Inside Middle Market M&A: What Every Business Owner Must Know Before Selling

Bruce EckfeldtWelcome, everyone. This is From Angel to Exit. I'm Bruce Eckfeldt, I'm your host. Our guest today is Bill Snow. He is a managing director at Focus Investment Banking, and he has a lot of experience in the M&A world. He's also a Vistage speaker, and he has written several books, which I'm sure we'll talk about. He has a lot of insight into what the whole process looks like for companies looking to exit: all the different types of exits, the things you need to do to get exits right, and some of the trials and tribulations companies go through. I'm excited for this. Bill has a lot of experience and a lot of insights, and I'm excited to hear what he has to say. So with all that, Bill, welcome to the program.

Bill SnowBruce, thank you. I appreciate it.

Bruce EckfeldtIt's a pleasure to have you on. Before we dig into everything you're doing today with Focus and the books and everything, I'd love to get a little background. Professionally, how did you get into this space? What got you into the whole M&A world? Give us the story.

Bill SnowI became an investment banker because I couldn't do anything else. Or maybe I lost a bet and had to do this kind of work. When I finished college, I didn't know what I wanted to do, so I floundered around for a while. I had sales jobs. I worked for a theater company selling group tickets, things like that. I worked for a retailer in a management role, where we were acquiring mom-and-pop stores. I was living in Georgia at the time, and I was overseeing the operation of those stores.

I became interested in how businesses start. What's that whole process? So I very wisely, or very stupidly, decided to work for a friends-and-family-funded company. Then I worked for an angel-funded company, and eventually a venture capital-funded company. So I learned that game, the financing game. The venture capital-funded company went the way of the dodo.

A few years later, I was contacted by a former colleague I'd stayed in touch with. He'd gone to work for a middle market investment banking firm, and they were looking for someone who could make phone calls, read a balance sheet, and talk to people. They couldn't find anyone, so they called me. And I turned down the position, I think, four or five times before they caught me in a moment of weakness and I decided, "Okay, fine, I'll go be an investment banker."

Everybody thinks it's this big, incredible thing. It's about being active, learning, knowing a lot of people, and those opportunities sometimes come along, and you have to be open to them in your career. Everybody wants to be an investment banker for some reason, and maybe some will make it, but there could be other very viable career paths that you stumble upon that end up being a good thing. I've been doing this for close to 20 years now. I used to be a lot more intelligent before I became an investment banker, but I'm hanging in there.

Bruce EckfeldtClarify for me, because I think people get really confused. When we talk about investment bankers, it really has nothing to do with a bank, and not much to do with investments. What does an investment banker do?

Bill SnowThat's what I say. We do nothing with investments, and we're not a bank. We call ourselves investment bankers. It's just a fancy term so we feel good about ourselves, because we're not an official profession like law, accounting, architecture, or medicine. There are all kinds of flavors of investment banking and all kinds of creatures who do this crazy work. Essentially, it's working with a company that wants to do something with its ownership.

Raising money by going public is one of the main things. I don't do that. I don't work with public companies, and I don't list shares. That's obviously a very viable business, and it's what everybody thinks of. In that case, you've got to have retail investors who can buy the shares you're listing for the company.

I do middle market, lower middle market. That's roughly companies with $10 million in revenue up to $300 million. We typically like to see at least a million in earnings, EBITDA, but these days probably about $2 million is going to be more viable. And what do we do? We sell those companies: sell part of them, sell all of them, sell off a division or unit the business might not want.

In certain situations, we'll raise capital. That's really brain damage work. You don't want to do that. That's bad. Everybody has a nephew who has an app, needs $250,000, and thinks they can hire someone like me to raise it. It's not going to happen. Nobody wants that kind of stuff. It's terrible. Go do something else.

And we'll help make acquisitions, too. That's also brain damage work. I do it, and I really enjoy it. I've got some great clients. But trying to buy a company might be one of the most difficult things you can do in business. Don't do it.

Bruce EckfeldtIf you can avoid it. You mentioned a couple of terms in there that I'd love to get your definitions of, or at least your insight on: middle market, lower middle market. How do you divide up the world of companies? You're mentioning EBITDA and ranges. What are the categories, or the breakpoints, for you in terms of the size of companies or types of deals?

Bill SnowSure. When we look for clients, we look for a really difficult, challenging type of client to find. I think they're called "anybody who will hire us." That's basically what we're looking for. And this is the dirty secret: most investment bankers will do that, because we're consultants. We want to get paid. We do good work, and we deserve to be paid, of course, but it's tough to find clients.

I define middle market, and everybody has their own variations, as roughly $10 million in revenue to $300 million. Maybe that's lower middle market. I used to work for a firm that didn't like the word "lower." They thought it would be insulting, so it was just "middle market." So it really depends. Other people might say the middle market goes up to a billion in revenue. But these are going to be closely held businesses, owned by a founder, or maybe a family, or maybe two, three, or four entrepreneurs. They're privately held, not listed companies, and they're doing $20, $30, $40, $60, $80 million a year in revenue. That's kind of the sweet spot where we work.

Bruce EckfeldtHow do you differentiate between privately held companies versus companies that may be VC backed or already have some kind of cap table or set of investors? Is that a different beast for you? How do you divide up the world of ownership structures?

Bill SnowNot really. I've worked for private equity firms selling things, and it's the same thing. Whether the company is owned by one entrepreneur or by a private equity firm, that company still has shares that have been issued and registered. It's just a matter of who owns it. So it doesn't really make that much of a difference. There are pluses and minuses. The entrepreneurs are a little more shoot-from-the-hip, which can be good and can be bad. The PE firms are sometimes more methodical, which can be good, and sometimes that slows things down. There are pluses and minuses to both kinds of ownership.

Bruce EckfeldtIn terms of types of deals, how do you categorize things when a company comes to you looking to sell, and the possible different types of exits?

Bill SnowWhat's that? A company comes to us and wants to sell? Where are these companies? How can I find them? My goodness, that would be wonderful, Bruce. You'll have to send me a link afterwards.

Bruce EckfeldtI've got a secret link I'll send you.

Bill SnowIt is one of the most difficult things to do, to buy a company, because everybody wants to buy. I'm in Chicago. You can walk around downtown Chicago, assuming you don't get mugged, and within five minutes, just randomly asking people, during the daytime, not during the nighttime when they block off the streets and drive their cars in circles and smoke marijuana and all that kind of stuff, but during the day when the business people are down there, if you ask somebody, "Would you like to buy my company? Do you know anybody who buys companies?" odds are you're going to bump into a CFO, or somebody who works for a CFO, or somebody adjacent to a CFO. Somebody who's going to know somebody very quickly.

So it's very easy to find a buyer. I say finding a buyer is easy. Getting a deal done that makes sense for the seller, that's difficult. Finding a buyer, easy. Getting a deal done that makes sense, really difficult.

Bruce EckfeldtAnd why? Why is it hard to make a deal actually happen?

Bill SnowWell, because everybody wants to look.

Bruce EckfeldtEveryone likes to shop. No one likes to buy.

Bill SnowYeah. Why not? If someone wants to give you a free look at a business, why not take a look at it, whether you're interested or not? Maybe you're not that interested, but you take a look, and hey, this is a good thing. So of course, why not?

Bruce EckfeldtIt's like test driving a car. Yeah, I'll test drive any car.

Bill SnowExactly. When you're a buyer and you want to make acquisitions, why not cast a wide net if somebody wants to show you stuff? I get contacted by investment bankers who don't do their job, which is a lot of them, probably most of them, and they think I'm an executive at a company instead of just an investment banking creature. So they'll send me a teaser, and I'll sign the NDA to take a look. Sure, why not? They're reaching out to me. Why not learn?

So finding a buyer is easy. Everybody wants to look. Finding the right one, where you can actually get the transaction done, that's what's really difficult. And a lot of buyers make the mistake of thinking it's like going to a grocery store. "Okay, we're out of bread and apples and milk. We'll go to the store and buy that." If you're out of that stuff, you go to the store and get what you need. "We need a company. Let's go to the M&A store and buy a company." Because they contact us all the time: "Show me your listings." No, I'm not going to do that. Make sure I can find you. If your investment criteria match a company I'm selling, then by all means, we'll reach out and contact you.

But it's so hard, because you have one company for sale and multiple buyers. If you're in a frothy market and multiple bidders are interested in that asset, you can't duplicate it. You can't run a second shift and crank out more of that company. It's a very limited resource. That's why, if you have a good asset, you tend to have pretty strong bidding these days, even with higher interest rates, because it's just so hard to find a good company that's willing to sell.

Bruce EckfeldtYou mentioned investment criteria: whether what a buyer is looking for fits the asset you're representing. What goes into that? How do you break down what a company is looking for to decide if it's a fit? What are the variables?

Bill SnowSure. Anybody who wants to buy a company, please take note. I tell this all the time to private equity creatures who contact me. They want to get on our list. They want to see our list. What I tell them is that we use something called Capital IQ. Maybe PitchBook, but I've always used Capital IQ. The younger kids, the hipsters, like PitchBook, I guess because it has a cooler name.

These are expensive databases. You have to subscribe. People like me, or my firm, have to pay. But it's invaluable. I've made a very good career using Capital IQ. When we're looking for buyers, strategic or private equity, it doesn't matter, we'll put in all the criteria: geography, revenue size, type of business. It gets very granular.

So I always tell private equity people: if you want to get looks from my firm and firms like ours, make sure your information is up to date in Capital IQ, with the investments you have. What we like to see when we're selling a company is a strategic company that's owned by a private equity firm. There could be a really good strategic fit, and we have a private equity firm that not only has money, but these are deal pros. We might be on opposite sides of the transaction, of course, but they're professionals, and I like to negotiate with people like that, because they know how to run a process and what's to be expected.

So make sure you do that. Make sure it's easy to find you. Make sure we can find your email address and your telephone number. If you're a privately held strategic company, not a private equity firm, and you want looks, make sure somebody has "corporate development" in their title. Put corporate development in somebody's title, and people like me will be contacting you all the time. You'll get some crazy stuff too, but also legitimate offers of companies that are for sale.

Bruce EckfeldtSo it's really about figuring out how to get into the ecosystem and position yourself properly.

Bill SnowWe want to find you. But it drives me crazy, because so many big private equity firms that I won't mention, do your own research, you'll see you can't contact them. They don't want to be contacted. Or they'll put the big mugshot and the fancy bio of the founder and all the heavy hitters at the top, and then at the very bottom you might find the person you actually want to talk to. It should be flipped around. If you want to buy a company, make it easy for people like me to contact you. Get your contact information out there.

And the follow-up emails and phone calls. It's just amazing to me how often... I spend most of my day deflecting people who want to sell me fractional jets, bespoke suits, workout regimens. If I get one more jackwagon who says, "I'm just looking for X number of high-charging executives," it drives me crazy. And it's the PE people too: "Hey, let's just talk about our list, our fabulous list of what's perfect for us." I might want to talk to that person, but I don't have time in my day to do that. So make it easy for us to find you. When we have something that might be a fit, we'll reach out, and we'll be very happy to have that conversation.

Bruce EckfeldtYou mentioned a couple of different types of deals there: a private equity deal, a strategic. How do you categorize the types of exits for a company? Give us the landscape of the types of exits companies can have.

Bill SnowSure. The most important thing is that the owner, or owners, of the company figure out what they want to do. Do they want to create some liquidity? Do they want to sell 70% or 80% of the business, hold on to a meaningful minority share, work for two, three, four, five years, and then get out? If that's what they want, okay, fine. Then you'd better make sure you understand how you're going to be able to sell those remaining shares. Let's say a private equity firm buys you. Are they going to want to sell the company in a few years? Do you have some sort of put right, so you can put those shares back to the company? You have to figure that out.

Do you want to sell the whole thing and retire completely? In that case, you want to make sure the company is set up to operate without you, because a company where the owner is not needed is going to be worth a lot more. And you want to communicate that you're probably still going to be needed for some sort of transition period: three months, six months, maybe a year. It really depends.

Do you want to create just a little liquidity and sell 30% or 40% of the business? Then you have to find an investor or buyer, probably a private equity firm, that's okay with taking a minority position, but maybe put a plan together with some sort of formula where, over the next X number of years, the remaining shares are acquired.

Whatever the owner wants to do has to be communicated. There's no right or wrong, but they have to figure out what they want and then be able to communicate it to the buyer so it lines up with the buyer's expectations.

Also, business owners, make sure you talk to your tax people. It drives me crazy that most often they don't do this. And why would they listen to me? I only sell companies for a living. Talk to your tax people ahead of time so you understand the structure that makes sense. Are you going to sell assets, or are you going to sell equity? Everybody thinks you have to sell equity. Maybe so, but maybe there's little to no difference if you do an asset deal. And there might be some other wrinkles too. Your accounts receivable might be taxed at a higher rate than the rest of the proceeds, because that's going to be viewed as cash, not a long-term capital gain. Talk to your tax people and have them do some calculations for you.

Bruce EckfeldtYou mentioned figuring out what the owner or owners want to do: sell everything and retire or move on to something else, take a minority stake, a majority stake. How do you figure that out? What does that conversation look like with a seller, in terms of helping them sort through what type of deal they want to do?

Bill SnowWe'll ask the question just as you asked it. And the answer usually is, "I don't know. Whatever the buyer wants to do."

Bruce Eckfeldt"What are the options?"

Bill SnowWe're happy to talk about the options. Sometimes they know. But if they don't, I'll say, "Don't make a quick decision. I can send you an email following up on our conversation. Here are some things you need to think about." Maybe it's just a matter of having that reflective time. Whatever you do to think, whether you take a walk with the dog, drive your car, go work out, or just sit in your chair, you need to do that. Maybe talk with your spouse, or with your partners, about what you want to do, because there's no right or wrong. The important thing is to have a plan when we go to market.

We can be open to different ideas. Maybe someone wants to sell the whole company, and a buyer comes back and says, "We'd like you to stick around for five years, and here's a different structure." Well, maybe we can consider it. Maybe we'll do that. But you have to have a specific plan. Why? I buy companies too, so I'm the guy who writes those offers. When a seller says to me, "I'll do whatever," how do I write that offer? If they tell me, "Bill, I want to sell the whole thing," okay, we can buy the whole thing. "Bill, I want to sell a little bit and work for another four or five years." Okay, I can start putting that together. So you have to have something specific. You have to be very clear about what you want, because the market responds to clarity.

Bruce EckfeldtI want to ask about the big one that everyone talks about: "I want to sell my company. How much am I going to get?" How do you approach the whole valuation conversation with sellers? Helping them understand the nature of their business, what the market is looking for, how buyers value these things, the things that affect valuation, or maybe the different types of deals that will have different valuations. What does that conversation look like?

Bill SnowA couple of things. Is the person working with a financial planner? Do you have a number you need to hit? It's nice to hear that. Then we can look at the business and think, "Yeah, I think we have a good chance that, after taxes are paid, that number or more will be met." Or if it's, "I need to have $100 million," and, well, after tax, I think you're going to get about $2 million, that's a hole nobody can fill. So it's nice to know that ahead of time.

M&A is microeconomic. Everybody thinks it's macro. Everybody's looking at what's going on in the economy, as if a strong economy is going to help a bad company. It won't. A good company in a bad economy will command a good price, probably a premium, because finding good assets is difficult. A bad company, with revenues dropping, losing money, key managers fleeing, maybe a big concentration with one customer, a struggling company, in a great economy? I don't care how great the economy is. That bad company is going to get low bids, or maybe struggle to find bids.

The macro can certainly impact the micro, but as long as the company is performing well at the micro level, I don't care what the economy is doing. So I think it's a bit of a misnomer: "Let's try to time it. When's the market going to be hot?" Who the heck knows? Control what you can control. Do the things you can do to improve the value of the business.

Because M&A, like I said, is microeconomic. It's supply side. It's not demand driven. The demand is out there. You put supply out there, and you will get offers. You might not like the offers, but if you get three, four, five offers, quite often you'll see a trading band. They're pretty close in price. You might not like it, but what does that tell you? That's how the market values the business.

So we tell them we can do all kinds of valuation exercises, which I think are good to some extent, but that's an academic exercise. And I can't guarantee it. Sometimes it's there, sometimes not, but we want to find the buyer with a strategic imperative: the buyer who absolutely needs to do the acquisition for reasons beyond the profitability of what they're buying. It's plugging a hole in their product offering, or something else.

Bruce EckfeldtGive us some examples of that, because I think that's the interesting one. Everyone's familiar with private equity coming in, looking at the numbers, and giving you five to eight times. The strategics are where it gets really fascinating. You see some crazy situations with valuations and opportunities.

Bill SnowYou do. And actually, because it's difficult to find good assets, the demand is still there, but the good assets aren't there as much. Quite often, the private equity firms are just as competitive as the strategics, maybe even more so, because these big private equity behemoths have all this money they've got to put to work. So they'll do all cash now and hope they can refinance at some point in the future if interest rates come down.

Bruce EckfeldtThey've got to put things into play.

Bill SnowBut I've lost the original question. I'm sorry.

Bruce EckfeldtJust how you find or identify the strategic opportunities that are above and beyond a financial calculation.

Bill SnowI'll give you some examples. We sold a company a long, long time ago that made equipment you'd see in professional kitchens and stores and things like that. The buyer had been chasing this company for a number of years. Our client was located in the central part of the country, in Louisville. The buyer was backed by a PE firm and had a facility on Long Island, New York. It was an old, decrepit facility, and they were distributing to the United States from Long Island. No offense to Long Island. It's great there. But that just doesn't make any sense, right?

Bruce EckfeldtWhat a nightmare. You've got to cross at least two bridges to get anywhere.

Bill SnowIt's just difficult. It just doesn't make sense. So they were looking at spending millions of dollars to build a new facility, and lo and behold, they could get this company they'd been chasing. So they were willing to pay a price far beyond anybody else. Of course, when I talked to them, I said, "Well, actually, you paid exactly the right price: a dollar less and my client would have walked."

They were the highest bidder, and the reason they paid that much is that they were willing to spend millions of dollars to somehow obtain a new facility. So they were able to roll what they were willing to pay for a facility into this company. My client was located in Louisville, close to the Midwest, I guess, and had a state-of-the-art facility that was underutilized. So the buyer could roll their facility from Long Island into Louisville and save all kinds of money. It was worth every penny. That's something that shows up as a strategic imperative.

We had another situation with a smaller company, a packaging company, and they had a fantastic inventory system and accounting system. Their controller could have been a CFO at a Fortune 500 company. She just didn't want that lifestyle. She had kids at home and wanted to work part-time, like three-quarters time. So they had the benefit of a really sharp woman who, like I said, could have been a C-suite executive at a big company but didn't want that. They had another partner there who was great with technology.

When we had the first meeting with the company that was the ultimate buyer, the first thing the buyer's president said was, "Our accounting system is all blanked up." He used a word we can't use in polite company here. And I thought, "Hot dog. This is going to be our buyer." Because it's not just the product, and it's not just the profitability, which is very nice. Our client solved a problem for the buyer. Quite often it's boring stuff like that: systems, warehouses, things like that, which can add real value in the right situation.

Bruce EckfeldtWhen you're looking at a seller, how do you assess where those opportunities are? What kinds of capabilities or assets do you look at? Is there a process you go through to see where there may be things you could create strategic value around?

Bill SnowThe process is a very unusual thing that younger people are probably not familiar with. We will talk to them. We won't send emails. We'll have a phone conversation. Sometimes, and this is going to be a shock to people, so they'd better sit down, we'll even sit down in the same room and have a conversation. It's amazing what comes out when you learn about their business and ask intelligent questions. I really recommend it. Get out of your rooms, everybody, as I'm sitting here in my office at home, of course. Don't be like me. Get out there and go meet.

Bruce EckfeldtDo as I say, not as I do.

Bill SnowPick up the phone. It's just amazing. Stop using email and texting and all this stuff they're doing. We'll have a conversation. We want to learn about their business. What we're looking for is four, five, six aspects of the business that might add value. You don't know. Sometimes you have an idea or a sense of it, but you don't know until you have that conversation.

Going back to that client years ago, we saw it firsthand: the reporting they did and their inventory system, how well that was managed, was one of the key selling points. "Yes, it's a nice business, the profitability is this and that, but they also have this wonderful system and inventory management," and so forth. There were some other value-adds too.

So sometimes you can identify those things. Sometimes, when you're talking to buyers, you have to see what they come back with in terms of what's motivating them. Sometimes we're surprised, and sometimes it's the thing we were expecting. Like I said, I can't guarantee that a strategic imperative is out there, but quite often it is. If we talk to the right buyer with that strategic imperative, they will bid accordingly. Quite often you'll see three, four, five offers here, and then one offer up here, clearly above the band. Why? Because they're willing to pay more, because they need this business for reasons beyond the financial performance of the company.

Bruce EckfeldtTalk to us a little about how the general process works. I'm sure no client goes through the perfect, idealized process, but when you start talking to a buyer, how do you set their expectations in terms of phases and time frames? How long is this going to take? What are the things they need to do? Map this out for us.

Bill SnowYou mean talking to the seller, when they're looking to sell the business?

Bruce EckfeldtSorry, yes, a seller. "Hey, I'm interested in selling. Do I do it this week? Does it take six years?" How do you set their expectations? Do you have time frames?

Bill SnowIt takes six years. No. Once we're going, it should take roughly nine months, give or take. The steps are: we get signed up to sell the company, or part of the company. We put materials together. We put a deal book together, called a confidential information memorandum, a CIM. We love acronyms in this business. EBITDA is an acronym. M&A is an acronym. LOI is an acronym. We love acronyms.

So we put the CIM, the deal book, together, and at the same time we put a buyers list together. Quite often the business owner has been contacted by numerous potential buyers, or maybe has a short list of competitors or other companies that might be interested. So we can use that list of four, five, 10, whatever, and build it out by doing research with Capital IQ, which I mentioned. So if you're a buyer, make sure we can find you on Capital IQ. You will get opportunities. Make sure you put corporate development in your title. I don't care about anything else. Corporate development, that's who I want to talk to.

So we put that buyers list together, and the seller approves every buyer on the list. Typically we start with a bigger list and whittle it down. Maybe we'll put some crazy things in there. We'll cast a wide net. But I want to get it down to somewhere around 100 or 120, something like that.

Then we reach out to those buyers. That's phone calls and email. In the first Dummies book I wrote, I called that "the alchemy of phone call and email," and one of the editors came back and said, "We can't use that." I said, "Why not?" And I kid you not, the concern was that we would insult the alchemists of the world. They didn't get the joke. I said, "I'll take my chances with the alchemists' guild." I have not been sued by the alchemists' guild yet, and it's been 13 years.

So we reach out to the buyers and send a teaser, which does not name the company but provides some financial information and, obviously, what the company does. We have a nondisclosure agreement, or confidentiality agreement, which we call a CA. Again, we love acronyms. If the buyer is interested, they sign the CA, and when we get the CA signed, we send them the deal book, the CIM. Again, we love acronyms.

The first thing the buyer does is come back to us with an indication of interest, an IOI. God, we love acronyms. The indication of interest says, "Yes, we're interested, and here are some rough ideas about deal structure." The big thing we're looking for is the valuation range. Based on that valuation range, we'll have meetings with hopefully five, six, seven potential buyers who we think are serious and whose offers meet the expectations of the seller.

After those management meetings, we ask the buyers to come back with a letter of intent, an LOI, which has a lot more detail on timing and structure. There's a specific price, not just a range anymore, and some other details. We'll most likely do some negotiating, sign an LOI, go into due diligence and purchase agreement writing, and then you close the transaction. All told, it should take roughly nine months.

Everybody thinks they can get it done faster. I just don't know where you can trim substantial amounts of time, because we have to get a lot of information from the client. They have a business to run, and quite often that's the big slowdown, through no fault of the client. They've got a business to run, but we can't do our work until we get the materials. It should take roughly nine months.

Bruce EckfeldtAnd if a process breaks down, where does it typically break down for you?

Bill SnowThe company is not performing. That's the big thing. We've had this before: a company had a great year, and now we're going through our process, putting the materials together, and we're getting month after month of financials showing, "Wow, now you're losing money." That's not good. Then we're eating away at the trailing 12 months of EBITDA. Buyers typically look at the last 12 months, so we're seeing erosion there, and we're not seeing any pickup. "Hey, maybe we need to put this thing on hiatus." We've had that before. So that's the big one.

Or the company... We had another client where everything that could go wrong went wrong. They had a sudden, substantial drop in profitability. The EPA showed up and said, "You're doing something wrong," so now you've got an EPA problem you have to fix. And there was a lawsuit by a former partner. Everything that could go wrong went wrong, so we pulled the plug on that one. That was a few years ago. Maybe at some point we'll sell it.

But if the company is performing well and growing, ideally with profits growing, you're going to get offers. You're probably going to get multiple offers. Then the only question is whether the offers, which are what the market is saying, meet the expectations of the seller.

Bruce EckfeldtIn our prep conversation, you mentioned that most sellers, once they get through this process, tell you they wish they'd known all of this far sooner. What are some of the things sellers can be thinking about earlier in the process, and when should they start thinking about them, so they have a more successful sale?

Bill SnowSure. The biggest thing is: owner, make thyself expendable. A company is going to be worth more if you, the owner, are not needed. That's a bitter pill for a lot of business owners to swallow. So make sure other people are running the business day to day. The business will be worth more.

Watch out for concentrations. If one of your customers accounts for a substantial amount, 40% or 50% of sales, or 80% or 90%, which we've seen at times, that's going to diminish the value of the business, because if that one customer fires you, your business is impacted. That's a huge amount of risk. Maybe it takes multiple years, but try to spread out that risk by getting additional clients, so that big client, which is great to have, isn't such a big client in terms of the percentage of the business.

Pay attention to the balance sheet. One of the things that gets really boring in M&A is these things called working capital adjustments. So you want to understand what working capital is: essentially accounts receivable plus inventory minus accounts payable.

Are you collecting your AR on time? Are you writing off AR? Do you have huge amounts of dollars that have been in AR for 100, 180 days, certainly over 90 days? Are you really going to collect it? A buyer is going to say, "Wait a minute, is this impaired?" If it's $5,000, who cares? But if it's a substantial amount of money, that's going to be a problem. What's your history of writing off bad debt?

Inventory. Are you writing off bad inventory? This is where it gets really boring. If you have a company with inventory, you should be taking a measurement, hopefully by auditors or reviewers, on January 1st and also on December 31st. Then you look at what was bought and what was sold, so you can calculate cost of goods sold very accurately. And if that's accurate, guess what? That flows right down to the bottom line. If we don't know the actual cost of goods sold, maybe because the auditors weren't there on January 1st because it's the first year of an audit, okay, we'll take a deeper look, but that might be an issue.

Especially if inventory is obsolete or slow moving, a buyer might say, "You know what? This is impaired. You're not going to sell it. I want this written off." A lot of people say, "Okay, fine. You're going to reduce my assets, my inventory, by $500,000. Big deal." Well, it's not just that, because it hits earnings, and you have to look at the multiple. If it's a five multiple, that's a $2.5 million hit. If it's a seven multiple, that's a $3.5 million hit. So it's not just half a million dollars off. It's reducing your earnings. Pay close attention to that.

Payables. A lot of companies want to pay very quickly, on time. You know what? If you've got 30 days, take 30 days, because that's a use of your cash. As odd as it might sound, paying early can come back and ding you at the end, because the buyer might say, "We're not going to pay that quickly. We're going to take the 30 days or 45 days and then pay." That can lead to a readjustment of the working capital amount, and that can hurt you. So plan. Talk to your accountants about what they recommend and how to prepare the business to sell.

Bruce EckfeldtIt's easier to do when you've got some time to make those adjustments before you actually go into the sale process. If you're trying to do all this 30 days before you go to market, that's not going to get you very far.

Bill SnowYes, absolutely. It's the same thing. We get contacted all the time by all kinds of well-meaning consultants who want us to do all the work of obtaining the client and then turn it over to them: "I've got this great sales thing. I'll improve sales and do this, blah, blah, blah, make the company worth a lot more, and then you'll get more, Bill." And how long does that take? Can you get it done in a week or two? "No, no, we need a couple of years." Okay, goodbye. It might be valuable, but it doesn't do us any good, because we get retained. I want to start working as soon as possible. I want to get the thing done and closed as soon as possible. I don't want to sit around and wait for a few years, because the client's not going to do that.

Bruce EckfeldtThat's not your time frame. So, for an owner who's looking to sell, who should they involve in this process? I think it's a big decision and a challenge for a lot of folks. "I've got a lot of people on my leadership team, or in the company, who know these things or have insight into this stuff." What do you advise owner-sellers to do in terms of who they should involve in the sale process and the preparation for sale?

Bill SnowWhen they're ready to go, hire an investment banker. Absolutely. Talk to a couple of different people, a couple of different firms. The first thing is to hire someone you like. If you don't like the person, for whatever reason, don't hire them. You want to look at their history and what they've done. And the most important thing is their ability to negotiate. You want to determine that. What I always say is: get their fee agreements and cut them to the bone. If the investment banker takes your lowball offer, don't hire them, because the way that investment banker negotiates with you is how that investment banker will negotiate for you. That's very important.

Have a lawyer. A big mistake we see is a business owner selling the business who hires, or keeps using, an attorney they've used for years for contracts and other things, but who hasn't done transactional work. You want an M&A attorney. You want somebody who has done transactions in the past. Very important.

We had a situation years ago where the owner refused to hire somebody with M&A experience. "I'll use my guy." I think he was a roommate: "I've known the guy 40 years." And he was a capable attorney. He did contracts, and when the daughter gets a DUI, he gets her out, and he helps you adopt a kid from China, and all that kind of stuff. Very valid legal work. But he had not done M&A work.

And how did that ding us? Other guys at my firm were working that deal. I would never let something like that happen. But when the deal moved into the purchase agreement writing and due diligence phase, you're leaning on the lawyers. One of the things that goes on is the production of schedules: all kinds of documents that back up all the promises made in the purchase agreement. That is brain damage work. You don't want a senior person billing out at a senior rate doing it. You want young people who don't know any better. You want paralegals and junior accountants who are trying to make their mark, who are willing to work late, and who don't bill as much. And you have multiple bodies working on it. This lawyer was in an office by himself, doing good legal work, but he didn't have a support team.

So the deal was supposed to close in January. The lawyer couldn't get the schedules done. Now we're closing in February. The lawyer still couldn't get the schedules done, because he didn't realize how much work goes into these things, because he'd never done one of these transactions. In early March, the client's big customer fired them, and they lost about 30% of their business. And guess what? The buyer said, "Hold on, we're pulling up stakes." It took years before a transaction got done. Why? Because the lawyer was not prepared.

You think you're doing a favor to an old pal who's an attorney. You think it's going to be done economically. It can cost you. Hire a larger firm that has suitable support people for the M&A attorney. It'll be worth every penny.

Bruce EckfeldtWell said. Bill, this has been a pleasure. If people want to find out more about you and the work you're doing, what's the best way to get that information?

Bill SnowYou can go to the website that I'll have until the day I die, and then I'll pass it along to some heirs, and they'll keep it as a memorial to me in perpetuity. That's billsnow.com. You can also find me at focusbankers.com, Focus Investment Banking. We're an investment banking firm. We do nothing with investments, and we're not a bank, but we call ourselves investment bankers. We work with middle market and lower middle market companies, helping them buy companies, sell, things like that.

Bruce EckfeldtI'll make sure the information is in the show notes so people can get it. Bill, thank you so much for taking the time today. It's been a pleasure.

Bill SnowMy pleasure. Thank you.