Business Exit Planning, A Guide to a Successful Conclusion

Business Podcast » Strategic Planning » Business Exit Planning, A Guide to a Successful Conclusion

Business Exit Planning, A Guide to a Successful Conclusion Featuring Chris Younger

Business exit planning. It’s really never too early to start thinking about your business exit plan. This is one of the most important parts just after starting and being successful in your business. For most, it’s their retirement plan. Some entrepreneurs are asset-heavy and cash short. Please don’t wait until the last minute to handle this. It can make a huge difference.

About Chris

Chris is the co-founder of Class VI Partners (fka CVA), a Denver-based financial services firm providing investment banking, wealth management, and business exit preparation services for middle-market companies. Class VI’s mission is to Enable the Entrepreneurial Spirit by helping business owners get the most of out their investment of time, energy and money in their businesses.

Class VI developed CoPilot, an online assessment application, to help business owners better understand how an investor would view their business. CoPilot’s patent-pending algorithm prioritizes the different risk factors in a business and suggests ways to resolve those risks to increase value.

Unlike online valuation tools which provide only a high-level analysis of a business’s value (which can be dangerous), CoPilot reveals the specific factors that help or hurt a company’s valuation and a roadmap to help guide the business owner.

Class VI utilizes CoPilot as the first step in its own program to help business owners prepare for a sale (Pathfinder), and as part of Class VI’s unique 12-month “boot camp” called Exit University that helps business owners learn more about mergers and acquisitions. These programs are available to interested and qualified companies.

Prior to founding Class VI in 2005, Chris co-founded and was the President of the country’s largest communications equipment value-added reseller (Expanets), which he helped grow through acquisition (27 acquisitions over 2 years) and subsequently sold to Avaya Communications. Chris also practiced law at the law firm of Wilson, Sonsini in Palo Alto (he is a “fully recovered” attorney), and clerked for The Honorable Jesse E Eschbach of the United States Seventh Circuit Court of Appeals.

He is a graduate of Miami University (Ohio) and Harvard Law School where he was Managing Editor of the Harvard Law Review, and he attended the London School of Economics. He is also the co-author of Harvest: The Definitive Guide to Selling Your Company

Chris lives in Denver with his wife of 25 years, Maribeth. They have three children in college and high school. Chris is an avid mountain biker, golfer, and tries to get up to the Colorado mountains as often as he can.

Contact

Class VI Partners
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Business Podcast » Strategic Planning » Business Exit Planning, A Guide to a Successful Conclusion

Full Transcript Below

Business Exit Planning, A Guide to a Successful Conclusion Featuring Chris Younger

Estimated reading time: 37 minutes

Tue, 8/3 12:08PM • 42:42

SUMMARY KEYWORDS

business, business owners, buyer, transaction, businesses, sell, money, deal, people, typically, work, roy, entrepreneurs, acquisitions, capital, revenues, question, pandemic, risks, online, Business Exit Planning, Successful Conclusion

SPEAKERS

Chris, Roy Barker

Introduction

Roy Barker  00:07

Hello, and welcome to another episode of The Business of Business Podcast. I’m your host, Roy. Of course, we are the podcast that brings you a wide variety of guests. That can talk to a diverse set of topics. Hopefully, we can shine a light on something maybe haven’t thought about. Or at the very least provide you with information and professionals to help you solve some problems that may be keeping you up at night.

Today, we’re excited to have with us Chris Younger. He is the founder of Class VI Partners, a Denver-based financial services firm providing investment banking, wealth management and business exit preparation services for middle-market companies. Class VI’s mission is to enable the entrepreneurial spirit by helping business owners get the most out of their investment of time, energy, and money in their business. Chris, thanks so much for taking time out of your day to be with us.

Chris  00:57

Well, thanks for having me, Roy. And thanks for doing what you’re doing for your listeners. It’s a it’s a great service to him.

Roy Barker  01:03

Well, I appreciate that. It’s so much fun, I get to meet awesome people like yourself from all over the world. So it’s a you know, it’s kind of the best gig in the whole world. I love it. That’s terrific. So um, let’s start off with a little bit about your history. I’ve got so many questions, I don’t even know where to start. Let’s start from the gate. Let’s start with, you know, kind of your history how you found yourself here. And then you can also tell us. I like the explanation of Class VI, you can tell us about that, too.

More About Chris

Chris  01:30

Oh, you bet. Happy to do it. And, you know, in terms of history, my wife accuses me of having a little bit of career add. I started out as an attorney. Worked for a Federal Judge on the Seventh Circuit Court of Appeals for about a year. And then spent a couple years practicing corporate and securities law in Silicon Valley, a firm called Wilson Sonsini and quickly figured out that I didn’t much care for the law. And I have to be careful because my wife’s an attorney.

But um, and so I left legal practice to start with an investment group. It was a, an investment group that was funded by utility. They were investing in unregulated businesses. And so at a fairly young age, I was able to help them develop a consolidation strategy in the communications industry. I was the lead acquisitions person. And so I would go out source acquisitions and then manage the acquisition process. So it was a pretty intense experience, we completed 27 acquisitions over about 25 months. So yeah, it’s

Roy Barker  02:47

a heavy schedule.

Chris  02:48

Yeah, lots of travel. And as you might expect, when you do that many acquisitions in that short period of time, you make your fair share of mistakes. Like, I always like to joke, I, for about a third of those deals, I looked a lot smarter than I am, about a third of those went exactly as planned. And then about a third of those, I probably should have been fired for doing. But so I I did the acquisitions and then moved into an operating role, I became the chief operating officer and the president of that business. At that time, we had grown it to over a billion dollars in revenues, and was responsible for the integration of the businesses.

We did a big systems conversion. Then we sold that business to Avaya, which is a large communications company back in 2003. And then I actually tried to retire about a year and a half. And it was after organizing my wife spice drawer that she told me I needed to go find a hobby, maybe in a little bit more colorful language. But yeah. And so with my partner, we started our investment bank, and we originally started it as a hobby, really just to do a deal or two a year. We really like working with entrepreneurs.

And but as the business progressed, we got busier and busier. So we were fortunate to be able to hire a lot of really, really great, smart, talented team members. And today we’ve got a team of 23 people across our across our business and like you I feel like I’ve got the best job in the world. I get to talk with entrepreneurs every day, we get to help them with a really meaningful and important transaction in their life. And with the advent of our wealth management for a lot of those entrepreneurs, we get to work with them in their families, you know, for the rest of their lives, and hopefully the rest of their families lives as well.

And so it’s a it’s been really, really rewarding and we’ve worked with I think we’ve completed almost 100 transactions In that, you know, in the 15 years since we started 16 years since we started, and it’s like I said, don’t get me wrong, I love doing transactions, but it’s really getting to know these entrepreneurs and call them friends, once we’re complete is, it’s been really gratifying.

Roy Barker  05:18

Yeah, that’s an awesome transition, because you know, selling a business, especially a smaller one. I mean, that’s somebody’s baby, that’s somebody’s child that they’ve nurtured and grown. And, but I think that’s an awesome transition, once you’ve built that relationship and built that trust, and you can help them on the wealth management side, you know, once they decide to retire.

Entrepreneurs

Chris  05:40

Yeah, it’s when you think about for an entrepreneur, to the point you just made Roy. It’s their business is usually their largest investment. And prior to selling their company, they’re usually I call them asset rich and cash poor, right. Most of their cash is going back into the business. And if we can get involved with them two or three years before they’re gonna sell, you can actually do a lot of things. From a tax standpoint, from an estate standpoint, from educating their kids about money management, budgeting.

That you can have a much more significant impact than what typically happens. An entrepreneur might sell their business, come into a bunch of cash. And not necessarily know what to do or how to do it. And you know, at that point, you’ve got every wealth manager in the, in the world trying to get their money. But it’s usually too late to really accomplish a lot of the things that we can accomplish earlier on, if we get involved before they actually transact.

Roy Barker  06:42

Yeah, and it’s, like you said, when you’re when they’re in that position, the unfortunate part I’ve seen as you know, they have kids and family members that they end up giving all their wealth away, and still have a quite a ways to go in life to make it in, you know, I’ve seen some they’ve had to go out and get the, you know, menial jobs just to try to live in that.

So it’s so important. I think it’s also, the other thing that’s always on my mind is people that may think that they want to sell or we’re getting close. And I’m gonna let you answer this, but you can’t wake up on Monday morning and say, I’m ready to sell and put a for sale sign out in the front yard. And it’s just, it’s a lot more preparation that goes into that.

Chris  07:31

Yeah, it’s, uh, you know, for our clients, they kind of fall into three buckets, right? You have one bucket are folks that they’ve been approached by somebody. For whatever reason, I mean, they, a lot of business owners get approached quite a bit for people wanting to buy their business. And for whatever reason, this particular one, they’ve decided this is the one and I want to go sell my company. We’ll get that call just to help them navigate that transaction.

It’s a, it’s a fairly complex process. So you have about a third, you have another third, who know that they want to sell their business, but they want to run, you know, full process, they want to go talk to multiple buyers that want to put their story together and tell it in a compelling way. And so they run a traditional investment banking process. And then you have this other third, I call kind of the intentional planners, they know, hey, in five years I want to sell.

So what are the things I ought to be doing today, in my business, whether that’s, you know, building my management team, diversifying my revenue stream, you know, taking certain risks out of my business, what are those things that they can be doing today, that set them up such that when they do go to sell, they get the most out of it, and you know, get the most money and the best transactions? And I can tell you, in those thirds, we, we can get very successful deals done in each one of those buckets, but those business owners who are really intentional and plan ahead, by far the most successful transactions that we work on. Yeah.

Preparing To Exit A Business

Roy Barker  09:04

Yeah. Like, I can only imagine, you know, trying to clean up an income statement balance sheet. And then also, you know. If it’s the right size business, where the owner whose name is maybe even on the business, but he’s the guy that’s at the top, there’s always a sustainability question. And I really liked the point you brought up. Is that if you’ve got that five year time horizon, you can actually bring some management in and kind of start slowly stepping away where you can prove to buyers that hey, this is a sustainable business without me coming in every day.

Chris  09:38

Yeah, what’s interesting is for business owners who undertake that effort, to bring in a team to start to delegate their day to day responsibilities. A couple of things happen, which all of which are positive. One is that that business owner starts to get potentially more of the life that they want outside of the business. They’re able to, you know, most business owners are typically type A. And so this allows them to actually either spend more time on the things that they really liked doing in the business. Or get more free time for them and their families.

And so that has the corollary benefit of increasing the value of the business. As you said, if that business owner is the key revenue generator. Or has their hands in every facet of the operations. For a buyer, that’s really risky. Because as we all know, you know, that business owner cashes a nice check, their incentives are gonna change, and that creates risk for the buyer, if they don’t have a good team underneath them. But having that team kind of correspondingly decreases, potentially the need for the owner to sell.

Because if they’re generating good cash from the business, and they’ve got a good team, you know, they may have a perfect life for them, which is great. That’s that’s the position you always want your business owners in, we would call it being indifferent to whether a deal happens or not, you know, if they’ve got a great company, and they’re comfortable continuing to own it, that means that any deal that they do is going to be the very best deal possible, because it has to be so compelling, as to convince them that yeah, that’s better than continuing to own and operate my business.

Business Exit Planning

Roy Barker  11:25

Right. So let’s go back to the beginning just a little bit. Let’s talk about what what’s the difference in the ways that we, as a business can get money, you know. We have a loan, we have the underwritten by SBA. But we also have, you know, investment bankers, angel investors. Wonder, can you just briefly touch on all these different types? And then, you know, kind of what space that y’all feel there?

Chris  11:54

Yeah, you bet. You bet. So, if you think about, we call it a capital stack, and you, as you said, you start at the least expensive, but the most restrictive is, you know, a bank loan. Right? The bank loans today have relatively low interest rates, but they’re gonna have covenants and restrictions on the business in terms of what it can and cannot do with its cash flow. And at the very top of the equity stack is common equity, which is the most expensive, it’s gonna dilute the business owner the most in terms of their ownership.

But it’s the most flexible, right, it typically doesn’t come with covenants or restrictions on what the business owner can do. In between there, you have in that debt stack, so you start with bank debt. And then you might have third party debt that aren’t banks, but are more flexible lenders, interest rates are going to be higher, but they’re more flexible in terms of what the business can do with the capital. Then as you get into equity, you might have a preferred equity, which could have a dividend or what we call liquidation preference, meaning their money comes out before a common shareholders money comes out. And there are different players in terms of investors at each one of those stages.

So, for example, for a young business, you obviously you know, about banks and SBA loans, those, those are traditional commercial banks that can lend money. There are also mezzanine lenders, which are those folks that provide debt that may be more expensive, but more flexible. And then you have venture capitalists that provide capital, usually in the form of preferred equity, to businesses that are relatively young, maybe that’s prior to when they actually have revenues or prior to when they have earnings.

And then you have private equity, that typically like to invest in businesses that are more mature and have free cash flow, where they like to typically either provide growth capital, or they may actually provide a majority of the capital and what we call recapitalize the business. Our job as an investment bank, is usually at the later stages of a business, which is when a business is ready to raise capital, not necessarily venture capital. I think venture capitalists, a lot of times have sort of an allergic reaction to investment bankers being involved.

But we typically get involved when they’re looking to raise growth capital from private equity, or they’re looking to sell or to recapitalize their business, and we’ll help them put their story together, identify the biders, manage the transaction process, help them get ready for diligence, and then manage that that whole process to closing.

Complicated To Do Right

Roy Barker  14:46

That is so important to you know, maybe you’re good at running your business. But this is a very complicated process. And I’m sure that the larger, more complex businesses it gets even more and more complicated. You know, each one of these, you know, debt or investors, you know. They have different things that they want, you know. Of course debt, they want you to pay it back. Paid back in the scheduled time. But you know, at the investor part, you know. The sometimes people want to invest the money, and then they want to get out within a couple years. Sometimes you have these groups that maybe they want to come in and perform a little bit more of the management oversight or send their people in.

So, anyway, that’s one reason why I just advise people seek out a professional that has the understanding. Because, you know, I’m sure it’s like, my house that, you know. I get probably two or three calls a day. Hey, I really like to buy your house. And of course, they do you know. About half the price. So, you know, assume businesses are probably in that way trying to get squeezed out. That’s the other thing. I’m assuming you can help with, is that valuation cleaning everything up. Saying This is what it should be worth?

Chris  16:07

Yeah, it’s, you know, it’s a fairly, as you said, it’s a fairly complicated process. It takes a lot of kind of expertise and experience. And there are lots of different ways, right, that the transaction can go off the rails. And so having someone you under really understands. Hey, hear the train wrecks that could happen. How do we prevent those right? But also, as you said. How to tell the business’s story. In a way that’s going to maximize the value of that business.

Because we have found entrepreneurs and investors, they may say the same words, but their language is a little different. Entrepreneurs think about their business in a certain way. And investors think about business in a different way. And so helping to translate that story so that the investment community really hears the story. In the way that you want them to hear it is, is important.

I liken it to, it’s like any other business process. If you were setting up a new manufacturing line for your business. Most times, you’re you’re probably not going to try to do that all on your own. You’re going to require you’re going to require somebody who has done that before. Who understands the equipment. Who understands what you need to accomplish with that equipment. It’s no different, right. In a in a transaction. You want somebody who understands that process to help guide you. Because it’s a, you know, the stakes are very, very high. And mistakes can be really, really expensive.

Tell Your Story

Roy Barker  17:42

I think they like the story part, because we all have a story. You know, things look one way on paper, but when we can tell the story. But the second part of that is who’s telling the story. If it’s somebody that you trust, and you know. It’s in this business. Then a lot of transactions would probably sit there with a lot more ease than, you know. If I’m telling the story of my business and how great it is. It’s always better for somebody else to tell people how great you are. Than to have to tell people how great you are.

Chris  18:17

Yeah, it helps in it. I think it’s also good, right? I think business owners, oftentimes are very comfortable with their business. And they’re comfortable with the risks in their business, right. So in in sometimes that creates blinders for the business owner, they may not see their business the same way an outsider is going to see their business. And so having a third party, objectively look at the business and identify, hey, you’ve got an every business does.

You’ve got some soft spots here that we need to shore up and make sure that we’re prepared to address. It’s not just like sales, right? You want to know, hey, what are the objections that I’m going to hear when I go talk to this prospect? It’s the same with selling your company only the stakes are a lot lot higher. So kind of anticipating those objections and being able to explain them and position around them. It’s critical. Otherwise, you’ll leave money on the table.

Roy Barker  19:17

So what is our climate right now? Are there? Is there a lot of money chasing a lot of businesses? Is there a lot of money chasing few businesses? What’s that look like?

Chris  19:27

It’s got a little crazy Roy. We’re as busy as we’ve ever been. I think we have 16 active deals right now that are trying to get done before your end, which is kind of crazy when you think about it. And that’s created by a couple of different dynamics. One is, there is a lot of they call it dry powder in our industry, but there’s a lot of capital sitting on the sidelines right now looking for homes.

So it’s it’s over a trillion trillion and a half dollars, not including the debt financing that they typically use, so maybe double or triple that in terms of cash. capital that wants to invest in businesses. During the pandemic, there was probably a six month period where almost none of that capital got deployed. And for those managers of that capital, you know, they get paid when that capital gets deployed, so they’re anxious to get it to work. So you have that on the, on the kind of the demand side. And on the supply side, when Biden announced potential tax increases for capital gains, you know.

His proposal, which we don’t think will pass at this level, you know, 43%, on capital gains, that drove a lot of business owners who may have been thinking about selling, to conclude, I gotta get out before year end, right, because the increase in taxes, you know, if your deals a $20 million deal, and the taxes went from, effectively 20-23%, up to 43%, well, that’s a couple million dollars to you $4 million to you, which is, you know, that’s meaningful. And so that on the supply side has drove in a lot of driven a lot of business owners to conclude, if I’m going to get out, this is the year to go do it. And so I don’t know what that holds for 2022. But at 2021, it’s crazy.

Pandemics Effect

Roy Barker  21:11

So the something I just read this morning is that you know, product businesses and product-focused businesses, you know, had been really under the gun through this pandemic, everybody was staying at home, we weren’t doing anything. So we’re buying stuff. And then now, they were saying that you know, we’ve got supply chain issues, but we’re kind of moving out of that, because now people are going out trying to have experienced. So is this something that we need to take into account, like how this pandemic affected your business? And that, you know, if you have time, of course, it may not be the right time to do it, we may need to, you know, take that two or three years to, let’s get out of it and have some sense of normalcy?

Chris  21:57

Yeah, it’s a great question, because I think businesses fit into one of three buckets. During the pandemic, you had businesses suffer greatly, where they couldn’t do business, right, restaurants are a great example. Or gyms, where, you know, their business discuss shut down, and a lot of them couldn’t make it out. You also had businesses where there may not have been much of an impact at all. Software sales, businesses where he didn’t necessarily need to be in person to execute the transaction, you know. Those, those did pretty well.

Then you had businesses and we’ve represented a few of them, were actually COVID, in the pandemic dramatically increased their sales, we had a business that was in online training, in the real estate sector of business called a The CE Shop that we sold late last year. That business did very well during the pandemic, because students, instead of taking their classes in person all moved online. And once they figured out just how convenient and cost-effective taking those classes online was, you know, that’s a permanent shift, that’s not going to go back to, you know, somebody taking an online class.

So that business did very well, we have another business that was selling home fitness equipment, and, you know, they, they literally would sell out, as soon as they got inventory because everybody wanted to stock their home gyms. And that’s also a trend that we don’t necessarily see, going backward. People, that that convenience, the safety, and just the ease of being able to do your workouts at home, you know, it was a big boon to their business.

And so, you know, there’s, for each one of those businesses going back to the importance of being able to tell your story, hey, if your business really suffered, you’ve got if you want to sell, you’ve kind of have to be able to normalize for that hit to earnings. And that’s, that’s a story for those businesses that did well. You also have to be able to convince buyers, that that wasn’t a COVID bump.

But it’s a new plateau for that business that they’re going to continue to do well, and so it’s, you know, that it really depends on the business on the industry. And now that we’re out of COVID you start to get some proof points. Is the business continuing to do well, or is it recovered? And those will be helpful to be able to kind of tell the story in the right way.

Move To Online

Roy Barker  24:27

Yeah, yeah. No, it’s very industry and product and service-specific. But in your opinion. Do you feel like we’re gonna remain like 75% of what we’ve been doing on the internet. Or is it going back to 50%. You know, and I’ll use me as an example is you know. We ordered some stuff over the like groceries, you know. We’ve ordered we’re pretty prolific orders of other stuff. Always because the convenience of coming to your house and not getting out. But groceries, we were still always going to the store. But now that we were forced into it. We’re staying with it. We’re not, we’re not gonna I’m not going back to the grocery store.

Chris  25:09

Yeah. I. To your point, I think the jury’s out, we, we have some clients that have a mix of online and retail-focused business and the retail has come back pretty strong. And so I do think there’s a subset of consumers, just like you, Roy, where, hey, the online convenience, it’s going to stay, I think you have another set where they enjoy the the shopping and the store experience. And you know, and those, I think those businesses will do pretty well. But overall, I would expect probably a more permanent trend towards online purchasing. Because people experience just how convenient that is, you know, for those of us that have an Amazon addiction, you know, it’s, it’s pretty easy to get on your phone, you know, when you order things and haven’t delivered the next day. So it’s

Roy Barker  25:57

Christmas every day, you know, I was trying to find something in my order history yesterday, I’m like, Oh, my gosh, I’ve had something delivered just almost every day, the last month or so.

Chris  26:08

Yeah, it’s my wife gives me a hard time about the box to show up. So.

Roy Barker  26:15

So um, you know. I know that when we go through these transactions. It’s important, you know, people are looking at what is the profit margin. You know, what are the revenues, expenses, things like that? What are some other things that people take into consideration? That business owners really need to think about. That may not be, you know, on an income state or balance sheet?

Chris  26:39

Yeah, if you think about how businesses are valued, it’s really mean, you can have two identical businesses in terms of their revenues and cash flow. But if one, business is a lot riskier, right, their revenues might be more volatile, their management team may not be as deep there, they may only have a few big customers, you know, they may have litigation issues or environmental issues, that business is going to be worth less than the business that doesn’t have those risks. We we use an application.

And I think I mentioned we’ll make this available to your listeners for free. It’s called Copilot, which allows a business owner to really self diagnose, they can take this assessment, and it asks about 120 questions, but it’s designed to uncover those risks, to be able to help educate the business owner, hey, here are the things that an outsider looking in, is going to see that makes my business less valuable. And we use it in our own business, just to help us quickly assess the business to know, hey, here are the things that we’ve got to either explain our way around, or if we’ve got time, go fix, because that’ll make the business more valuable.

But there’s, you know, we break it into six value drivers, you have the financial value drivers, you’ve got operational and organizational value drivers, you’ve got customer value drivers, you’ve got your team or employee value drivers, you’ve got strategy, your strategic value drivers, and then you have market value drivers, and you want to look at each one of those to really understand, Hey, where is this business situated? Does it have you know, what Warren Buffett calls a moat around that business? Or protects it from competition? Or is it just I’ve got to run faster and jump higher type business, which is, you know, more risky?

Due Diligence

Roy Barker  28:29

Yeah. You know. Assume that at certain levels, you know. There there’ll be a team. Either from your company or from the buyer. That’ll come in and do a lot of due diligence. Walking around kick, you know. If we say in the old days, kicking the tires, and, you know. Seeing if that if there really is a plant here. We really do have employees. That kind of stuff.

Chris  28:51

He had due diligence these days, typically takes between 45 and 60 days, and I I really try hard to condition our clients as much as I possibly can just how intrusive, how challenging how frustrating that process can be it is explained to him. It’s like having your three worst medical exams all at once. It is it’s very painful, because they, you know, sophisticated buyers, I mean, we we’ve closed deals where the buyer has spent over a million dollars just on the due diligence process.

So that’s their lawyers, their accountants, they’ve got environmental people, they’ve got insurance people they’ve got, you know, Employment and Labor practices, people, they have all kinds of outside advisors. Their whole job is to come in and assess that business to see where the landmines what issues are, we’re going to have post closing. And it’s it’s truly remarkable how many different players come in to do this due diligence. And so, as a business owner, you’ve you’ve got to prepare for that. If you’re not prepared. Paired life is going to be really, really challenging and odds are your deal will probably bust, because they’re just going to be too many issues that the buyer uncovers. And you know, how this goes is.

If you’re negotiating a one off transaction where somebody has approached you and they want to buy your company, you’re going to put your best foot forward, right. You’re going to try to tell your story, the best way that you can, they may make an offer on your business based on the story that you’ve told them. And as that story starts to unravel, during diligence, as they start to learn the truth, the price is going to come down, you’re going to feel like they’re trying to nickel and dime you. And ultimately, that transaction will fall apart because the trust breaks down. So being being prepared. And really, you know, if you’ve got an issue in your business, you kind of have to lead with that. So that the buyer understands that and prices that in so that it’s not a surprise later.

Roy Barker  30:55 Business Exit Planning

Yeah. You know, in? Well, it’s hard, because like I mentioned earlier, this is our baby that we’ve you know, we’ve raised and brought up and live with for many, many years. We don’t want some, even if we know we’ve got a kink in the armor, we don’t want somebody else calling that out. But like you said, if we don’t know, and somebody else funds it, I think, you know, we can almost have to look at that as a free opportunity that, you know, somebody pointed this out, we can fix it and make it better for us, and may change our mind, we may well be like, Oh, well, this isn’t so bad. Now that we fix this, or, you know, we just need to spruce it up a little bit to you know, engage the next buyer.

Chris  31:34

It’s interesting, we had a deal, three or four years ago, and it was a business that had a lot of revenues, they were utility services company. And so their customers were utilities, well, their biggest customer was probably 70 or 80% of their business. And when we first took them to market, we knew this was going to be an issue. But it really it actually prevented any deals from happening because that that risk with that big customer was too much. And we did get we got one bid, and then we the owner said, hey, let’s take a step back. And so what we did was we worked on that relationship, we instead of having one contract with that main customer, we broken into four contracts. Instead of having a one year contract, we got it into five and seven year contracts.

Instead of having the relationship just at the CEO level, we built that relationship all the way through the organization. And then we were able to take them back out to market. And the value of the company probably doubled, just by taking care of that risk. You know that and and it was, it’s a great story to your point of pay, if your first deal busts, it’s not the end of the world. It’s given you great feedback on the things that you can do to drive more value in your business. And usually it mean, like I said, we’ve had a story after story like that, where, you know, the second time around the business has just been worth a lot more money. And it’s been to the owners benefit.

Timing

Roy Barker  33:04 Business Exit Planning

It gets back to time, if you have the luxury of time. Get out ahead of this because I think the people, again, that get hurt the worst are the ones that maybe it’s not the maybe it’s a health issue, or maybe it’s just like, I’m just over this. You know, there could be a lot of reasons not necessarily financial, or that have to do with the business itself. But you know, you can take a huge risk, a huge hit on the price just trying to get out too soon without handling stuff.

Chris  33:37

No question, no question. We we see it all the time, there’s, there are risks that you can do a lot to fix and or alleviate. And if you do that, you’re, again, your business is going to be more valuable. And to the point that you made earlier Roy. It’s it’s going to make the business more fun to manage. Right. Yeah. We’re not dealing with all those risks.

Roy Barker  33:58 Business Exit Planning

Yeah, it’s like, Hey, thanks for taking care of that. I think I’ll stay around. It’s fun now. Yeah, I actually I actually enjoy it. Right. So I know we’re getting short on time. But one more question is like, what about owners staying around is, I guess it can depend on the business, the size, a lot of variables, but just in general, is the are these transactions where it’s like, just we’re done, you’re out and you got your money? Or did they have these consulting contracts where they want him to hang around for a year or something like that.

Chris  34:33

So there, again, I’m gonna use the three buckets, okay. The first bucket are business owners who maybe they’re younger, and they want to stick around and grow the business to the next level and maybe sell it again. We’ve had a lot of instances where a business owner, you know, they may have sold 80% of the company, but they reinvested 20% with A new buyer. And then they stuck around, they were the CEO for that next sale right three or five years later. And they may have made more money on the second sale than they did on the first sale.

So, you know, there’s that type of owner who can successfully transition from being the entrepreneur to working with an outside investor, and managing for that investor. That’s probably maybe 30 to 40% of the time. The next bucket are business owners who they want to transition, but they’re willing, and ideally, they want to stick around for two or three years, because that will help ensure the best transition for the business that takes best care of their team, it cares for their reputation, it’ll, it’ll just make that transition smoother. Then they work with the buyer to find the next CEO.

And that’s maybe another third. And then you have a third of business owners who they just want out when the when the transaction closes. Now that tends, that tends to decrease the value of the business, because it’s now riskier, right, because if that business owner were really involved, and they’re now gone, you know, that makes that business much more risky. So it’s, you know, we always advise business owners, if they don’t have a really strong team, you should plan to stick around for at least two or three years after the deal just to make the buyers comfortable, because that’ll add a lot of value to the deal.

Roy Barker  36:27 Business Exit Planning

The guy that comes to closing in his tennis shoes and kind of down in the track blocks, you know, getting ready to jet out probably probably makes a buyer a little nervous. Definitely. So one more thing I thought about what we’re talking about that is what about like clawbacks or, you know, I’m sure this isn’t just as like, it’s a done deal. And, you know, buyer beware in some of these transactions, or are there actually causes written into contracts? Or how does that work in general?

Chris  37:02

Yeah, so when you sell a business, you’re going to make a series of statements about your business in that purchase contract, you’re going to state that you don’t have any environmental issues, you don’t have any litigation issues, you don’t have any, you know, your financials are accurate. And usually, there’s probably 25 or 30 reps and warranties, we call them, which are the statements that you make about your business. And in some deals, the buyer will take 10% of the purchase price, say and put that into an escrow account.

So if you’re sold your business for 20 million, they might take 2 million and put that into an escrow account. So that when you if you if you sell your business, and it turns out that one of the statements that you made was false, right? Whether knowingly or unknowingly, about your business, then the buyers got recourse against that 2 million. And if it’s, you know, big issue, they could come after you for more than that. Typically, it’s typically it’s limited to the escrow. But that’s, again, it’s it’s kind of like providing a warranty on the car, right? You’re representing this business as a sound business. It doesn’t have all these different issues.

 I don’t know about any surprises that you might find as a buyer. And if there are surprises, you know, that’s where the contract come in, comes in to determine is that going to be on the buyers nickel? Or is there going to be on the sellers nickel? And so, back to the complexity? You know, that’s where you want a great transaction attorney who knows how to protect you as best he or she can, you know, as it relates to that transaction?

Behind The Name

Roy Barker  38:39 Business Exit Planning

Alright Chris what the other thing you were going to tell us about Class VI partners, I think, I think that’s an awesome name. But where did that come from?

Chris  38:47

So during COVID, we decided we had we needed to do a rebranding and Class VI is a classification system, right for rapids. You know, we have whitewater here in Colorado and Class VI, or, you know, those rapids that haven’t been navigated before, and are treacherous. And so as we like to say, as you’re as you’re going down this process of potentially selling your business or raising money, it can be quite treacherous if you’re not familiar with the river. And so as a guide, right, hopefully will reduce your chances of something really bad happening.

Roy Barker  39:24

That’s a great visual. I love that. Yeah. Yeah. Well, Chris, we appreciate you taking time out of your day to talk to us. It’s been very informative, and we’ll have to get you back on we could talk for another couple hours. I’m sure. You know, this is an exciting, I can see your passion for what you do really shines through. So I think that’s awesome as well.

Chris  39:43

Well thank you so much for having me. And likewise, it’s great that you’re doing this for your listeners and always, always happy to help entrepreneurs.

Roy Barker  39:52 Business Exit Planning

Alright. So before we go, a couple questions. First off, do you have a tool or a habit, something that you do every day that you feel like adds a lot of value personally or professionally,

Habit

Chris  40:03

I will tell you that, for me, it’s exercise. You know, in our careers, things can be pretty stressful. And so, you know, my, my morning starts out with a little bit of reflection on kind of what’s important. And then usually, you know, 45 minutes to an hour of some type of exercise. That just helps me kind of level set and clear my head. It’s, I’ve done that for probably 15-20 years, and it’s worked out really well.

Roy Barker  40:30

Yeah, I like that even during the day, if I get blocked up, just taking a you know, 10 minute walk outside just really clears your head and come back. And you’re like, wow, that that problem wasn’t as big as what I had made it into just getting a little getting a little air.

Chris  40:45

Yeah. 100% 100%.

Wrap Up

Roy Barker  40:48 Business Exit Planning

All right, we’ll tell people who you’d like to work with, of course, what can you do for them, and how they can reach out and get a hold of you?

Chris  40:55

Sure. So our ideal client is really it’s an entrepreneur, typically, with a business that’s, you know, probably more than five or 10 million in revenues. And, and the best clients for us are really what I call lifelong learners. You know, these are folks who love to better themselves, they love to better their businesses, they want to learn more, you know, we’re going to be a great fit for them and, and they’re going to be a great fit for us.

And we said, we love working with those entrepreneurs. If they if they have an interest, they can reach out to me My email address is Chris, C H R I S @ Class VI Partners. That’s Class VI Partners.com and happy to happy to help anybody whether we get formerly engaged or not. Like I said, Our mission is to enable the entrepreneurial spirit. And so even if we don’t get engaged, I love talking with entrepreneurs.

Roy Barker  41:49 Business Exit Planning

Awesome. Yeah. And we’ll include all those of that in the show notes as well. All right, Chris, I hope you have a great afternoon and thanks so much for stopping by. That’s great. Thank you so much. You bet you bet. that’s gonna do it for another episode of The Business of Business Podcast. Of course, I am your host Roy. You can find us at thebusinessofbusinesspodcast.com we’re on all the major podcast platforms, iTunes, Stitcher, Google Spotify.

If we’re not a one that you’ve listened to please reach out I’d be glad to add it to make your listening easier. You can also find us on all the major social media platforms we typically hang out on Instagram more than others so we’d be glad to engage with there. Also a video this interview will go up on our YouTube channel so go check it out. Till next time, take care of yourself and take care of your business.

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Business Podcast » Strategic Planning » Business Exit Planning, A Guide to a Successful Conclusion

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