EP54: Insider Secrets From Merger & Acquisitions Lawyer on Optimising Your Exit

Dealmaker and innovator in the legal community, Jerome Fogel shares his secrets on maximising the value of the sale of your business.

Recently we interviewed an investment banker on how to optimise your outcome if you’re selling your business - but one of the other key team members in the deal is the lawyer.   


Lawyers see the deal from a fascinating perspective as they’re thinking about risks, loopholes, terms, issues, the negotiation and when you’ve got a great one on your side they can be a force to be reckoned with for the buyer – helping you get the best bang for buck and ensuring you don’t accept any terms that aren’t reasonable or favourable for you.  


In this week’s episode (our last in our “selling your business” mini-series) we interview Jerome Fogel from FP General Counsel.  He’s a deal maker, an innovator and a specialist lawyer who’s advised both buyers and sellers in hundreds of transactions, capital raisings, contracts, partnerships and structures.

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[00:00:00] Sean Steele: G’day everyone, and welcome to the ScaleUps Podcast where we help first-time Founders learn the secrets of scaling so they can fulfill the potential of their businesses, make bigger decisions with greater confidence, and maximise the value and impact they can create in the world. I am your host, Sean Steele, and my guest today is Jerome Fogel. How are you today, Jerome? 

[00:00:31] Jerome Fogel: Doing great. Yourself, Sean? 

[00:00:32] Sean Steele: Mate, I am absolutely super and excited about our conversation today. We've had a couple of conversations offline, and for those who don't know your background, maybe I'll give a few quick insights and you can correct me if I'm missing anything key. Fundamentally, you're a deal maker, right? You're a deal maker, but you're also an innovator in the real space. And you've participated in north of a hundred transactions, be they in corporate or sports or entertainment, you've been on both the buy and the sell side, capital raisings, a million different kinds of kind of contracts and agreements and structures. And you're also an off-site general counsel for some small to I guess lower to mid-size, mid-market kind of businesses. And selected in the last couple of years, if I'm not wrong, as a Rising Star in the SuperLawyers, which I think is really cool. And also, part of the EO Accelerator Program. For those regular listeners, you will have heard us talk about EO before, the Entrepreneurs Organisation. But that means you probably get to see a lot of businesses trying to scale and get some really interesting optics on some of the earlier stage ones. Mate, that sounds exhausting. Did I miss anything really key that you think I should have explained to people?

[00:01:37] Jerome Fogel: No, that's it. I see myself as a deal maker with a 360-degree view of deals. So, whether it's representing an early-stage company, that is raising money for the first time or they're more sophisticated and have a half billion-dollar valuation or venture funds that are being put together. We help them fund, or form their fund. And then on the third side, we work with athletes doing off field transactions and we're very deal focused, M&A capital raises, venture funds, so that's really the common theme. 

[00:02:13] Sean Steele: Well this is one podcast, mate. There's not too many that I can get my kids to listen to, but this is one podcast I'll definitely be getting my older one who's really, he loves business. He loves legal, he loves kind of economics and stats, and I'm trying to go; Hey, there's really interesting stuff that you get to do. There's a lot of creativity that happens in deals, mate. Like, there's so many to linking pieces. You have to have such wide knowledge, and then be able to really create an amazing outcome. So, I think, this will be fun, mate. I'm excited. And I guess the point of our conversation today is, I have a whole, you know, I've recently done a couple of episodes with Sean Flynn. I'm really trying to unpack the secrets for business, you know, most Founders who are in that kind of 2 to 20 mil range, if they sell at some point, and many are interested in some kind of an exit where they've got a transaction ‘bag of cash and walk away’ kind of model. And I'm almost doing a bit of a mini-series here, because you know, I've got one client who's just exited. I've got another one that's just embarking on the process. I've got others that'll be in the process in the next three to five years, and some may never sell and have more of a lifestyle business and that's really not their objective. But what I want to do is get them thinking about if I'm only going to do this once. Then I really need to put some effort into it, right? Like, how do I think about preparing to get the best outcome for me, given I'm probably only going to do it once. Kind of like, my wife always said to me, it's like a major piece of renovation in your house. She's like, you're probably only going to do it once. So, like, put the effort into YouTube, but you're not going to do this over and over and have time to affect it. You just got to accept that you're probably only going to get one crack. So, just put the work in. 

Jerome Fogel: That's right. That's right. 

Sean Steele: So, lots of ground to cover today. I'd love to talk about things like, some of the common mistakes, things I think, I’m really interested in things that you found in due diligence that scuttle deals. Because when you're on the selling side, sometimes you don't really know why deals gone cold. And actually it's because of stuff that they might have discovered during due diligence that you weren't really thinking about and all of a sudden it, it just made them a bit nervous, things that you think business owners might want to do in preparation if they've got, say, 12 or 24 months before they know they want to transact things that they should, you know, should they be doubling down and investing heavily to accelerate revenue growth or will plant some new seeds of new revenue streams to get their buyer excited? Or should they be really doubling down profitability, you know, reducing cost to sort of tightening things up? It's interesting set of optics. And one of the things that have always comes up for a Seller is, well, how do I, you know, if somebody, if I go out to market and someone says, oh, your business is probably worth three or four times, What do I have to do differently if I want to get six or seven? And what are the characteristics of a business that gets 10 to 15? Like, what’s the difference that makes the difference in those kinds of businesses? So, plenty of ground to cover. And let's jump straight in if we can. The common mistakes are made by Seller. What is the stuff that you see sometimes, I'm sure you end up rolling your eyes, sometimes you laugh, you probably see it over and over. What are some of the things you see?

[00:05:06] Jerome Fogel: Yeah, and first off, great coverage that we're going to do today. So, I'm really excited. I think, interestingly, I was having lunch with an investment banker today and we were just talking about what are the types of common issues that we see. And I think the big theme is that for the most part, it's the seller’s, like you said, first and only time. So, they don't have experience and they don't know what they don't know. And so, I think, but to be an entrepreneur, you've had to be very successful. You've had to boot-strap, you've had to be very scrappy. And so, you've been used to tackling new things. But when you're doing a sale, this is something that is unique, they're sophisticated players in this space, so you're dealing with a very different animal than your typical deal that you're seeing when you were running your business, you weren't dealing with these types of sophisticated players and numbers. So, I think that the stakes change, the first off the background is the stakes have changed. There are different players. And so then what happens is if you don't realise that, what you do as an entrepreneur is you may just step into the deal like a bull in a China shop, and think that you can make the deal happen. So, that's number one is no planning, just step into the deal. Hey, this looks great, and you run into a lot of issues. I think that's the first thing. The second thing is not getting advisors in your corner. Now, ideally, I love every entrepreneur to start early with the investment banker, with the wealth manager, with the attorney. It doesn't always happen. We get deals sometimes 11our LOI stage.

I've come in the middle of deals, but typically we like to work with a client, like I was working with a client four to five years prior to their sale. So, we're able to really get a lot of things together, get the corporate side together, we're able to get their IP side together. So, it's really important to be able to do that early. So, I think that, the third mistake is they don't start doing these things early. An institutional buyer especially, is going to look at corporate governance from inception to present. They're going to look at third party consents. Things that you wouldn't think of as an entrepreneur that you didn't have to run your business doing. But now these are going to be front and centre for a typically sophisticated buyer if you're in the 20 to plus million, even some of the 10 plus million deals as well.

[00:07:52] Sean Steele: I had a client, yesterday we were talking about a deal that they're just sort of embarking on, and he said; do you think now's the time to get the right lawyer? And I was like, absolutely. And if you think about it, you know, even when you haven't considered the fact that in due diligence everyone's going to see the contracts that you've got. And so, you know, what can we do to strengthen those contracts and tie down the right things and what about your IP? And so, now's the time to be having those conversations. Absolutely. So, we've already got tax planning, tax and wealth planning happening. We're making introductions to sales side advisors. We're looking at the who's going to be the right solicitor to help them on the journey because to your point, you've got to get that team organised and get the risk profile aligned, right? 

[00:08:31] Jerome Fogel: That's right, that's right. I mean, I think we have 70 factors that we look at because over the time of doing deals, whether we've been on the venture side, or the sell side, or the buy side, here's the common things that you need to address as a seller from a corporate governance perspective, from IP, from employment, from privacy, your cap table, all these things come into play. And then to your point too, it's the risk profile. So, I look at, some entrepreneurs are more cowboys, some are going to be more detail oriented and want to read the contract and get into all the details. I've had entrepreneurs highlighting different colours, different parts, and some don't read it. So, it's just a very wild range. To simplify it, I just tell entrepreneurs; Hey, listen, you know, think about this deal. Is this going to be a green light deal? Meaning, Go no matter what. Is this a yellow deal where there's caution or red where you're really not sure. But I have to educate the entrepreneur of what I'm looking at the deal.

For example, and you know this, I mean, when you present a deal, the highest bidder may not be the one that's going to close. And I have to explain them; Hey, if this is a newer entrant into the market, they're probably going to be afraid when they look under the hood versus somebody who understands the market. And maybe they bid a little bit less, but they're more likely to close. So, I have to educate the client a little more to make an informed decision on those colours. 

[00:10:05] Sean Steele: Yep. So true. Or they may be more flexible one of the buys because of their likely, profile of risk, as you just said, one might be quite happy for you to leave much earlier. And the other one's like, no way. Like they don't understand your business model, so they're not going to let you go anywhere in a hurry. And you want to be out quickly then, which not every entrepreneur does. But if that's a thing, then you better be speaking to somebody who actually understands your business model, has existing resources, can deploy people straight away if everything goes wrong, like their risk profile is lower. So yeah, they may not give you the same premium, but they're probably going to be much easier to transact with and get you maybe some of the other things that you're looking for in the deal, some of the other terms you want. 

[00:10:46] Jerome Fogel: Exactly. I think it's really important to know as an entrepreneur, I want one deal that I did recently, an entrepreneur had to stay on, I think it was 3 to 6 months, and he told me it felt like, you know, his wife got remarried and he was living in the basement because the deal had been sold.

The company was no longer his, but he was still there and the employees weren't his. He just kind of felt weird about it. But that's a, some entrepreneurs, they're just by nature dreamers and visionaries and it's going to be hard for them to, but I think staying for a few months does have some value. I know some want to wash their hands. I think there is institutional knowledge, especially, where you've had a lot, your hands in a lot of parts of the company. It's important for the entrepreneur to stay on for a few months to help the deal. And especially if you have an earn out, it's going to be your benefit to help out.

[00:11:39] Sean Steele: Totally. I mean, I've had deals that we wouldn't have considered letting the owner leave within 12 months because of the level of complexity, regulators would've been looking at who's the key person and who's the character of that person. And if there's a rapid change, they'll get really nervous. And on the flip side, I've done deals where we've had heaps of existing capability. We totally understand the nature of that business. We know what to do if anything goes wrong. And actually, we want those owners out as fast as possible because we know it's going to be painful, having to do, we want them out of the way so we can get in and start working installing our own management, et cetera. And so, it's a really interesting case. What about the due diligence period. I'm really interested in your perspective on this, especially given the legal bent that you bring to this conversation. I quite often, and we talked about with Shawn, how important it is to make sure that everything in the confirmation confidential information memorandum, matches up with what's in the data room. Like, you obviously don't want disconnects in that kind of information, but what are some examples of other things that you've found or you've come across in due diligence that the owner may not have even thought about that was in there where maybe it was something that was said in a management meeting, maybe it was something that you discovered that they hadn't really seen as a risk to them or scheduling the deal, but you were like; Whoa, hang on a second. Maybe this is not a good one for us to pursue. 

[00:13:02] Jerome Fogel: I would say, one of the number one issues is the corporate governance issues, especially not having all the proper board consents, written consents, even the stock certificates, the shares. Because a buyer wants to know that there's no other interest outstanding. There is no other options given. There is no other promises piece of the company. And if you can't show that, it doesn't really inspire confidence in the buyer, especially if it's institutional buyer, Sean, because institutional buyer, there's a lot of an analytics and analysis that's rolling up top. And so, if you can't show your house is in order, they're worried that this deal's going to be a circus to complete. And so, I think number one off the bat is showing you have your corporate governance in order would be a tell-tale sign for buyers to show you have your things together. So, that would probably be number one for me. I think third party consent is probably the number two issue. For example, let's say, Seller had a $10 million revolving line of credit or some kind of inventory loan. Let's say that loan needs to be paid off or will be paid. You actually will need an official payoff letter from the bank to close the deal, and an institutional buyer is not going to budge on that. But the bank's motivation, you're talking about people, unless you have the private banking side, for the most part, the wheels grind very slowly in the. So, that's going to hold up an issue. Third party consent… 

[00:14:50] Sean Steele: For example, they've got a loan. That loan is actually going to be paid out as part of the transaction, and that's fundamentally why you want to make sure that that financier is given pre-approval. That actually that that's okay and it's fully understood and they…Yeah. Okay.

[00:15:04] Jerome Fogel: And here's the payoff amount, or you have a real estate deal and so you have a warehouse and you've got inventory. Well, you're leasing… is the landlord going to okay the transfer, you have key contracts. Did you have provisions in there that allowed you to transfer in the events of an M&A deal or not say it would be unreasonably withheld, and the Buyer wants to make sure all these ducks are going to be in row, all the schedules are going to be in row. So, I think Sellers, for the first time, they have no idea what they're getting into, and sometimes in these agreements, they don't even have records of them, so you know, they don't keep good records of the agreements. There's issues there. So, I think that third party consents and sophisticated buyers will point out right away, you have to ask them, Okay, which of the most important things right now, and third-party consents will be one of the first things they tell you. And I think those can really slow down deals if you don't take care of them.

[00:16:11] Sean Steele: That was a real challenge actually in education M&A when you were playing in a regulated sector because you couldn't, fundamentally the regulator would look at the key people in the new Top-co, you know,whatever the parent company was. They'd actually look at the directors of the parent company and decide whether they thought they were fit and proper people to have ownership even of a subsidiary that's in a regulated space. And so, but you can't go to the regulator before the deal and say; Hey, can we have pre-approval? Can you look at our people? No, we look at that after you've done the deal. You're like, what? So then, you know, all of the kind get out of jail free cards become pretty important. That was a pretty material third-party consent that I saw a few businesses really get wrong… wouldn't approve it.

[00:16:54] Jerome Fogel: And in the US a very active administration on the antitrust side. So, you know, you need to get those things rolling well in advance, especially on the bigger deals. And you get specialists involved there too. 

[00:17:10] Sean Steele: And so, on the flip side of that, then what are the things, and some of them may be the opposite of what you just said, and some of them may not be, things you've found in due diligence that have actually materially increased your confidence in the deal because it makes them seem, I don't know, more professional. I've even more so got the ducks, or it's like another level up to what you would see in the general kind of population that you thought actually, that really strengthens our conviction in the quality of this business.

[00:17:35] Jerome Fogel: Right. Now that's a really good point. I look at, when doing an acquisition, I look at the responsiveness of the seller and their advisors. So, when we send out a diligence request, I look at how completely and thoughtfully they're filling these out. Some sellers will just say; Hey, I don't have this information. Or you know, you send a 10-page diligence request, you get maybe five answers. And I just tell the client, listen, this is not a really thoughtful response to these questions, and I don't know how much in order this business is if they can't give you thoughtful. So, I look at how thoughtful, how responsive are they to diligence. That's probably number one on my list. I would say number two would be numbers. There's a story, this is a true story of an acquisition that supposedly was being done of an Indian company. And this doctor essentially, had these recipes or formulas that he would sell to manufacturers, and it was showing incredibly profit. I think it was like 60% gross margin or something like that. And so, the buyer wanting wants to verify this, so brought in a forensic accountant, and the accountant tried to verify all of the receipts.

And then, you know, the doctor kind of met with the doctor and the doctor said, oh, you know, all this is valid. But then the forensic accountant said, okay, well, why do you want to sell? He said; Well, I have a mango farm I want to retire to and just enjoy at any rate, when they finally sent, all the invoices that were paid, they sent those invoices to the clients to get verified. And then the faxes came back from an unknown number and the forensic accountant suspected something was a mess. It turned out that the doctor had made up, fabricated all the numbers, and there was no real business. They hadn't done business with those clients in five years. So, the second thing is the numbers. Are they being honest and truthful in the numbers? And I think that is a big one for Buyers. Now, there's always some creativity going on in terms of an analysis of the numbers. And each side should be getting an analysis of the cash flow numbers. But I think that's a big one, Sean is, how honest and integral are they in their numbers. And I think that's a huge red flag. I presented you a scenario that was really an outlier. But honesty and integrity in numbers, that's a big one.

[00:20:46] Sean Steele: I've seen that. I mean, when you think about, you know, when I was growing up through the ranks, you know, I kind of got through the sales side before I sort of became a CEO, so I wasn't really that involved in corporate finance. And you know, I didn't have that grounding. And it was only later on that I realised in some of my first executive roles how much subjectivity there is in accounting. I just assumed it was like this kind of black and white profession where everything is rules and it's like, yeah, there's rules, but there's so much interpretation and there's so much in things like, okay, how are we going to recognise revenue? For example, our expenses match to our revenue are really in an appropriate way.

And of course, you can imagine being a seller who wants to prep their business for sale, all of a sudden changes their accounting policies, starts bringing a whole bunch of revenue forward on some hypothesis that they came up with a dodgy accountant and has kind of kept the expenses the same or even maybe further delayed the expenses that, you know, driving it from two directions to make the business look more profitable. But I think I always have to advise to owners is, just don't get cute. Like it wraps back to your earlier point. The quality of the people that you're going to be dealing with. If you're doing a professional M&A transaction, they are not going to miss a thing they see exactly what they're looking for.  

[00:22:02] Jerome Fogel: Yeah, yeah. They're not going to miss it. That's right.

[00:22:08] Sean Steele: No, they'll be asking because they have to understand your financials well enough to build their own model for the next several years so they can actually hypothesize what the return's going to be on this business. If they're finding funky stuff, they're going to be all over that. And to your point, even if there's a reasonable explanation, you got to remember that on the buying side, there's a whole bunch of people that want to scuttle the deal. And actually, it's a lot easier for people. It's far easier for people to come up with reasons not to do the deal than to do the deal because it actually kind of takes a bit of courage. So, don't give them ammunition by doing stupid stuff and trying to hide this and that to get a few extra dollars. Like to your point, if everything that you say and everything that's in that data room matches up, through the process, it actually builds confidence in the buyer. It makes it more likely that you'll get a deal done because you're not trying to come up with clever things.  

[00:22:57] Jerome Fogel: That’s right. And to your point, you know, buyers, the people in those positions, their jobs are on the line often. And so, they're going to be more risk adverse. So, you're absolutely right. The numbers should tell a story, the 12 months. But it should tell the true story. It should tell the true story of the business. And there is some flexibility, but once you go beyond that realm of reasonableness, I think you lose credibility and deal will get pulled pretty fast.

[00:23:36] Sean Steele: Really interesting example of that, I was looking at doing a deal. It was maybe 12 months ago. And it was a really interesting business and the owner was kind of getting close to retirement. He'd put in a CEO a couple years earlier. The business had been really good, major change had happened in the industry. They lost a whole bunch of money. They kind of went into negative territory. They brought in this CEO, he turned it around. He had all these new revenue streams. I thought the CEO was great, like really honest, super transparent, upfront. Everything was kind of matching and then they gave me their forecast in the due diligence, in the data room was a forecast for the next three years. And it was like, this year we're going to do 4 and a half mil. Next year we're going to do 12 and a half mil.

The following year we're going to do 27 mil. And I was like, What? I was like, Who? So anyway, I'm like, okay, walk me through the assumptions of this three-year forecast and the CEO sort of doing his best job. And I could just feel, I don't get the sense that he believes this at all. I was like; Can I just ask a question? Did you put this forecast together or did the owner put the forecast together? He's like… And you can see it in his face, like, I've been told that I have to sell you this forecast. I don't believe in it. I didn't put it together whatsoever. Every number that's in the past is absolutely factual and true. I can tell you what I think the forecast is going to be, but it's not going to be what you find in the data room. And I was like, how do you do a deal with this owner in that sort of circumstance? But that's a great example. He is trying to make the business look amazing, but actually reduced comfort and reduced our likelihood of buying, not increased it. 

[00:25:03] Jerome Fogel: Absolutely. I mean, you're trying to project into the future, and if someone's giving you phony numbers, you lose trust really quickly. Versus, if they had realistic numbers and could back up why, hey, here's the ranges of possibilities. You’d think, you'd have more, because then also it makes you wonder if this business is going to do so well, why are you selling, if it's doubling every year, why are you selling? This is another question. 

[00:25:35] Sean Steele: Okay. So then let's just say, you know, you've decided to sell in the next couple of years. You've got a bit of time to prep, so maybe it's 12 to 24 months of prep, and then you've been kind of going to market. Business is going well. It's growing, you know, 25-30% year-on-year, profitability is healthy and so on. And you're looking, you've obviously got a nice kind of organic tailwind happening. Everything is kind of working well in the business, what do you think when you put yourself in the buying side of, I guess, some of the different strategies they might play out in that previous 12 months? You know, kind of option one is just carry on as normal, don't make any big or interesting investments, don't see anything new, just sort of bunker down and keep going. Option two, okay, really start to focus on kind of tightening the belts, trying to really optimise profitability.

So, you've got a fatter bottom line, but the reality is you might have made the business a bit lean and someone may have to kind of reinvest to kind of add some capability because it's probably not going to support ongoing growth at that level. Or seeding, or you're actually making some, maybe not massive investments, but smaller bets on seeding some new revenue streams, new products, some new opportunities because you think that might help somebody see a greater opportunity in owning this business. But it might actually cost you a little bit, it may not be a CapEx investment, it might be an OPEX investment. So, it's going to cost you some earnings. How do you think about that from the buying side in terms of what you think is an optimal way to think about that kind of preparation period and what might help?

[00:27:08] Jerome Fogel: That’s great question. So, I think the first thing is, what is the buyer buying? So, for example, in a tech sense, it could be users. It may not be profitability. If it's a strategic acquisition, it could be customer list. It could be IP, is it an add-on to a platform? So, I guess, the question really is, first, who is the buyer and what are they really buying? Because if it's an add-on, they're probably going to strip a lot of the, I mean, we don't want to say this, but the reality is they're going to strip a lot of the team out and put them into their existing platform. So, that would be a different look. Or, are they looking to buy this as a platform company? Well then, so I think you have to take a step back and look at, what is the buyer really buying? So, I'll walk through each one. So, if the buyer is buying the users, the customers, well then, yeah, I think you want to invest, you want to keep to build that base up. It's not as much a function of EBITDA as it is in terms of the users. Like, for example, when Facebook bought Instagram, I don't know what the revenue was. I don't think it was based on that. It was based on future revenue users. So, that's kind of one piece. So now, if the buyer is buying an add-on company, okay, what they're buying is, they're buying sales, they're buying some of the profitability. So, I think you have to manage it as if it may not sell for two years. Like you think as a seller, you're going to sell it in a year. You don't know what's going to happen.

So, I think you have to continue to manage the business and invest in it. You do want to start, I think, trimming some expenses on the trailing 12 months side to maximise your EBITDA. But from the buyer's perspective, you don't want to hand them a falling knife, you want to hand them a growing business. So, I think you continue to invest, expand in sales. You try to maintain profitability. Now, if you're selling a platform company, that's different. I mean, you're selling the whole team, the leadership, the systems, so everything needs to be in place so that you can bolt on other companies to this. So, then I think at that point, the most important thing is the people and the team and the systems. So that a buyer says, hey, I've got a platform in place with the team, with the people, with the systems. And that's profitable. And so, then I think you're investing in the team and people in that sense. And you've seen it's a delicate balance. You have to be able to keep your eye on the business while you're trying to sell. There's a well-known performance drag that happens once the deal goes into LOI, the next two quarters usually performance stats, because the CEO is focused on the deal, thinking about being on the beach and not focused on the ball versus having system and people in place that keeps things running. So, I think, like I said, depends on each one.


[00:30:50] Sean Steele: And something that you said really. I think really is an important message for people to hear, which is you don't know how long this is going to take. So, you might be thinking, I'm going to play this so smart, like, I know I'm going to sell within 18 months and therefore 12 months, or whatever you've got in your head. And then you kind of build a strategy of what you're investing in, how you're cutting expenses, yada, yada. And then actually you find out you couldn't get a deal done, couldn't find the right buyer, couldn't get the right numbers, whatever it. You've still got that business, are you going to be happy with those decisions over the next three years if you're still at an… and so, you have to continue to build it in a sustainable way, which doesn't mean you don't think about it.

What I love about what you said is, start with the buyer in mind and think about what is the value that actually you're going to be creating for them. Because, and yes, it may not be one buyer, but it's probably going to be one kind of key type of buyer that's going to be attracted to whatever the most important core value sort of proposition is of your business and how they're going to leverage it for value for themselves. That's really interesting. So, what about then, and I know this is a hard question to answer, but the differences or the characteristics between a business that gets 3 times, business that gets 5 times, a business that gets 15 times, what are some of the things that you think are characteristics of business that get lower or high multiples? How do you…

[00:32:16] Jerome Fogel: And this really goes to like you talk about the value. So, I think typically a 3x multiple, those are businesses I'm seeing that are local or they're highly risky. I mean, it's funny, before covid e-commerce used to be kind of in that 1 to 3x, 2x - 3x space. Now obviously it's more favoured, but I think that the 3x is considered a very higher risk investment, possibly a lot of labour intensivity, maybe localised market. It's a higher risk investment, maybe less kind of room for growth, I would say on the three side. 5x multiple, this is like a great e-commerce business that has growth potential. This could be a products, consumer products company, could be apparel, but something that can scale to where the buyer can get in and grow it and start to really expand.

So, it's probably not going to be a local business. It's probably going to have some kind of international or national kind of reach. And I think then in terms of you get to the 10, 15, 20x, typically you're talking about a platform company, which for your listeners would be, a company that you can purchase and you can add acquisitions onto the company using that as a platform. And so, you know that 15 multiple, 15x is going to be a platform. You do see that 8 to 10x for high growth, hot industries that have a lot of growth potential where there's a lot of bidding going on. So, I think that 8 to 10x, you've got a hot industry, you know, possibly a SaaS company, something there, subscription revenue where there's tons of predictability. It's very scalable. I think that 8 to 10x kind of would command that, but that's kind of my general overview of what I think in each one.

[00:34:33] Sean Steele: That's really helpful. I think that's super true when I put on my own optics, you know, businesses that we've paid, businesses that we might have paid three times, as you said, were like fundamentally we're going to have to do a lot of work here. There might be a lot of turn-around, there might be high risk, a kind of vendor cliff, sort of risk like, you know, hey, this owner is going to leave and we're probably going to lose all these key relationships and we're going to have to have got in and got control of it quickly. So yeah, for us it's risky. It could go south. And so if we definitely can't overpay, if it's five times, then it's probably, and it was mostly services businesses that I'm involved in, less technology businesses, and at five times, you'd expect there to be a suitable level of management capability, you know? If those owners are going to depart, I'm not paying, You know, one of the things I always try to talk about with Founders in this sort of 2 to 20 mill space is, you got to remember that that is, if I'm paying five times your earnings, if the business doesn't grow at all, that's five years before I even get my money back. So, you know, that's essentially the calculation I'm doing in my head of going. Is that, you know, how fast is this thing going to grow? How long is it going to take me to get my money and how long till I get a real return? Like I'm basically buying your future cash flow and you are selling your future cash flow. So, you are going well, what would I have achieved over the next five years if 5x is the best that I can get, you know, what actually, I have picked that up in three years. If I'm growing at 30% year on year, maybe I actually get it in two and a half. Like, is it really worth selling this business now for the next two and a half years’ worth of earnings? Like, is that the right time to sell? But the 8Xs, you know, would have to have some strategic, you know, for us, like a, probably a pretty strategic benefit. Like, you know, yes, it's either high growth or strategically important, they've got a kind of market lockup, like they've got a real choke point or something in that industry.

It's really hard to unseat them because they've set a standard or they've locked up the key kind of supply of IP or whatever it is. And we can see how probably we can add a whole bunch more value if we're going to pay that kind of premium. We can see very quickly either at a revenue, either revenue synergies or cost synergies. We can see how we can actually bolster that quite quickly to bring forward that time for return because we can take a whole bunch of costs out and we've immediately got customers that we can take that product or service and sell it to tomorrow, and we think we can really convert on that. So, that's really, and I haven't, uh, other than the platform, the last CEO role that I built and that business is now a platform business that would be commanding that sort of 10x plus kind of multiple. And that's because, as you said, it's a platform. It's got existing capability, it's got suitable sophistication. You can just bolt more businesses onto it. It's already got six or seven businesses now. You could easily add another, you know, 8 or 10 or whatever. And actually, it's already set for that. So, it's got the healthy characteristic. It's a really interesting conversation. I appreciate your thoughts on that. What about, Jerome, negotiating tips? Everyone's always go have two perspectives on the negotiation. How do you try to think about prepping an owner for the negotiation in the deal? And also, what role do you see the owner playing versus the sell side advisor in the negotiation?  

[00:37:56] Jerome Fogel: I think that the biggest tip I can give the owner is this is a marathon. It's going to be a marathon, and some processes are designed to weaken and weary the seller into submission by the amount of diligence and getting concessions. So, you have to understand the deck is stacked a little bit against the seller here. But this would be my negotiating advice, and this was learned from…

[00:38:52] Jerome Fogel: So, the advice I got from Marty Lipton as an M&A attorney would be number one, you have to be, know what your facts. Know the facts. Know who you're dealing with, know who the buyer is, what they want, what they're about, what types of deals they've done in the past. Do all the research you can, know the facts, number one. Number two, you be patient and don't give in until it's absolutely clear that you have to. So, there's a lot of times in a deal where you're going to want to throw in the towel, you're going to want to give up, or maybe you won't, but you do not give in unless till you have to. You don't know how many deals I've seen where if you're just patient and you wait, you find out there's a way out. And so, leveraging the deal switches all the time, but you never give in unless you have to and you know that you have to. And then the third is, I think you'd just be a straightforward dealer like you don't have to fabricate or create things, you just straight up, you can tell a buyer, you know, this provision is onerous, right? I don't want a 10 year liability provision. I don't want a 40% earn out, something like that. I mean, you just have to be real clear and here's why. So those three things, number one, be clear with the facts. Know who your other party is. Know what you want. Two is, being patient. And three is, just being a straightforward dealer. And I feel like those tips have, I share those with every client. And again, Marty Lipton is the premier M&A attorney in the world. He is a alumni and someone I've reached out to and spoken to from my law school. And you know, he's got to know something. He's been doing deals for probably 60 years. So, that's what I show people. 

[00:40:44] Sean Steele: That's awesome. Yeah, I love that and I love the simplicity of that because it's easy for owners to get their head around. Can you gimme an example on the second point of where somebody may want to give in or give up or capitulate? Like what would be an example where someone might get wore down and that happens, but they need to kind of keep it together? 

[00:41:06] Jerome Fogel: What I have seen, Sean, is after the LOI phase and you're kind of in the middle due diligence. You're at the APA phase. I do see some deal re-treading and so I think you have to be firm on what you want and the deadlines, and be very clear. And I think that the buyer, if the buyer really wants to deal, maybe they want to buy it a little bit of a discount and they're going to look for ways to kind of start chipping away at the valuation. And you just have to be firm. Maybe you give in a little bit something here or there, but you don't give away the farm and you certainly do not want to give in. Because then they smell blood in the water and then maybe you haven't been managing your business while you're trying to sell it, and you're kind of in a desperate attempt and saying; Hey, my next quarter numbers are not going to look good. I need to sell now. And now you're in a bad spot, right? 

[00:42:12] Sean Steele: Yeah. You're just handing over cards, hand over fifth, a hundred percent. Jerome, I want to say a huge thank you to me for the wisdom that you've shared. What have I not asked you that you think I probably should have asked you? You know, things that, when you think about, I always tell people this because I think it's really key, but maybe it's a question that I haven't asked you. What else would you like to share with the audience that perhaps we haven't covered before we wrap up today? 

[00:42:40] Jerome Fogel: Well, listen, I think as a seller, money is really important and even some sellers who don't think it is, will say this. I will say it's important to realise what's really important to you as a seller? And I think money may be the top of the list, but it might be legacy, it might be employees, it might be the impact. And I think it's really important to think about that and think about the buyer before. Don't just run to the best offer right away, but look at a, is this buyer strategic? Someone who gets your business? And because when you start getting into a deal, you want this deal to work out. So, I think it's really about being clear about what that buyer looks like. And do they understand your business and are they going to be able to go through with the deal, not just necessarily the highest price. But all those things that are important besides the money, I think it's important as a seller to really think about that because there's some people sell their business and they're just bored out of their mind, and they need to go figure out what they want to do next. I think it's really clear to have a plan in place of what you're going to do, because I think that there is a little bit of a, one of my clients calls it “The what-now club”. You know, once you've become that millionaire, you never thought. Then it's like, what now? What's next? 

[00:44:00] Sean Steele: Yeah, totally. Yeah. I had quite a few, you know, quite a few conversations with a member of one of my YPO forums who'd sold a business and the number of “what now” conversations that we had over the course of six months. He's like, well, I'm only 50. Like, what am I going to do? I don't know. This is all I've ever done. What happens now? I don't know. Yeah, that's really helpful, Jerome. And I think, it's even more important in the context when you think about as the seller, you raised this earlier, it's a distracting process. It's like keeping your eye on the main game and on the ball of running your business whilst you're in a transaction, is actually really challenging. It's really challenging and it's exhausting because you're going to be working some long hours for quite a period of time. And if once you start engaging with that buyer, as you said, you want it to work because why? Because you could be spending a good six months in that process.

You could spend, it might take you, you know, out of four to eight weeks of initial engagement. And if you end up in due diligence, and maybe that goes for 90-days, maybe it goes for 120-days. Like, who knows, it could be a while. So, you could be six months in with that party. You want to have done the thinking before you started that process because you're not going to want to immediately come out of it and then immediately go into another one, because it is a hard process. So, that pre-thinking, I think about the right buyer for you, the characteristics of that buyer, how does that work with what you really want out of it? And having all that clarity, is really going to help you in the process, you know, minimises …As friction in the process, it's unavoidable. It's not easy. 

[00:45:34] Jerome Fogel: And if you start to due diligence early, before they get to it. If you get all these things taken care of, you're not going to be doing fire drills and scrambling trying to get it done. And that you're going to basically just have more time to focus on the business. It's going to be late nights, but you're absolutely right. Like if you get that stuff done early, you won't have to do, you don't have to deal with that. 

[00:45:55] Sean Steele: Yeah. Actually, I think I mentioned on a few podcasts ago, I give my clients a due diligence checklist just as a starting point and go; Hey, this is just the basics of what we're probably likely to get asked for. So, let's get this stuff organised now. Let's get it happening over the next six months so that at least by the time we get there, you've already got all that stuff. You're not having to think about that. And you're going to get a whole bunch of things that you get asked for that I haven't even thought of. So, you know, be prepared. There's still going to be new things. 

Jerome Fogel: That's right. Always. 

Sean Steele: Jerome. Huge thanks. I'm sure our community would've found that super valuable. How do people get in touch with you, follow along with what you're doing? Where would you direct them to if they kind of wanted more information? 

[00:46:31] Jerome Fogel: Sure, Sean. Thanks for having me. It's been great to be with you. Really enjoyed the conversation. You can go to our website. It's fpgeneralcounsel.com. You can email me directly at jfogel@fpgeneralcounsel.com. I'm happy to answer any questions I can.

[00:46:54] Sean Steele: Beautiful. That's very generous. Thank you. Thank you very much, mate. And folks, if you like today, the best thing you can do for us is leave us a review on your podcasting app. Just helps us get into the hands of more buyers. And if you know somebody else who you think might be selling in the next several years, I'd suggest you share them this episode because, there's a whole bunch of nuggets of gold in here that are really going to help them, this, and probably the last two episodes I did with Shawn Flynn is really going to give them a great head start in optimising the outcome for them, or for yourself in selling your business. So, thanks again very much, Jerome. Really appreciate your time today. 

[00:47:26] Jerome Fogel: My pleasure. Thank you, Sean. 

About Sean Steele

Sean has led several education businesses through various growth stages including 0-3m, 1-6m, 3-50m and 80m-120m.  He's evaluated over 200 M&A deals and integrated or started 7 brands within larger structures since 2012. Sean's experience in building the foundations of organisations to enable scale uniquely positions him to host the ScaleUps podcast.

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