Business Acquisition Process: How To Become More Sellable With Chase Kenner
27th February 2020 • Business Leaders Podcast • Bob Roark
00:00:00
00:41:08
Shownotes
Selling an entire business or company is, without a doubt, daunting for the owner. However, with the right people to help execute this process, the business acquisition process can be quite successful. Today, Bob Roark interviews Chase Kenner, an Associate Broker with Raincatcher and a certified financial planner, about how his company proceeds with their process of helping companies become more sellable. He also discusses the importance of educating clients on what it takes to sell a business every step of the way, along with setting realistic expectations and client red flags.
Business Acquisition Process: Earnouts are typical during acquisitions of small businesses.[/caption]
You're talking about the owner is the business. Without the owner, you don't have a business. From the buyer's eye on the acquiring firm, how do we acquire the firm and keep its customers from not going out the door? It's very much like any other business that has a client concentration risk. I would imagine most of the investment firms, 80% of their business comes from 20% of their clients and you see that a lot. For you, when you were looking at an acquisition previously and you had the owner of the small firm was the business, did you structure that much an earn-out where they had to stick around for transition?
An earnout was typical during these transactions. These firms were always 100% fee-based, so we did have great projections of revenue moving forward with the risk of market fluctuation. What I mean by that would be a fee attached to the account. However, many assets that the firm has, a fixed fee would be attached to those assets and that's how we would project the revenue moving forward.
Thinking about what you were doing and the preparation for what you're doing. When you're talking to business owners, the business owner gets in touch with you and you're chatting with them about their business and they go, "We've seen acquisition strategies for business owners." You see the similarities between the investment practices that you are acquiring to build a bigger firm. You see the challenges with the meshing cultures and then you go, "How do you take in and preserve the client relationships?" All of those things, when you're a seller looking for somebody to chat with them about who may be acquiring their company, you can talk very directly based on your experience on what you've seen from the deals that went well and the ones that you looked at and you go like, "I didn't quite see that one coming."
There's so much emotion involved. These financial advisors that we're speaking to, their business is their baby just like any other business owner. That's their book of business that they took them 30 years to achieve this level of success. They worked really hard for it and they've created these amazing bonds and relationships with their clients. Not only are you managing those expectations and emotions with the owner, but with the clients as well. Clients walking in and saying, "I feel you're losing control. What's going on? How will my investments be handled from here?" A lot of times, this is the only amount of money these clients have to sustain for a retirement or whatever it is. It's their nest egg. There are different levels of emotion, especially on the financial advisory side when it came to acquisitions. We had to be great listeners and it took a lot of time of getting in there and finding out exactly what service these customers are used to and how did this advisor who was captain of the ship steer. How did he operate?
As you've transitioned away from that and you're talking to business owners all day long that are considering it. When you have a business owner call you and go, "I'm thinking about," what does that initial conversation look like? Once that conversation is made, if they want to start going further down the road, what does that process look like from your perspective?
I had a lot of experience as a certified financial planner with those types of phone calls before. Even though I'm new to Raincatcher I took on hundreds and hundreds of calls where I would start with, "I'm planning to do X." The call is very similar to Raincatcher, I get a phone call from a potential seller thinking about, “I need to sell my business,” and they have no idea where to start. They find us online and then we're having a conversation about their business. It's a lot of discovery. I ask a lot of questions to figure out exactly what their goals are. Everyone has different goals, objectives, and values. Values are more important. They tend to not change so much. Goals will change as life changes, especially their values and figuring out what an end result looks like if we go down that road and sell that business. How do we make sure that they're satisfied at the finish line?
[bctt tweet="There are different levels of emotion, especially on the financial advisory side, when it came to acquisitions." username=""]
The potential business owner that's out there goes, “I may or may not want to sell. I'm at a crux. I've got to take in and start looking at my business.” When you get a typical call, if there were the top 1 or 2 things that you think that the business owners that call and are surprised about, what do you think they are?
One surprise that comes up often is the amount of time it takes to sell a business and how much work is involved in selling a business. It's not you’re listing a piece of furniture on Craigslist or a nice house or something that. It's a very intricate process. A lot goes into it, a lot of gears and parts. Explaining that process to them and educating them on what it takes to sell a business successfully and create that environment of bringing qualified buyers to the table and creating a good quality market for them will drive up the price of their business. Educating them on that process. Also, one thing that surprises them is how the deals are often structured. Many times they're expecting someone to write them a check, 100% cash. Going back to what you were talking about with earnouts, performance-based metrics of getting paid. A lot of times, they're not aware of how those deals are structured. Educating them on those things as to where everyone's on the same page and setting realistic expectations.
In the CFD world, you can be a questionnaire type discovery documentation or process and you have that as well with Raincatcher, do you not?
Yes, we do. From the very start, a business owner will be asked to take this thirteen-minute assessment. It's made by Value Builder. It's a sellability assessment. It's a fantastic questionnaire that will benchmark the business owner's company based on its industry and its peers and provide a sellability score to see how sellable the business is. Unfortunately, most businesses that go to the market end up not selling because maybe the business was too attached to the owner or wasn't priced properly or wasn't marketed well, whatever the reason might be. The majority of businesses that go to the market do not end up selling. One of the tools that we've implemented at Raincatcher in order to prevent that statistic from leaking over into our business, and we flip that statistic upside down. One of the ways we did that was by implementing the sellability assessment to figure out the nuts and bolts of the business and find out how attractive they maybe when buyers start to look at the business.
I think about the value of that discovery. Let's say that you have a whole series of levers within that sellability document. You talk to the business owner and you have a client concentration issue or you might have a short contract issue or you might have policies and procedures and intellectual property issues. We always hear you should have good financials. I always said, "I should be taller." I don't know if that helps, but when you talk to the business with the benefit of having that assessment in front of you, what types of insights or discussions do you have post the questionnaire with that business owner that's serious about moving forward?
The conversations go quite well. At first, I didn't know how they would take it because you're pointing out flaws with the company. It’s the way it's presented. It makes for a great conversation because it's not saying, "No, buyers won't like this." It goes more in-depth by explaining why this may be a risk through a buyer's lens. It's very important because most sellers are so disconnected from what the buyer is getting themselves into and the risks involved in buying their business. It provides a great, realistic conversation about these different metrics. You can apply these different key drivers to a valuation range. You can say, "Realistically, if you think you are worth 20% more, we feel that this is the drivers that you need to concentrate and hone in on in order to get there. Maybe in six months or so, we are confident that you're there." It eases us into that conversation without anyone getting too defensive and pointing out what is.
[caption id="attachment_5013" align="aligncenter" width="600"]
Business Acquisition Process: Buyers will want to know that true cashflow and showing its details is necessary.[/caption]
There's a pretty big disconnect between the owner that's run his business for twenty years and their view of their risk in the company versus a buyer coming in going, "I want to buy this particular company." You go, "I don't know your top clients well," if there are a lot of things unknown. It's challenging for the business owner that's been submerged running his business to step back and go, "Would I buy my own business if I didn't know anything about it?"
We're dealing with that every day. The personalities of each business owner are completely different as well. Finding out how do we take them by the hand and step back and get out of the day-to-day and look at this from a buyer's lens is a lot of what we do.
If the business owner says, "I had this price in mind," whatever it is and go, "My neighbor down the street, my CPA, somebody said it should be worth this much." You take a look at it and you go through the assessment and go, “Given the assessment, there are some areas that you can work on that will increase your chances to get to that target price that you're looking at.” If you were to look at the top 1 or 2 things that you're running across, those business owners that are reading could work on, what do you see that maybe they don't see?
It's funny because we joke around have clean financials and all those things but it’s true. Business owners, it's quite common that you're going to run personal expenses through your company and save to help yourself with taxes and so on. You have to do the opposite when it comes to selling your business. At the end of the day, buyers are going to want to know that true cashflow and it's so important that you show that. Many times in these conversations, bookkeeping has to be flipped. You have to adjust your cashflow. You have to show what the company is doing performance-wise and that way, you can maximize your earnings and your selling price. It's changing that mindset that they've been so used to for decades.
I think about the time frame for the business owner. For many business owners, they're busy with the day-to-day keeping business and clients, making payroll, and keeping up with all the regulatory changes. That's busy for them, and I don't think they step back and look at the value creation process that happens and the effort it takes prior to sale. We talk about good financials and the last thing you'd want to have in financials from a buyer's perspective is a surprise. You go through and do your due diligence and you've seen a number of these. What are the typical surprises that you started to run across that throw up red flags for a buyer?
Something different from many of our competitors that we do at Raincatcher, we're taking 30 to 45 days or however long it takes to prepare them for buyers. We're not even going to market or launching to market unless we know that all the skeletons have come out of the closet. We've prepared everything and have it all in a good life for buyers. We tell our sellers, "This is a partnership. You're going to partner with us and we're going to get into the weeds of this business and we're going to know it well. Because being a success based firm, it matters that we partner with the right businesses." Fortunately, our process has helped us eliminate many of those surprises down the road. Taking that 30 to 45 days of due diligence on the sell-side has been successful for us and our clients by saving us 4 to 6 months when buyers start to come in and start seeing surprises be because they're already spooked. They don't know this business. All those risks are running through their minds as well. Any little thing will definitely...
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Watch the episode here:
[embed]https://www.youtube.com/watch?v=m9aWq6sUrnE&feature=youtu.be[/embed]Business Acquisition Process: How To Become More Sellable With Chase Kenner
We have Chase Kenner, an Associate Broker with Raincatcher and a certified financial planner. Chase, tell us a little bit about how you got here and what you do. It’s great to be here, Bob. Thank you for having me. I was born and raised in New Iberia, Louisiana, home of Tabasco. That's our claim to fame. I graduated from the University of Louisiana at Lafayette, so I'm proud of Ragin’ Cajuns, in business administration. Right before I graduated, I received an offer from Edward Jones Investments to be a financial advisor within their corporate headquarters in St. Louis, Missouri. I was excited at the time to leave South Louisiana for the first time. It was an amazing experience. The boy from the Bayou went to the big city. We're known as Bayou Teche in New Iberia, a beautiful little town. I ended up moving to St. Louis and it was a tremendous experience that made some lifelong friendships. As a guy who likes to hunt, fish, cook and drink beer, the home was calling me. It turns out that South Louisiana was where I wanted to start my career. I moved back to Lafayette, Louisiana where I reside, my wife and our two children, and I became a fiduciary independent advisor. Years later, I lucked out. I was at the right place at the right time and met this incredible group of guys that founded the top five wealth management firms in Louisiana and they were looking to bring in a younger advisor. What intrigued me the most was that this particular firm, their desire was to grow inorganically through acquisitions. Originally, I was meant to be another financial advisor, but our managing partner who I still see as a personal role model, a very smart and great guy, saw something more in me and gradually involved me as a leader in implementing necessary operations in order for them to scale and grow. It was a very exciting new territory for me as well. My first experience in M&A which was also industry-specific and on the buyer side of things. Once I became part of the M&A team, I found myself more excited about planning the firms in organic growth rather than the typical day-to-day financial advisory role. That's something that ended up happening organically. One day, my good fishing friend, Jude David, tells me that he's now with this amazing business brokerage firm called Raincatcher where they help entrepreneurs buy and sell businesses. I was very intrigued. I learned more and I immediately thought of all the business owners that I was serving as a financial advisor and a certified financial planner at that time. I knew that many of these people would benefit from this information I was receiving from Jude. After learning more and trusting his judgment, I was fortunate enough to meet our CEO, Marla DiCarlo and a VP of brokerage, Jason Thomas. I immediately saw their passion for small business owners. It was so contagious and motivating to hear them speak about how they're changing the game of business brokerage and setting the bar in the entire industry. Shortly after that, an opportunity presented itself for me to join as an associate broker with Raincatcher. Here's this opportunity of two things that I love most. One, helping small business owners and also that M&A environment that I grew to love as well. To me, it was a no brainer. Here I am, talking to you. When people hear inorganic growth of a financial management firm, it's where they go out and acquire other practices and they start aggregating the practices for asset growth. You had a foreshadowing of what you're doing because you were involved in the acquisition of small businesses at that point to bring in to a larger firm. You saw the gamut of well-run practices and the other ones. As you think about contrasting the companies when you guys brought them on board and go out, that was an amazing company versus, “It's a good thing we bought them because they would have gone away if we hadn't.” What were the chief characteristics that you saw in those companies that you see working with other business owners? I see a ton of similarities. Having that buyer's lens with the inorganic growth and the acquisitions from wealth management firms, I was able to see the risk involved for a buyer. There's a ton of risk when you're acquiring someone else's company. As far as the characteristics of the business owners whether it be a financial firm, a manufacturing company or a construction company, a lot of times you would have the business is the owner. It's a very difficult transition when you're trying to detach that business from the owner. A lot of times, it would be an individual as in the financial advisory world who was not entrepreneurially minded was fantastic at building relationships. He was phenomenal at building relationships and had trusted clients that trusted him. He was great at managing their money. The thought of leaving the wirehouse or any other broker that was overseeing them frightened them to think, “Who's going to pay the light bill?” or “Who's going to be in charge of payroll?” All of those questions would go through their head. Sometimes, we'll come across a company that’s great, but it is the owner. The owner is so involved and meshed within its entire operations, networking and customer base to where there's a lot of work to be done before that business can potentially be attractive to oncoming buyers. [caption id="attachment_5012" align="aligncenter" width="600"] Business Acquisition Process: Earnouts are typical during acquisitions of small businesses.[/caption]
You're talking about the owner is the business. Without the owner, you don't have a business. From the buyer's eye on the acquiring firm, how do we acquire the firm and keep its customers from not going out the door? It's very much like any other business that has a client concentration risk. I would imagine most of the investment firms, 80% of their business comes from 20% of their clients and you see that a lot. For you, when you were looking at an acquisition previously and you had the owner of the small firm was the business, did you structure that much an earn-out where they had to stick around for transition?
An earnout was typical during these transactions. These firms were always 100% fee-based, so we did have great projections of revenue moving forward with the risk of market fluctuation. What I mean by that would be a fee attached to the account. However, many assets that the firm has, a fixed fee would be attached to those assets and that's how we would project the revenue moving forward.
Thinking about what you were doing and the preparation for what you're doing. When you're talking to business owners, the business owner gets in touch with you and you're chatting with them about their business and they go, "We've seen acquisition strategies for business owners." You see the similarities between the investment practices that you are acquiring to build a bigger firm. You see the challenges with the meshing cultures and then you go, "How do you take in and preserve the client relationships?" All of those things, when you're a seller looking for somebody to chat with them about who may be acquiring their company, you can talk very directly based on your experience on what you've seen from the deals that went well and the ones that you looked at and you go like, "I didn't quite see that one coming."
There's so much emotion involved. These financial advisors that we're speaking to, their business is their baby just like any other business owner. That's their book of business that they took them 30 years to achieve this level of success. They worked really hard for it and they've created these amazing bonds and relationships with their clients. Not only are you managing those expectations and emotions with the owner, but with the clients as well. Clients walking in and saying, "I feel you're losing control. What's going on? How will my investments be handled from here?" A lot of times, this is the only amount of money these clients have to sustain for a retirement or whatever it is. It's their nest egg. There are different levels of emotion, especially on the financial advisory side when it came to acquisitions. We had to be great listeners and it took a lot of time of getting in there and finding out exactly what service these customers are used to and how did this advisor who was captain of the ship steer. How did he operate?
As you've transitioned away from that and you're talking to business owners all day long that are considering it. When you have a business owner call you and go, "I'm thinking about," what does that initial conversation look like? Once that conversation is made, if they want to start going further down the road, what does that process look like from your perspective?
I had a lot of experience as a certified financial planner with those types of phone calls before. Even though I'm new to Raincatcher I took on hundreds and hundreds of calls where I would start with, "I'm planning to do X." The call is very similar to Raincatcher, I get a phone call from a potential seller thinking about, “I need to sell my business,” and they have no idea where to start. They find us online and then we're having a conversation about their business. It's a lot of discovery. I ask a lot of questions to figure out exactly what their goals are. Everyone has different goals, objectives, and values. Values are more important. They tend to not change so much. Goals will change as life changes, especially their values and figuring out what an end result looks like if we go down that road and sell that business. How do we make sure that they're satisfied at the finish line?
[bctt tweet="There are different levels of emotion, especially on the financial advisory side, when it came to acquisitions." username=""]
The potential business owner that's out there goes, “I may or may not want to sell. I'm at a crux. I've got to take in and start looking at my business.” When you get a typical call, if there were the top 1 or 2 things that you think that the business owners that call and are surprised about, what do you think they are?
One surprise that comes up often is the amount of time it takes to sell a business and how much work is involved in selling a business. It's not you’re listing a piece of furniture on Craigslist or a nice house or something that. It's a very intricate process. A lot goes into it, a lot of gears and parts. Explaining that process to them and educating them on what it takes to sell a business successfully and create that environment of bringing qualified buyers to the table and creating a good quality market for them will drive up the price of their business. Educating them on that process. Also, one thing that surprises them is how the deals are often structured. Many times they're expecting someone to write them a check, 100% cash. Going back to what you were talking about with earnouts, performance-based metrics of getting paid. A lot of times, they're not aware of how those deals are structured. Educating them on those things as to where everyone's on the same page and setting realistic expectations.
In the CFD world, you can be a questionnaire type discovery documentation or process and you have that as well with Raincatcher, do you not?
Yes, we do. From the very start, a business owner will be asked to take this thirteen-minute assessment. It's made by Value Builder. It's a sellability assessment. It's a fantastic questionnaire that will benchmark the business owner's company based on its industry and its peers and provide a sellability score to see how sellable the business is. Unfortunately, most businesses that go to the market end up not selling because maybe the business was too attached to the owner or wasn't priced properly or wasn't marketed well, whatever the reason might be. The majority of businesses that go to the market do not end up selling. One of the tools that we've implemented at Raincatcher in order to prevent that statistic from leaking over into our business, and we flip that statistic upside down. One of the ways we did that was by implementing the sellability assessment to figure out the nuts and bolts of the business and find out how attractive they maybe when buyers start to look at the business.
I think about the value of that discovery. Let's say that you have a whole series of levers within that sellability document. You talk to the business owner and you have a client concentration issue or you might have a short contract issue or you might have policies and procedures and intellectual property issues. We always hear you should have good financials. I always said, "I should be taller." I don't know if that helps, but when you talk to the business with the benefit of having that assessment in front of you, what types of insights or discussions do you have post the questionnaire with that business owner that's serious about moving forward?
The conversations go quite well. At first, I didn't know how they would take it because you're pointing out flaws with the company. It’s the way it's presented. It makes for a great conversation because it's not saying, "No, buyers won't like this." It goes more in-depth by explaining why this may be a risk through a buyer's lens. It's very important because most sellers are so disconnected from what the buyer is getting themselves into and the risks involved in buying their business. It provides a great, realistic conversation about these different metrics. You can apply these different key drivers to a valuation range. You can say, "Realistically, if you think you are worth 20% more, we feel that this is the drivers that you need to concentrate and hone in on in order to get there. Maybe in six months or so, we are confident that you're there." It eases us into that conversation without anyone getting too defensive and pointing out what is.
[caption id="attachment_5013" align="aligncenter" width="600"] Business Acquisition Process: Buyers will want to know that true cashflow and showing its details is necessary.[/caption]
There's a pretty big disconnect between the owner that's run his business for twenty years and their view of their risk in the company versus a buyer coming in going, "I want to buy this particular company." You go, "I don't know your top clients well," if there are a lot of things unknown. It's challenging for the business owner that's been submerged running his business to step back and go, "Would I buy my own business if I didn't know anything about it?"
We're dealing with that every day. The personalities of each business owner are completely different as well. Finding out how do we take them by the hand and step back and get out of the day-to-day and look at this from a buyer's lens is a lot of what we do.
If the business owner says, "I had this price in mind," whatever it is and go, "My neighbor down the street, my CPA, somebody said it should be worth this much." You take a look at it and you go through the assessment and go, “Given the assessment, there are some areas that you can work on that will increase your chances to get to that target price that you're looking at.” If you were to look at the top 1 or 2 things that you're running across, those business owners that are reading could work on, what do you see that maybe they don't see?
It's funny because we joke around have clean financials and all those things but it’s true. Business owners, it's quite common that you're going to run personal expenses through your company and save to help yourself with taxes and so on. You have to do the opposite when it comes to selling your business. At the end of the day, buyers are going to want to know that true cashflow and it's so important that you show that. Many times in these conversations, bookkeeping has to be flipped. You have to adjust your cashflow. You have to show what the company is doing performance-wise and that way, you can maximize your earnings and your selling price. It's changing that mindset that they've been so used to for decades.
I think about the time frame for the business owner. For many business owners, they're busy with the day-to-day keeping business and clients, making payroll, and keeping up with all the regulatory changes. That's busy for them, and I don't think they step back and look at the value creation process that happens and the effort it takes prior to sale. We talk about good financials and the last thing you'd want to have in financials from a buyer's perspective is a surprise. You go through and do your due diligence and you've seen a number of these. What are the typical surprises that you started to run across that throw up red flags for a buyer?
Something different from many of our competitors that we do at Raincatcher, we're taking 30 to 45 days or however long it takes to prepare them for buyers. We're not even going to market or launching to market unless we know that all the skeletons have come out of the closet. We've prepared everything and have it all in a good life for buyers. We tell our sellers, "This is a partnership. You're going to partner with us and we're going to get into the weeds of this business and we're going to know it well. Because being a success based firm, it matters that we partner with the right businesses." Fortunately, our process has helped us eliminate many of those surprises down the road. Taking that 30 to 45 days of due diligence on the sell-side has been successful for us and our clients by saving us 4 to 6 months when buyers start to come in and start seeing surprises be because they're already spooked. They don't know this business. All those risks are running through their minds as well. Any little thing will definitely...