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Tanner Montague came to town from Seattle having never owned his own music venue before. He’s a musician himself, so he has a pretty good sense of good music, but he also wandered into a crowded music scene filled with concert venues large and small.But the owner of Green Room thinks he found a void in the market. It’s lacking, he says, in places serving between 200 and 500 people, a sweet spot he thinks could be a draw for both some national acts not quite big enough yet for arena gigs and local acts looking for a launching pad.“I felt that size would do well in the city to offer more options,” he says. “My goal was to A, bring another option for national acts but then, B, have a great spot for local bands to start.”Right or wrong, something seems to be working, he says. He’s got a full calendar of concerts booked out several months. How did he, as a newcomer to the market in an industry filled with competition, get the attention of the local concertgoer?

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by Beth Ewen
April-May 2016

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Exit Strategy

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Workshop

Because selling the company is every entrepreneur’s grand finale, Upsize and Club E convened a panel of experts to explain how it’s done.

From accountants to lawyers to investment bankers and more, they shared the skinny.

Rick Brimacomb, moderator, Brimacomb + Associates and Club E: Our focus today is the M&A market, covering topics including who are the buyers of small companies, what are buyers looking for and how can you get the most value for your company.

In anticipation of selling the business, what advance planning should a seller consider, first on a personal level, and then from the business perspective?

Chris Carlisle, Gray Plant Mooty, co-chair of the corporate finance and emerging companies groups: From a legal perspective a lot can be done in pre-planning. A lot of that is assembling the due diligence, assembling the homework that a potential buyer is going to need.

Some of it is obvious, like market strategy. Some will be very granular, like employee benefits and tax stuff, that isn’t going to be intuitive.

Chip Myers, Franklin Partners, a boutique investment banker, specializing in companies with enterprise values under $100 million: I think it’s important to start with some kind of end in mind. Most business owners come to us because they’ve been approached by someone, and they’ve tried to put a transaction together and they feel the need to do this.

One of the first things we do is talk about what their objectives are. For most of our clients it’s the most important thing they’ll do. Frequently it starts by somebody else initiating it, so I think it’s worthwhile to have talked that through.

Chris Carlisle: Often a client will have had someone make an overture. Think hard about how do you create a market for your business. Entrepreneurs don’t often think about it that way. More often than not it’s not going with the natural acquirer that has given you a call. A lot more thought needs to be put into it.

Dean Jones, founder of Power Objects, who took his business from employee one to 300 and then sold it: You should be controlling the conversation. My phone rang every month: Hey, are you interested in selling? We said, here’s our game plan.

We did not entertain any of these offers over the last two or three years. We took it to market, instead of listening to the market saying do you want to sell. It would be a waste of time otherwise.

Rick Brimacomb: When do you think is the right time to sell?

Dean Jones: That will be personal for everyone. I had a certain number I wanted, where I said if I had this much money I’d be happy. A business changes. Fifty employees is different from 100, is different from 300.

I knew what I wanted for the company, and I didn’t want to time the market. We grew every year 40 percent. At some point you have to say, I’m at the number where I want to be.

Chris Carlisle: It really depends on the entrepreneur and the situation. For family businesses it can be a family transition and it’s a natural inflection point. Some times people see things in the market and they say I want to do it before that happens. The pre-planning is the key part of the whole process.

John Falb, oversees the upper Midwest division of The Private Bank, which is a publicly traded bank headquartered in Chicago: Different companies, different industries, different macroeconomic factors apply. There were companies that didn’t sell back in ‘06 and ‘07 and they wished they had. It’s reading the economy, and reading the factors in your industry.

Tom Barton, founding partner of the CPA firm Barton Walter & Krier in Maple Grove: We had a client company with $15 million in revenue, and it made about $2 million a year. The owner was very frustrated, and at first I couldn’t understand why.

But his company was best in class and he knew he was in a $100 million market, and he knew he didn’t have the skills to get it to that level. So selling for him was really a growth strategy rather than an exit strategy.

Chip Myers: People call us all the time and say what are market multiples now and is this a good time to sell? I would say, I don’t know. There’s a strong enduring market for lower middle market companies.

That’s different than it was a generation ago. So I think it has more to do with your business, the opportunity for it going forward and your willingness to continue to do that or to gain some liquidity.

A generation ago people likely went to companies and worked their whole career, and that’s changed. When I started this 25 years ago, I thought I’d be helping old guys selling manufacturing companies.

And I’m not, I’m working with younger people, who have an idea and take it to a certain place, and then they want to take it to the next level. A big mistake people make is hanging on too long.

Chris Carlisle: A-plus assets are always highly prized. If you’ve got a good business there are plenty of people out there to buy.

Rick Brimacomb: Talk about the sales process from your particular perspective.

Chip Myers: I’m presuming most of us are talking about private companies. In the stock market, there are rules and information to be shared, so there’s a free exchange of information. There isn’t in the private world. There’s no information. Nobody knows about your business.

The process is really about establishing a market for your company in a discreet way, so you can obtain a market-clearing price, a market that should reflect a group of buyers and what they would pay for this.

When we marketed Dean’s company, Power Objects, there were a broad range of values, because it was worth more to certain people. We couldn’t have possibly known that.

The thing about advisers, the way I look at it is, if you’re selling in today’s environment, you have to presume the guys on the other side are the A team. So do you want to go in there with one bullet in your pistol, or do you want to go in there with an A team yourself?

Chris Carlisle: I build relationships with clients over a long time. When it comes time to bring the company to market, hopefully what I can do is be a little guide for the journey, help them select the right advisers.

When I look at successful outcomes for my clients, they have to be advised by the right firm. If they’re not, and negotiate on their own, they’re going to be leaving money on the table.

Dean Jones: We selected the legal firm first, and then we had the legal firm help us select the bankers. You have to ask, who do you connect with? Who can help you through this ordeal? I’m not going to say it was easy, oh wow it was fun and we had a blast.

It is a stressful time at your company You want to be working with people you trust.

Chris Carlisle: There are lots and lots of good law firms out there, but the key question is will you be an important client to that firm. In investment banking it’s the same thing.

In accounting it’s the same thing—find folks that will walk through walls for you. If you’re not a core client to that service provider it’s going to impact the deal and the advice that you get.

Tom Barton: We probably work more on the front end, making the proper introductions, and then on the back end working on making sure the deal is structured right.

John Falb: One piece of advice on the sell side is, make sure you have your financial house in order.

I can think of several situations in the last couple of years when a firm went to market to be sold and it turned out that their financial information wasn’t in good shape, some things had been missed, there had been some turnover in the CFO/controller area and the financial house was not in order.

Those things were found, and delayed the process and impacted valuation. It can really have a big effect on your sales process.

From the audience: Did you know HCL beforehand, the buyer of Power Objects, and how did the relationship go?

Dean Jones: We did not know the buyer. When we started the process we listed all the companies we expected to buy us. And we went after a hundred different organizations. HCL, I don’t even think they were in the first round.

They were a fantastic organization, but slower than I would have liked. We were 300 employees, so we pause the music and make a decision and move forward. They had 14 lawyers looking at everything. Am I happy with the outcome? Super happy.

From the audience: You said you had a number in your head, what you wanted to get for your business. Did that change over time? Did you change your own number?

Dean Jones: I can’t go into all of it, but at one point we walked from the deal. We said screw you we’ll grow the company for a few years ourselves. We walked from the deal, but people talked us from the ledge.

That was a good thing. If you think ‘I’m going to sell my company, this will be the most exciting time of my life,’ you’re wrong. Did my number change?

Maybe a little bit because we were making money. Buyers will point out dents and scratches in your company, but I wasn’t going to listen to someone tell us we weren’t running a good company.

The process took so long; we were selling the company on 2015 numbers, and we were hitting all the numbers. It took 12 months and a lot happens in 12 months in a fast-growing company.

From the audience: How do you set expectations and a timeline for how much of management’s time and effort will have to go into the sales process?

Chris Carlisle: As a benchmark I say it’s a six-month to 12-month process. A little bit of that depends on how prepared they are for the market.

From the audience: What advice do you have for the senior leadership for the people on the buy side?

Chris Carlisle: There’s two types. There’s the financial buyers, the private equity firms and so forth, and they for the most part have a very consistent and streamlined process around how they do deals.

They have outside advisers, they have deal counsel they’re accustomed to working with, they’re accustomed to the disruption in the business itself. Those transactions tend to go a little faster, because those buyers understand the process.

The strategic buyers tend to be a little bit slower. The business development group will bring the deal to the table and the operations people are the ones who drive it and they’re not necessarily accustomed to the process.

They will want things triple-checked and that’s not how entrepreneurial organizations work.

Chip Myers: I think buying companies is a lot harder than selling companies, because you start from a certain perspective of what you’re after. My experience is most people don’t have that entirely thought through.

It’s really easy to get enamored with a person or a product or a market opportunity and sort of overlook the issues. If you’re engaged with somebody who’s not ready to sell, that can take forever because they’re not prepared for it.

People underestimate how rigorous the process is. Our job is to help a private equity investor understand this and come to a rational decision. We look at it as, we’ve got to be really transparent, and we have to be forthcoming about the positives and negatives.

Tom Barton: In the accounting world we sure like the buy side, because we’re gaining a client. So that’s more attractive. I think a lot of our clients have grown very well through acquisitions. Sometimes one key acquisition has been the catapult to bring them forward.

John Falb: I agree, we go from being unhappy on the sell side, to excited about being involved with a client on a buy side transaction.

That’s where we get to roll up our sleeves and work with the ownership group to say does this make sense, what kind of capital structure makes sense; how much debt, how much junior capital should be on this balance sheet.

Let’s stress your cash flow, and look back at 2007, 2008, 2009 and see what happened to the cash flow then, and see what would happen in another downturn and make sure we don’t get too levered.

And then there’s a lot of discussion and focus around what kind of due diligence we need to do to get that done.

Chris Carlisle: Sell side can be bittersweet for a lawyer, because you’re losing a client. But on the other hand you’ve been with that client for years and it’s an entrepreneur’s seminal event. It’s fun.

From the audience: How do you keep your eye on the business while you’re going through this?

Chip Myers: We try to take about four weeks up front to gather all the needed information and set up an electronic data room that’s the basis for the due diligence.

We try to have the concentrated effort initially so we can then manage the process for another three or four months so they’re able to run the business. But that’s hard.

Chris Carlisle: Buyers can take all the time they want. Sellers work in real time. You have to think about, how can we return that request in 24 hours or less? Part of it is the delegation of duties.

But then the other element of that is burning the candle on both ends Owners are gong to have to make decisions in real time, and they’re going to have to do that while running the business.

Dean Jones: The biggest thing is you have to focus on your business all the time. It can be very easy to focus on the sale, to think, wow, I’m going to strike it rich. You can get excited and take your eye off the ball.

I don’t want to say selling the company was the second effort, but we never stopped growing.

From the audience: How do you counsel partners or family members that don’t agree?

Chip Myers: Frequently we’re in a situation where there’s a key employee, who’s a president or a COO, who says somewhere in the 11th hour, ‘well they’ll never get this deal done if I don’t go along with it, don’t you think I should get something for it?’

I’m always curious when they talk to me about that, because who do they think I’m working for? I’ve been known to say, look, this is the way it works. I explain the golden rule: He who has the gold makes the rules.

We have had people defuse that situation right out front by carving out some proceeds for the management team, for example.

Rick Brimacomb: How are companies valued? What role do you play in that process?

John Falb: Most of the transactional work we see is all based on some multiple of cash flow. Let’s have a credible number that’s very defensible, that represents the history of the cash flow.

Let’s not have a hockey stick projection. Be thoughtful, be credible, and have good defensible numbers that will be used in the valuation.

Chip Myers: There’s a financial valuation, which you can think of it’s an asset that requires a certain return, and there’s a mathematical equation. The easiest example is, when I was a young man I tried to buy the Windsor Tunnel, between Detroit and Canada.

I thought I had it nailed. But an insurance company outbid us and they bought it because their cost of funds was lower, and so they could put a higher valuation on the annuity side.

The other side is, I looked at a company that makes a very high-value product, so an annuity valuation might put it low, but someone who has the way to triple sales of that product would put it high. Every business is unique.

Dean Jones: It’s an interesting question, because we did not put a value on our company, the buyers did. We looked at the buyers and saw what they would pay and said we would pick that one.

From the audience: On a high level, what are the top three reasons M&A deals fail after the transaction is completed?

Chip Myers: There was a Harvard Business Review study that found they were made for the wrong reason. People become enamored with the opportunity.

There was a time when companies paid for revenue synergies. They would say, I’ll buy Power Objects and then I can sell Power Objects’ clients my product, but that doesn’t work out.

Dean Jones: There are enormous emotions going on. Deals fall through because people get emotional and passionate about what they’re doing and they say, screw you, I’ll do it on my own. A seller needs to step back and take guidance from their advisers and not get too emotional.

Chris Carlisle: I would say it’s people. I just had a client who sold six months ago and it was predicated on the entrepreneur becoming the CEO of the broader enterprise, and that happened, and it’s not panning out, and he’s already thinking about the next thing.

Tom Barton: I think culture matters. It seems if the culture totally changes and the people leave it’s hard to execute.

From the audience: When the cat is out of the bag, what are some of the best ways to protect the seller’s data and people?

Chip Myers: In the years I’ve been doing this I’ve seen the cat let out of the bag very few times. That’s part of our job to make sure that doesn’t happen.

Chris Carlisle: It’s managing the process as best you can.

From the audience: When did you tell your employees?

Dean Jones: Jim Sheehan and I are the owners, so we were the ones that made all the decisions. We did not bring people into the process until very far along. We were six, seven months into it before the CFO was even brought into it.

Employees did not know until the morning it happened. Out of the entire company, maybe six people knew prior to the transaction being done.

Tom Barton: I think it depends on facts and circumstances. My partner has a client, he isn’t passionate about the business. The market is offering $45 million; I think it’s time for him to sell. We have another client who loves his business;we say I don’t think the time is right.

From the audience: From the buy side, on a transaction where you’ve got key personnel, how do you work the deal to make sure that they stick around and are motivated afterward, when they are likely to end up with full pockets after the transaction?

Chris Carlisle: There are two pieces to it: keeping them motivated through the transaction, and what happens on the back end. That is about what the buyer will do. There are lots of things you can do to make sure they’re committed.

Chip Myers: We’ve seen buyers have retention escrows and things like that to keep people in place.

From the audience: What percentage of deals are tied to earn-outs and how often do owners stay around?

Dean Jones: I’ve heard multiple stories from others. Our deal does have an earn-out with it. The amount I took off the table from day one was my number. The amount I sandbagged from year one is, sweet, I’ll take that two.

Year two, I said yeah, I’ll take that, too. And year three, I don’t care. I’ve heard stories about people where the earn-out is impossible to meet so it’s a terrible deal.

Chip Myers: If you run a broad enough process you will see a lot of different offers, and you can see different scenarios and you can make a choice.

I’ve had people take earn-outs who have done fabulously well and we’ve really only had one deal where the earn-out didn’t work out, but frankly that was the client’s fault.

John Falb: We see earn-outs a lot. It’s a good form of incentive to keep management engaged and ownership engaged. We see a lot of it for all the right reasons.

Rick Brimacomb: Be careful with earn-outs that you protect yourself. Now I’d like you each to answer, what would be a mistake to be sure a seller did not make, and likewise a buyer?

Chris Carlisle: Seller: you have to run a transparent process. So if there’s some skeleton in the closet you have to bring it out there. The last thing you want is to be looked at as disingenuous.

On the buy side: be very, very careful about repositioning the price based on diligence discoveries if you really want to do the deal. You can very well kill a deal that way. A seller’s position is to walk on those types of things.

Tom Barton: The Twin Cities has a plethora of really, really good investment bankers, but not everybody is a good investment banker. What we see a lot is over-promising and under-delivering.

Dean Jones: From the sell side, the biggest mistake is to attempt to do it on your own. If you think you’ll sell it to the phone call, you’re crazy. Take it to the experts, and let them sell your company

Chip Myers: If you’re gong to do this you really need to be committed to it because it’s a  long, rigorous process. It’s no fun to go through it and not get to the end. It’s also damaging to your business if it doesn’t go through. Otherwise you’re wasting time and a lot of money.

Rick: Closings thoughts you’d like to leave the audience with?

Tom Barton: If you’re interested you need the right experts to run a process. You can’t go it alone.

Chris Carlisle: It’s your life’s work so take it seriously. Do everything you can to have a good outcome.

John Falb: The M&A market, the capital market, have all changed dramatically from just the end of the calendar year. What happened in 2015 is very old news. Multiples have changed.

Dean Jones: Do what you do best. We hired experts who know how to sell a company. Jim and I know how to run a company

Chip Myers: Pick people you trust. Pick people you can connect with. You’re going to spend a lot of time with them. Everything they do is going to reflect on you.

 

[contact]

Tom Barton, Barton Walter & Krier:
tbarton@bwkaccounting.com.

Rick Brimacomb, Brimacomb +
Associates and Club E:
rick@brimacomb.com.

Chris Carlisle, Gray Plant Mooty:
christopher.carlisle@gpmlaw.com

John Falb, The Private Bank:
jfalb@theprivatebank.com.

Dean Jones, PowerObjects:

dean.jones@powerobjects.com.

Chip Myers, Franklin Partners:
cmyers@franklinpartnersinc.com