Exit Planning Fundamentals With Cam Bishop

Business Leaders Podcast

The vast majority of business owners spend somewhere between 90% to 95% of their time working IN their business and only about 5% working ON the business. Running the business is working in it; exit and transition planning are working on it. However, when it’s high time to sell, most business owners don't know what they don't know about selling their company. They are unaware of how to transition or exit their business. Joining Bob Roark on today’s show is Cam Bishop, the Managing Director at Raincatcher, a business brokerage and M&A firm that partners with entrepreneurs and business owners looking for help in buying or selling remarkable companies. If you’re thinking about selling your business or in the process of doing so, you don’t want to pass up this episode as Bob and Cam dive into the exit planning fundamentals that will help you extract additional value out of your company.

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Watch the episode here:

[embed]https://youtu.be/eB4ILmWLn_g[/embed]

Exit Planning Fundamentals With Cam Bishop

We're incredibly fortunate we have Cam Bishop. He's the Managing Director at Raincatcher. It's a business brokerage and M&A firm that partners with entrepreneurs and business owners who are looking for help in buying or selling remarkable companies. He is the author of Head Noise: Perspective and Tales from the Executive Suite and Onward & Upward: Motivational Advice for Career Success.

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Cam, thank you from Kansas City and for coming on the show. We appreciate it.

Thank you, Bob. You’re welcome. I'm glad to be here.

Before the show, I did a little bit of homework. I looked at your long resume of experience. If you could, give us a quick snapshot or thumbnail of your experience prior to here.

It has been an interesting journey. I went to the University of Missouri School of Journalism. I got a degree in Journalism and came out of school. I wanted to become an advertising copywriter. I thought I'll spend my entire career working in ad agencies. Instead, I started out in a marketing job and writing ad copy in a small publishing firm. It was a $7 million business. It got acquired and the new owner said, "We want you to go out and buy companies to grow this thing." We grew from $7 million to $13 million, to $90 million and then we got sold again. We grew from $90 million to $300 million. I stepped in as the CEO of that company and we grew it to $400 million. It was a profit machine. We were throwing off $100 million a year. We had 2,000 employees in 23 US cities in 4 or 5 foreign countries. It was a crazy ride.

[bctt tweet="The integration plan is the absolute make or break of the deal." via="no"]

The management structure changed and I said, "I liked this business model." I took six months off, wrote a business plan, flew around the country, pitched in the concept to about 50 different private equity firms, and ended up landing in a very happy relationship with JPMorgan Chase Banks' Private Equity Division. At that time, they had about $6 billion fund they were working out of. Unlike most PE deals, we didn't start with a direct acquisition. We started on my kitchen table. We went out and sourced a business as a starter, what they call a platform company.

We ran the same model I had been running at the previous business, which they called in the PE world, the leverage roll-out business, where you buy a platform company and then you rapidly begin to tap companies that are strategic fits for your business. You build it up into a much bigger company, then you exit that deal and gain a benefit from scale that we used to call arbitrage on the exit multiple. Meaning if you had averaged all your deals in six times EBITDA, when they're aggregated together and you resell it, you can sell it for 8 or 9 times EBITDA based on the scale of the business and the efficiencies that you've driven into the business.

We did that and then we exited that business. I consulted as a partner in a consulting firm that did exit and transition planning. Over the course of my career doing these leverage roll-ups, to buy one company, you normally look at 30 to 50 companies before you buy one. Over the years, I've looked at well over 500 different businesses in terms of their offering documents and completed 40 buy-side deals. A lot of times, we would carve out non-strategic assets from those deals, repackage them, and sell them off. At any one time, we might be buying 2 to 5 companies and spinning off and selling 1, 2 or 3 companies. We were a deal machine to that process.

[caption id="attachment_5848" align="aligncenter" width="600"] Exit Planning: If you listen to the employees of the company you’re acquiring, they'll tell you everything you need to know about the strengths, weaknesses, opportunities, and threats of that company.[/caption]

What you see with so many business owners, sadly, they don't have the right representation and they leave money on the table. If I was paying somebody $2 million, $3 million, $4 million for their business and if it had been a better package, they could have gotten an extra $500,000 or $1 million. For most people's legacy, that's a lot of money. I developed a passion for that to help business owners. That's why I went into exit and transition planning, where I also helped broker a few deals for those companies.

I spent the last few years doing a very fascinating and extreme business transformation, coupled with a digital transformation for a $60 billion 501(c)(3) organization that looked behaved, felt, and competed like a for-profit company. What was very attractive was the purpose-driven nature of that business. I was under a contract for the board of directors to do that because all the money that business made went to fund scholarships and the endowment for a small private university. It was a very worthwhile cause, but that contract ended and I said, "What do I do with the rest of my life?" I love the transaction business. I love helping business owners to achieve their life goals and financial goals. I started looking around for somebody to join and that's where I found Raincatcher.

What made you decide on Raincatcher?

After I finished my contract, which was very high stress and extremely difficult work environment, it was 10 to 12-hour day for three years, I said, "I don't want to go back into another CEO job, but I want to be challenged. I want to be useful. I get bored way too easy." I said, "I want to partner with either a lower-level market investment banking firm or a higher-level, sophisticated business brokerage." I spent a month just doing research on firms around the country and identified a list of about twelve. I began doing deep-dive research on one of those to proceed with conversations. It would have to be a two-way street, but I was going to be very picky about who I would want to work with.

Fortunately, the third firm I came to was Raincatcher. I was very impressed with their digital presence and the quality of their website. I reached out to them via their website. I got a call back from the two partners, Marla and Jason. We set up a couple of Zoom calls. We hit it off. We found that we were very much in alignment on mission, vision, and the value of corporate culture in a company. They're marvelous and highly ethical people. I said, "I like how this is going. If you're agreeable, I'll drive out nine and a half hours from Kansas City to Denver during COVID. Let's meet someplace outdoors." We met at an outdoor restaurant and spent five hours together. We went through lunch and dinner. It was great. My wife came out with me because we believe in the family orientation of businesses. She came over after a while.

[bctt tweet="Running a business is in and of itself a full-time job. Packaging a company to sell is also a full-time job." via="no"]

We had to figure out a business model that worked for both of us and rightfully so, that took some time because they were evolving their business. We finally got that all ironed out. We set up Raincatcher Midwest LLC of which Marla and Jason, the two owners and partners with them held a co-firm in Denver, our partners and I'm a partner. We're going to focus on building out the Central Standard Time territory in the United States as part of their nationwide build-out strategy.

It's the chemistry. You think about the importance of that. In your early career of acquisition. When you were rolling up all the companies initially, how important was chemistry to you when you were looking at acquisition targets?

The chemistry portion of the acquisition process is primarily driven through the integration into the business. That's one of the big mistakes that many companies make when they acquire a company. I've seen it countless times. I've done a number of lectures for CFO-type organizations on the whole process of mergers, acquisitions and integrations. The primary thought is you put about 90% to 95% of the effort into identifying the business, doing the due diligence, negotiating the deal, and trying to get the deal closed. Only about 5% of the energy and time goes into the integration plan. The integration plan is the absolute make it or break it of the deal. With the exception of certain terms and conditions in the contract, it's not on the frontend of the business.

As part of our deal machine, we developed a very rigorous approach to try to identify the culture of the organization we're acquiring and to avoid the habit and practice that is so prevalent in deals where it goes like this, "I'm buying you. Therefore, I'm right, you're wrong. I'm the boss, you're going to do it my way." That's where the breakdown occurs in a lot of these integration deals. If you approach it from the standpoint of listening to the employees of the company you were acquiring, first of all, they'll tell you everything that you need to know about the strengths, weaknesses, opportunities, and threats of that company. At the same time, if you listen, you will hear that they are doing things better than you are doing. If you have an open mind and can control your own ego in order to adapt to the best practices of the company you're acquiring, you end up not only a larger but a much better overall and more efficiently run total company with a more compatible corporate culture.

I think about that business owner that their dream is an all-cash offer. I don't think that's all that common. I suspect that earn-outs and performance clauses are in that world. Piggybacking on what you just talked about, the culture and so on. If you're the business owner who has an offer that has an earn-out, what should you be aware of or try to take and see in advance to make sure there's an opportunity to achieve your earn-out?

Some of them are related to the terms of the deal and what the earn-out is tied to. As a seller, if you could get the earn-out tied to top-line revenue, you're in much better shape than if the earn-out is tied to some element of whether it's gross profit, operating profit or net income. Pick whatever profit line you want to take because there are so many elements that become out of control of the seller of that business, especially if he or she exits the business in conjunction with the deal. Even if they stay on for a retained period of time and still get paid an earn-out against some level of profitability, you no longer control all the decisions if you're a minority shareholder in that business on a consulting contract, or just an employee.

[caption id="attachment_5849" align="aligncenter" width="600"] Exit Planning: With a few exceptions on some of the higher-end private equity deals, there are a few deals that get done these days that are pure cash deals.[/caption]

You are correct, Bob. With a few exceptions on some of the higher-end private equity deals, there are a few deals that get done these days that are pure cash deals. They're all either combining a seller note with an earn-out, or one or the other if not both, especially if they're in a small enough range where they're going to have some SBA loan backstopped against them. Almost all of those require some element of seller carryback on a note basis. It’s not necessarily an earn-out basis, but a seller carryback.

The thing that struck me is you’re talking about the chemistry between you and the folks at Raincatcher. I'm thinking about the business owner who maybe has the luxury of more than one offer and you're going to go, "This one's got this. This one's got that. This has got the other." The reason that they're buying my company is because they theoretically like what I do and how I did it. They go, "There's no chemistry. The chemistry is better in one offer than the other." For that potential seller, what do you think are the critical 2 or 3 things you need to have foremost in your mind to make sure you navigate that earn-out properly?

That can be a huge issue, especially if it's a long-term independent entrepreneur running his or her business and they're acquired by a private equity firm. It's important for a seller in that case, especially if they're going to do a traditional PE deal where they sell off 80% of the business and retain a 20% equity stake, remain involved in the business for the typical whole period of generally 3 to 7 years with a five-year midpoint. It's important for them to do their due diligence on the private equity firm. If it's a family office, it's the same situation by talking to CEOs and former company owners of other firms that investment bank or that private equity firm has acquired.

There's also one other element inside your own business which is a control factor. Many companies have anywhere from one to a handful of what I call key knowledge keepers and/or key points of failure in the organization, where somebody is so critical to the organization either because they have a certain type of unique experience, customer relationships, or some technical capability that is essential and central to the business. A smart seller will not be penny-wise and pound-foolish. He will create some kind of a stay bonus or an incentive structure for those individuals, which accrues over time to essentially put golden handcuffs on them and make it worth their while to stay through that seller's earn-out period at a minimum.

What struck me as we're talking, we always hear that the business owners don't know what they don't know about selling their company. Why do you think there's such a gap between the skillset that they have to run their business and do well running their business, but they're unaware of how to transition or exit their business?

It ties in with the question we get from company owners who talk to us about representing them in the sale of their business. You are correct. They don't know what they don't know. I've never seen an actual statistic, but based on experience, I'd say 95% of business owners have never bought or sold a company before. They have no idea what's involved in the process, how much work it is, how much time it takes, and how complex it is. It is a case of, "You don't know what you don't know." I've been a CEO of companies for about 35 of my 40-plus years in business. I always worked on the philosophy that you know what you know how to do well and you do it. You know what you don't know how to do well and find an expert to do it for you.

In the management world, I certainly know accounting, but I'm no CFO expert. I bring in a top-level expert. I know more than enough to be dangerous about human resources and all the laws and regulations around that, but I still bring in a top-notch human resources executive. It's the same with my technical operation and head of IT. It's no different. There's that old saying in court, "He who represents himself has a fool for a lawyer." There are certain parts of that that apply in the sale of a company. There is a large element also involved with that basic risk mitigation of having the knowledge of both a professional who represents you in the business from all the technical aspects of the deal, as well as someone to look out for your best interest and help you divorce the emotional aspects that go with selling a company. It's a highly stressful emotional process. It's very easy as a business owner to make decisions based on emotion rather than on a solid business principle. That's where we play a critical role.

There are many different ways to go. There's the transaction fatigue factor. I'm sure you've seen folks who go, "I'm just worn out. I'm done. I don't want to play anymore." You've seen it with all the acquisitions where the business owners are responding to requests. How do you see that business owner when they're in the transaction process? How well do they do run their company during that process?

The challenge in selling a company is that’s also one of the things we try to keep an eye on and monitor those owners on. Running their business is in and of itself a full-time job. Packaging a company to sell is also a full-time job. If you don't have somebody who's controlling and doing the work on as many elements of that as possible outside the firm, you can become consumed with it as a business owner. Take your eye off the ball and you can see deterioration in the performance of your business while you're over here focused on trying to package and sell the business and doing something you don't know how to do.

To compound that problem, a lot of times, an owner will try to backstop with their attorney and an accountant. Usually, an attorney that a company works with is not a transaction attorney. They're not an M&A attorney. They may be primarily an HR law specialist or just a general business specialist. It's another case of penny-wise, pound-foolish not to be represented by a special legal counsel that knows all the intricacies and ins and outs of the terms and factors that can make or break a deal. Most deals die not because of the price but because of the terms.

I've heard that enough and I think it's understated or underappreciated on the price versus the terms. People get enamored by the price and then they fail to observe the fine print terms.

They just don't understand the ramifications of those things. How many people have ever had to deal with baskets, caps, escrows, long-term liabilities, and certain financial performance benchmarks that trigger certain factors in the contract? What are the elements of the non-compete, no-solicit, and no-hire elements of the contract? What do all of those mean for that business owner? Those are things that can significantly impact the total value received on a deal.

[bctt tweet="If a business can’t be perpetuated if you got hit by a bus, you have a job and not a business." via="no"]

For the business owner who's out there and