In this episode of Your Life Simplified, Daniel Sharkey, senior wealth advisor, and Tom Tilley, managing director, mergers & acquisitions, discuss the aspects of navigating the sale of your business and exercising as much control as possible. Tune in for valuable insights on preparing your business to go to market, navigating exit strategies as well as tax and income implications of the sale.

Transcript

Daniel Sharkey: If you’re a business owner, are you currently maximizing the value of your business? How about creating and executing a succession plan? Well, if you’re thinking about selling, passing to a family member or just planning your next move, today’s episode is one you won’t want to miss.

Welcome to Your Life Simplified. Today, I have an extra special guest. His name is Tom Tilley, and he is our managing director of investment banking and business owner solutions. Tom, welcome to Your Life Simplified.

Tom Tilley: Thank you, Dan. Happy to be here.

Dan: I’m really excited to talk to you. We have been wanting to talk to you for a long time. And we’re going to get into the business owner solutions part of it here in just a second, but before we do that, I just want to touch on your background because, of all the guests that we’ve had, I think you have a particular uniqueness and interesting fact pattern that is worthy of mentioning.

So, you have a bachelor’s degree from Michigan State. You played hockey and were on the Big 10 all-conference team. You also won the 1986 national championship. Following that, you spent 12 years in professional hockey. How did you find yourself moving from professional hockey to M&A deals?

Tom: Yeah, Dan, it wasn’t the traditional way. My last few years when I was playing, I started working in the front office for the team I was with, and on the business operations side, not on the hockey operations side. So, building out my resume, and when I finished playing, I got a job with CBS Radio in Chicago, running the Chicago Blackhawks radio network, which was interesting because I’d been with the team. So I started doing that and, within 18 months, was running the third-largest sports radio station in the country for CBS.

And I would say I was possibly unqualified for that position, but I made it. I managed through it and made it work. And then moved to Kansas City to do a startup sports station for a public company out of Pennsylvania, and along the way, met the owners of a small M&A firm in Kansas City, and I was intrigued by it.

And one had worked with Jack Welch at GE back in the day, when GE was doing a lot of M&A acquisitions, and the other guy was in the consulting group at Hallmark. And so they started this firm, and they were looking for some help. And I joined them. And I merged that firm ultimately and was there for 11 years, and joined Mariner going on nine years ago now and came here to do deals and noticed an opportunity within Mariner from the perspective of a growing company, very entrepreneurial, [with] a lot of business-owner clients built into the network, and it’s been a great ride since I’ve been here, great company, been along for all the growth, and it’s been awesome.

Dan: Well, I think that’s an important point. I would imagine a lot of our listeners aren’t even aware that this type of service is offered within the halls of Mariner. And one for yourself has really been there from the beginning.

So, let’s just talk a little bit more about that, about how we help those business-owner clients, what it is that we actually do, and think about the areas that they should be focused on. So, “business owner” is a very, very broad term, but specifically, we’re talking small to mid-market companies, typically founder-led.

What are the areas, when you come in with an engagement or you begin to have those initial conversations with a business owner, what are some of the focus areas that you encourage them to begin to think about? What are some of the ideas that you bring to the table? And how do those conversations really begin to get going?

Tom: They start with succession planning. That’s a broad question, and a lot of business owners don’t really understand or know about the different ways to exit their business. They may know one or two, but the conversation is, are there any family members in the business? Are they the next generation of operating the business? Do you have a strong management team? That’s a management buyout. We could help orchestrate that. An employee stock option plan. Is it a company structured for it? Does it meet the right metrics and that kind of thing? And then the last thing we talk about is the third-party sale.

Ultimately, most of the people, they may have family members in the business, but they’re in many cases not interested in it because they see their family going through the — let’s just say it’s a dad running the company — and what a day in his life looks like. And in a lot of times, they’re not communicating about that.

And so the impression is that that’s the next gen. And I get more calls after having those conversations where it’s like, my son doesn’t want to run the company or my daughter doesn’t want to run the company, so I guess the only option is a third-party sale.

And same with management. In terms of management teams, a lot of them will want to take over the business, but they don’t want to take on the responsibility of taking on debt to buy it out. And so those are the deeper conversations we have, and eventually, we hone in and help them through whichever of the options that makes the most sense for them and that they want to follow.

Dan: Do you find when you’re having those initial conversations that a lot of the options that you just laid out on the table are often ones that are not fully considered to the depth that would be required? Meaning that when I work with my business owner clients, it feels like a lot of time they have a vision in their head, and they don’t necessarily give full weight or full credence to other potential exit options.

Have you had a similar experience, and what’s it like walking through those different options and getting them to begin to make room in their plan for a different way out than what they had originally envisioned?

Tom: Yeah. As an example, I’ll use a family member in the business, and they’re resolute on this is what’s going to happen. And the question I always ask is, have you had that discussion with that child, that son or daughter, if that’s what they’re actually interested in?

And the answer is almost always the same. Well, no, but why wouldn’t they want to take over the business? And I’m like, I’m just asking the question, and you should probably sit down and have a meeting with them to talk through that.

And I would tell you that most of the time, they come back and tell me, my son or daughter is not interested in owning the company and, in fact, may want to go and do other things, so now let’s talk about the other the options you’ve mentioned before. And so, it’s just a communication thing sometimes.

Dan: No, I think that’s spot on. Business owners are so dialed in for what it takes to see quarter to quarter, year to year, that they have a lot of these blind spots that they don’t necessarily fully appreciate until they have someone like yourself or other folks here at Mariner walk them through what they’re missing and what their other options may ultimately be.

So, let’s talk a little bit about those blind spots. What are some areas that you see that business owners need to be mindful of, need to potentially think through, or even need to improve as they reach the point where the next chapter, next phase, through whatever vehicle or way that they’re going to transition that business, that they should really focus on before they ultimately come to the signing table?

Tom: Yeah, I think that there’s three areas of focus that we start with. One is operationally, the business and how it operates. The second is financial. Do they have audited financials? Do they have reviewed the financials? What kind of shape are their financials in as they decide if they’re going to go to market or not? And then the last one is people. It’s a lot harder to sell a company where the owner is the business than when they’ve built out a management team, they’ve got customer contracts, sort of the things that can enhance the value.

Because a business valuation is not just based on a multiple of EBITDA, although that’s how private equity and the like acquire them. It’s an assessment of risk. And if the owner is the business, that’s a risk to them. If their people are not strong and they don’t have a strong management team, that’s a risk. So it’s a big risk assessment at the front end when we’re taking a company to market that we’re thinking about. And in a lot of cases, we may tell the business owner, this isn’t a good time for you to take your business to market. We have resources to help you clean up your financials. We have resources to help you with operationally getting things in better shape.

And so we’ll be the first ones to tell them that, hey, we’re going to do some upfront business valuation work, but we’re also going to do a high-level assessment of the business and ask a number of questions to figure out if we feel that we can get the highest price for the business if we went to market today.

Dan: I think that’s such an interesting point. And one, I want to emphasize is that it’s not just about growing the business to get a higher valuation or a higher multiple. I think what is so often overlooked in the businesses that we have helped figure this out as they get to market is, how can I de-risk the business to such a great degree that will ensure that I get a higher valuation?

And things like customer concentration or management team, all issues that you mentioned, are incredibly important and things that potentially take time to fix but ultimately will get you a much higher valuation over time than it will if you just blindly push to the finish line.

Tom: Yeah, and I’ll give you an example. I had a call this morning with the CFO of a company. It’s in the agriculture industry. There’s three owners, but they hired a CEO 10 years ago and brought in a strong CFO. The business owners are not even active in the business.

I mean, that’s pristine. That is one that you say, OK, they’ve been planning this for 10 years, and now they’re ready to approach going through a third-party sale.

Dan: It’s wildly important. And I’m glad you brought up partnership and owners thinking about things beyond their day-to-day involvement. How important is it that the owner has their own personal financial plan and their own personal financial details, their vision for what comes next? How important is that to have dialed in before they actually go to sell their business?

Tom: Well, what I would tell you is that I always ask a business owner when I’m speaking to them for the first time, have you had a business valuation done? And most will say no. And they’ll say, well, my friend sold his business for $40 million, so mine’s got to be worth $50.

And I’m like, we’re not going to go to market blindly. We’re going to do that upfront work, pulling comparable transaction data, running through financial models that professional investors utilize to determine the value of a business and what they want to pay for it.

And so, to me, that’s the first place that a business owner should start is to really get a third-party business valuation, so they can put that line in the sand. And also, it’s important for their advisor because what you don’t want to have is that wealth gap.

So let’s say, for instance, we took a business to market, and it came in at $20 million, but it’s a big part of their net ownership of their life. So, I would say that what happens is we don’t want to go to market blindly, come in at $20 million, and they need $30 million to live the lifestyle that they want to live.

So it gives the advisors visibility on what that looks like, and it gives the owner visibility of, hey, I’m going to have to grow this company 20 to 25% to be able to live the way I want to live after I leave the business.

Dan: Whether it’s a business owner or any other client, it’s important to really have that level of clarity. And I think if you go through those exercises to really understand, hey, this is what I’m taking as income out of the business now, but that may not correlate to what you can get in terms of the valuation of the business if you do have some of those blind spots that we mentioned earlier.

So, I think when people make that decision, provided that the business itself is ready for sale and is attractive for sale, that is a critically important part. It also allows you to ensure that you take advantage of any pre-planning opportunities, whether it’s for legacy or generational gifting goals. All those things are critically important and best done ahead of time than at the time of sale, for sure.

Tom: Yeah. And we bring in our estate tax people early on in the process to look at tax mitigation opportunities pre-sale, and then looking at the income tax mitigation wholesale.

And so, what I tell our advisors and I tell the business owners is, let’s look at this through the lens of taxes, and how can we help you there, and let’s start that conversation. As soon as we sign an engagement with a business owner, we’re having those discussions because it’s all about net proceeds.

Dan: Right. Yeah, absolutely. Let me just throw a little bit of a curveball at you, and this is primarily because we’ve seen a huge uptick in this in the business community. I know you’ve completed deals in which this has come to the table, but there has been a massive inflow of private equity money into small and medium-sized businesses, and even things in the service industry, things that you wouldn’t typically see private equity being involved in. But there is a glut of capital on the sidelines, and they’ve found these small businesses and midsize businesses to be really attractive acquisition opportunities, particularly when they can scale them.

We are seeing more and more business owners get unsolicited calls and unsolicited offers. If you’re in that position and you’re advising a business owner who may perhaps already, or may in the future, receive one of those calls, how can they not get caught flat-footed? What are some key things to think about when assessing a private equity opportunity? And what would you advise them if they do get one of those calls, what their first step should be?

Tom: There’s $3.2 trillion of private equity capital looking to be put to work. So, what the funds do is they pick an industry, they pick a sector, and then they do direct outreach to business owners. The purpose being they’re looking for a proprietary deal, and they want to avoid guys like me, right? Because we’re going to run a competitive process. We’re going to bring in 10, 15, 20 offers. Everyone knows it’s a competitive process, and they have to put their best foot forward.

So, what I would say is, I would seek out an advisor and talk through with them because I can tell you that first offer that they’re going to put forward, whether it’s the offer or the structure of the transaction, is not going to be their best offer.

And for us, we have data to utilize to see where businesses are valued. We have the experience of going to market and knowing who the high bidders are. And I would tell you that most of the transactions that I’ve done in the last seven or eight years are private equity add-on acquisitions because they’ll pay the highest price.

It’s a multiple arbitrage play. They buy a platform at 10x, and they do the add-ons at 5x. And every time they do a transaction the value goes up for them and their multiple goes up. So that’s how they make their money.

But, yeah, these funds have to hire young people and just have them sending emails every day, phone calls, you name it. And whenever I talk to a business owner, I’ll ask them, how many times a week do you get contacted about selling your business? And the average is three to five times a week.

Dan: A week? A week? Incredible!

Tom: You catch a business owner on a bad day and that’s what they’re hoping for. And next thing you know they’re — and the problem is, they dictate the timeline too. And they’re going to hire a third party to do a quality of earnings report, which is basically verifying revenue and profitability. And they’re going to point the finger at the third party who did the work to re-trade the deal, which happens in many cases. I hear about it every week.

And so they think, we’ve got control of this deal. We’ve got them down the path. They’re tired of the process because we’re dragging this thing out. And then next thing you know, the deal gets re-traded. And most of the deals end up blowing up anyway. And there’s a bad experience with a business owner with private equity where they can be really good partners if you find the right one.

And I think that’s what our real value is — offering options where our clients are running the process, and they have the opportunity to interview each of those parties and find out what is the best fit. Sometimes, it’s not about the most money. It can be just about, I could see myself really working with these people.

I did a deal out of Tulsa earlier this year, and it was a building products distribution company. And we ran our process. Not only did we drive the highest price, but we found the best partner. And I just talked to my client last week, and we were talking about it, and he said, “You couldn’t have found me a better partner. The CEO of the company grew up framing houses. Now, he’s the CEO of this big building products distribution company. He’s a real guy. He’s from my world.”

And that’s what makes my feet hit the floor in the morning, when you get a chance to have outcomes like that.

Dan: And let me just have a quick follow-up because what you just described there is so interesting, and I want people who are listening to really take it home. Can you just talk a little bit more about the competitive process and why that is such a key differentiator?

I mean, you’ve done hundreds of deals, and just compare and contrast the business owner who takes the first offer at the table to the process that your team and our Woodbridge colleagues as well put them through, and just talk a little bit about the difference in outcomes. I think that’s a key point that people need to really wrap their heads around.

Tom: Yeah. The process is typically six to eight months long. The first 45 to 60 days are putting together a confidential information memorandum, which is a 40- or 50-page deck on the company.

At the same time, looking through buyer lists through our databases that we have access to. We have the same access to data as Goldman Sachs and JP Morgan and all the middle-market investment bankers. But we’re downstream intentionally because those are the people who need the most help.

And so once we identify all the buyers, we’ll do the outreach. It could be to thousands of buyers, private equity groups, strategics. And we put together a blind teaser when it first goes out with a confidentiality agreement so that we’re not telling people who the company is. We describe it, a broad geography, but very specific on the revenue, the profitability, the owner’s objectives, that type of thing.

And once they sign the confidentiality agreement — and, of course, the confidential information memorandum has to be approved by our clients before it goes out. The buyer list has to be approved by our buyer clients because we don’t want competitors sniffing around, looking for an opportunity to find out if it’s one of their competitors that’s selling.

And ultimately, we’ll filter it down and send out offer letter instructions. So we want to get to five things — purchase price, structure of the transaction, terms, contingencies and timing to close. Timing to close being an important one. We want to push them to close quickly.

Then our clients will hire a third-party attorney because the attorneys will start to come into the mix. Now you start to have other parties coming in, and we manage the process and the cadence of it such that our clients have the opportunity to focus on operating their business in the process, not getting distracted or disrupting doing their business.

And ultimately, we’ll narrow it down to three to five parties. That’s when we sit with our clients. We’ll train them on how to present the company and the important things that need to be said.

Dan: So, Tom, sorry, let me just interject quickly because clients always think about maximizing price and that is incredibly important. But could you also talk about some of the other elements that we help them focus on that are equally as important and often overlooked?

Tom: Yeah. So there’s a purchase price. Then there’s the structure of the transaction. So, there’s a few different parts that can be a part of the structure.

So cash at closing could be a seller note — basically a loan to the company. Could be an earn-out based on the performance of the company. Could be an equity role. In many cases, private equity groups want the business owner to roll some equity, meaning they keep some equity in the company and ride along with them. So those are where you start thinking about the structures of the deal.

But then you have the terms of the deal. And those are the things that we get into very early on. How long do they want the business owner to stay around? What happens to the rest of the people in the company? Who else may lose their job if the portfolio company has a CFO already?

Does that mean that their controller or their CFO is not going to be around any longer? So really, the deep questions to find out [are] what does the business look like post-closing? And how does that impact the important things to a business owner?

Dan: Yeah, those are all wildly important points. And again, what I hope people take away from this conversation, and what I hope is resonating, is that we want to bring this idea of planning for exit to the present tense, meaning there’s always things that we can be doing now, from the things you mentioned at the beginning, such as making sure your financials and customer concentration and all those parts are buttoned up, to really examining things beyond the purchase price in terms of the terms of the deal. So all wildly important, and we appreciate your time.

Tom: Absolutely. Thank you, Dan. I appreciate being here.

Dan: Thank you, Tom, for being so generous with your time. We have been speaking with Tom Tilley, who is head of Mariner’s investment banking and business owner solutions.

If you enjoyed this conversation, please be sure to check out the hundred-plus other ones that we have done. Please be sure to subscribe at Apple, YouTube, Spotify or wherever you get your podcasts. And for our team here at Mariner, I’m Dan Sharkey, and have a wonderful day!

Disclosure:

The views expressed in this podcast are for informational and educational purposes only and do not consider any individual personal, financial, legal or tax situation. As such, the information contained herein intended and should not be construed as a specific recommendation, individualized tax, legal or investment advice.

Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals regarding their specific circumstances and needs prior to taking any action based upon this information.

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Mariner is the marketing name for the financial services business of Mariner Wealth Advisors, LLC and its subsidiaries. Investment advisory services are provided through the brands Mariner Wealth, Mariner Independent, Mariner Institutional, Mariner Ultra and Mariner Workplace, each of which is a business name of the registered investment advisory entities of Mariner.

For additional information about each of the registered investment advisory entities of Mariner, including fees and services, please contact Mariner or refer to each entity’s form ADV part 2A, which is available on the Investment Advisor Public Disclosure website. www.adviser.info.sec.gov. Registration of an investment advisor does not imply a certain level of skill or training.

Mariner is the marketing name for the financial services businesses of Mariner Wealth Advisors, LLC and its subsidiaries. Investment advisory services are provided through the brands Mariner Wealth, Mariner Independent, Mariner Institutional, Mariner Ultra, and Mariner Workplace, each of which is a business name of the registered investment advisory entities of Mariner. For additional information about each of the registered investment advisory entities of Mariner, including fees and services, please contact Mariner or refer to each entity’s Form ADV Part 2A, which is available on the Investment Adviser Public Disclosure website. Registration of an investment adviser does not imply a certain level of skill or training.