Episode Summary:

In this engaging episode of The Future-Ready Advisor, host Sam Sivarajan sits down with Richard Betsalel, a senior investment banker with Crosbie and Company. They explore the intricacies of mid-market business sales and strategic financing, shedding light on effective preparation and the impact of competitive tension on achieving successful outcomes. Richard's insights provide valuable guidance for business owners contemplating the sale of their companies.

Key Quote from the Episode [5:47]:

"Yeah, that's a great story, Richard. It's funny, we all remember some of those early transactions from our junior days, which I have a good few memories as well. You make a great point. Too many business owners think that they have identified the perfect buyer because it's a supplier, it's a customer. And, the person has told them that this is a perfect fit and they've got it. And you've seen it. You've just talked about an example. I've seen it where you're walking down the aisle and at the altar you get left behind after months and months of work and disruption to your ongoing business. And as you put it, having that competitive tension, having a number of buyers is good, not necessarily from a price perspective, but just minimising the risk that the transaction doesn't get done."

Topics Discussed in this Episode:

• Navigating Complex Sales Dynamics in Investment Banking [1:22]
• Key Steps for Preparing a Business for Sale [6:51]
• Strategies for Maximizing Business Valuation in Sales [14:26]
• The Importance of Competitive Tension in Negotiations [18:47]
• The Emotional Aspects of Selling a Business [21:01]
• Preparing for Unforeseen Sale Opportunities [27:00]

Resources Mentioned in this Episode:

• Crosbie and Company Website [29:29]

Episode transcript: 

Access the full transcript for the whole conversation on the thinking and planning behind selling your business.

• Subscribe to the Podcast: Don't miss an episode of The Future-Ready Advisor, subscribe on your favorite podcast platform.
• Follow Sam on Social Media: Join the discussions on Sam's LinkedIn to get more insights and updates.
• Check out the Website: Visit www.samsivarajan.com for more resources and episodes.

Sam 1:22

Hi, everyone. I'm your host, Sam Sivarajan, and welcome to today's episode of The Future. Ready Advisor. Today I'm here with Richard Betsalel, an investment banker who works with entrepreneurs and business owners on their strategic and financing objectives. Richard, welcome to the show.

Richard 1:41

Thanks Sam pleasure to be here.

Sam 1:43

Looking forward to our conversation. Let me quickly introduce you to our audience. Richard is a partner at Crosbie and Company, a leading boutique investment bank focused on mid-market, private and mid-cap public companies. Crosbie provides M&A and financial transaction advice, as well as related advisory services. They advise companies, business owners, boards of directors, creditors and other stakeholders. For full disclosure, I was previously a partner at Crosbie and I'm currently on their advisory board. Richard, can you share with us a little bit about your business, your journey and one memorable transaction to whet our appetites?

Richard 2:25

Sure. So as you mentioned, Crosbie is a mid-market, focused investment banking firm. We've been around nearly 40 years, largely focused on working with owners and family businesses and managers of private companies. Three broad service areas, mostly M&A, generally on the sell side, although we do some buy side work, we work on financings helping people raise everything from senior debt all the way to equity. And we have an advisory practice where we provide valuations, fairness, fairness, opinions and sort of board advisory and strategic options reviews for both private and public companies. I joined Crosbie about 20 years ago. Can't believe it's been that long and prior to that I spent five years working for one of the big banks and an independent securities dealer doing public company financing. And since I joined Crosby, it's mostly been the private M&A world working across a pretty broad range of industries, everything from construction and engineering to food and beverages like the whole gamut. He asked about one of my most memorable transactions I got to go back to, like when I first started at Crosby and I was a junior and I was sort of tagging along on a deal. You know, we were selling a company called Terra Footwear, which is a brand that a lot of people may be familiar with. They make safety boots and safety shoes. And this was a family owned business. Second generation, the 11 family had started it. They had a facility out in in Newfoundland, and then the three kids took over and they built a second facility in Parkdale, Ontario, and they decided it was time to sell. And we were helping them do that. We marketed the business all over the world. I think we had interested parties from Asia and Europe and North America and ultimately we had sort of two. It was a two horse race. We had Kodiak, which is, you know, the other major boot maker that a lot of people would be familiar with. And we also had Timberland, which was a large public company. Both were kind of competing and we thought that Timberland was going to win the day. They kind of had the most firepower and it was really strategic for them. But at the 11th hour they changed the deal on us and they they went from a from a share deal to an asset purchase and they lowered the price. And we said, guys, this is not going to work. It's, you know, you're going to lose the deal. And they didn't believe us. They thought we were bluffing. They really they really thought we were bluffing, even though we we told them that we had another party. So we went back to Kodiak and we got them to come up to kind of the same deal that we had with Timberland and we moved forward with them. And when Timberland found out that they were out, they lost their minds. It was it was it was really fascinating to see their reaction. They were trying to, you know, change everything at the 11th hour, trying to get back into the process. And at the end of the day, our client didn't even really want to work with them anymore. And they they closed a great deal with Kodiak and had had a great success after that. The company is still around. You'll still see the the the brand on the shelves in stores. So it was a great outcome for our client and sort it goes to show that you really need competitive tension. You need multiple parties at the table if you want to have a good outcome,

Sam 5:47

Yeah, that's a great story, Richard. And it's funny, we all remember some of those early transactions from our junior days, which, I have a good few memories as well. you make a great point. Too many business owners think that they have identified the perfect buyer because it's a supplier, It's a customer. And, the person has told them that this is a perfect fit and they've got it. And you've seen it. You've just talked about an example. I've seen it where you're walking down the aisle and at the altar you get left behind after months and months of work and disruption to your ongoing business. And as you put it, having that competitive tension, having a number of buyers is good, not necessarily from a price perspective, but just minimising the risk that the transaction doesn't get done.

Richard 6:37

yeah. It also comes in to deal psychology, like when you've got multiple interested parties, you behave differently and that comes through in the way you have discussions with potential buyers and they feel it and it gets you better results.

Sam 6:51

So maybe we can expand on that. Financial advisors often work with business owners when they consider the sale of their business. Can you walk us through some of the initial steps a business owner should take when they start considering the sale of their business? what are some of the first critical moves

Richard 7:06

I think first of all, you got to put together your All-Star team of advisors. You go and you get all the people around you who can give you the advice in all the different areas that you need to have a good outcome. And so that starts with, you know, an accountant, you know, maybe a tax advisor. You have your personal wealth advisor who can advise you on, you know, your personal financial situation and what you need from a firm, from a transaction. You need a transaction like an M&A lawyer. This may or may not be your typical lawyer that the company works with. For commercial matters, you need someone who really knows deals and then of course, you need an investment banker who's experienced and can represent you well. You know, this team, you know, can provide that holistic advice that you really need to make well-informed decisions before or during and after our sale process, though, I would say that's number one.

Sam 8:02

and then?

Richard 8:03

And then and then once you have that team in place, you start you have to kind of delve into a bunch of different areas. So you have to start thinking about, okay, what are my personal objectives for for a transaction? You know, do do I want to stay involved in the business or do I want to, you know, hand over the keys and walk away? Do I want to retain a piece of the business going forward, or do I just want an all cash transaction that's really clean? Are there like family members in the business and is there a role for them going forward? Is that important? Maybe it is, maybe it isn't. These are all issues that can affect not only, you know, the way you approach the market, but the different types of buyer. So, for example, private equity, you know, private equity always backs the jockey, not the horse. So you need to have someone in place who can run the business. And if you're leaving, then maybe that precludes you from going to private equity. Not not always, but it could there's you know, there's tax issues that you need to hammer out and you know, the financial community knows that there's there's a lot of complex ways to go about this. But sometimes these these structures take years to set up and years to cure. And you got to get those in place early. There's operational things you should be thinking about. You know, do you have a quality management team in place that can run the business day to day as you kind of move away from a transition and sail off into retirement or whatever your next adventure is, You know, are there things you can do in the business that are kind of quick and easy, that make it more attractive to potential buyers in the near term, just kind of getting the business ready for a sale? And then there's legal stuff like we run into legal issues all the time on deals where people haven't thought through like what? What change of control consents do I need? Do I have all my contracts kind of lined up, you know, whether it's employment agreements or contracts with major suppliers or customers, Have they been signed? Are they updated? Are they you know, do they do they have some runway to them? You know, if you have a major client where the the contract's coming up in three months, that's probably not a good time to go to market. You want to get that contract redone and extended so that when you go to market, there's no doubt about the quality and veracity of that client.

Those are all great points. you probably have experience with this. I've seen it where, for example, it's a family business, there's a lot of little shareholders. And the buyer isn't going to want to have to deal with each of the individual shareholders. You're not going to get maximum value. So there's some element of getting reorganisation before you even start going to the market. And you encapsulated it quite nicely that there's a lot of work before you actually even put a for sale sign on the business. And to me it reminds me almost of, we're a real estate country. It's almost like staging a home, right? You have to get all of this work done before you can actually position it in an attractive way to buyers, whatever that might be. So on that note, and I mean, I get that obviously, that each business and each client is going to be different. Walk us through a little bit what a typical timeline might be for selling a business from all of this prep work that we were talking about through a sale process, through the post-closing type of work that might need to be done.

sure. So that prep work in some cases can take years, particularly for some of the more corporate reorg tax planning type activities. It takes a while. You know, the things like getting of second tier management team in place like that could take a very long time, like some businesses have, you know, sort of a general manager who's operating below the owner who runs the business day to day and has a good team around them. That's great if you have that. But if you don't have that in your plan as to is to walk away after a short transition, then you should really think about hiring someone or a team of people and getting them in place and that that's not an overnight activity, that that can take a while. Once you have everything more or less in place and you start to, you know, you're ready to go to market, that process, it can vary quite dramatically. Like we did a deal last year where it was a bit of a distressed situation. So we had to go to market quickly. We we got expressions of interest within six weeks of go to market and go got and close the deal. Within four months We had another transaction that took almost two years because the buyer was Japanese and they were very slow and methodical and there were, you know, a couple of issues that we had to deal with. And so that, you know, that's the other end of the spectrum. But I would say a typical sale process from the point you hire your advisory team and start preparing is probably 8 to 10 months. That's a good rough estimate. And, yo know, you spend a couple of months getting ready upfront, getting you're getting learning about the business, preparing marketing materials, and then you get into the market, speak with potential buyers, hopefully, you know, get some offers and then narrow things down to to one buyer after maybe some management meetings. And typically all of that takes about eight months to up to about ten months.

And I'm sure there were situations because the prep work is so important and the answer that you're giving is that you can never start too early in terms of thinking about it. even if it's informal. Have there been cases that you've worked on where somebody has come to you to say, look, we're thinking about selling and you tell them, okay, here's all this prep work, go do this and then come back and then you can start the formal sale process. At that point.

Absolutely. We're working with a client right now where they're they're in the process of onboarding some major new clients through a new program they have, and we're working with them through that process. But they know that they're not going to go to market for, I don't know, say, another year. But we're keeping tabs with them. We're giving them advice along the way. And at at the right point in time, we're going to tell them we think you've done enough work, that you're going to get full value for this new business that you've brought on. And we think it's time to go to market now. So never too early to start.

And you mentioned a key thing, and this is probably the first thing that owners think about, which is the valuation. So that is one of the most challenging aspects of selling a business, is what price am I going to get for it? Can you walk us through how you advise business owners to think about valuation? I mean, are there common pitfalls or areas that are often overlooked?

Sure. So I would say, you know, look, value is it's like beauty. It's in the eye of the beholder. Different buyers are going to have, you know, very different views on value. You know, we've run processes where we get bids that are, you know, from X to 2 x, you know, like very broad goalposts on value. So the key is to make sure that you go out and talk to all the logical parties so that you really canvas the market and the market will speak loudly, right? There's nothing there's nothing better than running a process to unearth the true value of your business in terms of method, all ages, you know, lots of different businesses are valued different ways. I mean, people always kind of rely on multiples of EBITDA earnings before interest taxes, depreciation and amortization and that and that's because that's sort of a proxy for for cash flow. But just this metric is not relevant for for every industry or every business. You know, you get tech companies that trade on multiples of recurring revenue and asset management, companies that trade on, trade on, you know, a percentage of value. And there are a whole bunch of different approaches. But at the end of the day, people are looking for for growth and they're looking for a cash flow. And so you kind of have to distill down to those two those factors. And we tend to look at, you know, what's the market saying, You know, when we're trying to give advice to our clients on what we think their business is worth, we're going to go to the market and say what other transactions for similar businesses, what have those businesses traded for? Right? Those are precedent transactions. What are the public companies in the space? If there are relevant ones, what are they trading at? And you can look at those as guideposts. But at the end of the day, most of the transaction data you're going to get from the market is for much larger companies that are maybe they're international, maybe they're multibillion dollar businesses. We're dealing with mid-market companies, and it's very hard to compare them. And what I would say is that business owners often look at those public metrics. You know, they'll see a deal in the paper where, you know, a company, ABC in their industry sold for 15 times EBITDA and they're like, well, that's great. My business has got to be worked pretty close to that. I have a great business and you know, yes, you have a great business, but you know, your mid-market businesses are a lot more fragile. They tend to have, you know, thinner management teams. They're not as diversified. They often have some form of customer concentration. You know, there's a whole bunch of reasons why they're just much more fragile than these big public or large private businesses. And they trade at a discount. So, you know, that discount could be quite substantial. It could be, you know, some something sometimes close to 50%. So you really have to take all that public data with a grain of salt. And that's one of the biggest hurdles we run into as advisors, where clients come to us and say, I saw this deal, I heard about this deal, and it was at this multiple. I'm like, Well, that business, yeah, they're in the same industry as you, but they're not the same business as yours. And it's, you know, it's hard for people to hear that, but we're trying to be honest with our clients to make sure that their real estate value expectations.

Yeah, and that's so important. Richard, You provide a rational outlook. And going back to your memorable transaction, you've just demonstrated the value of a competitive process because having different buyers who have different distribution and different business models can make a difference in the price that you get in theory. On the deal that you talked about, Timberland should have been able to distribute Terra foot work through a much wider network than Kodiak could for instance, and as a result, they could afford to pay a higher price. Now, whether they, flubbed the deal or not doesn't matter. Having them in the process has helped drive the price that, Kodiak eventually paid right.

Absolutely. Absolutely. Without that competitive tension, we would not have gotten the great result that we did.

And of course, price isn't everything, right? I mean the price that you sell your company for, as I always used to say, you can get a high price. But if you care about what's going to happen to your employees, what's going to happen to your customers, there may be a buyer that is going to say we're going to run it exactly the way you did. No changes here is the price. And there may be another buyer that says, look, we'll pay you, 30% more than what the other guy is going to give us. But, we're going to make these changes that are going to basically gut your business.

Right. And we see that all the time. And we see clients make decisions sometimes to go with the lower offer, because that offer, you know, it has other factors in it that are more attractive to the, you know, whether it's has to do with how the business is going to be run afterwards or elements of the deal that are, you know, germane to their financial well-being. So, you know, a $30 million offer from one side, it may not be the same as a $30 million offer from the other side where, you know, maybe there's less cash, there's more more of a VTB or an earnout. Maybe there's closing certainty. That's something that people often don't think about. You know, they're they're just focused on the number and they forget about that. Not all buyers are created equal, that certain buyers have much greater ability to close on the terms that they've put forward. And and that's a risk. You don't want to go through a sale process and have it fall apart if you can avoid it. So, you know, picking a party that has much greater closing certainty is really important. And that's often a trade off that we see in that our clients make in the deal selection process.

that's a great point. And along those lines, obviously and you touched on this before, selling a business involves a whole bunch of different considerations. Financial tax, emotional.

We touched on it, but I'd love to see if you can explore it a little bit further. Is can you talk about some of the trade offs and considerations that business owners do weigh during this process? And any examples that come to mind would be great.

Sure. So I would say that the the sale process is incredibly emotional. You know, a business, it often becomes kind of like a family member, right? It kind of it almost has a seat, you know, at the Thanksgiving table or, you know, the holiday table, like it's it's it's that has that kind of presence. And and so, you know, over the years, we've seen a lot of different situations where clients are behaving in a way where they're not they're they're acting emotionally. And that's understandable. So, you know, they they often think about, you know, we always ask them, you know, think about the role you want in the business going forward and your other family members be sold. The business a few years ago where it was very important that that next generation maintain their jobs going forward and had ongoing management roles in the business and that that was part of the selection process that our client chose a bidder that was, you know, many millions of dollars lower than the highest bid. B it provided that second generation actually, I think was the third generation in that case, with the opportunity to stay with the business. Protecting employees is also another one. And then one of the things we often see is, is the company name or the brand that we operate, is that going to survive or is not just going to disappear? And for some people that's a nonstarter. Like they're like that's I don't want to see the name of the company disappear. It's really important to me that it continues on. And so, you know, choosing who you who you sell to impacts, you know, the outcome there. And it impacts the decision making process.

And given that our audience is financial advisors who work with business owners, and have clients thinking about these transactions, what piece of advice would you offer financial advisors in their conversations with their clients to get them to start thinking about some of these things that you highlighted?

I would say they have to start having, you know, open and frank conversations with their with their business owner clients early on, even if they're, you know, not close to selling, you know, get to know them, understand what their objectives are long before they plan a process. And so that's let's figure out what your long term objectives are both for the business. And then after you sell the business, you know, what age and stage are you at? What's your family situation? How does the business perform? Because I would imagine a lot of business advisors don't really have insight into how the business itself is performing. Have you begun to plan for an exit and you know, if you had to diagram what ideal exit looks like, what does that look like? You know, do they have a timeline in mind? Not everybody's on the same timeline. You know, you could have a young person who just doesn't want to run the business anymore. And then we you know, we have people who are 75 years old coming into our office all the time saying, I'm not really ready to sell, but I feel like I have to you get you get all different kinds. So really understanding what their objectives are and understanding the business to a certain extent. And I think starting early is the key.

And maybe we can explore one more element of that. At least it's my view and you may disagree, is that, business owners and financial advisors should start thinking in business cycles. I've seen too often that, somebody is thinking about selling and then they look at it and say, okay, the market's now taken a turn and the EBITDA multiples have come off a little. And the idea is, well, I'm going to wait until those multiples go back up and I'm then going to sell. I mean, it's a bit like real estate. But, you get to the

Yes.

that could be another five, six years away. And there is a danger that it's never the right time to sell. Right. So what would you say to an advisor that, do they need to kind of get that kind of thinking into their business owner clients that the business cycle is out of your control? So start planning well in advance of even the next business cycle, perhaps

Yeah, absolutely. You know, as you said, the business cycle is out of your control. You don't know where market multiples are going to go. And mid-market businesses, you know, they they're by their nature, somewhat fragile. They can be not all of them are, but a lot of them are. And, you know, you lose one client, you lose one contract, you lose a key person on your management team, and it really sets you back. And then you're kind of retrenching for another, I don't know, five years to kind of get back to where you were. The other thing people should also think about is that sometimes you get approached, you get approached out of the blue by a strategic and you're always want to be ready for that conversation. Right? And I'm not saying that you necessarily want to engage, but that strategic without running a process, but you should be ready to at least have a preliminary discussion. And that requires having all your ducks in a row, like really understanding your business, having done all the things I mentioned before about preparing for a sale, like doing that, even if you're not planning to go to market, can, can really add a lot of value if something happens out of the blue that either forces you to sell. Sometimes we see people with unfortunate health events or family issues that forces you into a transaction or sometimes there are good things in the business that you want to capitalize on, and it's really important to be ready to go and enter that process and have that advisor team set up, have all the things that you needed to do beforehand, set out, whether it's tax planning or restructuring, get it all done, and then if and when the right time comes, then you're then you're ready.

it's great advice like straight from the Boy Scout handbook, right. Be prepared for all of these things

Exactly.

that can happen. Richard, this has been great. I think some really good insight and advice for business owners. We're coming to the end of our podcast, so I have a few final rapidfire questions for you.

Sure.

Professionally, what is the most important lesson you've learned over the years?

Time is your enemy. You know, it's really important to have an investment banking team who runs the sale process while maintaining that competitive tension and avoiding what we call deal creep. That's just when things just keep dragging on and dragging on and the deal never closes. You really want to get to to closing a transaction because time is not your friend and all the longer things go, only bad things seem to happen.

Well, maybe I can expand on that. To your point, it's not just that, the competitive tension is reduced a little bit, but presumably as a business owner, your time is diverted from day to day operations of the business and more and more focused on these other deal related issues. So your actual business is potentially suffering as well.

Absolutely. And the first thing we tell our clients when we get engaged is your number one priority is to run your business. We have seen too many times where business owners start to take their eye off the ball. The business suffers in one way, shape or form and that either kills the deal or it negatively impacts the outcome.

Number two, what is one practical tip you would offer listeners keen on applying the insights that you shared?

I would sort of reiterate what I said before is that start start planning early, even though you may not have plans to sell for many years, it's important to be prepared if circumstances change. And as I said, this could include a health event or a business specific event or something in your industry. Or maybe you get approached on an unsolicited basis from some third party. If you start planning early, you're going to be in a much better position to deal with events as they occur.

This has been great. Lots of great advice and insights and stories. If listeners want to learn more about you or Crosbie and find out about your work, where do they go?

Our Web site is Crosbieco. com, and they can find my contact information on there. Feel free to reach out, happy to address any questions people have. We also have a list of all the transactions that we've done over the number of years and some really nice pieces on on the M&A industry that are that are good bedtime reading.

Awesome, Richard. Thank you so much for joining us today and future Ready Advisor.

Thanks a lot, Sam. Pleasure to be here.