Link To Guest Website: https://www.tbhr-law.com/
Title: “Selling Your Business & Thinking About It Well Beforehand”
Guest: Michael Radin – Tarlow Breed Hart & Rodgers
Interviewer: Marc Zwetchkenbaum – Marc Z Legal Staffing & Mark Furman – Tarlow Breed Hart & Rodgers
Click here to read the transcript
Welcome back Radio Entrepreneurs, listeners and fans, I’m producer Nathan Gobes filling in for Jeffrey Davis this morning. Excited to have Mark Furman of Tarlow Breed, Hart, and Rogers and Marc Z of Marc Z Legal Staffing hosting this interview for us today. Welcome. Mark’s
Great. Great to be here, Nathan. Thanks. Great to be here and looking forward to hearing from my partner, Mike Raiden. Excellent corporate lawyer, M and a lawyer.
Yes, of course. Well, mark, you’ve let the cat out of the bag on our next guest. That’s all right. It’s all right. Our next guest, as you mentioned, a Michael Radin partner at Tarlow Breed Hart and Rogers. Welcome Mike.
Good morning, Nathan. Good morning marks.
Well, Mark Furman. I think I’ll hand it over to you for the first question, if you’d like.
Sure. Well, Mike, you’re a corporate M and a lawyer. Why is there so much interest right now when owners selling their companies?
Michael (1m 12s):
So it’s a great question, mark. And you know, I think there’s probably four major issues going on here. The first is just demographics. The baby boomer generation is getting older and as people age, they start thinking about what do I want to do when I have not running the business? People might take a hard look internally to their family and determine whether or not there’s family members who want to and are capable of taking over the business. And if not, then what does that mean in terms of selling number two? There’s lots of investible cash out in the marketplace right now. This is in the hands of both strategic buyers and private equity firms.
Michael (1m 56s):
Each of those has different pressures to deploy the capital in different ways for their own growth returns for their investors. The third reason right now is that debt is very inexpensive and it’s very covenant, light banks want to go out and lend money. Interest rates are unbelievably low. We’re getting a bit of a, a surgeon inflation, which has been dormant for quite some time. There’s a lot of different reasons for that. But when you have lots of equity in debt floating around, that tends to drive up demand, drive up prices. And that leads to the fourth issue, which has sort of built up demand, which is a combination of demographics.
Michael (2m 40s):
The fact that the pandemic has kind of dragged on a bit, and then there’s sort of a shift in targets in terms of what companies are in favor media companies. Maybe if they’re digital media are still pretty hot, but things like supply chain and logistics, which were considered boring are suddenly white hot. So those are sort of a four things I see in talking to clients who are either sellers or buyers as to what’s driving demand.
Marc (3m 9s):
The other thing I’m finding just in terms of my business, Mike, and you can obviously add in on this is when you talk about the baby boomers. I think there are a lot of owners that wanted maybe a five to 10 year, more window to stay in what they’re doing. And now they’re getting tapped on the shoulder or they’ve gone during this period of time and saying, you know what, maybe now is the time as opposed to waiting. And you finding that, that sort of like that five to 10 years, that a lot of people put in terms of their timeline to sell a business, or now it’s being ramped up now to the present because of what’s been going on.
Michael (3m 51s):
So mark, I, I, a good question. I was having closing dinners with two different clients, neither of whom was doing a sale transaction. We were doing sort of a strategic investment for them or restructuring their debt. And each of them independently said that they are fielding four or five calls a week, unsolicited from potential buyers. This is oftentimes driven by private equity firms that are trying to source deals or investment bankers, putting books out on the street. So yes, there are people who say, I didn’t think that I’d be ready to sell or I’d ever want to sell maybe five or 10 years. I think about it, depending on whether they’re working with a wealth advisor, they may have a plan in terms of how much cash they want to build up.
Michael (4m 37s):
So they were thinking five or 10 years out in order to build a company to sufficient scale. But right now the multiples can be insane if you have a good business. What I often think about when I hear that from clients, is that, are they being active? Are they being reactive? If the market’s coming to you because somebody might want to buy you, that’s obviously reactive. Are you going to get the, the, the highest and best value and the best terms from someone like that versus going to the market and actively positioning the company where you want it to be including after doing cleanup, that every company can use to be more attractive as a target.
Mark (5m 19s):
Interesting, Mike, you know, you’ve represented people who have bought and sold a numerous number of businesses, but you’ve also represented people who are Selling their, their baby, their business probably for the first and only time in their life. And with regard to sellers, who’ve never been through this before. What are some of the things they’ve learned and need to learn? You know, about this process?
Michael (6m 0s):
It’s a good question, mark. There’s kind of two different buckets for that. And we try and talk with clients early in the process. If they’ve involved us early, the first is that our clients often say to us, after a closing, that they did not appreciate how much time it takes to go through the process. And there is indeed a process to these transactions. The process will start obviously with the letter of intent, which comes about because hopefully you have multiple bids for the company and you can set out some basic terms, including, you know, how much, how much is going to be held back and other things like that. But once you’ve signed a letter of intent with someone there’s a long process that comes, that sort of breaks out into three different buckets.
Michael (6m 41s):
There’s the financial piece upfront where quality of earnings gets tested and looked at very carefully to see if the purchase price sort of makes sense. And how robust are the sellers, accounting systems and books. Secondly, after the quality of earnings analysis, per se, is going to be a deeper dive into accounting because that’s going to provide the due diligence phase and information for the buyer where the buyer really starts kicking the tire and getting in the weeds to see how clean is this business? What kind of risks do they have relative to other targets I might be looking at is this really an attractive company? And then the third and final stage is the legal stage, which is documentation, which is the last of sort of three stages.
Michael (7m 25s):
It’s also the most detailed. And the one where sellers are already exhausted from the first two phages phases of financial and due diligence. And now you want to go and we’ll have guts of a document and a disclosure schedule where you’re trying to shift risk to the buyer. It’s exhausting, you’re running your company at the same time. You have a completely separate job that takes at least as much time trying to sell it. So that’s number one is sellers often say they just didn’t appreciate how much time it takes. And the other thing that they tell us when we’re sort of debriefing afterwards is make sure you know, what you want to do after closing, because all of a sudden, now maybe you’ll get six months.
Michael (8m 7s):
Maybe you got a year with the buyer. It’s pretty rare that someone’s going to be able to just walk away the day after closing, but what do you want to do with yourself when you’re done? That’s an important thing to think about.
Mark (8m 19s):
So I, you know, from the point of view of someone who handles business litigation, this legal documentation process that Mike is talking about is, you know, we’re, we’re not talking about boiler plate and we’re talking about critically important things because the seller’s going to have to make certain representations to the buyer. And I have spent a good part of my career dealing with litigation that has arisen based as a result of transactions right now, defending sellers who are accused of financial fraud in connection with the sale of the business.
Mark (9m 11s):
There may be a employment or consulting agreement for the buyer, for the, for the seller. And the next thing you know, who is the buyer, throws them out of the company unceremoniously, and doesn’t pay them. You can have disputes about earnouts promissory notes, all sorts of things. So if I could just throw in the work that Mike is doing to protect his selling client is just, and I think that people who have bought and sold multiple businesses have a greater appreciation for the importance then perhaps, you know, the first time seller,
Marc (10m 6s):
Well, I’m sorry, What I, what I was just going to add as both of you know, that my, this business that I’m in right now is my second employment business. And my first one we’re actually, we sold about 20 years ago when I was partners with my ed partners, with my father. I can tell you that the work that Mike is mark said, that’s important because you’re right. You go in there with your, your, especially, it was a great time for my father to get out. But for me, it was like, oh, you know, here’s an opportunity with this public company. You know, they, they want me to come in for a certain period of time.
Marc (10m 47s):
And then all of a sudden you come in and the next thing, you know, a recession, which is the Gulf war recession company. And all of a sudden, the executives you were excited to work with are no longer with the company, because it’s all about the shareholder price. And you’re like, okay, it’s a lot of things happen. So it was, as mark said, a lot of things happen and it’s important to protect yourself. So it’s, it’s really great. What you say, Mike, even though you might not want to think about it. That was something that got ingrained in my head by particularly my father. So it was, it was really helpful for me post that, to say, okay, this may happen. And it did right.
Mark (11m 26s):
Mike, did you speak, could you speak briefly about the importance of having a team you’re selling a business or buying a business for that matter,
Michael (11m 37s):
Right. It’s really important. And this is where different types of clients really rely on us. And, and we, we have to have a discussion with someone who maybe hasn’t done it before has only done really small transactions that you want to get your team together early. And this is both your internal and your external team. The internal team is your critical support staff who are going to help run the business through the closing. And beyond that for the buyer, you want to make sure that those folks are incentivized to stick around for the buyer, because what the buyer is buying is predictability cashflow return on their investment.
Michael (12m 22s):
Post-closing and you don’t want to find out that your CFO or your COO or your head of sales can just walk after closing and take with them. The sale, the revenue that the buyer was looking to get. So the internal team is really important and here it really needs to be documented with a combination of carrots and sticks, carrots being. Look, if, if, if, if you stick around after a transaction, then you’ll get X dollars. If you stick around for six months after the closing, let’s say you get an additional slug of cash.
Michael (13m 3s):
So you’ve incentivized them to stick around through a transaction. Now, obviously you have to determine who on your internal team is going to know about the deal. And a lot of sellers, who’ve never done this before. Think they can do it themselves and not tell their team. That’s probably one of the first illusions that people have to give up. Once this thing gets going, you simply, can’t not let your CFO know what’s going on. When, when spreadsheets and reports from all over the place are being requested and your operations people, you start asking for copies of your critical customer contracts and find out that, you know, it’s, there is no contract with your customer. They can walk. So that’s the internal team in terms of the external team.
Michael (13m 45s):
Look, you know, lawyers first in, in of course I’m lawyer centric in part, because you want to identify risks in your business, try to streamline processes and document them, including with your customers. Next on your external team is a good investment banker who can help shop the company and tell you what you need to hear in terms of growth margin. How to be thinking about positioning yourself, where to put your resources. Third is going to be a really good accountant who can do tax planning, clean up your financial statements, get your, your turn on your receivables, as low as possible, stop financing your customers, get better debt terms, fix your capital stack.
Michael (14m 29s):
And then lastly is your wealth advisor. If you have somebody who has looked at different sales scenarios, what your tax obligations are going to be, how much you’re going to net out of sale. And is that enough for you to support you for the rest of your life, for what you want to do?
Mark (14m 44s):
Great. Very important stuff. My Thank you.
Nathan (14m 47s):
Yeah. Yep. Obviously this is a conversation that we could talk about for hours, because it’s extremely important to business owners. And we’ll have to have you back on the show, Mike, but if any business owner or entrepreneur out there listening or viewing wants to get in touch with you and find out more themselves, what’s the best way for them to reach you.
Michael (15m 10s):
You can reach me by email. I am at Tarlow Breed, Hart and Rogers, M Raiden at TBHR hyphen law.com just mentioned that you heard me on this program and I’d be happy to respond. A phone call is always best, just a chance to open the dialogue. And one of the things that’s important is you want to have a lawyer and part of your advisor team, not just tell you what they think you want to hear. You want them to sort of tell it to you straight. They shouldn’t waste your time or theirs.
Nathan (15m 40s):
Great. I want to thank you again for joining the show. Of course, that was Michael Radin partner at Tarlow Breed, Hart and Rogers.
Michael (15m 47s):
Thank you everybody. And of
Nathan (15m 49s):
Course, of course, also from Tarlow Breed, we’ve got Mark Furman, mark. If people want to reach you,
Mark (15m 56s):
I can be reached at 6 1 7 2 1 8 2 0 2 5. My email address is M Ferman, F U R M a N at TBHR dash law.com.
Nathan (16m 11s):
Great. And last but not least mark C Marc Z Legal Staffing. How can people reach you?
Marc (16m 16s):
Thanks, David. First of all, I want to thank again, Mike, for some great suggestions and comments and Mark Ray questions. As far as myself, you can Google Marc Z and R C and the letter Z or Marc Z Legal dot com MIRC z.com and 6 1 7 3 3 8 1 300.
Nathan (16m 38s):
Great, thank you. And of course, both marks are on our show regularly four segments, almost every single week. So you can find them on Radio Entrepreneurs dot com as well as YouTube, Spotify, LinkedIn, and a whole host of other sites that we stream on. I want to thank our listeners and fans last of course, and we’ll be back with another segment on Radio Entrepreneurs.
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