foreign [Music] thank you for joining me today today we're going to talk about the sell side of M A which is really at the core of what we do and before we get started I wanted to send a sincere thank you out to Ron Hodgkin's Bellow pass Ron the Opus X you sent me I appreciate it it's fantastic [Music] and once again we find ourselves at Monte Cristo here in Old San Juan you know having run deals for the last 20 years the extreme majority of them being on the sell side I've come to realize um that there's a lot of things that a typical business owner doesn't know getting into a process and that's what we're going to talk about today we're going to talk about you know the mindset of a seller and how to think about a formal sell side process [Music] what you're effectively trying to do when you take a company to Market you know a lot of owners think okay I've got a business there's buyers out there I'm going to negotiate one-on-one with them come up with a price strike a deal but the most effective deal makers on the planet are negotiating two things simultaneously one is process the other is substance so the process by which the business is sold is extremely important as well as the substance and what I mean by substance is terms price so on and so forth if you think about negotiations you know I think probably the most difficult person on the planet to negotiate with is a crazy person right I mean saying crazy things doing crazy things being entirely irrational [Music] another very difficult person to negotiate with is a bumbling idiot that really just has no idea what the hell's going on but if I think about a third classification of very very difficult people to negotiate with it is children you know if you think about you know an eight-year-old negotiating with his parents I mean children always have extremely high aspirations right I mean they always shoot for the Moon they understand the decision-making structure within the family unit you know they know what to go to Mom for what to go to Dad for what to go to their brother and sister for so they know the incentive structures within the family unit and they understand how decisions you're making is made um the other thing about children is you know if you sit there and watch them negotiating for them no is just an opening bargaining position right it's just something to be ignored and rolled right past so you know in a lot of ways I think on the South Side you want to negotiate like a child and not really come into any sort of a bargaining situation with preconceived notions I think the most important thing a seller can do is take a step back and say okay I have a business I have an asset and there are likely to be multiple acquirers for that asset I think a dangerous thing to do and although valuation is extremely important you know sellers oftentimes when they come to us really like to spend a lot of time focusing on what the business would likely sell for and while evaluation is obviously an extremely important aspect of what we do it's oftentimes really difficult to understand at the front end of the process precisely what the business would sell for and so my advice to folks is spend the time trying to understand value but be like a child have very very very high aspirations once you kind of frame up the value once you understand what it is that you want to get out of the transaction then you have to design a sell side process that's very specific to that unique asset and they're there are literally thousands of different ways to run a process and sell a business and many of these businesses are unique and today we're going to talk a little bit about I think the most appropriate way to set up a sell side process for our typical clients [Music] I think the first thing that you always have to think about before negotiating substance is understanding process and how can you create leverage and how does leverage work between the buy side and the sell side and there are a couple key ingredients to leverage you know one being necessity right are you a forced seller if you're a force seller you're in a bad situation most people um don't find themselves in that position they'd like to sell but they're under no compulsion to sell the other ingredient is desire both on the buy side and the sell side you know most sellers desire to sell and buyers if they're having discussions with you desire to buy but there's often a disparity of who wants that asset more so understanding desire on the sell side versus desire on the buy side is an important ingredient Leverage other important ingredients and I think by far the most important is that of competition whenever you have a unique asset and you can increase the number of potential buyers in the process you look the price and so when you think about this you should be focused on running what we call an auction and when you're running an auction really on the sell side my job is to be a process Setter you know I'm setting the process by which the buyers will bid to acquire the asset and auctions are not plain vanilla there are controlled auctions which are very formal there are open bit auctions where you know price is disclosed to everyone there are closed bid private auctions there are Quasi auctions there's modified auctions there's a lot of different ways to auction an asset so as a deal maker understanding the assets that is for sale and understanding the buyer universe and using professional judgment gained over Decades of experience allowing you to set the most appropriate process to sell that business and you know when I look at any sell side process a typical plain vanilla auction process at Potomac you know there's negotiations going on across the table so between us the sell side and the buyers but there's also same side of the table negotiations whereby buyers are competing amongst themselves for an asset today we're going to talk about I think largely the modified auction which is probably 60 or 70 percent of the transactions that we do are kind of hybrid modified auctions whereby there's no asking price on a business the business is taken out the market and there are clear process rules in order to participate as a buyer you need to understand where the finish line is no one wants to negotiate one of the most frustrating things on the planet is negotiating with somebody on the other side of the table who just never stops negotiating right like where is the finish line how long are we going to continue to negotiate is the buyer always going to want more is the seller always going to want more we never really come to a conclusion so setting process rules and showing the buyers the finish line and telling them specifically how they get to that Finish Line allows us to do a few things first off by laying out a defined process rules that are very clear buyers aren't holding back and you can take a race for example right you know let's say that you've got a uh you know a marathon you watch the Boston Marathon it's always in the last five or ten minutes that all the runners are now sprinting to the finish line if you go to a race and there's no Finish Line and somebody shoots off the gun you don't know at what point you need to start sprinting you don't know who's going to win is it just the last guy standing so I think it's very important to set clear process rules and most of our clients when they come into this whole process don't really understand that a sell side process is really one in which it's an auction process quite frankly there's no other way to say it there's no asking price on a business materials go out into the market and acquires have to bid and we use closed bid processes so no buyer knows what another buyer is bidding and the whole goal at least at the very front end of the process is not to find ourselves negotiating directly with any specific acquirer you want to have ideally at minimum six buyers in a process I think when you start getting north of 12 to 15 it starts to get cumbersome but if you can shoot for high single digit number of buyers in a process you will likely get enough demand that will ultimately Force up the price and my job is is multi-faceted my first job is to make sure that I conceal as much information as possible on my side of the table so being on the sell side what I try to focus on is not having sellers reveal too much information that might cause the buy side to get leverage so for example if you want to sell a business and you call up an acquirer one-on-one between you the seller and me being the buyer for example it's pretty easy for me to understand okay this guy really has a high degree of desire to sell because he's calling me all the time he's emailing me I told him I'd take a look at some materials maybe get back to him with an offer I might be a little bit slow in getting back to him and he's calling looking for the offer so you know I can judge desire you know sellers often will talk about large big ticket purchases that they're going to make one of the reasons why I'm selling this business is I'm buying a ranch in Utah I'm doing this I'm doing that we want to conceal as much of that information as we possibly can because we don't want the other side we don't want the buyers to really understand level of Desire or necessity in addition to concealing information one of the other things that is extremely important is trying to ferret out as much information as we possibly can to help us in negotiation so for example when we meet with buyers in a process we want them to do the extreme majority of the talking and there's a lot of things that I think are counterintuitive where you know when I sit down with acquisition meetings or just the conversations that I have with Buyers all the time I'm trying to understand what sort of quarter they're having what sort of year they're having what sort of strategic initiatives are going on behind the scenes because there's multiple examples that I've talked about over the years on the boardroom Buzz where we've sold businesses at prices that were substantially higher than what they should have otherwise garnered because we knew a company was having a bad quarter and needed to cover up some organic growth issues and so they were going to do a big acquisition and when we understand the decision-making structure and the incentives of the people behind the scenes at the Target we can definitely use that to our favor so we want to ferret out information understand as much about the individuals who are doing the transactions what their personal career has operations are how they get compensated we want to understand those things we want to understand that the m a guy is actually getting paid to commit Capital right if he's getting paid as a percentage of ebitda or as a percentage of total committed Capital now I've got somebody on the other side of the table from me that has a very very strong incentive to do a particular deal so [Music] understanding the decision-making structure and fairing out as much information as possible is extremely important in the early stages of the negotiation and quite frankly having my client say the least amount is possible I mean always be very kind always be very courteous but do far more listening than talking the other aspect of an appropriate cell side process is to have deadlines right when you think about Union negotiations yeah ninety percent of progress is made within an hour prior to strike both sides have pretty adverse consequences so we expect that in any sort of formal sell side process the majority of the concessions take place at the end and it's not a union negotiation right there's no collective bargaining agreement we don't have a strike deadline we have to actually impose a deadline so using deadlines allow us to Corral buyers into making decisions simultaneously let's say that we started with 10 buyers we did it round one so what does that mean that means round one bids are due at Thursday at 5 PM okay foreign we've done ourselves a favor because we're getting all of our offers simultaneously so we don't have a bird in the hand versus two in the bush we're not doing things sequentially we're doing everything in parallel so now we have five offers on the table and we're able to look at them and compare them right and when you're looking at something side by side is very easy to compare and contrast so now we've got these five bids as we go into round two we're going to ask the acquirers to revise their bids forward so we want more money from every one of them and we're going to systematically eliminate them from process but by imposing specific deadlines we're requiring the other side to act in a formal process where the deadline doesn't impact Us in any way shape or form and the teeth behind that deadline is if you don't provide your bid by such and such a date you're eliminated from process so if they don't get it in you know and and quite frankly in the deal World things happen right there's investment committees there's bosses that travel there's folks that have to approve it so it's not a hard and fast rule it's not in by five you're pulling out of the process we definitely discipline repeat offenders in this matter but either way it puts us in the South Side in a position where we're not waiting a week or two weeks for an offer deadlines on a Wednesday we get them on Wednesday we might get them on Thursday but we're not waiting a week or two and we're certainly not calling and tracking down the buyer looking for them so [Music] that is using deadlines or using the concept of time to our advantage remember a deadline that impacts the other side of the table that does not impact us helps us from a leveraged perspective so as we go through this whole cell side process it's important I think for sellers to understand a few things first off perception really is reality in a sell side process whether you're negotiating with multiple buyers or whether you're negotiating with one if you feel that you are strong if you feel that your position is strong and you're confident in your position in a lot of ways you are because you know I find that humans don't and anything in life and acutely in negotiations you know we don't really see the world as it is we effectively see the world as we are and as our brain is interpreting the events sellers who don't do this every day tend to read into things that really quite frankly are are not there so it's important to think about the fact that when you go into a sell side process it is gathering information it is concealing information and it is really trying to alter the perception of the other side and I'm gonna give you some examples of that in my life multiple times I've been in a formal sell side process where materials go out to buyers I get no bids except for one acquire now if that acquirer realized that there was an effect of busted auction there were no other bidders in this process it was just them I would have lost a tremendous amount of Leverage but if the process continues to move sequentially if folks are required to revise bids even though there's only one buyer into the mix it can alter the perception of that buyer that it is a competitive process sometimes you think if I'm too hard on this one buyer and I push him too far I lose this buyer I have no buyer so your gut instinct is to handle him handle this acquirer more delicately because you don't want to run them off the flip side of that though is that that's not what you would do if you had a strong hand right if you had a strong hand you might even double down and push them harder and so the natural inclination of the seller would be I've got a high desire to sell I've only had I only have one buyer so I need to really relax a little bit not negotiate as hard because I don't want to scare him off the actual right thing to do more times than not in that situation is flip the script entirely and be more difficult with that buyer because that's exactly what you would do if you had a very very strong hand now judgment comes into play here right I mean you really have to judge how badly that buyer wants that asset and if you've done your job correctly and you're looking at indeed desire as you go through the process you'll understand how committed maybe they need to buy the asset maybe they really want to buy the asset maybe they need to plug a hole in a p l maybe they're maybe they're buying another business in an adjoining city or state from where you are and combining those two would create a lot of value if you've kept your mouth closed and done a lot of listening you'll know that so when the time comes and there's only one buyer you know exactly how to deal with that buyer so the most important aspect of a sell side process right out of the gate is setting a process because it is a process I've said this multiple times there's no objective price on a business it's subjective it's based on the subjective judgments of a choirs so setting the process and and also being Nimble and having judgment to be able to change process rules as you go along as as circumstances change you know if we were in a process and went through three rounds of bidding and then I lost every acquirer but one I would have to use professional judgment in order to determine how I may or may not change that process so having judgment built up by Decades of experience is of course extremely important and how to make game time decisions in a process but if you do nothing else and set a process you were going to be in a substantially better place than your peers out there because you know most business owners don't really understand this and usually when when a seller wants to sell a business the first thing they think about is who's the most likely buyer you know a lot of times if you take the pest control industry for example you know you might size up your business and say well I don't want to sell to Terminix I don't want to sell to Oregon I don't know run a kill I don't know ntcmx but I know the Aero folks or I know the massive folks and I think that that would be a good match for my business when you fall in love with any sort of buyer prior to commencing process your seeding leverage to that particular buyer so whenever I think about a sell side process I always tell our clients we have to go into this from an agnostic perspective of we don't care ultimately who ends up buying it now at some point we will but we need the cards to be all on the table before we start making the subjective judgment that this acquire is a better match than that Acquire I think it's a very very important thing to do I think another big mistake that that sellers make is they don't understand in auction Dynamics what one extra bitter can do on the margin to a process you know sometimes you run an auction and you get to the very end and you might have three bidders out there and there's a very narrow Delta between all of their offers right it might be very very narrow but sometimes if you run an auction well and you've negotiated processing substance throughout and you've done a stellar job sometimes you can find yourself at the end where you've got three bidders and one bidder is just materially above everyone else and so when I talked to a lot of sellers over the years who have either sold their businesses on their own or used guys that really have no business advising sellers you know one of the things that typically strikes me is that number one they didn't include enough participants in the buyer universe number two they didn't run a formal process I mean they basically just put some materials together threw it out the door and see what what sticks and it's really hard to it's really hard to take back discussions that you've had and here's what I mean by that when we run a controlled auction for example it's controlled and we really limit the flow of information that goes out at each stage of the process in order to protect the seller and also to protect the Integrity of the auction process at the end of the day I get paid based upon what my clients put in their pocket so I have every incentive in the world to blow past targets so when I think about a sell side process for me it's this number one I assess the asset what is it I'm selling step number two I determine who the appropriate buyer universe is and then I try to expand on it and I never ever make assumptions as to what a buyer may or may not do sellers always say Paul who do you think will buy my business I say I don't know I do this every day of the week and 50 of the time I'm wrong and that's exactly what I should be I should be wrong because if I'm doing my job right the buyer universe is expansive enough so that I'm never making assumptions as to what a particular buyer may or may not do I want them to be in this process and I want them to demonstrate what they're going to do by putting those numbers on a piece of paper so that second mistake is not really you know it's a failure of imagination in determining what the acquisition Universe should be and you know a lot of times when you get into specialized Industries like HVAC and Lawn Care and Pest Control you'll have the standard business broker out there will largely go to the strategical choirs right they might throw a few Financial sponsors private Equity firms into the mix but they often won't get creative and go to Allied Industries and you know the reality is oftentimes folks in Allied Industries might not be the best buyer from a bit perspective for your business having particular Financial sponsors that you really don't want to do business with might not necessarily be the best buyers but when I'm thinking about a controlled auction process or a modified auction really what all I'm thinking about is terms and price how do I ratchet this up how can I use a buyer that I don't want to do business with jack up the price right and and I find that in at least 25 percent of the processes I run I am using buyers that I have zero interest in doing or the client has zero interest in selling to jack up the price on the buyers that we ultimately want to sell to even though we use those other buyers to jack up the price in rare occasions we end up selling to them because the offer is you know literally an offer we couldn't refuse so it's important to not fail in using the imagination when determining your your acquisition universe and I know that sellers by their very nature are concerned about confidentiality and rightfully so you should be extremely concerned about confidentiality you should keep the sell side process extremely limited um with regard to who knows about it right you don't want to tell your team I I know there's some sellers who like to be opened but while you're going through a sell-side process it really should be the smallest amount of people possible on a need to know basis only sellers often get worried well if I bring in a big enough acquisition Universe a lot of people are going to know about this they're going to steal my intellectual property and proprietary processes they're going to know them for sale my competitors are going to use that look small competitors will if you've got a decent sized business you're going to focus on acquirers that have the capacity to pay and the willingness to pay and that's often not small in Regional companies and those are the guys that are most likely to use this against you big national players or large companies with Deep Pockets that are in the business of making Acquisitions are often Pleasant to deal with and the chances of them blowing through confidentiality is extremely rare now I I see it maybe last year I think we did 54 transactions I think I saw confidential Ellie get blown once and it was addressed very quickly and it wasn't a problem so I I don't worry so much about that from the standpoint of I wouldn't necessarily limit the acquisition Universe solely based upon some unwarranted concern about confidentiality thank you when I think about the psychology of transactions you know when I talked before on the counter-intuitive nature of m a um you know we talked about the importance of being likable right and you know you've got Executives who will be ultimately writing a very very big check and you know you sell a business for 50 million dollars that's far more than these people make and so the last thing you want to do is be a jackass that they're running a 50 million dollar check to you want to be somebody that's likable and if you find yourself in the unfortunate situation of ever negotiating with one buyer and almost a positional bargaining situation you have to understand that there's a certain acquisition mating dance that takes place and you have an asking price in your mind let's use an example you want 25 million dollars for your business this buyer wants to pay you 15. so there's a 10 million dollars spread there you know in a positional bargaining situation you're effectively going back and forth Tit for Tat and it's important to realize that whether it's a controlled auction or it's a one-on-one negotiation that concessions really need to be earned you know I have watched this for decades and every year Rings more and more true to me is that if the other side doesn't expend effort and energy to get something they're not going to Value it so if I were to ask you to concede to something and it's not that important to you and you can see it relatively quickly I haven't really expended much energy to get that I'm not going to Value it much I'm not saying that um every time you make a concession you have to yell and scream and cry and rant and Rave and make them feel like you know they're pulling it out of your hide but at the end of the day you you need to make sure that the other side works for it it's the same thing on you know for buyers it's it amazes me sometimes that you know I'll go into a process and you know a seller wants 20 million dollars for a business and a buyer really wants to buy it and we very quickly get to that 20 million dollar Mark now the seller should be ecstatic please get the 20 million he wants but he really didn't have to work for it and so he's always going to want to negotiate more so when you find yourself in in a bargaining situation you got to remember that concessions of course take place over time there's more concessions later in the process and the size of concessions is a signaling mechanism right so in the beginning of a process you can make a larger concessions like for example let's go back to the positional bargaining situation I want 25 million a buyer wants to pay 15 million now we end up somewhere in that zone on the buy side you might move in million dollar increments on price early in the process right you might move on five million dollar increments but by the time we get towards the end of a process whether it's a one-off negotiation or is a controlled process you have to signal on the buy Side by decreasing the increments by which you move so on a 25 million dollar deal at the very end if I'm a buyer I might be moving at 100 000 or Minister fifty thousand dollar increments whereas two rounds ago I was moving at a million dollar increments and and that's a signaling process that's a signaling process from the buy side right as we go through iterative rounds the Improvement on price gets smaller and smaller you know the same thing goes for sellers though right you should be willing to bargain the things that you're least concerned about towards the beginning you should be more willing to give those away in exchange right quid pro quo for something else and this mating dance of give and take over time as you start to get closer and closer to the end and what you ultimately are willing to do what you're willing to give should be less and less and less and it should get significantly more difficult to extract those concessions from you again as a signaling process that we're getting towards the end of the road [Music] back to what I was discussing a minute ago I've seen you know acquires move very quickly in large increments and basically give it it all away up front and oftentimes it's better to let's say I'm willing to move five million dollars on price why don't go from 15 to 20 million and say that's it this is my best and final that's not a good position to be in because the seller will always believe that there's more but if I'm willing to move five million dollars you know I might start at 2 million at first and then a million then 500 000 then 200 000 and moving very very very small increments and really make that seller work for never ceases to amaze me when I see this sort of activity and sometimes you know I listen to acquires telling me hey we're coming towards the end here but I'm going to give I'm going to move on price x amount on the one hand I'm happy because they've moved a significant amount on the other hand I'm just like I don't understand what you're doing because now what you've effectively done is you've signaled to a seller who has never been through one of these processes that you've got a lot in your pocket and you're willing to move in big chunks so again it's important to make the other side work very hard for concessions because it's human nature to not value what you haven't worked for [Music] if I've learned anything over the years I've learned that again back to perception is reality a lot of times I think we tend to understate our strength in a process and sometimes overstate the strength of a of our adversary of the person on the other side of the table from us and really the best thing that you can do on the south side is get the buy-sides imagination to really run wild right if if I've only got one or two bitters I want them to think there's 10 or 15. I want them to think this company's going to do something crazy or that company's going to do something crazy the more I say will only hurt my causes it'll only hurt my purpose the less I say allows the imagination on the other side of the table to run to run wild and and I see and I've seen it play out for decades so look I guess in summary of this particular topic you don't ever want to be in a position to lie number one you don't ever want to even be in a position to talk about other bids you don't you want to let strength speak for itself because really you know it's the negotiations and the threats that actually are displays of weakness subconsciously the quieter that you are the more confidence you are confident you are in your process the least you say you will exude strength and I know that seems counterintuitive it clearly must be because 99 of sellers take the exact opposite approach right and then again I've talked about this before where they say I'm not giving my business away I've got a lot of options well no [ __ ] like we realize you have a lot of options you have a valuable asset you're not running your process right and you're going to end up leaving money on the table and I see it all the time and quite frankly I'm happy sometimes certainly not when our clients do but I look around the industry and it kind of excites me I just saw a [Music] I saw a deal that was done earlier this year where [Music] a seller left a good 25 million dollars on the table and you know I came to find out after the deal that you know he kept threatening hey I'm gonna give me what I want otherwise I'm going to call Potomac and he went through this kind of one-off negotiation with one buyer and at the end of the day when you know the deal was done and I learned what the price was for I thought to myself well that was 25 million dollars left on a table because the seller of course was extremely confident in his ability to negotiate um and to make threats with the buyer and of course buyers professional buyers right you do maybe one or two deals in your whole life of this scale a lot of these other guys do this 20 30 40 times a year so you tend to learn this over time and a lot of the inquirers in the industries in which I work they're typically publicly traded companies or large private equity-backed firms they do a great job in shielding decision makers and here's what I mean by that when you're negotiating with runicil you're often not negotiating directly across the table from Andy Ransom the CEO or John Myers for example the North American president these guys are in the background they've got their team out there doing the negotiations and at the end of the day the folks that are negotiating for them their employees are running kill they're not the ultimate decision makers right they have to seek approval there's investment committees there's Boards of directors there's senior Executives that ultimately approve material transactions so you're never really sitting across the table from a real decision maker and farther somebody is from the negotiating table the more difficult they can be right I mean it's easy to sit back here and a smoke-filled lounge and say you know what do this don't do that I'm not giving on this point go into the bargaining table and get it done it's easy to do that when you're sit far away from the table when you're negotiating for yourself you know and the other side knows that you're the decision maker and they know that everything that you say at the table you're either going to have to commit to or you're going to have to backtrack from which puts you in a very very difficult spot so that's why I always say like it it really makes sense for you as a seller you never ever ever get into any sort of direct negotiation with the other side and when you do that more likely than not you're actually guaranteeing yourself that you will get a less attractive deal and I see it over and over again because first off you're emotionally attached to the business it's part of your ego your identity is tied to it you have a lot of concern for your employees and of course this is a large transaction so you're concerned about the money when you're in very tense negotiation situations you yourself of course don't want to lose the deal and so you get nervous and you can undercut yourself when you're sitting face to face with the other side it's really easy to read it on on somebody's face when I'm sitting at a table with a professional negotiator who can look at me and say well you know this sounds reasonable the boss is probably going to say it's a bunch of [ __ ] but you know like we'll have a talk about it or I can say the same thing like look I don't like what you put on the table I don't think it's going to fly but I'll have a conversation and we'll come back to this it's easy to trial blown things when two non-decision makers are sitting at a table if you're sitting at the table you look at the other guys he's telling you that this is [ __ ] it can be read on your face so again if you want to do this right you engage somebody who has spent his or her entire career negotiating process and substance if you're not going to do that at bare minimum at bare minimum find somebody who's not you anyone who's not related to you and related to the business to negotiate on your behalf and I guarantee you will do better because you are the worst negotiator on your own behalf I don't negotiate anything anymore at all I don't go and negotiate my own purchase of a car any sort of Big Ticket item I'm not the one who negotiates from us I never do it anymore period Nothing in life any sort of acquisition I'm going to make or a purchase I have somebody do it on my behalf because I know that we're all the worst negotiators when we negotiate our on behalf it's a lot easier to negotiate on somebody else's behalf so I think if you take anything away from that when you do get into negotiations whether it is on the purchase of sale of a business a piece of real property whether it's a material joint Alliance or anything that you do in business resist the urge to be negotiator in Chief on your own behalf find somebody that can do it in your stead I appreciate you joining me today I look forward to seeing you again foreign