Transcript: 

[00:00:00] Intro: Welcome to Retirement Unlocked with Larry Heller, your life Your Way, unlimited possibilities. Join us as we explore how tailored financial planning and investments can help you navigate life transitions with confidence. Let’s dive into this week’s episode.

[00:00:21] Bill Tucker: And welcome back to Retirement Unlocked with your host, Larry Heller. Joining us today is Gregg Sho, CEO of Protegrity advisors with more than 25 years experience in mergers and acquisitions, corporate development and leadership roles at some major companies. Gregg brings a deep understanding of what truly drives a successful.

Transaction. In this episode, we break down the essentials, the different types of buyers in today’s market, how sellers can evaluate their options, the ideal time to consider a sale, and what preparation really looks like. Gregg [00:01:00] also walks us through a full m and a process from initial planning to closing, so business owners know.

Exactly what to expect. Whether you’re thinking about selling now or planning for the future, this conversation offers practical insights you won’t want to miss. So Larry. Get down to

[00:01:20] Larry Heller: it. Right. Thanks Bill. Thanks Gregg for joining us today. I think we’ll cover a lot of ground that’d be really helpful for some of our listeners.

So, uh, so why don’t we kind of jump right in and kind of talk about, you know, selling your business the right way. And so when a business owner is. Thinking about a sale, what are the different types of buyers that are out there in today’s market?

[00:01:43] Gregg Schor: So, today’s market, there’s actually a, a broad spectrum of, of buyers and, and really more than ever before.

Um, so you have the strategics who have always been there, so you know, a company that operates in the same business sector or something adjacent to, it could be public, private US or, or [00:02:00] international so that they’ve always been there. But there’s been a proliferation of private equity firms of, of all types and sizes.

So a PE firm is, is really an investment entity that pulls capital from private investors, from institutions, from other funds to acquire, manage, and ultimately. Sell companies at a profit. Um, and then you have family offices, you know, which are kind of the private wealth management entity, which manages the financial affairs of, of, of high net worth families.

Now the family offices used to really just invest their money in private equity firms and they decided, you know, I guess several years ago to kind of knock out the middleman and now the family offices invest directly in companies as well.

[00:02:43] Larry Heller: Hmm.

[00:02:43] Gregg Schor: So if

[00:02:44] Larry Heller: I’m a, if I’m a seller, should I be concerned about which one of these, are there pros and cons for the buyers?

Or is it just doesn’t make a difference? I should just take the highest price? No,

[00:02:55] Gregg Schor: it, it, it, it, it, it definitely does make a difference. It depends upon what the [00:03:00] objectives are of, of, of the seller. Some objectives, you know, some sellers would like to retire. Some say, you know, I’d like to stay another year or two, and then, you know, and then go, some say, you know.

Three months, six months that I’m gonna transition. And some say, Hey, you know, I’m good for, you know, as long as it’s a role that I like, you know, they’re say, you know, I’m good for three years, you know, five, five years or more. Some buyer, some sellers, excuse me, want, you know, they want cash Act closed.

They’re old school. And I, I counsel our clients. The only thing you can ever count on is, is, is the cash amount at closing. If there’s any type of earnouts or bonuses, the company’s not under your control anymore. So you don’t know what will happen. We’ll do our best to negotiate very attainable objectives and thresholds to get those additional payments.

But, but the bottom line is they don’t run the company anymore. And, and you have to be happy with, with the cash Act closing. Um, a strategic will typically wanna buy a hundred percent of a [00:04:00] company. Um, because there’s not gonna be another exit plant. Mm-hmm. You know, and, and the, the strategic will typically have a management team in place already.

So unless there’s some. Compelling reason for the owner to stay on. Maybe they have great relationships, maybe they could take on a different role. Sometimes an owner can even join the corporate development partner because department of of the buyer, because they may know of other companies that that could be ripe for, for acquisition.

But usually you’re not gonna stay, the majority of times you’re not gonna stay for any kind of ex extended period of time. A private equity firm, in contrast to the the strategic. We’ll typically never wanna buy a hundred percent. It’s the exception where they do, they usually like to be in the 60 to 80% range.

They view the owner having what’s called rollover equity. Mm-hmm. As some type of insurance and incentive that. The owner is gonna make sure that the transition post-transaction goes well, and kind [00:05:00] of the representations and promises that were made are going to be kept if they have a financial, a financial interest in that.

The rollover equity, you know, it’s, it’s a risk reward thing, right? You’re, you have no idea whether you’re gonna be able to recoup on that, but if you do, sometimes it’s what it’s, it’s called in the industry that cliche, it’s a second bite of the apple. Mm-hmm. That, that second bite of the apple could be larger than what you got on on the first transaction.

So, you know, the benefit is you get to take cash out and you may have a second hit in X number of years. Usually private equity firm, um, would like to sell the business again within five to seven years, or the ones that are in that particular fund, a family office is, is kind of a mix. So. It’s always best to, you know, to, uh, sell a hundred percent to a family office because they’re not motivated for a future sell.

They’re fine if the company is doing well. There’s profits and distributions. They don’t need to [00:06:00] sell it. If something comes a, if they get a great offer that comes along, but they’re not gonna be proactive in that respect the same way that a, a, a private equity firm will be. So if you do get rollover equity in a family office situation, you would wanna have some type of right.

You know, if there’s no liquidity for that. Equity that’s held in X number of years to have the right to sell it. Also, a family office will many times want the, um, the owner to stay for, for some extended period of time, as opposed to a private equity firm that many times they have their own bench of executives that, you know, they purposely.

Look for companies in certain sectors because they have someone in mind already who can, who can run it, or they have a platform already. And if it’s an add-on to that, again, they have, they have a management team in place.

[00:06:48] Larry Heller: Hmm. You mentioned the, so you mentioned the cash upfront and you, um, and the equity, but you also talked about, uh, the earnout.

Can you just kind of give a, and it’s a little bit more of like, what is that, [00:07:00] how is that usually set up? What, why is that important?

[00:07:03] Gregg Schor: Sure. So what happens is when we go through a transaction, you typically, you go back three years for the, the financial statements, the p and l, the balance sheet, you make the adjustments.

We end up doing the opposite of what the accountant does, right? The accountants wants to minimize profit on the books so that there’s least amount of taxes that are paid. We do adjustments and add backs and normalize things and push the envelope, um, everything, you know, fully credible, supportable. But we wanna show the most amount of profit on the books because that’s typically how a company is valued.

It’s some multiple of the adjusted earnings, but we also do projections. So a buyer will say, you know, the seller will say, Hey, I’m gonna do, you know, 10 million this year, you know, with another 2 million in adjusted earnings at the end of the year. If I’m getting a five x. If it’s a five x multiple, then you know the purchase price should be this, and the, the buyer will say, well, you know, you [00:08:00] haven’t achieved that yet, so we can’t pay you on for the future.

But we’ll, what we’ll do is we’ll create an earnout situation where if you hit X, Y, and Z milestones, whether it be revenue, whether it be adjusted earnings, whether it be customer retention or something else, then you’ll get paid additional funds at that time. So it’s like a bonus. But you know, as I mentioned, and, and, and I repeat this all the time ’cause it’s important as we tell our clients cash act flows.

You know, I I is the only thing, you have to be happy with that and you have to view any earnout as a bonus.

[00:08:33] Larry Heller: Right. And sometimes you may have, get all, may have all three cash plus an earnout plus equity. Correct. Can you just just touch a little bit about the different types of, um, sales, kind of like an asset sale, stock sale that you see, you know, the, what’s the tax ramifications of this?

Are you seeing more, is it strictly mo, mostly, um, asset sales? How, how, how do you, how do you see that? What’s going on?

[00:08:57] Gregg Schor: Yeah, so I’ll only, you know, um, [00:09:00] I’m dangerous when it comes to taxes. You know, we rely on, on the client’s accountant. Typically a buyer is gonna want an asset sale because they don’t want to inherit.

Past liabilities from the company, right? So if they, if they, if they do a stock sale, then they step into the shoes of the company and they could be liable for prior claims. So now that will be addressed in the agreement. But, you know, and you, you really can’t blame, the buyer doesn’t want any, any aggravation from anything that occurred prior to them taking ownership of the company.

There needs to be a compelling reason. Sometimes a compelling reason could be if there’s any licenses associated with. With the business, or maybe contracts can’t be assigned, but if they, if they step into the shoes of, of the, uh. Of the seller, then you don’t have to go through maybe getting consents of all the customers or, or suppliers.

If you’re a seller, you want a stock sale, um, because you wanna maybe offload some prior responsibilities, [00:10:00] but there’s also a, you get taxed at a much lower rate than if there was an asset sale. So there’s kind of conflicting interests. Sometimes what we are able to negotiate is even if it’s an asset sale.

We get the buyer to gross up the purchase price. So the net effect is as if it, from a financial perspective is the same as if it were a stocks sale.

[00:10:21] Larry Heller: Yeah. So when, when is the best time for, you know, for a, you know, an owner to consider selling, you know, all or maybe part of that company?

[00:10:28] Gregg Schor: Um, the best time it is, is really when the company is doing well.

We speak to many, you know, many business owners who say. Company’s doing great. Why, why would I think about selling now? And we say that that’s the exact time to think about selling is when you don’t need to. You don’t wanna wait until the business is on a decline and there’s issues, or the market looks like it’s, you know, for your type of product or service, um, isn’t as robust as as it used to be.

Um, you can get the highest valuation, you can get the, the best non-financial terms. [00:11:00] Um, you know, and you can get the best, the best purchase price, um, and you could walk away, right? You don’t need to sell. Um, and that’s actually when you’re the most attractive.

[00:11:11] Larry Heller: Hmm. So, and, and when should someone start really considering, you know, they, you know, they decide, you know, I wanna sell, but you know, people think that, you know, they wait till that date and then it’s just gonna be like that and sell.

So at what point should they really start either talking to you or start to thinking about selling the business at some point in the future?

[00:11:32] Gregg Schor: You know, there, there’s really no time like the, the present to start preparing. Um, certain things from a tax perspective you may need to do, you know, between one and five years ahead of time to, you know, to, to minimize your tax exposure.

Um, you wanna get your house in order before you’re under the magnifying a glass, the magnifying glass of a buyer. Um, so, you know, I think I mentioned earlier, usually they go, buyers want to go back three years for the, the, the financial statements. So the [00:12:00] p and l and the balance sheet. You want to get that in order.

You wanted to make sure that it could withstand due diligence. Um, many times our clients, you know, really the, the financial statements are just for tax purposes. Um, if there’s any kind of bank loan or, you know, line of credit, then there’s usually kind of a higher standard that’s required from the banks, um, with respect to the financial record keeping.

But if that’s not the case, as as as happens often, um. Again, the, the, the financial statements are, are really just a, a, a tool for, for tax purposes. Um, inventory is another thing that becomes a major issue in transactions, especially if it’s some type of manufacturing business or, or distributorship. Um, many times the inventory is not accurate.

It’s kind of backed into, um, during, you know, the end of the year. Again, for, for tax purposes, you want to clean up contracts. Sometimes contracts, you know, as we discussed, are not assignable. Sometimes there’s no [00:13:00] contract in place. Like, you know, we’ve had conversations with, with clients where, um, you know, do you have a contract with your main customer or main supplier?

And it’s, oh, you know, I know them for 30 years. We don’t need a contract, we just have a handshake. I said, but that, you know. That’s not gonna suffice with, uh, you know, with a buyer that presents too much risk. So let’s get a contract, you know, in place. Also, you know, is the owner too critical to the running of the company?

Um, that’s a bad thing when it comes to valuations and purchase prices and, and, and attractiveness to buyers that presents too much of a risk. They don’t want key relationships to be with the owner who’s leaving. Mm-hmm. Um, they want a, a management team. You know, the best thing you can do as an owner is to, is to put yourself out of a job and, and make it so that you’re not needed.

And the management can go on without you. That’s actually when the company is, is, is more valuable. And, you know, and I’m sure there’s things from your perspective as a, you know, financial advisor on steps that business owners should take while in advance. Um, [00:14:00] you know, well, I,

[00:14:01] Larry Heller: I know, I know one of the things from a, from an accounting standpoint and.

I don’t think anyone from the IRS is listening right now, but a lot of business owners put a lot of things through their, through their business. Um, so you, you kind of wanna clean all those up beforehand, right?

[00:14:17] Gregg Schor: Yeah. So, so we, I mean, we normalize and make adjustments for it, and everybody knows that that’s, you know, what’s done.

So what we’ll do is when we create our financial model, um. We’ll have a listing of here’s all the add backs and here’s, here’s, you know, here’s all the, the reasons for it. So, you know, it’s not only personal expenses as, as you mentioned, but sometimes there’s, you know, one-time expenses that wouldn’t happen on a recurring basis.

Maybe there was a major repair or a major purchase. We can actually. Pull those out, you know, and so that the profitability of the company is, is going to be higher, you know, as, as a result, because when we do the financial modeling, it’s, it’s [00:15:00] normalizing things. So what would, in a normal year, what would the expenses, so even if there was like a major litigation or something, you know, and there was a hundred thousand or 200,000 in legal fees, that would get added, added back and would kind of go on the profit side rather than, um, you know, on, on the expense side.

[00:15:16] Larry Heller: Right.

[00:15:16] Gregg Schor: So is there like

[00:15:18] Larry Heller: anything a prospective seller should be looking for in terms of, you know, when, when they’re going, you know, when they’re starting to put the business up for a sale? Um, you know. You know, is there kind of a, I, I know I’ve talked to some business owners and I, what I’ve told them is, you know, what are some of the deal breakers?

What are the things that you want? So, uh, so, you know, some said, you know, I’m not gonna sell to a private equity firm. Or, um, so are there any specifics there that, um Yeah. That you, that, you know, you kind of guide your clients through? Yeah.

[00:15:54] Gregg Schor: Well, we, we ask them what, you know, what, what, what’s your objectives?

You know, do, do you want to, [00:16:00] obviously the, the dollars are important, but what else do, do you wanna stay? Um, if, if, if yes, for what period of time are you, you know, are, are you willing to leave some equity in or do you want a hundred percent and be done? Is keeping the name of the business the same important to you?

Um, is keeping the location the same? Obviously, majority of of the owners want to make sure that their employees are taken care of. You know, are there gonna be reductions? So those are the, you know, kind of the, the types of things that we would like to know. Are there family members in the business that would wanna continue and stay?

And, and stay involved. So we try and match what the objectives are of the client to the kind of the matrix of buyers that we have. So it’s good for them to be thinking about all those types of things that are in addition to the, you know, monetary objectives.

[00:16:56] Larry Heller: So, you know why, you know, someone’s thinking [00:17:00] about selling, why, why, why work with a, you know, an m and a firm?

Is there a process kind of that you, that you do? And why should somebody work with an m and a firm,

[00:17:08] Gregg Schor: you know, for, for a few reasons. And, you know, I, I, I may not be objective when it comes to this, um mm-hmm. But you need to focus on running the business, right? That’s what you know. And the last thing you want to happen is for.

Revenue, earnings to go down when you’re ready to sell, you know, you want it to, to continue, you know, you want an upward trend. You also don’t want anyone finding out, you don’t want employees, customers, suppliers, certainly not competitors, knowing that you’re contemplating a sale. So we act as the single point of contact and everything goes through us.

We wanna handle the, you know, I say 80% of the questions that come in from potential buyers so we don’t disrupt or distract. The business owner, um, we know how to run a competitive process. Sometimes clients come to us and they say, well, you know, I was approached by [00:18:00] someone and I wanna sell it to them.

But it’s, you know, how do you know that you’re not leaving money on the table? You know, you have really no idea what your business is worth in the market. So we, that’s one of the first things we do is, is, is do evaluation. Sometimes the initial one we call a preliminary evaluation, where we give the client a very good feel for.

What we think the market commands, uh, we’ll think that their business will command in, um, you know, in the market under current circumstances. And y it’s good information for them to have. It helps them decide, you know, do I want to go to market now or not? We can also advise them, we think if you do X, Y, and Z and wait six months, 12 months.

You’ll see an appreciable difference. So we’ll take you to market now, but we recommend that you wait and, and, and, and make these changes. You know, it, it’s, you know, the analogy is, you know, do you want to sell your own house or do you want to use a realtor? You know, where are you gonna get? You know, where are you gonna net a higher amount?

What we find is we could [00:19:00] typically get our clients many millions more than they could get on their own. Mm-hmm. So even with them, them paying us, they still end up way ahead of, you know, of the game. Because of our involvement, because of our connections, because of our positioning. Even if we stick with the one buyer, um, that had approached them, um, we can still get the purchase price up.

The buyer now knows that. If they don’t make a, you know, what is a, uh, you know, a, a fair offer that we can now just take them to market so that now they have some external pressure to make sure they’re not just gonna low ball. Mm-hmm. You know, see if the client says yes.

[00:19:38] Larry Heller: You mentioned, uh, p, you know, mentioned po, you know, positioning.

You know, I’ve seen, you know, some m and a firms, they talk about the sim and why it’s important. Uh, can you just touch on that for a second?

[00:19:48] Gregg Schor: Sure. So the, the, the sim on the, the confidential information memorandum, it’s the story of the company, right? So it has the history, it has description of the products and services.

It, it [00:20:00] has, you know, two, we typically put, you know, some timeline of milestones. Um, we’ll put the organizational chart, but we won’t put any names in it. It’ll just be titles. Um, and very importantly, we’ll put the growth story. So it’s, this is what a buyer could do. To take the company to the next level.

Like a buyer is not necessarily looking, there has to be a good foundation, but they’re not buying it because of what you did in the past. They’re looking out what they can now do in the future moving forward. So the, the growth story is a critical part. Um, it and the sim a a, uh, a potential buyer has to sign a non-disclosure agreement before a client gets disclosed to them before they can receive the sim.

It, it helps qualify interest further. So they take a look at the book and you know, certain percentage of them are gonna say thanks, but no thanks. But some are gonna say, Hey, I would like to know more. They’ll come back to us with questions, maybe end up with a, a site meeting. But, but you wanna put the information out there because, you know, time is critical.

Also, [00:21:00] the, you know, the client is kind of, you know, we stage it, but they’re opening their kimono, right? They’re sharing information and you don’t wanna do that unnecessarily. You want it to be qualified. And staged. So the sim helps to do all those things.

[00:21:14] Bill Tucker: Hmm.

[00:21:16] Larry Heller: So, and obviously, you know, working with a firm that puts together a bet of sim may get you, like you said, millions of dollars, more about how you’re positioning this.

So last question, how long does it take the m and a? How long usually does the m and a process takes and kind of what happens after you’ve kind of have a verbal agreement? The verbal

[00:21:36] Gregg Schor: agreement

[00:21:36] Larry Heller: with the

[00:21:36] Gregg Schor: buyer. Yes. Okay. So the whole pro, it depends upon how prepared or not the, the seller is. And even time of year is impactful, right?

Because, you know, we don’t go to market now because a lot of people are gonna be taking off in, you know, towards the end of the year. Um. The typical process will take somewhere between nine and 12 months from engaging with [00:22:00] us for early conversations, um, to, to closing. Could be a little bit more, could be a little bit less.

Um, you know, it. A lot of it depends upon getting the, the financials from the client and how fast they could do that end of month, end of quarter. Some can do it faster than, you know, than than others. And, um, you know, it, it’s, it’s critical that they kind of get to that routine where every month we get updated financials because those need to go to the buyer.

I mean our, it takes us from when we initially go to market and we’d use the, the blind teaser first to contact the targets. Um, those that are interested in signing the non-disclosure, get the sim. Um, it usually takes us, would say. One to two months to have the financial model in place and have the marketing materials, and the client approves everything.

They improve, approve the targets, they approve the sim, they approve the blind teaser. Um, [00:23:00] usually takes, like I said, one to two months, then a couple of months in market answering questions, arranging site visits, you know, filtering out who, who might be the best candidates fielding the offers. Many times they’ll put a deadline and say, offers must be, you know, provided by a certain date.

Um, then you get a letter of intent. So we don’t, you know, go to due diligence. On, on just a a, a verbal is definitely helpful and it helps us to kind of focus on a few. Um, once the letter of intent is signed, that’s when things really kick into gear with respect to, to, to due diligence. Um. We caution clients that a letter of intent doesn’t necessarily cost anything for a buyer, except when they really get their lawyers and accountants involved, because now they’re, they’re spending real money so you know that they’re interested.

The letter of intent, really the only obligation or restriction is on the seller, is on our client because they’ll be what’s called the no shop clause that’s incorporated into that. That usually says, you know, because where the buyer’s gonna say, because we’re spending [00:24:00] money on accountants and lawyers and other advisors.

Um, we don’t want you to continue shopping the company, so you can’t talk to anybody else for, they usually start with 90 days. We, you know, try and get it down to 60 days. Um, sometimes you, you compromise in the middle. Um, so then we’re working on due diligence, which, you know, can be very stressful. For, you know, for a client, especially if they’ve been in business for many, many years and they’re very contract intensive and due diligence can take easily, you know, one or two months depending upon the type of business.

And I even tell clients there’s gonna be one or two times during this process where you’re gonna get so frustrated where you’re gonna say. You know what? Forget it. Mm-hmm. I’m done. I’m, I’m not doing this. They’ve asked this question already. I’ve given everything. Um, it’s just, you know, it’s just too frustrating.

The next morning they’re fine again and the, you know, the deal is back on track, but, but it, it’s, it’s normal. It, it, it can be very stressful, but we are here to, you know, to, to take off as, as much of the stress [00:25:00] off, off of the client’s head as as possible. About halfway, two thirds through the due diligence process.

When both sides are comfortable that it, there doesn’t seem to be any deal breakers, the, the buyer will provide the asset purchase agreement or the stock purchase agreement, whichever type of of sale it is, and that’ll start getting negotiated in parallel. Um, that, that could take, you know. A month, six weeks, something like that.

Again, it depends upon the type of business, if approvals are needed, if there’s licenses involved, um, and then, um, you know, then it’s, it’s typically a simultaneous signing and, and closing. Um, but again, you know, figure, figure nine to 12 months. Great.

[00:25:44] Larry Heller: All good, all a lot of great information. If you’re, if you’re a business owner and you’re thinking about selling your, your, your business, um, uh, Gregg, where can they reach out to you, to, uh, to, to contact you?

[00:25:58] Gregg Schor: Yeah, so our, our website is [00:26:00] protegrityadvisors.com. Um, my number is 6 3 1 2 8 5 3 1 7 2. Um, and my email is gshor, G-S-C-H-O-R, at protegrityadvisors.com.

[00:26:16] Larry Heller: Great. Thanks so much for, uh, for joining us today, Gregg. Thank

[00:26:19] Bill Tucker: you, Larry. I appreciate it. Interesting conversation. And Larry, thanks for, uh, for bringing us that conversation.

And listeners, thank you for joining us on Retirement Unlocked. If this episode gave you a clearer understanding of the business sale process, be sure to like, subscribe and share it with a fellow business owner. Who might benefit. Remember, a successful sales starts with smart planning, so let’s begin that conversation today.

We’ll see you next time on Retirement [00:27:00] Unlocked.