Start Early: Hard But Necessary Advice For Business Owners Thinking About Selling With Aaron Linnebach

Business Leaders Podcast

Selling a business is much more complicated than handing it over for an amount of money and then walking out of the room. On the part of the buyer, it involves a meticulous process of diligence and preparation. If those buyers, who are experts in buying, are taking the effort to be prepared before the transaction happens, why should you, the seller, who is probably selling for the first time, not want to achieve the same level of preparedness? Joining Bob Roark on the show, Raincatcher CPA Aaron Linnebach has some advice for business owners who are thinking about selling their companies at some point. Old wisdom tells us that “The early bird catches the worm,” and it couldn’t be truer when it comes to M&A. Listen in and learn why you should already be investing in exit preparedness now, even if (especially if) you’re not raring to let go of the reins just yet.

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Start Early: Hard But Necessary Advice For Business Owners Thinking About Selling With Aaron Linnebach

The one thing that I would tell a business owner is to start the conversation early. If you can find your advisory team before you're ready to sell, and start discussing the things you can do on your business so that when it comes time to close that deal, you're prepared. You've got a clear strategic goal. You've got a compelling investment thesis. Starting early before the deal is about to close is only going to create money. It's only going to create extended value for your business.

Our guest is Aaron Linnebach. He is the Managing Director of Raincatcher. Aaron, thank you so much for coming on the show.

Bob, thank you so much for having me. It’s always a pleasure to talk to you.

We have a little history. We've shot out a few birds here a little bit, so that's a good thing. I've seen him in the field, in his natural setting for lack of a better term. Aaron, tell us a little bit about Raincatcher. What is your role at Raincatcher? Your backstory about how you came into this field is interesting.

Raincatcher is a business broker and M&A advisor for small to medium-sized businesses. We help deliver it to you in our succinct form. We help business owners buy and sell remarkable companies. We exist to represent sellers when it's time to go to market. My personal role in that is incredibly exciting. I get to spend all day every day working with my team and our business owner clients to help shepherd that business through the process of getting ready to go to market, pulling the trigger and go into the market, navigating all the uncertainty in that path, and then successfully closing that deal. It is an incredible honor and privilege to be a part of that process.

For us, it boils down to four main value add activities that we take. The first is emotional. It's a big deal to sell a company or your business. It's not all about the numbers and the Ps and Qs. Oftentimes, it's about the heart as much as anything else. We help navigate that part of it. We help take the mystique and the mystery out of selling your company. The next part is educational. It's making sure the business owners are smart on what they need to do today, what they need to do tomorrow, and what they need to do the day after that to complete that objective of selling the company successfully. The next one is strategic. That’s where we differentiate ourselves. It’s being able to take a strategic perspective on the overall life cycle of your business and why now is the right time to go to market, and then it’s tactical. It's the blocking and tackling. It's the boots on the ground grind of crunching the numbers, telling the story, putting together marketing materials, contacting buyers, negotiating on your behalf.

At the end of the day, you take all of those things together. What we do is serve business owners. When a company comes to us and says, “Guys, I'm thinking about selling,” our response is, "Great. Why?” It's not, "Great, let's sign you up and get the process going.” We try to dig in and understand the motivations behind that. That tucks into my personal story. This slightly circuitous path I took to get out here. I started in the family business. My education is in accounting. I've got a CPA license hanging on a wall somewhere out there. We owned and operated group homes for people with developmental disabilities. It was a great business. I worked in that company for about 5 years of the 25 or so that my parents owned it. I got to help work that to a sale.

Being a part of that team gave me an insider's look into a day in the life of a business owner. It can be incredibly rewarding on one hand, and incredibly challenging on another hand. Walking arm and arm with my family members as we tried to monetize the business that they had built was incredibly eye-opening for me. It sparked a passion in me to move into the role I'm in now, which is helping small business owners, helping them get through that path of going to market and successfully closing a deal.

[bctt tweet="Run your business like you’re going to own it forever, but be prepared to sell it any moment." via="no"]

It's an honor and a privilege to be a part of that process. It's emotional. It's heart level for me. I've been fortunate in my career to move both from a corporate side into a big company, public accounting at a Big Four firm. From there into deals, and now for almost the last years, I have focused 100% of my time and energy on helping businesses prepare for, go to the market, and successfully sell their company. It’s fun and I love doing it. It gets me out of bed excited every single day.

I think about the journey of getting to work in a family business, report to your parents effectively, then take and watch the emotional journey for your folks. As they say, "We're going to take in and plan on selling the company.” You see it go to the transaction, watch the emotional behavior of your folk’s post-sale. Was there anything surprising that you noticed as your folks got closer to closing the transaction?

There were far too many surprises to answer that question honestly. Without diving too deep into the specifics, what I'll say is as an organization, we're not as well prepared as we should have been. The unfortunate truth is it costs the shareholders money. We were not able to get a valuation that was more appropriate for the business had we taken some steps early on. Specifically, it's things like making sure our accounting records are complete, accurate and consistent. It’s making sure that our key management team is in place and incentivized to stay in place after the sale. Even making sure that the right people on the team are involved in the process of selling the business.

A lot of times, and we were guilty of this, business owners have this concern that their management team is going to panic as soon as they hear the word sell. The reality is what I found with most business owners when they collaborate with those key personnel, when they take steps early on to shore up the financials, to shore up the story of the business, it makes for a better process. Someone who's going to buy a company is not coming in to buy what the company did yesterday. They're coming in to buy what it's going to do tomorrow. For sellers thinking about creating an enterprise that's easily transferable to a new owner, that's going to create a ton of value. It takes preparation. We learned some hard lessons there. I've seen other businesses learn some hard lessons. That's one of the things I try to help my clients avoid in the future.

There's that old statement, "Tuition is expensive,” paid tuition and the transaction. For the business owner that’s listing and they go, "How do I know if now is the right time to sell?” What do you tell that person that goes, "Should I wait? Is this the right time?”

There's an answer that's relevant now, and then there's a different answer that will be relevant in a couple of years from now. Let me explain that. Business owners that are coming to me now asking that question, "How do I know if the time is right?” My response at the start of 2021 is the time is right now. We’re in an environment where we've had about a ten-year run-up in private company valuations. We may not be at the very peak from an evaluation standpoint. I don't know exactly, but we're certainly near the end of what's been a very long economic growth cycle for privately-held businesses. That’s one thing. You're never going to nail the top of the market, but now is an opportunity to get close.

The other part of that is because of the stimulus package passed by Congress and a couple of different iterations. There are some additional factors in place that are helping deals get done more easily. If it's a deal that's going to be an SBA insured loan, an SBA loan to go buy a business, which is the most common way to buy business under about $5 million in enterprise value. The SBA is waiving the guarantee fee. Ordinarily, that’s 2.5% to 3% of the total price of the deal. They're waiving that and they are also making the first six payments, principal and interest, on any acquisitions completed before the end of September 2021. Collectively those represent anywhere from 3% to 4% of total enterprise value up to about 6% of the enterprise. That's just a discount that's going to buyers, which means as a seller, there are some opportunities in place for you to get a little bit more for your business. It's a little easier to get it done in this environment.

That’s the immediate answer to the question. The reason that answers change over time is that it's unique to every business owner. What is the right time to sell? I'll refer back to the question of why. The first question we asked when a business owner comes to us is, “Why do you want to sell?” Understanding the motivations is incredibly important. There’s this thing floating around like in ether. We've all heard it. It's the die at your desk type. We've all met the business owner or the executive who says, “I'm going to die at my desk.” Sometimes it's a badge of honor. For some folks, that's it. That is a real goal. I commend them for that.

[caption id="attachment_5808" align="aligncenter" width="600"] Selling A Business: If you wait until you're psychologically or emotionally ready to sell, then you would have waited too long because by that time, you may already be disenfranchised with your business.[/caption]

For most of us, when we sit back and think about the concept of dying at our desk, there are a lot of things in life that we have not done if that's how it ends. There are a lot of things we've missed out on. Business owners sometimes hold on too long to the company. You need to understand as a business owner, what does life look like after? What are the things that I've given up? If you start thinking about that now when you’ve got maybe 1 or 2 years to sell, and you can collect your M&A advisor or wealth advisor like Bob Roark, your attorney, your CPA. If you can get that team on board to start looking at the business and really diving in and preparing that company for a sale at some point, you'll be better off. You'll extract more value.

Think about why you want to make a move as a business owner, and then start taking steps to accomplish that goal. There are a lot of unknowns. Every business owner wants to sell for a different reason than the guy next door. By and large, it boils down to the fact that you, as a business owner, have created this enterprise. You've invested the time, tears, blood, sweat, money and all of it, but how are you going to get out of it? How are you going to capture that value that you've created? If you wait until you're, “Ready to sell,” if you wait until you're psychologically or emotionally ready to sell, then you've waited too long and it's too late. By that time, you may be disenfranchised with your business. You may be so busy that you missed a year of your kid's life, or a year with your spouse, or a vacation that you've always wanted to take. You skip things in life sometimes to work in your business. My advice is to start today and then run it like you're going to own it forever but be prepared to sell it any moment.

The thing that perhaps is missing is having your business built ready to sell. We have all the things, policies, procedures, derisking, and all that stuff. That's just good business. It truly is. It's funny, you'll talk to somebody who goes, “I got an unsolicited offer to buy my business.” You go, "How do you know if it's the right price?” There's a lot of that going on. I'm thinking about your career at EKS&H. Is there a deal that you were involved with where the business owner did 2 or 3 things incredibly right, which had them selling their company at the top end of statistics for that industry? If so, what did they do that made them stand out?

I had a deal that I worked on at EKS&H, which was a large regional accounting firm here in Colorado, the 800-pound gorilla if you will. It’s an incredible client base, an incredible list of businesses. We did one deal for a company that makes machinery for a small end market. The business dynamics are they sell a few very expensive items to a few very important customers. That's problematic in selling a business. Its risk. The way that they responded to that business risk was by institutionalizing the relationship. They made it so that the company, who was my client, was so integral to their customer's way of operating that they couldn't extract them.

That relationship between vendor and customer was so close that when a buyer came in to look at the business, we were able to make a compelling case that they've institutionalized this relationship. That's a specific example on a specific deal, but that concept holds true for every business, to the extent that you can create your company in a manner that customers have to keep coming back. You are thick as thieves in their business. Even if it's a consumer, they’ve got to keep coming back. That's a win. That will be a compelling business proposition. That’s one, institutionalize the relationships.

The next thing that they did is they brought their management team into the process of selling the business in advance. This is the second time I have brought it up. It is so critical to have that key layer involved in some capacity, understanding that there are commercial considerations and confidentiality stuff. Integrating your key management team in the process will create enormous additional value in a business because yet again, another buyer is coming in. Think about this. They're not buying the business for what it did yesterday. They're buying it for what it's going to do tomorrow. They need a team in place that knows what they're doing. Almost never does a buyer walk in and buy a company and fire everybody. That's a big fear. It almost never happens because the lifeblood of every organization is that team.

Institutionalize the customers, involve the management in the process, and then the last thing is don't short the soft stuff, the feeley meeley part of business, culture, loyalty, genuine care for one another, among your team. As an owner, you can put those cultural planks in place in your company. It's only going to create value. Even after a sale, those people are going to continue to be valuable to that business, loyal to that business, loyal to those relationships that they've built. Institutionalize the vendor-customer relationships, involve the management team, and don't overlook the feely meely stuff, the cultural and emotional things.

I'm thinking that the business owner out there is going like, “I am the sales team, and I am the CEO, and I have all the key relationships.” Pretty soon, you look at it and you go, "You're the business.” “Yes, I am.” What advice would you have to that business owner where they wear multiple hats, and they can't leave the business alone because it wouldn't operate without them.

[bctt tweet="Fire yourself from your business. You’re selling an enterprise, not a job." via="no"]

That's probably one of the most common problems we run into, especially amongst smaller enterprises. The advice I would give to those business owners is to fire yourself. At a minimum, work yourself out of a job by training up the next person to take on that, or hiring those skills. For every business owner, you've got to remember that you're not selling a job. You're selling an enterprise. You’ve got to take your job out of the enterprise so that you can effectively deliver the thing. If you're so involved in the business that if you get hit by a bus, it collapses, there's not much to sell there. You've got to pull yourself out of it. You have to. It's hard to let go with those control levers sometimes. It's tough, yet it points back to the importance of having a team that you can trust and focusing on things like culture. Making sure you've got capable management in place because that is your outlet for personal involvement in the business. It's your people.

The thing that comes to my mind is you've got that business owner that says, “I'm all the functions and I do have a job.” They go like, “I don't know how to work myself out of a job, get the right butts in the right seats, and that kind of thing.” That's where you bring on a coach. They go, "The coach is expensive.” I think about the multiple expansion down the road and that return on investment for that coach. I don't have a particular coach in mind, but I think about a lot of the business owners. They have enough courage to get it started. They had afforded to keep it running. It's probably 80% plus of their net worth. At some point, they're going to exit the business. Either they are going to sell, die or liquidate. It's going to go away. You go, "Why not make that investment?” I don't think that's a well-thought-out process of what's the return on investment to hire a coach to help you get there.

I should do some math behind that. I bet you we've got the data to be able to pull some of that information out. In my experience, 100% of the time in deals that I've worked on where the business owner was so deeply and intimately involved in the operations, the value of that business was impaired significantly. It's not just the value, the business itself is worth what it's worth. As a seller, you are integral to creating the value to making the sausage so to speak. You then yank yourself out of there. It's not worth as much because you're the key man. You're the key player. If you want to be able to sell that business and go buy a boat or whatever it is that you'd like to do next, you've got to be out of that business already before you go to market.

It's a hard thing to do, but you have to rip off. You have to do it. It's a step that must be taken. The flip side of that is spending money on a coach as you mentioned. Making that investment early on so that you can work over the course of a reasonable timeframe to accomplish that goal of getting yourself out of the business, that will be returned to you many times over. Think about it