EP52: Selling Your Business - What You Need to Know (Episode 2 of 2)

Investment Banker Shawn Flynn shares the reality and process of selling your business, and tips to help you maximise the value of your sale (second episode)

Selling your business is a big deal. It’s highly likely you’ll only ever do it once, maybe twice at the most.  But there’s so much you can learn, and prepare for early, that will help you maximise the deal value.  

If you’re keen to sell your business at some point in the future, you’ll love this episode. Today we interview (for the second time) Shawn Flynn, Investment Banker and mergers and acquisitions specialist who not only advises others but has built and sold his own businesses.  

We unpack the reality and process of selling your business, tips to help you prepare well and to maximise the potential value of your sale.

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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 business, 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 I am joined today for a second time, with the wonderful Shawn Flynn – Investment Banker. How are you, Shawn?

[00:00:19] Shawn Flynn: I'm feeling great, Sean, thank you for inviting me here. It's an honour to be here.

[00:00:24] Sean Steele: Mate, I'm thrilled to have you back. For those who haven't, I'm not going to go through Shawn's career history and stuff for you. For those who didn't hear the first episode with Shawn, please go back and listen to Episode-47 that was released on the 6th of September. You’ll learn all about Shawn's background. But fundamentally, Shawn is an M&A expert, is an Investment Banker. He's done a lot of deals. He's been an entrepreneur and a Founder and sort of built his own company. So, it comes from a bit of a different angle. And in our first call, we talked about a whole bunch of stuff, Shawn. We talked about the process for us, really we're trying to get into the mind of a seller and we're thinking about; well, if I'm a Founder and I'm going to sell my business, how do I get the best outcome for me? So, part of last time was talking about the process and the team and who you need around you, the data room, and how important that is in the context of the deal. We talked about maximising the value in the deal, of course, that's a big topic around, there's a lot of strands from there. We talked about understanding your walk-away price. We talked about other deal elements that can be leveraged to optimise value. And we're going to dig a bit more into that today. And also, how to reduce risk for the buyer to help you sort of optimise your outcome. And we talked a bit about strategic and financial buyers, so we covered a fair bit of ground. And today what we're going to talk about is, first of all, Management Meetings. You know, who is expected, what is involved, who to involve, maybe who not to involve. I’ve seen some interesting people brought into management meetings, terms that you can negotiate again to improve the deal economics. Because I think that's a really interesting space that a lot of people don't really talk about. You know, where are some of the terms that you can negotiate to improve the overall economics to your favour? When you're selling a business, it's really hard to keep your eye focused on the main game, right? Like it's, it's hard to keep running your business because it's a very distracting process, especially if the business is a bit smaller. So, we're going to talk a bit about that. And then some secrets from the buying side. You know, some of the things that actually as buyers, because both you and I, you've obviously spent, you are professional in this space and I spent a fair bit of time in being on the buying side. So, what are some of actually the things that we might think about as a buyer that give us an advantage in the deal, so, sellers can have that kind of in their mind. Might talk a bit about bio psychology and motivations like, you know, which I think some of the things that come out in a letter of interest or indicative sort of letter of interest, things that will help us understand where someone's coming from. And finally, I guess just changes in the landscape. You know, things that are changing, the nature of the questions that are asked or the due diligence requirements, whether that's cyber security risks now, or everyone's got retention issues. So, how does that sort of play out in their process at the moment? What about work from home and hybrid warning and the impacts on culture? How's that all playing out? So, a fair bit to cover, but why don't we get stuck straight in Shawn, management meetings. For someone who's never on the selling side, been involved in a management meeting as part of an M&A process, what's expected, who's involved? And if you were the Founders selling that business, who would you consider involving in the process, if anyone? And who would you not involve?

[00:03:31] Shawn Flynn: Oh, okay. So, we're going to cover an awful lot today, so I'm pretty excited about it, especially those last topics you mentioned. You know what's going to be talk or what's currently talked about a lot with the work from home, work remote, IT, all those, so this is going to be an amazing episode. For the question right there, Management Meetings. Okay, so that's very interesting. The management meetings, so think of it as you're running this process and you've just sent out maybe your confidential information memorandum, right? And now people are asking for questions. Some of them will say; Hey, you know, before… let's go back steps. Just reminder, everyone listen to that first episode. But you know, you got your market material, you go out, you might send a blind profile, then sign an NDA, they get more information, confidential information, memorandum is built off the information in the data room. Then that leads to an indication of interest and then maybe a letter of intent. Then you find that one person going to due diligence. So, in that process, when the CIM is sent out, people will start asking question. One of the questions that they'll ask is; Hey, I want to meet the Founders. I want to meet the management team. I want to know them. And yes, there can be pushback on; Hey, you know, we're going to put that later on the process. But there are people that will insist; Hey, I'm not going to submit an indication of interest until I get a conversation with the Founders. Even if it's just a short one, there's people that will insist that. And so, at that point you have to decide, you know, okay, in this process, are we going to allow this or are we not going to allow. If we don't allow, well, we're getting rid of some of those people, but if we allow it, it's taken those Founders time away from their business. It's kind of that distraction, but also you can look at it as; Hey, this is good practice for them for the later meetings. So, use this as kind of that warm up for that World Series later on, if that makes sense. So, say you're okay with the management meetings. Say you'll do a few before the indication of interest between that indication of interest and the letter of intent, you're pretty much going to have manage meetings with everyone that you're serious right then. So, there'll be quite a few in that gap, and maybe there might even be a second round of. You know, management means between the LOI and then maybe a final dance partner that you pick. So, there could be a couple meetings here because you know, there could be a lot of money on the line, right? People want to get to know this team before finally saying, okay, here's the offer that we're going to submit. We're going to spend all this money and resources going through due diligence because we're serious buyers to them and they want to, before doing all that, say; Hey, you know what, we can't work with these Founders. Or, hey, we're more impressed by these Founders ever, now that we've actually sat down and talked to them. And you know, it can go both ways. So, for those Founders, say there's an agreement to have one of these management meetings with a potential buyer. One, who should be involved. You know, at the very beginning, you might want to keep it very simple. Later on, they're going to want to meet everyone though, all the key people, you know, that C-level team. But at the very beginning, let's just talk about that. Say you're okay with having a 30-minute meeting, but they're like, we need an hour to have questions, or we need an hour and a half, or, you know, you can kind of gauge their interest by how far they push for these meetings and how much time they want. And some people just go, here's my calendar link, find a time. And you'll look in there 15-minute spots or 30-minute spots, like, well, what's going on here? And then others, you'll say; Hey, you know, we're only doing a 30-minute meeting. They'll go, no, no, no, no. We're getting our whole team there, or we're getting these key decision makers. We want 90-minutes minimum to do this. And you're like; Wow, they're taking this serious. So, it is a way to gauge early on who those real potential buyers are and who are the people are just looking. I know I'm going all over the place, so you are going to have to listen to this episode two or three times.

[00:07:22] Sean Steele: That's good. That's good.

[00:07:23] Shawn Flynn: Back to the Founders. Say they're okay to have this meeting. First thing you should do is tell that group that wants to meet them; okay, we're okay to meet you, but you need to submit a question set before. You need to give us what you want to talk about, kind of the outline for the meeting, and why? You don't want this team that's hasn't been in one of these meetings before, to get some curve ball out of the left field and just go, Wait, what? Why do you ask us that? We don't know what's going on. Make them look bad. No. Have everything in advance and even say, honestly, because they're going to be busy running this business. Okay, we'll have this meeting a week from now, but you have to send us the question set five days in advance and we're going to review those questions first. If they do it the night before, you've told them advance, they agreed to it. This could be a warning for later on. You know, have everything in advance. Use that with the Founders and coach them. If you're one of the advisors, if you're working with them, go through those questions. Hear them, give feedback two, three times to walk them through it. Because it's just like pitching to raise capital, right? That first time you do it, you're going to be nervous, you're going to, what's going on here? But then when you go through these questions multiple times, you're going to have that presentation. You're going to be calm, you're going to be relaxed, you're going to come off as professional, you're going to come off as confident. Say there's two Founders, or three co-Founders, or you know, the CTO, CFO, and CEO. They're going to know when to answer what questions, how to take turns. They're not going to step on each other's feet and just kind of seem like they're arguing and bickering with each other. It's going to be nice and smooth. So, practice with everyone multiple times before those meetings, then go into the meetings. Now, on the other side, the buyer's side, who's going to show up? This is a surprise in many cases, this early on especially, you might be thinking, alright, we're going to get that key decision maker, that management director of this group that's managing a billion dollars and I don't know where this associate. And you're like, wait, what? Where did this one guy come from? We have three people here, and they got one there. You know, ask them in advance when you send the calendar invite or however, who's going to be there, what's their position? We'd like to know what their LinkedIn. Do that the same with the question. Say, get all this information in advance. Sometimes they might just say, it's just going to be me or one person. Okay. Go back to the team, go; listen, there's only going to be one person on their side, this could be a good practice for us, or maybe we avoid it. Maybe we just get their questions set and say; Hey, we're going to answer these questions for you, give them back. We're really more interested in having more of your team there. It is kind of a discussion. But maybe just for the other side, this is kind of their event process to see how eager you are to work with them. It works both ways. Other times there's been, you know, that first meeting where you thought one person was going to show up. Next thing you know is one person, but they're in a conference room and there's six or seven people on that table and you're like, wait, wait, what's going on here?

[00:10:23] Sean Steele: Yeah.

[00:10:24] Shawn Flynn: Then you start sweating when you see everyone in the room. But luckily, you've had many practices. You've gone over the question set, everyone's calm, relaxed, everyone's good, and they're having a dialogue. Now, sometimes these dialogues are those questions, but then you know, often tangents, but also, the team itself, very early on in many situations are kind of judging the personality of those Founders. They want to see, hey, are these guys coachable? Can they work with us? You know, what would that post-acquisition really look like with our cultures merging together with them working together. So, a lot's happening, and we may not even be at the IOI phase, you know, and this could just be that one meeting.

[00:11:09] Sean Steele: Well, Shawn, when you're thinking about from a seller's perspective, they've spent all this time in preparation and their due diligence, they've got all their data together and then they've got the marketing material and they think, you know, we're selling our business. And you're like, yeah. But actually to your point, that first management meeting, like any other, like any meeting you have, you get a gut feel really fast. Do I like this person? Am I willing to work with them? Do they seem influenceable? Do they seem professional? What is that going to mean for the rest of their business? Like, if you've got somebody in who seems like really unprepared, scattered, can't answer things very succinctly or waffles on forever. Even that, like their inability to be succinct. I mean, we've turned down deals. I've turned down deals as buyers where I've just gone, yeah, that guy took 40-minutes to answer a question that you should be able to answer in less than 60-seconds. Like, can you imagine working with that guy over the a period of time? Like that would just be excruciating. He might have a great business, but we can't work with him. Just exit the process now and save us all some time, like that. People don't realise that they're very much buying you. Now, whether you are staying for a long period, you may be exiting very relatively quickly. So that also probably plays into it as to, well, how long are they going to have to work with me? But the reality is they are gauging the way your business is run based on the way that you present in these management meetings.

[00:12:32] Shawn Flynn: Yeah, and one thing to add on. It goes both ways. So, it's not just the buyer analysing the seller. The seller should be analysing the buyer. And most people forget this to say, hey, at the very end, leave some time so we can ask your team questions so we can ask, and these questions, you know, you don't need to send these over to their side in advance. You just have your questions that you've kind of; hey, we looked at your website and we've seen your portfolio companies, how do we integrate with those? What's the onboard look like? Where do you see us as that role moving forward six months in, a year in, and it's an opportunity for that team, the sellers, to also be analysing the buyers and ask them questions. And for some reason I see a lot of people not actually preparing for this in advance. They're just thinking, okay, we're going to be interviewed, we're going to be the ones getting all the questions asked to us, when this is an opportunity for both sides to ask each other questions, joke around, see how they like each other, see if they can really visualise what that relationship looks like, because I mean, Sean, and if you have a story or anything you'd like to share, but you know, everything is all rosy. And then once you hit due diligence, emotions fly on both sides. People start saying… and if you weren't friends before, you're not going…

[00:14:05] Sean Steele: You are not going on the other side of it. It's absolutely a chance to build a bit of rapport, isn't it? And you know, because yeah, the reality is once you're into negotiating terms and deals, like you've almost got the honeymoon on the other side and the honeymoon right up front, but in the middle it's like your relationship's being tested from every possible angle. Your patience is being tested, your boundaries are being tested, everything's being tested in the middle. So, it is a chance to establish rapport, but it is surprising how few people prepare well for management meeting on either side. To your point, I know that we've had deals where we have put some junior people in front of people who may have been very smart and intelligent people, but it really annoyed the Founders appropriately because the way they engaged was very transactional. There was no relationship there. It was like they just sort of came in with their 12th version of like, okay, question one, question two, the Founder is like, hang on a second. Who am I dealing with here? So, yeah, we've made mistakes on the buying side too.

[00:15:08] Shawn Flynn: Because I mean the Founder in a situation like that, hopefully they're running a broad process and they're going to be talking. Couple of other potential buyers in the next either day, two days. And they're going to remember and compare you to them. I mean, so if they're thinking, okay, you know, their offer when the IOIs come, this one's a little bit better than this, but we have a little asterisks because we didn't like these guys. And that guy… why did he make that comment? It could make a big difference,

[00:15:38] Sean Steele: And on the flip side, I would say, I've seen the opposite of that, where if you've got a buyer who actually has bought numerous other companies, one of my first questions where it may not be right up in sort of merge the many in one, but I'd be wanting to talk to the Founders who may still be there, who've sold to that parent company to find out what their process was like, because again, you're getting all of the sales spiel up front. What was the reality when they were onboarded? How did they get integrated? Do they still have autonomy or did they have everything stripped off them? Like, all of those questions that you're sort of worried and concerned about, maybe there's a way to find that out in that earlier stage process.

[00:16:18] Shawn Flynn: Write it out and then be prepared to say, Hey guys, at the end of this meeting, I want to ask you guys some questions. And lay it all out there. And if there's pushback, if there's hesitancy, if they're like, why do you want to know that? Red flags for later. So, yeah.

[00:16:35] Sean Steele: So, then what about, because I know there's a lot of other elements to that, but I'm also keen to, to keep progressing. What about some of these terms that you can negotiate from your perspective that, especially if you are a patient, I know we were sort of talking about one offline, but you know if you're a patient…some people are selling their business because they're at a stage where they just want to be out of it. They want to be out as fast as possible. They want maximum cash, they want limited deferrals of anything. So, they're the ones that are like, oh, no. I remember trying to buy a business off a guy who has a reasonable size businesses, maybe 25-30 million of revenue, reasonable EBITDA, decent size team. And he was like, well, I'm going to be out in three months. And I was like, that's not going to happen. But of course as a buyer, you're going; why does he need to be out in three months? And I know that he's been in a process trying to sell for like a year. Why is he still in such a hurry to leave this thing? And so you really start questioning the motivations. And sometimes that's appropriate. And sometimes that's fine. I guess that the point is, those buyers who still really believe in the business and maybe they're happy to stay involved in some kind of way, or essentially take more risk over time, have a fair few more levers, I guess, that can be pulled to optimise an outcome for them. What are some of those levers in how you think about it Shawn?

[00:17:58] Shawn Flynn: Yeah, great question because especially the time timeline because I mean I've been having quite a few conversations lately of just people that don't, going back to the first episode, understand the entire timeline of the process and that transition period where they're thinking, they might be older in their late 60s, and they're thinking, I'm going to sell this business and then go on vacation, and you're going, actually, you're going to sell this business and then be around for three to five years. So, you might want to think about selling it now versus selling it in a few years from now when you're now 61-62, then you'll be 65, leave when you're 68, 69. It's one of those things where a lot of people don't understand that, you're going to be asked to stick around to de-risk the whole transaction. And people, you know, one side wants to de-risk things as much as possible, which is understandable. And that goes back to kind of deal terms and price and everything else. So, I mean, there's endless things that could be negotiated. And the more time and less pressure and better situation you're in, the stronger position you are to negotiate those things. If it's one of those 3Ds, what is it? Death, Disease, Divorce, if one of those things happens, well, I mean, the death one, you can't really push too much, but divorce, disease, you're not going to be in a position to really push back. You're going to have to kind of take what you're being offered. But if you're able to relax, take a deep breath, things that you can negotiate, can be anywhere from that future employment agreement, what's your salary? What's your title? What's everything after the transition, your vacation, all those things to, okay, let's talk about the terms of the agreement itself. How much is cash? How much is a seller's note? How much is an earn out? Rollover? The seller's note, what's that tied to? Revenue, EBITDA or is it just employment for being around for a certain amount of time.

[00:20:09] Sean Steele: Give us an example just with a, I think in Australia, maybe sometimes we call it Vendor Financing rather than a Seller's Note. But just give us an example of Shawn with the seller's note where you've seen maybe somebody get a better overall price, but some of that money's being deferred through a seller's note. Give me an example of that?

[00:20:26] Shawn Flynn: Yeah. So think of it this way, it's kind of that risk to reward, right? If it's just all cash, then there's less… well, more risk for the buyer, less risk for the seller. So, if they want a higher price, well maybe that seller will take a little bit less cash, but the seller's note and that seller's note could be saved over three years, you get this amount of money every month for those three years. Or the first year is a holiday, you don't get anything. But then after that, every month you get this much, or every quarter you get paid this much or every year. And then at the end, there's this balloon payment or there's the way that you could structure a note. There's infinite number of ways to structure it. But you have that debt component where there's recourse. So, if it's not paid, you can go back after the buyer. Whereas like an earn out, which is more risky on your side, that would be tied to something. Maybe it's revenue or EBITDA or like I said, maybe it's just you being employed there for a year on good stand without getting fired. Who knows? It's tied to something where there could be that instance where, okay, we're doing it on our side, so we're not actually going to have to pay this person. And maybe they fire you right before, maybe they don't hit numbers, maybe, I don't know, spend all this money on this other thing. So, this part of the PNLs, whatever it is, and then there's that rollover component where it's, okay, I'm taking some of my money or equity putting in this new entity that hopefully years from now, there'll be some type of exit. So that seller's note, I mean, think of those as the risk where cash is the least risky for you, but most risky for the buyer, versus the other end, a rollover is most risky for you, least risky for the buyer and where you want to play in that spectrum. And that kind of ultimately, or no, that kind of adjusts that price from the lowest price to the highest price and everything in between.

[00:22:37] Sean Steele: And I think there's an interesting question in there. Let's say that you're selling to a strategic buyer. Some strategic buyers may be really happy for you to leave or want you to leave actually quite quickly. And some may really want you to be involved and not even be interested in a deal if you are going to leave at any point soon. So, you know, I advised a client a year ago that was, the deal structure was really; Well, we're going to take 30% now. We want you to stay in the business. We want you to continue driving this business for the next five years. We’ll buy the other 70% in five years at a pre-agreed multiple. So now we're both aligned on just trying to maximise your earnings over that period and we're really working in partnership. I also advised on another deal not long ago where it was a strategic buyer and because they had a whole bunch of capability in same area as this business. So, they understand the business model, they've got plenty of people, they've got plenty of other managers. They actually wanted to get the Founders out of the way sooner rather than later. And that also aligned with what the Founders wanted. So even though when the strategic buyer said; Hey, well we'd really like to defer some of this deal. You know, we would like to take 30% of the buying price and spread that out of the next three years based on the earnings of the business. And they're like; Yeah, but you want us now, so, we've got no influence over how this business performs in the next three years. So, that doesn't work for us. And so, to your point, it's nice to know that there are negotiable elements in there, but I mean, they can materially change the outcome of the deal in financial terms if those things actually play out. But of course, as you said, there's risk. If you take too much risk as the Founder and you defer things because you're really trying to get a total overall price that you think is higher, but you actually lose influence over being able to drive the performance of the business. You may find that the new owner actually does a terrible job in your business and that sort of evaporates. So, it's never easy to figure out, but it's good to know that there's flexibility in there.

[00:24:41] Shawn Flynn: There's two things that while you're talking, I was thinking of that your audience might like. And that one of them is having that conversation from day one with you and your co-Founders, whoever has equity, how flexible we are with the deal terms going into the deal and that way at the very beginning. Because when you have these management, going back to the management means they're going to sneak in at the end. Hey, just kind of wondering what type of multiples are you looking for? Hey, just kind of wondering what type of deal structure are you looking? They're going to try to sneak this in somewhere in that conversation to get an idea of what to put in their offer to give them the best opportunity or kind of know where they stand and just going into that going, yeah, we don't know. Or, you know, actually we're very flexible. We do want a pretty big upfront cash component, but everything else, we are flexible but it really depends on who's sitting on the other side of the table. You know, that's a pretty good answer. But knowing where your team, you, the other Founders are on day one going in the process is going to really help when narrowing down who you're going to go to the dance with, and sorry, there's a plane going on overhead. But having one of those conversations very early on; Hey guys, hey team, how flexible are we going to be with the deal structure? Are we looking for a cash exit for all of us? Are we okay with some of this creative finance and to get us a bigger value? Let’s talk about this now so that while we're going out to market, we're targeting the outcome that we really want. So, that's one thing. And then the second thing was…

[00:26:18] Sean Steele: And, sorry, actually just on that point Shawn, you may also have difference in the Founder of motivation. So, let's just say you've got, you know, three directors and the company who's buying you really wants the main, the CEO to stay and to continue driving the performance of the business because that's just the way that they sort of have their organisation or their portfolio, but actually they're quite happy for the other two, they might have their own CFO and whole finance teams, they're quite happy to, and maybe interested in the CFO exiting earlier, or the CTO or whoever else it might be in that business. So, the nice thing again is, it doesn't have to be all at one. You know, if you've got different motivations, it's about having a bit of clarity as to who's going to be flexible on what things, because yeah, somebody might want to be out now. Somebody might be really want to continue on for the next round.

[00:27:03] Shawn Flynn: And that's also, that was going to be the second one I was going to say. If you have that team or that company that's working without you, all the processes are there. It's a smooth oil machine. You going in and out is not going to affect those terms, that price of this deal, as much as this person, hey, we've discovered through our due diligence how valuable you are, or just having conversations. We've discovered that really this company can't run without you here, you have to stay for three to five years. Or the other one; Wait, you go on vacation every quarter for a couple weeks. That's odd. And everyone here on your team seems to know what their Key Performance Indicators - KPIs are, and everyone knows what they're supposed to be doing, and they have all these process. Huh? You know, there's a definite difference value of you sticking around in company one versus company two. And that's huge.

[00:27:57] Sean Steele: I think that's such a great comment. You know, I'm in the middle of building this ScaleUps Roadmap program, which talks, you know, it's helping Founders develop a growth strategy to maximise growth rate, but ultimately valuation as well as scalability. And so, one of the key points in there is, to the extent that you've built management capability that can be relied upon to that extent, you actually just have significantly more options. To your point, you know, I've looked at a lot of businesses where the Founders are very, not only intimately involved in the business where you know the business couldn't be done without them, but actually doing, like many Founders, right? They are hustlers. They're often doing 5,000 different things in the early stages of the business, and so they may have picked up all sorts of random jobs. So, you know, well, this Founder, I don't know, there's co-Founders, this Founder does the accounting, the bookkeeping, but they also run IT, But they also run, you know, they do partnerships and then this one's doing marketing and they're the CEO. And so, you're going; hang on a second. It's not like I can just replace the two Founders with two roles because they're actually doing part-time jobs of about six or seven people. That actually becomes really difficult as a buyer to get your head around how you're going to de-risk that process. And those Founders go, yeah, we're really keen to get out as quickly as we can. And you're thinking this is just no way, that I'm not going to have a big cliff and that I'm going to have to deal, I'm going to have to have a lot of capability, or have to add back in a lot of expenses into the deal, which probably kind of leads us almost onto our next point, some of the secrets from the buying side. We're going to have to add back in a lot of expenses into the deal to get the EBITDA that I am basing my price on to essentially account for the fact that I'm going to have to load in a whole bunch of money into this business to cater for these people who are going to leave, who are doing all these different jobs.

[00:29:47] Shawn Flynn: Yep. I mean, your audience trusted this conversation comes up so much where it's okay if you two leave, I have to put in this person, this person, this person, this person. Now we have to adjust the EBITDA for their salaries. Move it down and yeah, we were telling you we're going to give you 5x multiple on that, but now the new EBITDA is this and you're just looking at it. And this one group thought they were so smart by not hiring and just working harder, but then when it comes time to sell, they're dinged for it. And it's common.

[00:30:23] Sean Steele: I had a call probably, actually, I think it might have been, after your episode. I had a colleague that I'd known for a while. He rang me and said; Hey, heard the podcast with Shawn. You guys were chatting about, I've really been thinking about, I wanted to sell my business. And he goes, but I am so integrated into everything and I've really just been trying to optimize my EBITDA because I assumed, the higher my EBITDA percentage, the better deal I was going to get. And I was like, how would you even have conversations with anyone in a due diligence process? Because you're doing like everything in this business. He's like; yeah, you actually have to invest in the business, probably reduce your EBITDA, but get to something where that it's actually got some decent management capabilities. So, you've got some flexibility to what role you play because then you may stay on as a consultant. Maybe you stay on in part-time, maybe you own one segment of the business because you're really good at sales and you're happy to lead the sales team but not do anything else. Like there's lots of options that become available as long as you can de-risk it for the buyer.

[00:31:22] Shawn Flynn: And something with that is you might be scared that EBITDA is going down, but with the new multiple you're getting, the business itself probably is going to be worth more.

[00:31:31] Sean Steele: Yeah.

[00:31:32] Shawn Flynn: Just throwing that out there, the number of buyers that will come in interested in it versus your select few that is like, yeah, we're okay with this one guy doing everything to this. Oh, wow, there's everything, the team is in place, the processes, the competition that will bid for that company. It's going to be more valuable. I mean, yeah.

[00:31:51] Sean Steele: Hundred percent. It's really true. So, what about, okay, a couple of, let's put our buyers hats on, Shawn, you and I, and think about this from, like, I know when I've guided clients or had to advise them in the background on a deal, they're looking to learn from me what I might have been doing as a buyer that gives me an advantage in the process so they can try to mitigate that risk or kind of hedge against it in some way. And so I'm really interested to get your thoughts on things that help the buyer build a bit of advantage in the process. And you've mentioned a few already in some of the questions they might ask early because they're trying to understand your terms so they can negotiate around those but kind of create a bit of positioning. One of the things that I see, and there's probably a lot of different examples of how this plays out, is time and delays of time. And what I mean by that is, when you are the Founder, let's say the due diligence team will probably say; hey, this is probably going to take us like eight weeks. And then, you know, okay, four weeks for manage meetings, eight weeks of due diligence. And then we'll all be done. It'll all be done in three months, all tied up with a nice neat bow. And then, you'll be paid kind of quickly thereafter. And I don't think I've ever been in a process that's actually taken three months. I think that would be like a pretty incredible outcome. But the reality is, as the buyer, once the sellers engaged, let's say they really like you and they really want to do a deal. If you can get to the right terms, they really want to make this thing happen. But once you're into diligent to finding out a listen new information, as a buyer, every month that we're going through due diligence, I'm getting updated reporting on how your business is performing. And so, let's say the business has been going really well, but because your businesses are a little bit small, the reality is the due diligence process is a distraction. And actually, it's pretty hard to keep the focus on the main game of the business whilst you're in this due diligence process. And so sometimes things start to languish a little bit. And what happens for me is I've got this wonderful spreadsheet that you've shown me of like how the business is going to grow, but you start missing a few numbers. And because I'm starting to see you miss numbers, I'm like, okay, I really want to see then the month after that as well. And so maybe things start to take a little bit longer. It takes a little bit longer to get back to you or ask for a few more things and each month of delay that starts to creep in, is starting to annoy you because you are losing focus on the main business you want and you start to get to the point where actually you really want this process to end. You might really want to do a deal with me, but actually you getting annoyed and you actually almost start to become more pliable to maybe some of the terms being flexed because I'm going, oh, you know, the business isn't going quite as well as it was, or quite as well as you forecast. So now we're getting a little bit nervous about the multiple and the risk to us, and so you can see this kind of playing out where the delay is actually really play into my hands as a buyer and out of your hands as a seller. What are some of the things that you see or that you use, I guess as a buyer?

[00:34:50] Shawn Flynn: Well, let's just go to the management meetings. Let's just go right back to there. It's not uncommon for them, so why do you want to sell the business and the Founder to give up way too much information? Well, I'm about to have my first kid. You know, you're like, oh, why did you say that? Like, or you know, me and my wife are having problems. We're going through to tough time right now. It's like, they could be thinking on their side, okay, this person is going to have second or third kid coming up in the next three months, okay, we post due diligence, he's going to be stressed out. He's just going to… Okay. You know, we'll just sit on things a little. There's so much going on in their personal life. Or another thing is during this, I'm sure you've seen it. Maybe that key team that's running the company, once you start saying, hey, we're going to sell. One person checks. One person of that team is just like, oh, if we're going to sell, I've already cashed this check in my mind. You know, gets lazy on their work, starts missing things, or, hey, you know? After this is all done, I'm not going to have a job. Why am I going to really work that hard? You know, I got to start looking for something else. You have no idea what's going on with everyone there and even significant others. Significant others might have already cashed out going, wait, wait, we're finally selling after you've worked 80-hour weeks for the last seven years. Oh my gosh, I can't wait for this to be over. I have our plans. And then as things drag on, it's; hey, you know, honey, dear, you've told me we'd be done by now and we'd be traveling, and there's more fighting at home and you come to meetings all upset because of the night before. And you're just looking at it going, my life has falling apart here. When are we going to get this done? So, that time is key. And you and the other co-Founders or other people involved might start arguing. The entire process is very emotional, ups and downs the whole way and the littlest things in one of the management meetings, one of the due diligence meetings could be interpreted by someone different and then goes back to their team and they go, you know, I'm not interested in that any more. Did you hear what they said that last minute? They said this, they're like, whoa, that's not a big deal. I think you're interpreting it wrong. No, no, no. And you have no idea where that emotion's coming from. It could be three layers, backs for some reason, something, but it's affecting everyone. And then you have the other side. The buyers are like, we do this all the time. We're going to do like four of these acquisitions this year.

[00:37:33] Sean Steele: Yeah. No biggie, but exactly. They've got options, right? Like you are the one selling, you've only got one asset to sell. They've probably got five or six processes running, maybe even at the same time. And so, you know what, if they can, things do start to blow out sometimes for no other intention or their capacity starts to get a bit constrained and maybe one of the other deals is looking a bit better than your deal. So, it doesn't mean they don't want to do it, but it starts to slow down. And I think actually, it just jumped out to me that it's very similar to a property transaction, isn't it? And you used the 3Ds or the 4Ds, you don't want the people buying your house knowing that there's been a death and that actually all the kids are fighting over it and they just want this thing done. And now therefore, they're probably going to be pretty motivated to take a low rate. You don't want them knowing that you're going through a divorce and therefore it's a bit ugly. And the best thing for your life would be for it to settle quickly, even if you're taking a lower amount. Debt, you know, you don't want them knowing that you've racked up some gigantic debt somewhere else, or to your point that they've already spent the money mentally. Like one of the guys I was buying a business off, he'd already set up another business and he was essentially in a different country. So, he is already spending money on it. It was already costing him money. He'd mentally moved on and he'd sort of checked out, but he really needed this to sell so that he could go and focus on that other thing. And so all of a sudden, he is becoming pretty motivated and we know what those motivations are. So again, the deal they’ve become a bit more pliable. What else from your perspective, Shawn, if there was something else that you think about that creates a bit of advantage for you as the buyer? Where else do you think you might play or push a little bit?

[00:39:06] Shawn Flynn: I mean, a lot of the buyer, it's not a lot, but another way is just having those conversations once again where one side has given too much information. Hey, tell us what the other offers are. Hey, where do we stand in the other offer? What kind of structure, deal terms are they coming in on? Things like that. And how many are in this process right now? Is it just us and maybe one or two others, or is there five others? Can you kind of tell us where…and a lot of times it's funny people, if they get asked a question, they just blurt out an answer and you're like, what?

[00:39:40] Sean Steele: That's helpful to know. Yeah, absolutely. And I guess that's where your, because remember that you might have a sell site advisor helping you upfront find a buyer maybe in the first couple of management meetings, but they're not typically in every meeting from then on. So, once you get into due diligence, usually you're dealing with the vendor or you're dealing with the person selling the business, and they don't have an advisor in the room every single time. So, they're not probably, that sort of upfront coaching and upfront guidance often diminishes pretty quickly. But that's once you, and there's a bit of rapport building and that's when some of that information starts to unravel and be shared. And to your point, it can be incredibly helpful to know where you stand in that process because you know what they like and what they don't like. You know, if they really want to do a deal with you and they don't really like, maybe some of the other deals are better, but they really don't like the other people, but they really like you guys and all that stuff's super, super helpful. I think one of the other, we already talked about the fact that I think those adding costs back in is almost a sort of, you know, you're sort of tripping over your own foot as a buyer. Like if you've left the door open for people doing multiple jobs or you've been, there's a whole bunch of things that you've built into the business that when the buyer takes over and are not going, do either need to be costed back in or they're no longer going to be relevant. All of those affect, the normalised EBITDA, meaning EBITDA that actually the price is going to be based on. And so, if there's a whole bunch of reasons for them to add money back in, the EBITDA that your multiples being based on is going down every day. One thing I did notice, I've seen a couple of times actually work in a buyer’s favour Shawn is having an, I don’t know if it's unreasonable, but almost like an unreasonable minimum price. Like I've watched a guy sell a business and he was like, this business is going to be sold for 20 million. I'm not interested in any discussions whatsoever about it. And he would be right up front with the buyers. He's like, that is my absolute minimum price. So, if you want to enter a conversation about something different, let's not have the conversation whatsoever. And what was interesting is I watched this deal occur. And because the buyers actually really wanted to buy this business, and it was a great asset and it was a hot mark and everyone was trying to do deals and it was hard to get good assets. I saw the deal team start to actually almost manufacture ways to get to his price in a way that was probably not as good for the deal team, but to ensure, because they knew he was just going to be completely inflexible. So, you know, you had people essentially almost managing upwards and selling and telling, going; hey, if we want to be part of this deal, we have to get to this price, so let's figure out how to get to the price for this guy. Which they wouldn't have done had he not kind of put a minimum on the table. I also know, of course, that could knock a whole bunch of buyers out and it could work totally against you, but have you seen anything like that play out? How have you seen that play out?

[00:42:38] Shawn Flynn: So, going back to the deal terms that we're talking about earlier and the flexibility there. I mean I guess it's that one saying, you know, I name the price if you, or was it, “You can name your price if I can name the terms.” And If the person says, okay, this is our price. It's okay, how can we de-risk it enough to get the term so that we can hit that price? Whether it's, okay, we'll do an earn out over this enormous amount of time, which might seem unreasonable, but we can get to that price. Or, hey, we count the roll over, this much equity in the new entity and say, we have this astronomical exit five years down the line, you get the money back at that number that you want.

[00:43:20] Sean Steele: Hmm.

[00:43:21] Shawn Flynn: People are, you yourself said it could be very creative in getting to that number, but at the same time, is that the best number for the seller when they really start thinking about the risk that they're taking on for everything? I mean, buyers are creative. People are creative. They'll get there but really understanding, okay, by getting to this number, is it best for me and my situation? And sometimes it's; hey, go back, have that talk with that tax advisor, the wealth advisor, the estate planner, all those, and see like, hey, maybe get in these terms would be better for you at a lower valuation to have the lifestyle you want. But no, I've seen it where there's that seller that's like, you know, this is my minimum, get there, and then the buyers come around and go, okay, to get to that number, this is how creative we're going to have to be to get even near that. And if it works, it works. If it doesn't, it doesn't, But that's the conversation that having that lie in the sand could have a lot of conversations with a lot of professionals before you want to do that. I guess that's the way to put it.

[00:44:34] Sean Steele: I agree. Yeah. Occasionally it can work out, but yeah, many times it might create a rod for your back in the process. What about, so I'm conscious of time Shawn because I could just chat to you all day about this. What about some of the changes in the landscape in buying? So, some of these, you know, I guess emerging areas, be it cyber security or retention issues that everybody's facing when everyone's struggling to find staff and struggling to keep staff and work from homes become a big challenge for lots of businesses to sort of figure out. How are those things playing out in the process? How are they affecting conversations, due diligence, negotiations? What are you seeing?

[00:45:12] Shawn Flynn: They're huge. They're huge. We're having conversations of, hey, this staff, you know, was it pre pandemic hiring? During pandemic hiring? Now, what's the percentage that are fully remote? What's hybrid? What's back to the office? Then, when you went remote, what types, IT infrastructure, what was changed in that? Questions and questions about the last two years and how the companies reacted to it are huge because I mean if you have that company… well one, a lot of people; I keep saying a lot, but people hired a lot of contractors, and here in the states contractors are some states that are very friendly to contractors. There are other states that are not, and if you're in a state that's not friendly, it could be very difficult to switch them from 1099 to W2s and still hit the numbers in…

[00:46:14] Sean Steele: And do you mean by that…Because the Aussies wouldn't know that one. But is that really moving somebody from an independent contractor to an employee because they're essentially so dependent on the company that, you know, in Australia's called Sham Contracting where somebody is fundamentally, they're really working for you, but they've kind of got the aura of a contractor, and then all of a sudden you find you're obliged, you've got a whole bunch of liabilities that you weren't planning on, like their superannuation payments and a range of other problems. Yeah.

[00:46:40] Shawn Flynn: Yep, that's coming up in conversation. There’s, you name it.

[00:46:46] Sean Steele: What about retention, like maybe another way to think about it is, what are some of the things that, you know in those questions, because you're obviously getting a whole bunch of information about how they've performed during this period and what's changed in the business and how they navigated it. What are some of the things that, if you hear them make you a bit nervous because maybe or that's obviously one, like okay, they've taken on a whole bunch of contractors and maybe they've got some liabilities now that are problematic. What else are you sort of looking for that might give you some red flags?

[00:47:18] Shawn Flynn: Hmm. Employee one is the one's coming up the most in conversations, that's big. Other ones that are coming up, I mean, because a lot of that evolves or the length of time they've been at the company. But this is also if they were hired before, because I mean, people are able just to move around to so many companies now. It's not geographic as before that people are really worried post-acquisition, who these people are going to stick around. And when lights go off and they go home, are they going to come back the next day? Especially now that their skills are demanded and they can work almost anywhere in the country or world. I mean, conversations of that.

[00:48:01] Sean Steele: Probably cyber security risks. I'm also noticing, I've had a few conversations with people about that. I guess, in the smaller business segment, people always assume that's kind of like something that big companies deal with and that's their sort of problem. But all of a sudden, I mean, it's pretty clear worldwide that those risks are pretty real at all sorts of size companies. You may be a small company but dealing with really sensitive information and or not be compliant. So, do you sort of suss out their approach to the cyber security? Do they have consultants, do they have audits? Like how are they approaching that? Is that a key part of your risk assessment?

[00:48:34] Shawn Flynn: Yeah, I mean, do they have cyber security insurance, did they get that before? Because it's so much difficult to get it now. Have they done an IT audit? Is everything up to date, compliant? You know, the company that's acquiring them, does the systems they're using actually match with the other? What's that transition look like? I mean, a lot of those conversations have come, and I mean, IT luckily is one of those things where a lot of companies during the pandemic thought, okay, we need to look into this. You know, we keep hearing about all these companies getting hacked and having to do bitcoin ransoms or whatever. Or the person that was working a second job during the pandemic with one company's computer and now opening up, breaches everywhere and putting everything in... You know, it's kind of crazy. I don't think there's something that's not coming up in conversation. I mean, I think that would be an, you know, is your team still even in the US? Are they working from Columbia now? Do they plan on coming back to the office? What's the transition look like? How are we going to incorporate the two? We have one company that's during the pandemic might be from one of the Midwestern states, you know, Kansas, and never really had a lockdown acquiring a company from Silicon Valley where the people still think it's work remote only. How do we incorporate these two when this one acquires the other? And this group sees, wait a second, they all get to work remote. Why can't we? Hey, they have to go to the office. We don't want to do that. This is scary. And those conversations. And how do you integrate the two? It's kind of, I'm not sure for your listeners, but the US went through a very interesting time the last couple years where each state kind of had their own reaction to what was going on. And with that reaction, I mean, some states literally they went home for six weeks and then spent the next two years back as if nothing was going on. And then other states are still in semi-lockdown in one way or the other, where people are wearing masks to the gym, where people are asked to present vaccine booster certification before entering events. It's really different and it's state by state. So, imagine one company from one state acquiring a company from another state or merging with the company where they faced two different things. One fully adjusted remote. One stayed in the office the whole time, and whereas before there was a little difference in culture with red states, blue states, or however you look at it. Now, that divide is so much greater than ever before, and it's really interesting to kind of have these conversations with investment banks from anyone from these other states and just kind of say; hey, what's the situation you're going through pre and post-integration? What are those conversations like? Are there bonuses or different pay structures for people that are going the office versus remote? What's the flexibility now before, what is the next six months? What is the C-level team? What are the investors, the board…? I don't know. It's just conversation at every level and I mean, I'm not sure what's going on over there, I can't say. But here, these conversations. I was just on a panel last two weeks ago that had Chief People Officers from some companies in Silicon Valley just debating over best practices of; hey, this company's back in the office, so that the younger employees have those mentors with the older employees are able to actually have that culture, and it's more of an impact and there's that glue in keeping everyone together. And you have the other employee or company that's like, we've been fully remote this whole time, and we have the best talent from all around the world at a cheaper price, and we're building this grace. And you're listening to this and you're like; well, how would you integrate the two? 

[00:52:47] Sean Steele: Yeah, that's really interesting, that's super interesting. And it's a minefield, right? Because there's no perfect answer right now. It's more about what's the implications, how's it impacting the business now, but also how's it going to impact it in the future?

[00:53:01] Shawn Flynn: Yeah, we don't have the data or anything, and people are just guessing, that’s all gut feeling, you know, like, this is how I feel it's going to be. It's like, wait a sec.

[00:53:08] Sean Steele: Yeah. Get your crystal wall out. Well, last question for you Shawn is just around, we're almost backtracking like pre-management meetings, but I know you have some thoughts, which I think is really great for people who are sort of first timers in this process. You know, one of the early things that are happening is you're getting a letter of interest or letter of interest, you probably use slightly different language, but you're getting a kind of indicative interest in the business before maybe you've got a formal non-binding indicative offer. What are some of the things that you try to coach people around making sure there's sort of consistency in those letters so that you can elicit as much information as possible that's helpful for you as the seller?

[00:53:46] Shawn Flynn: Great question. This is key. This is one of those things where I see a lot of people they'll get an unsolicited acquisition offer presented to them, and there'll be so much information missing from that. You're like, Ugh. Whereas if at the beginning you said, okay, if you're going to make. Give me an offer, whether it's that indication of interest, I’ll have it this structure. Tell me the, the due diligence period, your estimate, is it 60 days? Is it 90, 120? You know, and that once you see these numbers, those could be red flags, those could be follow up questions. That could be anything, where is this money coming from, that equity? Do you have it? Are you going out to raise? What is that? What's the idea for the Founders for that transition period? What's the valuation that you're given to this company? Is it based on a multiple of EBITDA if it's based on revenue? Have as detailed as possible this kind of structure going, hey, when you submit your indication of interest, please have it in this format; 1, 2, 3, 4, 5, 6, all the way down. Yes, it takes time. The other side's going to look, oh my gosh, these guys are more professional. They're working with someone. We got to take this more seriously. And it's also a structure for them to go, okay, as long as we follow this, we know what to do. It tells you, okay, there's all this information given on this acquirer that we can, then used to compare apples to apples with everyone else. Whereas this one, if everyone is just to do their own, this one might have this information and lack all this other stuff. This might have this other information and lack all this other, but if you're actually going line onto line, okay, days to close. Okay, sources of funds. Okay, valuation, multiple of EBITDA. And you can see it all compared, you have a lot more and then you take notes from the management beans and everything else that we were talking about. You have a lot better idea of who you really want to end up with and who the best offer is based on, you know, going back to your earlier conversations of your flexibility on deal terms, what your key outcomes is, and you can really match it all up. And that information is given to you in a format that you can dissect and get your answers from.

[00:56:00] Sean Steele: That's right.

[00:56:01] Shawn Flynn: It just makes…

[00:56:03] Sean Steele: And even just one example that I know you and I talked about offline, just a combination of a couple of those items, you know, the days to close or the days of due diligence, how long they want for due diligence and what their sources of funds are. Well, if you've got four out of five potential acquirers have got the money that's sitting on their balance sheet and they've got it available and sitting in the bank. And they only need 60 days versus somebody else who says, Oh, I need 120 days, and actually we don't have the money. We've got to go and raise capital for it. You're like, huh, well that's a less favourable looking potential inquiry, do we even want to deal with them? You know, at least you've got something that you can go back and ask before you enter into conversations. I think it's a really helpful process of fleshing some of that stuff out.

[00:56:47] Shawn Flynn: And the crazy thing is, is during the process there's always a couple of those outliers. And you're like, oh my God, this offer is so amazing. You know, it's so much higher than everything else. This is the one we want. But if you were to get all that information in advance, you'd go, wait a second… that number may be that high, but it's most likely not going to happen.

[00:57:10] Sean Steele: Yeah, true. And I've seen it the opposite too, where somebody had come out with a multiple of, you know, that their indicative offer at stock was a multiple of five, and what ended up being actually by the end of the process was seven, and you kind of went the other way. So, yeah. Interesting. Mate, I could chat to you all day. I'm super grateful Shawn for your time, it's such valuable information. Founders who are building a business, there's not many Founders who will go through a sale process more than once. I always think if it's kind of like DIY in your house, it's like, well, if you're going to lay a new deck or I don't have to pull down a wall, you're probably only going to do it once. So, you've got to try to get as much coaching upfront so you optimise because you're probably not going to do it multiple times unless you're a professional builder. Well, unless you're a professional seller of businesses. You're probably not going to do this more than once or twice. So, getting as much information as you can to help you optimise the outcome is really valuable. So huge thanks from me. How should people, um, follow along with what you're doing or get in touch with you if they wanted to interact with you?

[00:58:10] Shawn Flynn: Best way if you're watching the video of this, there's a QR code in the corner of my screen, scan that, that connects to my LinkedIn. If you're listening to the podcast, just connect with me at Shawn Flynn, Shawn Flynn SV on LinkedIn, or it's Shawn Flynn Investment Banker. I forget. But if you want some information or to listen to another podcast, is it okay if I plug…Check out the Silicon Valley podcast at TheSiliconValleyPodcast.com. Connect with me, listen to some of my episodes. We're going to have Sean on it in the future as soon as he agrees to be on it. But yeah, I'm open for a conversation. Honestly, connect with me a year, two years before you're thinking of doing any of these transactions. Well connect with Sean first, have him help you out with your company and then I'd love to talk to you later, but I'm open for a conversation. More than anything, Sean, I want thank you for having me on your show and you know, if there's any opportunity, come back, please let me know.

[00:59:10] Sean Steele: Absolutely. It's been my pleasure and thanks again so much, Shawn Flynn. Folks, if you enjoyed the podcast today, best thing you can do really is to tell somebody else about it. You know, if you find us on LinkedIn, you see we have all sorts of little video grams. Just send it to somebody else who you think is going to find it valuable as the best thing you can do that gets Shawn Flynn's knowledge into their head and helps them out on their selling process. So, thanks very. Of course, you can leave us a review, and we always love that too. But thank you very much Shawn Flynn, and I hope to be speaking again with you soon, mate.

[00:59:39] Shawn Flynn: Me too. Thank you.

[00:59:41] Sean Steele: Thanks.

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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EP55: How to Scale Without Burning Out

Award-winning reporter, expert, speaker and author on burnout, longevity and happiness Sophie Scott shares insight on how to prevent burnout.
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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.
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EP53: The Heart of Your Business - Your Values

ScaleUps Roadmap Program Facilitator and Podcast Host Sean Steele unpacks “Values” (content drawn from ScaleUps Roadmap program).
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EP51: What You Need to Know to Expand Into China

China Market expert, celebrity and influencer Heidi Dugan shares expertise on how to successfully enter China and what not to do
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