah. And it's funny, bill, my book is Selling Your Business B, begin With the End in mind. It's, it's shorter than your book. And with the, begin with the end in mind, it also goes back to the first day of, of a, of starting a business because there's so many mistakes that that business owners can make along the way that, well, that's gonna take a little bit off the price when you get there. So, but even though you just, your yours is about mergers and acquisitions. Yours, your book is longer than mine. It's got a variety, it's got a variety of different topics. And it's funny that, you know, there, there's so much more to say about mergers and acquisitions than other types of deals. If, if there were a book about initial public offerings, I don't think anybody would read it because it's just not, there's not that as many things to say and mergers and acquisitions, it's kinda like watching the movie Pope Fiction. You've seen Pope Fiction

Bill Snow (02:16):

More times than you will ever know. Yeah. I've known it frontwards and backwards. Of course. Yeah.

David King (02:21):

And there's so many different stories there that somehow weave all together as one quite different, but then there's all just kind of bound together that's kinda like selling your business. How's it gonna happen? Well, sit down and just watch. This is gonna be interesting. Yeah. So first off, bill, tell us about yourself, your career, how you got where you are today.

Bill Snow (02:44):

Sure, sure. Happy to talk about that. So I've been doing middle market investment banking since oh five. Prior to that I bounced around all over the place. Ended up getting a lot of business acumen and experience and so forth. Everything from sales jobs. I was with a publicly traded retailer. And, and we were buying up mom and pop video retailers, not Blockbuster, a long, long time ago. So I was operating those, worked for angel funded startups and venture funded startups. Tried to play the venture game and was just pounding my head against the wall. I wrote a book that I gave away for free. It was a supposed to be an article. I didn't even know who was gonna publish the article. I just had this idea in my mind and I put it in a pdf, gave that away. It was a little booklet.

(03:28):

I wove a narration through it. I claimed that I used Keith Richards guitar tuning as a paradigm for venture capital, which I kind of do, but I thought that was a little unique and different, and I gave that away for free. And it went all over the internet. I was a very, very minor viral hit before viral hit was a term. I didn't know what to do with it. And as luck would have it, I segued into middle market investment banking. A former colleague was at a firm and they recruited me. And a few years after I gave that little booklet away for free called Venture Capital 1 0 1, Wiley Publishing contacted me. They wanted to write a book. And it's kind of interesting, you were talking about who would buy a book IPOs for Dummies, and they wanted to do LBOs for Dummies, and I think they've done that.

(04:10):

And I was, I was flattered they reached out to me. But I thought, well, LBO o leveraged debt, that's a form of paying for business. Very interesting. But I thought maybe we should broaden this. And so I came up with m and a for dummies, and they thought that was a terrible idea. And then two years later, they called me back with a new idea, m and a for dummies. And so I wrote the first edition in 2010, came out in 2011, and then just this past year we did the second edition, which just came out at the end of May this year.

David King (04:37):

There's a lot of topics that wouldn't make for good books. A friend of mine from Beckett Wilson Sonni said the shortest book that's ever been written is successful Joint ventures, <laugh>, everybody's got an idea. But generally the, the, the merger is also, and people go looking to go to, to business school. We're telling you, this is interesting. If you want a rewarding career, it's not gonna be easy. But this is probably a, a good rewarding career with a lot of different aspects to it. Fair enough.

Bill Snow (05:10):

It, it, it can be. I, I think people sometimes have a, their, their view of this business is a scan. They, they, I don't know, think it's exciting open outcry. Like we're a stock market. And I hate to break it to, to all the break the news to all the kids who wanna get into this all look at the college kids or people in their, their twenties thinking about doing this. It's not that exciting. Okay. It's a lot of quiet work and staring at your computer doing a lot of analysis, but before that, you have to get the client. And so how do you get that? That's, that's a whole other book and a whole other podcast that we could get into. Then you have to execute the transaction. That's what I started off doing. So I would disseminate the materials and set up the meetings, get the offers, negotiate the deals, and, and get it across the finish line.

(05:56):

The, the biggest skills that you need if you wanna do this kinda work is accounting. And I, I challenge young people, some people take me up on this, some don't take a balance sheet, an income statement from a publicly traded company, get a starting point, an ending point, and then create a cashflow statement just from the balance sheet and income statement as a test to see if you've got enough accounting skills. So you wanna have good accounting skills. You wanna have good math skills. So if you struggled in high school and algebra, certainly calculus, we use mostly algebra. If you don't like math, this isn't your, your your job. If you don't like to write, if you, you're not good at conveying ideas concisely and accurately in writing. This isn't gonna be your job. It's a lot of writing, it's a lot of math, it's a lot of accounting. And then of course, beyond that, when you negotiate, it's, it's being able to negotiate. And to that end, if you're not playing cards with your friends in college and learning some skills at the poker table, doesn't have to be big stakes. But if you're not learning how to read your hand in comparison to what you think other people have you're gonna struggle at this kind of work as well.

David King (07:00):

It's funny, the, the first thing you mentioned is accounting. And, and I do, I've got a bit of a concern about future business in America, because there's just, frankly, not enough people who are willing to study accounting these days. Young people today wanna study more of the computer science and be a programmer or do something different than accounting. It's not drawing people. And the accounting firms are having a, a hard time filling. I I, I was a CPA a before going to law school and it wasn't glamorous. It was drudgery every day. Yeah. But I use it every day today in what I do. And if people, you, you pick up people's books that you know, it, I, you know, it, it can really harm the value of a business just because you haven't been investing in your accounting all the way. So it's a, I I see it as a, an Im imminent, you know, issue for, for America to confront.

Bill Snow (08:00):

It's, yeah, that, that, that's a good point. At least the kids that are going to school, if they're studying computer science and programming, I think those are good tracks for them because they'll be able to find work. And obviously we're demanding more and more on the, on, on the tech end. But yeah, you, you're right. I mean, accounting. Well, I make a joke about accounting good naturedly, cuz I, I'm not a a C P A, but I'm, I'm quite good at it. And I always do this when I'm speaking to a group of accountants and they love it because I'm making fun of 'em. But they're so happy that someone's talking about him. They look at each other and say, Ooh, look at that. He's talking about us. And, and the joke is, how do people become accountants? They go off to college and they ask somebody, what kind of job can I get where I don't have to talk to people?

(08:39):

And someone says, accounting, and they say, hotdog, sign me up. Yeah, <laugh>. And, and, and they're very, very happy. And then they're doing very well. Then the old people bring 'em into an office and they say, you're doing great. We're gonna promote you. And the accountant says, hot dog, what does that mean? Well, we're gonna make you a partner. Well, hot dog, what does that mean? You have to go out and talk to people and bring business in and they curl up in a fetal position and cry. So that's kinda the life cycle of the accountant.

David King (09:01):

The, the, the definition of a tax attorney is that someone who didn't have the personality to be an accountant. <Laugh>.

Bill Snow (09:09):

Yeah.

David King (09:10):

We'll stop kicking around accountant. So with your investment banking work that you do today, what, what's your sweet spot? Are you industry agnostic? Any particular size?

Bill Snow (09:24):

Yeah, we are middle market or lower middle market, depending on how you wanna define it. So it's typically been 10 million to 300 million in revenue. In the past it's been at least a million of ebitda. So all your kids that are thinking about being investment bankers, if you don't know what EBITDA is, you better study. And by the way, it's, this is a little plug for my book. It is described in the book. So it's been a million ebitda, but I think now a lot of things have have changed and sometimes it's difficult to find buyers for those smaller deals. So we wanna see at least 2 million in ebitda industry agnostic. I'm in the Midwest, not surprisingly, I've done a lot with manufacturers, distribution businesses, some business services has been the focus. But it's, it's been more of, for me, casting a wide net. And I wanna be able to bring in as many opportunities as possible and then have other colleagues at the firm work on who might have some specific industry domain experience and knowledge, be able to work on those, those transactions as I bring them in.

David King (10:20):

It's funny, I mean, I, I've worked on $2 billion deals and $200,000 deals. Sometimes they can be just as difficult to close a really small deal as, as it can be a huge deal. Kind of the, the economies of scale here may make it hard for, for small business owners to get the professional services they need to really pull their chips off the table.

Bill Snow (10:46):

Yeah, you're absolutely right. In fact, sometimes those smaller deals require more handholding and pounding the table and, and pushing to find the buyer and get the thing across the finish line just because a smaller company's gonna have more risk than a large company, a 5 million EBITDA business. If it has a downturn and loses a million dollars in earnings, well, that's painful, but it's probably not gonna go out of business. A million dollar EBIT EBITDA business who loses a million dollars in earnings, they're in trouble. And so you have more room to work with. And I think a lot of business owners sometimes struggle to understand that. It's kind of counterintuitive, but the check is the amount of work needed to get the big deal done and the little work, the little deal done is gonna be about the same. And so that's why the fees, the the amount of work is the same.

(11:34):

The transaction is smaller. So yeah, you know what, the fees might be larger on a percentage basis. Yeah. That, that might not seem fair to the business owner. And I get their complaint, but I can't cut the fee by, you know one half or 80% be, you know, if, if the transaction took one half the amount of time to get the smaller deals done, okay, maybe we could get by on 50% of the normal fee. Right. But they're probably gonna take as long, if not longer. And it's, it's maybe not fair, but it's the nature of the beast.

David King (12:03):

It's the nature of the beast. They just still, you, you can't cut corners on the work that needs to be done to get a buyer and seller and negotiate, document the whole thing, pull the due diligence and close a deal. It just doesn't happen. There's no,

Bill Snow (12:16):

Absolutely.

David King (12:17):

Yeah. Yeah. Absolutely. So let, let's take a, a generic business, say a a 50 million cheese head manufacturing business in Milwaukee right around the corner from you. And when do they usually show up on your desk? When do you meet them? You know, T minus, when do you start working with a company like that that makes boxes for cheese heads? <Laugh>?

Bill Snow (12:48):

Well, that's a booming business in Wisconsin, I think. So they're, you know, as long as they're getting in the, the cheese, cheese card business as well, they should be in good shape there. Yeah. It really depends. I'll, I'll give you the detailed MBA answer. It depends. Okay. And, and sometimes you meet somebody and they're ready to go. Maybe they're interviewing other banks. Quite often we get referred to deals through referral partners, lawyers, accountants, wealth managers, commercial bankers, maybe a few others. That's been the, the main thrust of my marketing. And so we get introduced to them and sometimes they're ready to go. Sometimes they're just kicking the tires and there's nothing wrong with that. So it's, it's really difficult to say with, with an absolute blanket statement. So, you know, some, like I said, sometimes it's just a few weeks or a couple months. I have things that I've been chasing for seven, eight years. I've been buying a foursome at a charity golf outing because of the business owner who I know and I'd like to get his business. It's a good charity. I'm happy to support it. It supports our veterans. But that's been going on for, you know, seven, eight years. I, I take him out golfing and trying to develop that relationship. So sometimes it's quick and sometimes it goes on for, for years or a decade.

David King (14:01):

Okay. And, but in an ideal situation, would you say you need about this much time to properly do your work? The preparatory work fatigue, minus closing I a year or two years? 

Bill Snow (14:18):

If, if they're ready to go, probably about nine months, give or take.

David King (14:21):

Okay. Yeah. And do you, sometimes this happens to me, you know, when working as an attorney, deals will just show up on my desk, oh, we already signed this letter of intent. Don't worry. It's not binding. Yeah. It's not binding and it's not getting any better either. Yeah. Here we're Do you ever get deals that where you get a relatively short fuse and it's even locked and loaded, that you don't get a whole lot of rework on the letter of intent?

Bill Snow (14:50):

Well, no, that hasn't happened. I'm the one writing the letter of, well, I mean, I mean, I'm the one negotiating with the client. And so I'm the one negotiating the letter of intent. We'd like to bring the lawyer in and get the lawyer's blessing and, and the have the lawyer's input, Hey, you guys should do it like this instead of like, that, which is, is very, very valuable. Clients sometimes don't wanna do it, and it's, it's pushing a string trying to get them to bring the lawyer in. Why lawyers have this thing called billing, if you heard about this, where they, they wanna charge for their work. Isn't that a crazy thing? They wanna get paid for doing good work. So a lot of times the, the business owners don't wanna do that, which I think is, is a mistake. But ideally we do get the lawyers involved.

David King (15:31):

Are you seeing, speaking of those damn lawyers, are, you spend a lot seeing a lot of them moving more towards fixed fees, so there's not so much tension over paying to get the work you need?

Bill Snow (15:42):

I I, I've seen, I've seen both and, and, you know, really, really depends on the deal and, and so forth. Yeah. So there's some lawyers I know that will work on a fixed fee and, and you know, that's nice knowing that what it's gonna be. And there's, there's others that are gonna gonna bill at whatever their, their rate is. They're usually pretty good at, at estimating how much time is gonna be needed how much time they're gonna put in as a senior partner, how much the other junior partners or paralegals are gonna be involved with doing it. You know, the, the one, the one trick is if something happens in the transaction, no fault of the investment banker, no fault of the lawyer, maybe the business takes a downturn or there's some sort of delay that is out of our control mm-hmm. <Affirmative>, you know, that that can impact the amount of work that that is being done. But yeah, I'll leave that to the lawyers to negotiate that.

David King (16:33):

Yeah. And when you have a client, or do you typically have a a a plan of what sort of transaction that you're going to pursue? Or, or is it a variety of different things? I, I may sell to a strategic buyer. I may give to my three sons. I, I may, you know, also, you know, sell a portion of the business, just take a capital infusion. Do you kinda consider a, a range of alternative transactions?

Bill Snow (17:05):

Ideally, when we go to market, we wanna know what the client wants to accomplish. Yeah. And, and going to market saying, cause I've had clients and, and that have said, oh, we'll do whatever the buyer wants. I'm flexible, I can do whatever. And, and they're, and they're trying to be helpful and open-minded and that, that's great. But as someone who's also written, Lois, because I also do some buy-side work mm-hmm. <Affirmative> writing that l o i is difficult when the business owner says, well, I'll do whatever you guys want, or, you know, whatever, you know, we need to know something. Do you wanna sell all of it? Do you wanna sell a portion? Do you wanna hold onto it? Do you wanna sell the the company over some period of time? Do you wanna stay involved? Are you looking to retire? Have you talked with your tax people?

(17:46):

You know, you talked, just kind of backing up a little bit, some of the things that a business owner can do to prepare. Have they talked with their tax advisors? Yeah. About what is the preferred structure? Of course, everybody thinks assets and do an asset deal or a stock deal. Mm-Hmm. <affirmative>, but understanding that, but have they actually crunched the numbers? I call it the Yeah. Yeah. Yes. Cause I've dealt with this enough. The business owner calls up the, the tax person and the tax person kind of dismissively waves the head. Yeah, yeah, yeah. Do a stock deal, you'll be fine. And, and maybe the stock deal is, is fine. Maybe it's not. Maybe the asset deal, maybe there is little or no difference. But I implore business owners to have their people crunch the numbers, look at it, look at things like accounts receivable, is that gonna be taxed at a different rate than conveying the other assets of the business? Things like that. It really depends on, on the corporate structure and the basis in the assets, the basis in the stock. And so if they can do that, that is a huge help. Hopefully they're also working with wealth advisors, somebody who can help them manage the money after the deal's done. That person might have some ideas too, in terms of structuring the deal that might be preferential for the seller.

David King (18:54):

It's great when you get to the eve of the sale and they say, what can I do to, to cut the taxes? And like, what could you have done as the question Yes, that shipped sailed two years ago in terms of what we could have done. Yeah. On many of these issues. Absolutely. Tell me about EBITDA and why adjusted EBITDA has become like a Frankenstein's monster.

Bill Snow (19:19):

Tell me, you must have, you must have read the book cover to cover. So you

David King (19:22):

I did

Bill Snow (19:24):

<Laugh> you, you probably know it better than me. I only wrote the book. Yeah. The ebitda, and I, I talk about this in the book is, is a, you know, it's not gap, it's not official. Right. Accounting, generally recognized accounting principle practice, whatever they're, they're calling it these days. And, and it's something that was invented by an executive as some sort of measure of a business, as if it was operating in a vacuum. If it didn't have to pay taxes, if it didn't have to borrow money and pay interest if it didn't have to buy equipment and amortize that cost, that capital cost over some period of time and so forth. So it strips away all of those things. And what was, what, what, what is the business generating if it was operating in a vacuum? Okay. You know, that, that, that's pretty reasonable.

(20:09):

Certainly it is the defacto way or kinda the underpinning of valuation, the adjustments to ebitda. Those are of course one-time only expenses. Owner related expenses. Expenses, the owner claims will go away after a sale is done. And that can have some validity. But what happens is a lot of times business owners understand this. And so they're throwing everything in the kitchen sink and, well, this is a one-time only expense. This is a one-time only expenses. As we tell 'em, if every single month you have 20,000, $30,000 in so-called one-time only expenses, but every single month, maybe it's different expense, but every month you're having that kind of expense. A buyer's gonna say, wait a minute, this really doesn't go away. This might be an assortment of different expenses, but it really doesn't go away. I'm gonna be incurring, pick the, the topic or pick the, the, the specific expense.

(21:01):

I'm gonna be incurring this every single month. And so they're gonna battle about that. And so that's why it's become, in my mind, kind of a frankenstein's monster where we, the investment bankers have, were so smart. We're the smartest people in the room and you'll know this cuz we'll tell you we've created this, let's add back. And sometimes add backs are legitimate, but it has mm-hmm. Become a bit of a monster because I do think sometimes people overuse it and try to claim things that are one time only or go away when they really don't.

David King (21:27):

Yeah. That, that can be a sticky part of the deal to, to, to break it to owners that when these add-backs we're hoping to get aren't gonna fly. Yeah. with the other side here. And you look past the numbers to determine a, a company's true value. It's great. I had a, a, a really interesting guest a few weeks ago, Mack Lackey who's who's owned several businesses that he sold. And he was talking about how it's not, it's not primarily the numbers that determine a value to a buyer. They're looking for the other, you know, the, the innovations, the team that, what do you see as the drivers of a company's valuation? It's not just dollars and cents.

Bill Snow (22:15):

Yeah. That, that's, that's a great question. And it's, it's kind of difficult to define that certainly in a one size fits all approach. The way that we look at valuation, we'll do a valuation exercise. We don't share this with the buyer. This is just for internal discussions with the business owner. And we'll look at comparable transaction. We'll look at market comps, what publicly traded companies are trading at. Then we make some adjustments for, for size. We'll do a LBO analysis, leveraged bio analysis, then we'll do the, the favorite financial calculation of every college student. The discounted cash flow, though they love doing in the DCF F and those are that we'll blend tho those four together. Probably a lot of other firms do that, or something very similar that for me. And we don't publish that. We don't say, here's a 30 million enterprise business, gimme your best offer.

(23:06):

Right. That's just for our internal understanding. But that's an academic exercise. And what, what you're talking about is the strategic imperative. That's a term that my firm has, and I think it's a great term. Yeah. A strategic imperative to do a deal. So yeah, we wanna look at the revenue and the, the profit of course, but does the company solve the, does the product offering maybe plug a hole in the buyer's product offering? Or is it a big competitor that's become a pain point? Mm-Hmm. <affirmative>, things like that. Is it rapidly growing? Even a company that might have a concentration, which could be an issue for a lot of buyers, but another buyer might come in and say, well, we don't do any business with that company that where that big concentration is, and we've been trying to get in. And so that's actually, we can pay more. We're not, the buyer's not gonna tell us that, of course, but they could pay more than maybe another buyer because that concentration issue basically goes away because it solves a problem for them. So if there's some sort of strategic imperative, something beyond the numbers where a business absolutely has to make the acquisition, that's where you can see some really compelling valuations.

David King (24:14):

So along that line here, when you're putting a, a company to the market here, are you typically con considering the range of buyers, strategic buyers you know private equity firms, other and other financial buyers? Or do you generally say you, with this type of business and get the stage you're at right now, the you're probably gonna be best and get the highest value if we can find the right strategic buyer for you?

Bill Snow (24:43):

Yeah. Yeah. That's a great question. And, and it really depends. We'll, we'll go after all. We'll talk to the strategic buyers. We'll talk to private equity firms depending on the size of the deal. We know a lot of firms that are smaller, kind of quasi-private equity. They don't have limited partners, but it's a partner or a couple guys, a couple gals have thrown some money together and they, they buy companies you'll have to excuse the the common term, just cool stuff. Things that we, we like cool little companies. So they might be a viable buyer as well. And so it really depends on what the, what the owner is looking to do. If they wanna cash out completely, probably strategic, just forget the numbers for a moment, that might be better. If they're looking at maybe selling a piece of the company working for a few more years and then selling again, maybe working with a partner who can help with acquisitions or help make investment and make, make the business worth more over the next few years. Maybe a private equity firm is going to be the you know, sell a piece to the private equity firm, build it up a little bit, and in 3, 4, 5, 6, 7 years, sell it maybe to a strategic and, and get a, the so-called second bite of the apple. So it starts with what the seller wants to do. What is the seller trying to accomplish? Create liquidity, retire, bring in a strategic partner to help expand the business. There is no right or wrong. It really depends what the seller wants to accomplish.

David King (26:03):

Mm-Hmm. <affirmative>. And if, if we're gonna get into the, the financial buyers gonna get the, the more complicated deal terms with be, you know, carried interest in that, the, those sorts of pieces to it. The, and if you're getting different types of offers in there, then it's not just apples and oranges. You may get a peach alum, a pair and all these, and then putting them on the table together for, for the, for the seller to consider. That's kind of wholly macro. What, how do these equate to each other? Do you have to kinda run some algorithms for people? <Laugh>, here's what might happen. <Laugh>. Yeah,

Bill Snow (26:39):

Yeah, yeah. It's called analyst figure this out. So, yeah we'll, we'll spread the numbers. I mean, it's obviously under my direction, but we will put all those offers on a spreadsheet and then you wanna quantify everything. How much cash you close is a note included. How much interest is being paid. If they're, you know, a million dollar note paying 7%, well that's 70,000 a year. You know, you add that, that's, you gotta put the money somewhere mr. Business owner, miss business owner. Maybe keeping a small piece in your business and earning a, a good return on it. Maybe that makes sense, you know, to, to keep some of it there. Looking at earnouts, you know, those make me a a little nervous. You, you see that more and more mm-hmm. <Affirmative>, but we have to quantify that as much as possible.

(27:23):

Are they offering some stocks? So you wanna take some estimations of all those and look at all those components and then talk about it each deal. Who do you, you know, what do you feel best about, you know, a large PE firm, you're probably gonna feel pretty good about them closing. Cause they probably have the capital. You can see all the other transactions they're doing versus an individual or, or a couple people trying to buy a business and they're trying to scrape together a little bit of money that they have and borrow money from friends and family and so forth. And those deals get done. And we've sold companies to those sort of people. But you have to look at all those pieces and then understand what is the seller, what are you looking to accomplish? And have you been talking with your tax people?

(28:01):

Because quite often that big number, I call it the country club number mm-hmm. <Affirmative>, we, we sold our business for, you know, whatever, seven times, eight times, 10 times. Well that's great. That's the country club number. That's what you used to brag about it, the, the guy next to you in the, in the locker room. But what did you walk away with? And in that regard, sometimes when you look at that, that gross amount, the total amount before all the other expenses might be very different than the net. And I think that the business owners also should be looking at the net amount, what they get after they pay off any debt after they pay. Uncle Sam's gonna show up and take what a third roughly I get paid, lawyers get paid. All those sort of things factor in there might be working capital adjustment after all those things. What does the business owner walk away with? And in that regard, maybe a deal that has a lower gross amount mm-hmm. <Affirmative> is better than the higher gross amount. Because at the net may, maybe, depending on a lot of different factors, maybe that lower gross amount yields a higher net. And that would be a better deal in that regard.

David King (29:00):

Mm-Hmm. <affirmative> July 7th, 2023. What are, what kind of market are we seeing out there right now? Where's, where's it hot? Where's it cold? Who's, who's making off nicely today and who's maybe staying back?

Bill Snow (29:14):

Yeah. Well that, that's a great question. And that comes up all the time. What does the market look like? And as I point out to people, the market at m and a, like any other market, is divided into buyers and sellers. And in that regard, the demand from buyers, strategic buyers, private equity firms and so forth, remains very, very high. I get called and emailed on a daily basis, usually from PE firms. They wanna talk about what they're looking for, and of course they wanna hear we have in the pipeline. The challenge is, and always has been, and probably always will be enough supply business owners willing to go to market those with a good company and reasonable expectations. As I tell people, if you have a, a good company and you have reasonable expectations about price and the structure and so forth, you probably stand a really high chance of getting a really good deal.

(30:03):

Mm-Hmm. <affirmative>. And, and to that extent, that's always the challenge because those good companies don't trade very often. You call up a 45 year old business owner, married, happily married, spouse is happy, they've got, kids are happy, health is good person, enjoys the work, jumps outta bed in the morning. I can't wait to get to work in the morning. I love what I do. I make a lot of money. I've got a nice bank account. You can't offer that person enough money to buy the company. They're not, I don't care how strong demand is from private equity firms, that person's gonna say, I already do what I love. What am I gonna do with myself? Mm-Hmm. <affirmative>. And so that puts some upward pressure on price for those who do wanna, wanna step in. So if you have a good company and you wanna go to market, this is a wonderful time. The, the amount of demand for the buyers is still extremely high.

David King (30:52):

Great news. Great news. So on the fear side and maybe just the precautionary side, what, what sort of common mistakes do you see most often? What, what are the true deal killers out there?

Bill Snow (31:07):

Yeah. The mistakes that I see is, and, and these are not necessarily a deal killers. Well, the, the big deal killer is, is failure to plan for taxes. Okay. And, and I, I implore any business owner who's watching this, talk to your tax people before you hire somebody like me to sell your business and understand structure. Understand, do you wanna sell stock or assets? Have them actually do the calculations. Don't let 'em just say, yeah, yeah, yeah, you wanna do a stock deal. Maybe the stock deal's better. But you wanna understand that as a accounts receivable being taxed at a different rate, you wanna understand all of that. Ideally, you wanna have audited or reviewed financials for two years, not one year, two years, because one year is the accounts have just observed inventory at the end of the year. So they're gonna give you a qualified opinion.

(31:58):

We're taking the word of the business owner that the inventory value was x. Mm-Hmm. At the beginning of the year, we didn't observe. Yeah. How does that impact the business? Well, when you can observe at the beginning and the end, that's why you need two years. That helps solidify the cost of goods cuz you have a real handle on inventory, what's come in, what's gone out, what the actual cost of goods are. And if you understand your cost of goods sold, obviously that's gonna flow to the bottom line. So two years of audited review financials. The big one today also is do a sell side quality of earnings report. I implore business owners, cause we talked about the Frankenstein's monster, the adjustments to EBITDA audits and reviews set up ebitda. A quality of earnings report will set up adjustments to ebitda. And that is gonna quantify add-backs due to owner related expenses, excessive owner comp, you know, normalized owner comp truly one time only expenses that go away and so forth.

David King (32:54):

Well, bill, I think we're running outta time here. You're, are you, this, this is the second edition, correct?

Bill Snow (33:02):

That is correct.

David King (33:03):

Okay. And your, your next book is gonna have Fabio on the cover. It's gonna be a little bit more of a romance novel. Hey, after I sold my business, I, I went away.

Bill Snow (33:13):

Well it's, it's great that you mentioned that because Wiley Publishing when, and my, my PR firm, when they heard I was talking to you, the famous David King, they said, see if he'll pose for the next cover. So I'm putting you on notice right now that we want you on the next cover. Yeah. All

David King (33:30):

Right. I'm hitting the gym after this. Okay. All right. Well, I tell you, I really sincerely hope that, that your bears get back in business, <laugh> and, and, and, and your cubs, you know, turn it around. And when I come to Chicago, we are on for some poker. And don't take every penny I've got, I still gotta put my kids through college.

Bill Snow (33:51):

I, I'm, I'm happy just just bring a lot of money. I'll teach you how to play and we'll teach. No, no, that's me, David. Definitely. When you're in town, look me up. It would be great to get together and I really appreciate absolutely

David King (34:01):

Talking to you. Thanks so much. Great having you. And thank you for joining us and we'll see you next time on Selling Your Business with David King.