Are you thinking about selling your company…. some day?

Are there huge opportunities for buying a business now?

For a lot of business owners, Merger & Acquisitions (M&A) is a confusing black box that requires a lot of money to look into. So we thought we would demystify it. Brian T. Franco, Founder & Managing Partner at Meritage Partners, Inc. was kind enough to sit down with us to answer our questions.

If you previously had questions about how, when or if you should sell your company - chances are you’ll find the answer in this video.

Transcript of this video:

Nick Leighton (00:14):

Hi, my name is Nick and this Exactly Where You Want to Be. Today I'm with Brian Franco, founder of Meritage Partners, a boutique M&A advisory firm. Brian, welcome. Thanks for spending time with us.

Brian Branco (00:23):

Yes, Nick, thank you for having us. I appreciate this opportunity and hopefully that this will be a fruitful experience for us and those that are watching.

Nick Leighton (00:31):

And it's gonna be fun. Okay, so let's jump straight into it. How do we know if my company's ready to sell?

Brian Branco (00:36):

There are signs when your company's ready to sell. And I'll give a few examples of this. There are companies that are experiencing rapid growth and a company experiencing rapid growth is going to have a lot of needs, capital needs. It's going to need to hire employees, talent, and it perhaps it's also equipment and machinery depending on the type of industry you're in. I have had clients where they're approaching their seventies or in their seventies and they thought, gosh, this is a great time to sell. But that's a great example of being convenient timing for that individual. And when you go to market and you find that investors or acquirers are looking for companies because they too are going through growth or expansion and acquisitions provide a great opportunity to add talent to their team or to add geographic reach to their company. Or perhaps it's adding a discipline, providing a multi-discipline approach to a particular industry. In some circumstances, a business has gone through the life cycle of growth, and at times they can plateau and that's not necessarily a reflection of the business. It's not necessarily a reflection of the talent that's in that business. It's sometimes the leadership, it's a very difficult concept to understand because now it causes self reflection on that leader. It causes them to have to come to some sort of conclusion that perhaps they are not the right leader for the business at that moment. However, they should be praised because they were the right leader, in the early stages of that business.

Nick Leighton (02:15):

They got it to a certain stage. So I'm hearing that there's a leader, there is the buyer, there is the business and there is the industry. All these things need to somehow come together - to be the right time.

Brian Branco (02:25):

Correct. They either intersect on their own or at times and most of the time you have to thread these together so that you can create that opportune time to sell it.

Nick Leighton (02:34):

But it's not just because the owner of a company says, I want to sell now. Okay. Got it. Okay. So let's say I want to sell the company. What are the three things I've got to get right?

Brian Branco (02:45):

So you have to prepare for the sale. And part of that sale process is due diligence. So you're going to have investors looking at your business or acquires, could be in the same industry as you and they're going to want to see a number of things, a number of data points. So financial data is extremely important. So your financial house needs to be in order. If it's not, if we call, you know, you've heard the phrase, you know, skeletons in the closet, right? If you have skeletons in the closet, you need to do some spring cleaning and work on resolving any of those issues or potential issues because they are going to surface during that due diligence period. Okay. In your business, you may have one, maybe two folks inside your accounting department. Well, imagine when you go through this due diligence process, you're going to have a boardroom full of individuals, auditors looking at your business in ways that you've never looked at your business before. Taking measurements of your business that you've never thought to think and you never thought to make yourself. That would be one of the key ones.

Nick Leighton (03:52):

It sounds scary.

Brian Branco (03:54):

It isn't scary if you're doing what you're supposed to be doing to begin with. So that's pretty motivating too if you're trying to find motivation to have a business where your financials are in order to, here it is.

Nick Leighton (04:07):

Okay, got it. So should I have a good CPA on the team?

Brian Branco (04:11):

Yeah. And there's, there's some companies that are not large enough to have a full time CPA, but there are services out there that provide in terms CFOs or part time CFOs to help you prepare your business for whether it be an audit for your bank, whether it be for tax purposes. In our case that's going to be an audit for due diligence or at times they will do what they call quality of earnings reports, depending on the size and complexity of the business or business units.

Nick Leighton (04:41):

So the first thing we need to get right is the financials and get the right people around you to help you to do that. What else do we need to get right?

Brian Branco (04:47):

In preparing to sell your company, you have to make sure you have a vibrant and strong culture. You want to have appeal to the outside world. Why is someone going to want to buy your business over the next and assuming you're in the same industry or providing the same service or manufacturing the same good, right? What we found is strong and vibrant cultures really resonate with investors and acquirers. They do so because they're looking to possess or to have that culture within their organization.

Nick Leighton (05:19):

Okay. So what if your cultures clash? What if you have an IBM culture and a Google culture? Is that just not going to work?

Brian Branco (05:26):

We spend a tremendous amount of time upfront with the individuals and with the ownership of the business. We build out very robust pitch decks and confidential information memorandums that tells a story. It gives financial snapshots, but it doesn't tell you whether that culture is going to be compatible with the acquiring entity. So there are some cultures that just do not - do not mix and, and we find that out, not through any sort of analytics, but just spending time with the client and the potential investors and through those dialogues and through those conversations, you discover that those cultures are aligned or not aligned.

Nick Leighton (06:07):

And we do that way up front, so it's not as if you're going to find that way down the road of the sell cycle. That'd be my guess.

Brian Branco (06:12):

That's correct. In the beauty of working with a firm like ourselves is that we've had the experience working with a lot of these strategic acquires in various industries. So we have the ability to walk through an hypothetical deal structure. We have the ability to sit with you and help you understand what these other groups, cultures are before you even meet them, before they even know your name. And that's really the art of deal making for us.

Nick Leighton (06:38):

Okay. So the three things we've got to get right - the financials right - a strong culture - is there a third thing we should have right?

Brian Branco (06:43):

The third thing to get right in your business is brand identity. And it's understanding who you are to the outside world. And that's usually going to make our role and our job as advisors much easier if you know, and the outside world knows, what is your brand identity, what do you represent, why do you come to work every day and why do you and your employees come to work? And so we find the common denominator of those successful companies is that everyone knows that within the organization.

Nick Leighton (07:15):

So they have a brand. So it's not just a metal sheet fabrication company, it's a metal sheet fabrication company that has a brand that people understand and they know the name of. Got it. Okay. So I think I've got my three things in place. I'm pretty sure I want to sell. What are my four or so options? How many ways can I sell a company?

Brian Branco (07:33):

We'll cover four types of sales. Number one, being an ESOP or a sale to an ESOP. It's an employee stock ownership program where you're selling or ownership is selling the business in whole or in part back to all or some of the employees. So that'd be option one. Another option would be selling to a strategic buyer. And strategic buyers come in two flavors. They're either public or they're private. And they both have offerings that each other don't have. So it really depends on your expectations, the stage of your business and what you're looking to accomplish. A Third type of sale would be a merger. And merger is typically between two or more firms. And the idea is that these firms are merging to - they're looking for that one plus one equals three equation. It's not necessarily a two companies joining because they just want to be bigger, right? They want to either have a further geographic reach, they want to be vertically integrated, or perhaps they're strapped for talent and they need to access that talent. And one of the efficient ways to do that is by acquiring a company that has a proven track record, being successful with the talent that's in place.

Nick Leighton (08:44):

Okay. So they're looking at some kind of multiple effect for multiple things coming together or they're looking to substitute something that that week in. And the quickest way to do this would be through the budget. So then what is the fourth area?

Brian Branco (08:55):

So the fourth would be very unique in that it's very different than the first three. This would involve a sale to private equity firm, a family office. So these are typically financial investors or financial acquirers. So they're either looking for a platform acquisition, which would be an acquisition of a company that is poised for growth or is growing, but they're missing something. There's a number of elements that could be missing in a small business that a private equity firm can bring to the group and to the company. A private equity group represents a sale, but it doesn't necessarily have to be a liquidity event - meaning the business doesn't have to be sold so that the ownership can retire. The business can be sold to an investor or an investor, inject some level of capital to help further develop the business. And private equity groups also provide a different option to ownership where that they can sell their business, but that sale or that liquidity event is not today. Today, they're focused on bringing in capital or bandwidth of talent into the business, so that they can further the business, or, expand upon the platform that they've already developed. So a private equity group would work with you to either acquire all or part of your company. Where you still retain ownership. The beauty about that is you just expanded on your team. You have these private equity investors are not just investors, they're your partners. So culture is also important there. The vision has to be these private equity groups would have to subscribe to your vision and show you ways of how they can help execute that vision. So really in that process we are meeting with equity groups to find that fit. The beauty is there will be a sale one day because most private equity groups have a lifespan of investments from three to seven years or somewhere in between. And so if you're maintaining some level of equity on a go forward basis, you have what we call the second bite of the Apple. So the second bite of the Apple really comes when the private equity group comes to a time in the investment where they need to exit. And then the business is sold to either a later stage equity group. It can be a strategic buyer and that strategic buyers we described could be either public or private.

Nick Leighton (11:25):

So that's those three options you've got is really want to when you want to get out of the company. That fourth one is when you, there's a longer term for yourself and the company getting into a high level. Is that right?

Brian Branco (11:35):

That, that's a great way to say it.

Nick Leighton (11:36):

So then tell me ESOPs, a lot of people talked about them. They used to be very popular in the 80s should I sell or should I go through an ESOP?

Brian Branco (11:45):

ESOPs can be very valuable for a company depending on the industry. However, it comes at a cost. So if you're a smaller company, let's say under $50 million of revenue, the business may struggle to afford the maintenance of that ESOP. As an example, we have a client today that's structured as an ESOP and they have been since the 80s - at that time it was the right thing to do. Today they see the writing on the wall. They run the projections with us and we've looked at where they're headed and it's not looking good.

Nick Leighton (12:20):

Because the upkeep of an ESOP on an annual basis, compliance, that's expensive.

Brian Branco (12:25):

Compliance is expensive because you have to have third party evaluations and you have to have trustees. The difficulty with ESOPs that we see is that these businesses are not necessarily sustainable without the prior leadership that they had. So they are trying to bring up leadership - next generation leadership into the business, which some companies do very well.

Nick Leighton (12:53):

It could be risky though.

Brian Branco (12:54):

And other companies struggle to make that.

Nick Leighton (12:58):

Original founders that are often off in the distance playing golf, or whatever they're doing. So can you dig your way out of an ESOP? I mean, is an ESOP company able to then go into a different type of sale?

Brian Branco (13:08):

So yes, an ESOP can be dissolved or it can be sold in the sale of an ESOP. An outside party produces an offer for the business that's taken to the board of the ESOP and they decide, is this the right price at the right time in the right buyer for the business? They need to make that decision because it's part of their fiduciary responsibility, to the ESOP to make the right decision for the business, not for the individual.

Nick Leighton (13:30):

Okay. But an ISOP that could be hundreds of owners in that company. It could be every employee is that right?

Brian Branco (13:34):

It could, it could be from top to bottom and everyone in between.

Nick Leighton (13:38):

And is that the opportunity where everyone's going to make a ton of money? Hold on.

Brian Branco (13:42):

We've seen it. Yes, we had a client that was a citrus packing house and everyone had a piece of ownership of the company. What was interesting in that business and that we don't necessarily see an all, is that it created this culture. Everyone was so proud of their brand identity. They were proud of what they built and they were so happy to be a part of it. And those companies will remain ESOPs till the end of time, I would imagine, because they work. But again, ESOPs don't work for every business, nor do they work for every industry.

Nick Leighton (14:15):

Okay. Got it. So I think I want to sell my company. I think it's the right time to sell my company. How long is it going to take me to sell my company?

Brian Branco (14:21):

Selling your company can take anywhere from three months to 12 months. There was a unique circumstance where we had a client and we sold it in 28 days. It was in the healthcare space. The acquire had to be in three regions to service a national contract. Our client was in one of those three regions. We were at the right place at the right time with the right buyer. Hard to replicate that. I would encourage business owners to begin looking at the sale, their business, the day they start their business. And what that means is as you're building out your business plan is you're building out your vision. You need to have an exit strategy. Sometimes that exit strategy comes at a convenient time for you and your life and your family. Other times it does not. But you'd have to be able to recognize what's better for the business and not necessarily for that individual or the group of individuals.

Nick Leighton (15:15):

So when's the right time to start thinking about selling.

Brian Branco (15:18):

When you're planning your business? And we illustrate this as when you walk into a building, you're going to recognize exit signs. Those exit signs are there in case of an emergency, or if you need to find a quickest route out of the building. This during the phase you're building your business plan and your vision, this is a very crucial time to start thinking about your exit strategy. It seems counterintuitive that you're doing this at that moment in time, but it's extremely important so that when the timing comes to sell the business, and again, that can be at a convenient time for the ownership or not. But if it's a time where there's panic, there's, if it's at the realization to sell the business, it comes at a time when there's disruption to the business or some sort of panic. Typically we find those decisions made are emotional.

Nick Leighton (16:10):

So don't wait the last minute is what you're saying.

Brian Branco (16:12):

Don't wait until the last minute. Be precise and these business owners are talented individuals. They spent time building their vision over their lifetime. They owe it to themselves to build an exit strategy for themselves as well.

Nick Leighton (16:29):

So take control of the situation. Don't let outside factors affect when you should sell. So I think I'm ready for selling. I planned it. The million dollar question is how much can I sell for?

Brian Branco (16:42):

So we employ several valuation methodologies to help our clients build their expectations because those are the valuation expectations. So during this process, we are not trying to come up with a magic number. We're looking for a range and that range is going to be driven by market market activity and measurements that we'll make in the business.

Nick Leighton (17:07):

So I can't just say it's going to be a factor of my profits or a factor of my sales. Let's throw that out the window.

Brian Branco (17:12):

What you are describing are rules of thumbs, rules of thumbs are fun. You know, it's a good measurement that you could take in a day and look at the business. They can be fun to utilize, but they could also be dangerous because if you're using methodologies or rules of thumbs that are going to create unrealistic expectations for the business or the owners of that business, then they're going to be set up for disappointment somewhere down the road. So when a business owner or owners come to a conclusion that they were ready to sell their business, they shouldn't be waiting for an M&A advisory firm like ourselves to call them. A good business operator is going to establish a relationship with an M&A advisory firm like ourselves to help them navigate through the preparation of selling their business.

Nick Leighton (17:58):

So essentially you could just meet that magic person who's going to buy you company and do it yourself, but there are clearly going to be advantages of working with an M&A company. What are the advantages?

Brian Branco (18:07):

Working with an M&A advisor firm like ourselves is extremely valuable for business owners because we can go into their business and we can make measurements of their businesses that they are not necessarily making on their own.

Nick Leighton (18:21):

Give me an example.

Brian Branco (18:22):

Nick. Let me give you an example. So we have a client and they have been using a particular rule of thumb and which they're using to measure their business.

Nick Leighton (18:32):

So they're coming with an assumption to you, correct?

Brian Branco (18:34):

Correct. And so those assumptions or those rules with those don't always fit. So what we can do is we could go on and make measurements of their business through financial reporting data when we take certain measurements, such as what is the concentration of revenue with one particular client, right. But that concentration is high, that presents a risk to outside investors. But we face, some business owners fail to recognize that's a risk for themselves. There's a phrase, right? If you can't measure it, you can't improve it. So partnering with an M&A advisory firm like ourselves, really the benefit there for business owners is to help them make those measurements. Help them make those improvements so that when they come to the time when they're ready to sell their business, they are exceeding their expectations, because they really focused on their business and developing their business.

Nick Leighton (19:27):

Okay, so now Brian, I know that from my experience when I'm working with business owners and they come to an M&A company, one of the big advantages that I can see is that it takes the emotion out of the sale. That business owners, obviously it's like their own baby and you can go negotiate and structure that deal without that emotion. Is that a factor in what you're doing all the time?

Nick Leighton (19:47):

It really is. You know, this process is an emotional process. So there are some level of our advisory work that is looking at numbers and providing an analysis of the financial state of the business. But also we have to understand our client's expectations. And that is an emotional process. So it's difficult to strip that out of the equation because as you describe this business is their baby, right? They birth this business at some point in their past.

Nick Leighton (20:20):

After a sale going out into the sunsets. Do you deal with the onus post-sale?

Brian Branco (20:28):

Post-closing integration is crucial. Part of that integration is going to involve some level of participation from the existing ownership or the selling ownership. Time will vary for each partner. If there's only one individual time will vary for that individual owner of that business. So what we find is that business owners that have taken the time to prepare their business for sale are also the same individuals that have prepared themselves to take that three month vacation with their family.

Nick Leighton (20:58):

So Brian gives a little bit of history about how long you've been doing this, how long you've been in the industry and the changes you've seen. The trends.

Nick Leighton (21:06):

Meritage partners I started in 2005. Prior to that I was with a boutique advisory firm and when I started Meritage I started with a vision just like our clients. And we've seen a lot of changes over the years. And really those changes are advancements. So we talked about valuation. What does a company worth? Accessing data points in the marketplace have become much more accessible to firms like us, but we've also found that the speed of which we could access this data is dramatically faster so that we can provide, you know, real in some cases, real time measurements for some of our clients.

Nick Leighton (21:46):

That's great. Have you found the value of sales have increased or where you're selling to geographies, national, international, any other trends you've seen?

Brian Branco (21:55):

The trend of M&A is always the same, meaning companies and firms are looking for growth. Growth through acquisition is a leading cause of growth. There are approximately twelve to fifteen thousand, M&A transactions in a given year in the United States.

Nick Leighton (22:13):

Have you seen any change in international purchases in the domestic market?

Brian Branco (22:20):

Yes, there is. We've had a unique situation where a client was acquired by an Australian firm. That Australian firm wanted to have a presence here in the U.S. Specifically Southern California. We were able to identify that investor or that buyer for that business. And it's been a wild success. So last I heard that business has since been sold twice and now is part of a public holding.

Nick Leighton (22:43):

Wow, that's great. Exciting. So, what's your biggest success story? Do you have such a thing?

Brian Branco (22:50):

So success is defined differently in different transactions. We define success by meeting those expectations of those clients. And so it comes in different forms. So success comes in different forms for that reason. There was a transaction where we were able to consummated in the 28 days. It was a unique situation that our client was in. We happened to have worked with the acquire that needed to be in our client's geographic region in a short period of time. Therefore we close that transaction in 28 days.

Nick Leighton (23:20):

So that history that you have in the industry that allows you to know who's buying, because you're getting repeat buyers then, especially if we're talking about private equity. So you know the people are out there who are looking.

Nick Leighton (23:30):

Precisely. On a daily basis we receive phone calls, we receive emails from firms, that tell us what are they looking for, what region of the world, what industry, what size in terms of revenue or profitability. And the beauty of that is we mine this data, we keep this data and so we may not need it at that very moment in time, but it's there and ready to be accessed by our team for our clients at the appropriate times.

Nick Leighton (23:58):

Any horror stories from the world of M&A you can share?

Brian Branco (24:01):

There was a particular client that we had and he was in a major accident and he was in his forties - he was relatively young. He did not prepare. So this business, because he was 40, living the dream, built a beautiful business. He was enjoying the benefits that business provided for his lifestyle. Unfortunately, he was unable to return to work. He had to have caretakers and what was was taken care of. But at that time, his family came to me and said he was looking for a solution. So we were able to produce a strategic buyer that eventually acquired the business. But it put a lot of stress and a lot of emotional stress on the family. In fact, it may cause further health problems for extended family who are involved in the sale just because they were out of their comfort zone. They're out of their reach. And it was, it was difficult. However, we were able to get through the transaction. We sold the business for a meaningful amount of money. Which is now taking care of the family for generations to come.

Nick Leighton (25:12):

That's great. So there is a silver lining, but the message here, the learning is be prepared. Get ahead of the curve. Don't let situations take over.

Nick Leighton (25:20):

Exactly. If anything, the message that I would send or the thought that I would provoke would be to prepare the sale of your business in early stages of planning your business.

Nick Leighton (25:34):

So are you saying that if you had a business, even if you weren't thinking you need to gather it right now, it still makes sense to have a relationship with a merger and acquisition advisor because as a business owner, you just don't know who's looking and what they're looking for.

Brian Branco (25:47):

Absolutely. Because we could bring value to the firm and not just at the point of selling their business, but we also advise and assist in targeting potential acquisitions for that business.

Nick Leighton (25:58):

Can you give me an example of why someone should be in contact with an M&A advisor? Just something they didn't know in advance.

Brian Branco (26:07):

We're not solely disciplined on selling companies, although that's a big part of what we do. A company, let's say a business or a client in mid cycle of its of its lifespan, or early stages of the business, they too are looking for growth and that growth sometimes comes through acquisition. So our firm can provide data points for their industry, but also we're going to help them target potential add on acquisitions of smaller companies that perhaps larger investors and acquirers wouldn't even consider because they're too small.

Nick Leighton (26:45):

Can you give me some kind of example of when that might play out?

Brian Branco (26:49):

Absolutely. We have a client today where each firm has about 40 people within their firm. We talked about that one plus one equals three equation. So we have worked with a public acquire that has a rule that they will not acquire from with less than 80 people. So it is a unique circumstance where both of these companies were 40 person firms each and collectively 80, which now is a blurb on the radar for this large public buyer. So based on our analysis, we believe that these two companies collectively can be worth 20 to 30% more to this particular acquire, simply if they joined forces.

Nick Leighton (27:30):

Got it. Okay. That's exciting stuff. Why don't we move to some rapid fire. Can we do that?

Brian Branco (27:35):

Let's do it.

Nick Leighton (27:35):

Quick questions. We're ready.

Brian Branco (27:38):

Let's go.

Nick Leighton (27:38):

Deep breath. What does M&A, stand for?

Brian Branco (27:41):

M&A stands for mergers and acquisitions.

Nick Leighton (27:44):

What's the difference between a merger and acquisition?

Brian Branco (27:45):

So a merger is a joining of two companies coming together and an acquisition is typically a transaction where a larger entity is acquiring a smaller entity.

Nick Leighton (27:53):

Makes sense. Okay. I want to sell my company. How much is it gonna cost me to use an M&A advisor?

Brian Branco (27:57):

So the M&A costs are typically related to a percentage of the total consideration of the transaction.

Nick Leighton (28:03):

Is there a minimum revenue I need before I could sell my company?

Brian Branco (28:06):

Absolutely not. There are acquirers out there today looking for companies, small, midsize and large.

Nick Leighton (28:12):

Okay. Is there a minimum time my company needs to be in business before I can sell it?

Brian Branco (28:15):

Absolutely not. If you've come across or if you've design a product or service that the world needs and wants - then the world is going to need and want it.

Nick Leighton (28:27):

How long is it going to take for me to sell my company?

Brian Branco (28:29):

Selling your company should take anywhere between three to six months. In some cases it can take as long as 12 months.

Nick Leighton (28:35):

What's the one success factor I need when I'm selling my company?

Brian Branco (28:37):

Knowing your expectations.

Nick Leighton (28:39):

What's the one success factor I need if I want to buy a company?

Brian Branco (28:42):

I'm going to sound redundant, but it's going to be knowing your expectations.

Nick Leighton (28:45):

How many M&A transactions happen in a year in the U.S.

Brian Branco (28:49):

There's anywhere between 12,000 and 15,000 M&A transactions per year in the United States.

Nick Leighton (28:54):

Can a bull economy effect M&A?

Brian Branco (28:56):

Absolutely. It can affect it both in a positive and a negative way, but really depends on your industry.

Nick Leighton (29:01):

What I sell my company, what kind of time commitment should I be giving the purchaser?

Brian Branco (29:05):

It's going to vary how much time you'd have to transition the business, but typically the better job you did up front and transitioning your role internally, the easier it's going to be for an outside party to do the same thing.

Nick Leighton (29:17):

What's the best thing about being an M&A advisor?

Brian Branco (29:19):

We get to go on field trips every day. We get to see different operations. We get to experience different methods of manufacturing, to processing. It's really fun.

Nick Leighton (29:31):

Is there a saying here, there's one in the UK, which is you get to see under the skirt. Is that what you say?

Brian Branco (29:35):

You could say that. I'm glad we got that one out of the way! How about this... behind the scenes.

Nick Leighton (29:52):

So tell us about you - what's your champagne moment?

Brian Branco (29:54):

So I get really excited about solving others puzzles. As an entrepreneur who has owned businesses, sold businesses and build businesses, we relate very well to our clients for that reason. We've been in their shoes. We've felt their feelings. We've thought their thoughts. To be able to architect a deal is our champagne moment. That is very exciting for me as a professional and for us as a firm.

Nick Leighton (30:24):

I see that because we've worked together with people. I can see the empathy that you give your clients and then you go through the structured process, which gives them what they're looking for. That's awesome. Brian, thank you so much for spending time with us. Love what you're doing. Thank you for sharing and demystifying the world of M&A.

Speaker 3 (30:42):

I appreciate it. Appreciate the time.