Investment Banker Round Table On Everything You Need To Know About Investment Bankers But Probably Don't (#050)

Steve Wells: [00:00:05] I'm Steve Wells.

Jeffrey Feldberg: [00:00:06] And I'm Jeffrey Feldberg. Welcome to the Sell My Business Podcast.

Steve Wells: [00:00:10] This podcast is brought to you by the Deep Wealth Experience. When it comes to your liquidity event or exit, do you know how to maximize the value of your business? You have one chance to get it right, and you better make it count.  Most business owners believe that business value is determined during the liquidity event.

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Jeffrey Feldberg: [00:01:39] Welcome to episode 50 of the Sell My Business Podcast. Episode 50 is a special one because you're going to hear from three incredibly successful, diversified, and experienced investment bankers. As business owners, there are times where many investment bankers reach out to you pitching for your business.

What's different about this podcast you're going to hear things here that you're likely not going to hear anywhere else. The conversation that we have, it's transparent and some of the best-kept industry secrets within investment banking are revealed on the podcast. And again, this is one of the things that we do at Deep Wealth in our effort to pay it forward is to bring you the story behind the story, the facts, the information, and the strategies that you need to know to ensure that you don't get any deal, but that you capture the maximum value in your liquidity event so that it's the best deal. So, with that said, let's jump right into episode number 50.

Peter Kubasek is founder and managing partner of ArkMalibu. Peter has been closely involved in more than 500 merger and acquisition projects ranging from $2 million to over $1 billion in sales, representing billions in transactional value. Peter brings a vast background of knowledge and understanding to every engagement in which he is involved. His success stems from his ability to identify the core needs of his clients, developing creative solutions, and applying sound analytical and negotiating skills to each engagement. He has advised clients on preparing for exit, valuations, divestitures, and financing options in a variety of areas, including 3D printing, technology, services firms, communications, manufacturing, consumer packaged goods, and distribution.

Josh Curtis is managing director at Footprint Capital. Mr. Curtis advises business leaders in ownership transitions, and liquidity events, including sell-side and buy-side transaction engagements. As well as succession planning, strategic growth, management buyouts, ESOP formations, capital raises, and leveraged recaps. Mr. Curtis began his career at Fifth Third Bank, where he held several positions in commercial lending, including relationship manager. In this role, Mr. Curtis served companies with sales ranging from $5 to $500 million in central Ohio.

Michael Butler is a senior director at Footprint Capital. Michael is responsible for leading the sell-side and buy-side engagements with business owners. In addition, Michael cultivates relationships with clients, prospects, centers of influence private equity firms, and family offices. Michael's previous roles include auditor and consultant with a big four accounting firm, corporate executive with an insurance and financial service group, president of a securities broker and dealer, venture capital partner, business owner, angel investor, and board member.

Welcome to the, Sell My Business Podcast. And I'm delighted to share with you our very first ever investment banker round table that we're doing on the podcast.

And I have three friends of the Deep Wealth community who are going to be sharing their insights and their wisdom with us. And you've heard them all before in previous episodes. They're no strangers to you, and they've been wonderful in sharing what the rules of the game are and what you can do to dominate and win in your liquidity event.

So, with that said, Josh, Michael, and Peter. Welcome. Terrific to have you.

Josh Curtis: [00:05:23] Thank you. Good morning.

Peter Kubasek: [00:05:24] Always good to hang out with brilliant people like you three.

Jeffrey Feldberg: [00:05:27] there's Peter and his wonderful sense of humor and kind words. Thank you for Peter. So, it's been a while since we all last chatted, and for the three of us for the first time here, which is terrific, why don't we kick things off.

And it's been interesting out there. We have the pandemic that continues to make new records and set new social norms. But at the same time, I've been hearing some wonderful things in terms of what's been going on with mergers and acquisitions.

So, Peter, why don't we start with you? What have you been seeing from your side in terms of the M&A market amidst the pandemic?

Peter Kubasek: [00:05:58] One of the key things that we did when the pandemic hit in March is we started tracking all the positive news that was going on and all of the deals that were getting done. Historically a normal week between Canada and the US is about 400 closed transactions. The very lowest was in April, and there was a little less than a hundred transactions that transpired the closed.

In the fourth quarter of 2020, we were back up to 372 deals a week were closing. So, it's almost back to normal. We have just received offers on two different deals. The one deal exceeded client expectation by almost a hundred percent, even though the private equity guys were coming in beyond what the seller had expected.

But what we're seeing is it is back to the go-go days of M&A.

Jeffrey Feldberg: [00:07:19] Peter, that's wonderful to hear. And before we flip that question to Josh and Michael, Peter, I'm curious as to what your advice would be to business owners who have been sitting on the sidelines and saying now is not the best time to go out during the pandemic. You know, maybe my business suffered or revenues and profits are down, I should wait and see.

Generally speaking, Peter, what advice would you give to that kind of sentiment?

Peter Kubasek: [00:07:42] Two key things that we're saying is one, they should look at hiring someone like you and your firm, Jeffery as a coach to get them prepared. And two they should engage someone like Footprint or ArkMalibu, or other firms that truly go beyond the normal investment banker process and helping them think through and prepare.

So, even if they've had a stub your toe moment during COVID, get going with an expert to help develop green shoots and help the business to really look at what are the key areas that they should be focusing on. So, as they’re coming out of COVID coming out of the pandemic they're showing the green shoots so that they illustrate to the buyers that this is a good time for them to partner.

So, those are the two key things that we're saying.  The last thing is based upon relationships within our firm, one of the members of the Senate banking committee is communicating that they do not believe the tax code will change in 2021, but there is a significant chance that the tax code will change in 2022.

So, even though we're in February, the four of us would probably go whoosh are we going to be able to get a deal done that we haven't even talked with yet. The answer is yes, but you better get going soon because even with miracle workers, you still need time. And as all of us on the phone have pushed for significant valuations and exit partnerships that doesn't just happen by taking the first offer. It's by working the process.

Jeffrey Feldberg: [00:09:30] Peter some wonderful advice. And for our listeners, Peter really hit the nail on the head. It's not how much money you actually get from your liquidity event. It's how much you keep and taxes play a large role in that. And so the best time to prepare was yesterday. The next best time is today. And that's some words to the wise, Peter.

So, Josh and Michael, let's flip it over to you. What have you been seeing amidst the pandemic in terms of deal flow and deals happening and what are some of your thoughts for our listeners?

Michael Butler: [00:09:58] Yeah, this is Michael. I'll just jump in first here. I absolutely agree with everything Peter said there. I think on the capital gains issue first, we're getting a lot of activity, a lot of interest in folks that are aware of that.

And unfortunately, it does take some time. They don't want to wait until November to try to get something done by a year-end of 21, to try to miss a, potentially a one, one 22 change in capital gains.

I will tell you this, the investors are ready to get back to business. Investors by their very nature are an optimistic bunch. Obviously, they're betting on companies betting on people, betting on industries, and with all hopes that those will grow in the future. And I think like Peter said, you want to give them a reason to believe that your business has back and has returned to normal.

Even if you had a dip in the previous year. We've talked about on previous episodes of this Podcast, the concept of EBITDAC which is earnings before interest taxes, depreciation, amortization, and COVID. And so many times as we are working in this industry, we calculate for 2020 that EBITDA number as a way to really show what a normal year would have produced.

And if you can show that through volumes of customers through current run rate, all those sorts of things that your business is back that's good evidence to an investor that it's time to make an investment. One final thing I'll say then Josh I'll let you chime in if we left anything else, is that you certainly want to have confidence in your business.

So, if you feel timid, do you feel like your business is not back yet? That sort of thing, you certainly want to have a program like Deep Wealth to help you feel good about your business, yourself, your preparation for entering a process. So, get yourself mentally ready.

 It's a long haul. It doesn't happen overnight. It takes a lot of emotional stamina to get through a sale process.

Jeffrey Feldberg: [00:11:43] Michael, some terrific insights with that. And Michael, I'll put this your way and whether it's something that you'd like to address or Josh you'd like to address, I'll leave that to you.

There's been some discussions about, depending on who you speak to EBITDAC or EBITDA-C whether or not that's something that's somewhat credible or even going to be here for the longer term to stick around. I'm curious. What are your thoughts on that? Is there any insights or truth on that particular statement?

Josh Curtis: [00:12:09] So, I think from my standpoint is how tangible is that evidence. And I think we have an example right now that we'll probably sign an LOI today or tomorrow on a transaction where we got down to three buyers. Each of those buyers, we asked them to really dig into the QofE that we had prepared on the sell-side.

And each of those three buyers viewed our COVID adjustment differently. We had three elements to it for some business that we lost some business that we gained and then a fundamental change we made to the business that is currently impacting and will impact the future performance of the business.

And not one of those three parties, all of which were private equity buyers, viewed it the same. So, I think one thing that we're learning and I think carrying forward into our other processes is we can't set clients' expectations nor should we expect every buyer to see things through our eyes.

So, while COVID adjustment helped us in the process and ultimately helped us get to our value I think there’s definitely some gray area there. And it's not something that's going to be quite as heavily relied upon as the current run rate of the business.Jeffrey Feldberg: [00:13:22] Josh that's some really interesting in the trenches experience that you're sharing with us and something for everyone to keep in mind.

So, it sounds like from what you're saying is the buyers may or may not be accepting that or not at all, depending on the case. So, Josh, as you look ahead for the remainder of this year and going into next, you’re feeling good about this and where things are heading?

Josh Curtis: [00:13:42] I mean, I feel very good about where things are heading. And I think to the comments that Peter and Michael both made the market is very active. The investor community is very hungry for transactions. And I think when you look at both at the tax changes, coupled with those businesses that got through COVID performed well or maybe aren't quite back to where they are, there's a lot of sentiment amongst sellers that now is a good time for them to exit. Tax changes coupled with potentially some desire to de-risk personally is really driving an active market.

Jeffrey Feldberg: [00:14:15] Some terrific insights there. Let me ask a different question. Peter why don't we start with you. Investment bankers tend to be miracle workers and you just really give a lot to that term of taking the impossible and making it into "I'm Possible."

How many times do you see a deal that gets right to the brink of not happening and you literally bring it back to life? So, you've seen a lot and you've seen what works, what doesn't work. And one of the things that we really stress with our community and the Deep Wealth Experience, it can't just be about the seller.

Ultimately, it's a seller's business and it's a seller's future that's going to be happening and what's at stake, but it takes the team to be able to make things happen. And I like to say tune in to everyone's favorite radio station, WII.FM the what's in it for me radio station.

And so, Peter, to start things off the question I'd like to throw your way, knowing what you now know as an investment banker. And you've had quite the career before becoming an investment banker.

If you were going to be back in the seat of a business owner and selling a business, what would you be telling yourself of what you should be doing to be the world's best client for an investment banker?

Peter Kubasek: [00:15:24] World's best client for an investment banker. We have been blessed. We have had some awesome clients. We have had clients that have overpaid us at closing because they felt like their life was impacted and they wanted to bless us. If I was looking back and saying, what does the world's best client look like?

I think it's part of what Michael said, which is having a good attitude. I think it's being willing to take advice and I think it's being willing to change on the fly. So, we have seen clients that have embraced the idea of green shoots and adjusting their business prior to going to market. And those ones have seen significant positives and netted many millions more because they had a positive attitude. They're willing to listen to advice and they're willing to adjust.

Jeffrey Feldberg: [00:16:27] Peter, thank you for those insights and I guess, and the unfair advantage for Josh and Michael, who had a chance to think about this while you're speaking about that, Peter, but gentlemen, what would you say from where you are from your experience?

What would you want to see in your clients that perhaps you don't always see or typically don't see in your clients that would just make it so much easier for them, for yourself, and for the liquidity event?

Michael Butler: [00:16:48] I can think of a couple of things here that might be helpful. And thanks for the extra time Peter.  Deal fatigue is one thing that we always struggle with is how long a transaction takes to get closed. And the best thing you can do to avoid deal fatigue from a seller's point of view is preparation. 

And one idea I have and try to stress with people is before due diligence items are requested, we can figure out what they're going to be for the most part. Probably 90% of them we all know. We can get those set up in advance in a data room and have that process of preparation of material behind us.

In the sense that we'll keep the process moving along. So, that's one item I can think of is preparation and particularly related to due diligence. The second item is keeping focused on the business and keeping the business growing during that period by which you're selling, it's easy to shift your focus from the business to the transaction and starting to, count the proceeds before you have them.

And a lot of times what will happen is an owner and the team potentially can take their eye off the business. And stumble have a bad quarter or a bad month, whatever the period might be. So, obviously the worst period of time to have that happen.  You certainly don't want to have an opportunity for the buyer of your business to come back and say, wow.

It doesn't look like you're going to meet the projections you've set for yourself here. As a result, we're going to have to look at the purchase price and we're going to have to do an adjustment. So, just making sure that you don't have that stumble, that occurs by a lack of focus.

And that's part of the role that we play quite candidly, as we can stay focused on the transaction.  We can't take all of the weight and all of the attention, we certainly need the ownership group to weigh in on quite a few items. But if we can be running the transaction and the owners and management can continue to run the business effectively and grow the business during that period of time, it'd be great to have a situation where you are actually rowing faster than you think you would have during that transition period. Maybe you got something to go back to the buyer about and say, hey, we've exceeded expectations here. And it puts you in a great negotiating position.

Jeffrey Feldberg: [00:18:51] You know, Michael, you bring up a really valid point and you're right.

It's so often overlooked a seller or a business owner can become so focused on the liquidity event that they forget, hey, there's a business here. And that business during the liquidity event, not only has to meet the expectations but as you're saying, hopefully, exceed them. Otherwise, you're playing directly into the buyer’s arena, where perhaps they want to give you some kind of a discounted value because of that.

 What I'm hearing you say is the more you prepare ahead of time, the less pressure, the less stress, the less health-related kinds of stress, things that other are going to come up during the liquidity event itself. And so Josh, how about you, what you'd love to see your clients do that typically don't or would make your life so much easier. So, you can go out and get that much of a better deal for them.

Josh Curtis: [00:19:36] Sure. I think Peter and Michael really hit the primary items. I think the two I would add would be to trust your advisors. I think it's very important that as clients go into this process, they make sure that they have advisors around them that they trust. We've seen situations where clients have second-guessed decisions that advisors have made or, particularly let them control the aspect of the transaction that those advisors were brought in to do, and they know better. They do this all day, every day, trust the advice of those around you. And then secondarily it would be forthcoming to your advisors, to the investment banker, to your lawyer.

We've also had transactions whereby something was going on with a contract. There was something in a background check. Upfront deal with anything that might be concerning might be viewed as a little hairy might be a hurdle.

And I think the sooner you bring those up to your advisors, not every deal is perfectly clean.

Many deals get done where there's some sort of, quote-unquote hair on the deal. And I think the sooner that the advisors are aware of what those challenges might be, the more prepared we'll all be to handle this.

Jeffrey Feldberg: [00:20:49] And Josh would bring up an interesting point. I think this is hard for a lot of business owners, the Type-A personality where the business owner wants to be at the center of everything and control everything. And everything's got to flow through them. And really, it's taking a step back. And as you said, Josh letting the professionals around you do what they do best and let them run with that and take forward the liquidity event and help you maximize in every which way that you possibly can that process.

Some terrific insights on that. You know, a lot of times we hear information or you're speaking to someone in a specific industry and maybe it's quote-unquote conventional wisdom, but oftentimes conventional wisdom isn't so wise and it's wrong.

Anything that you've been hearing lately within the industry that is off base, or it would not be words to the wise in terms of following and listening to, and maybe going down a different path to get a better result.

Peter Kubasek: [00:21:45] The first thing that hits me is the number of people that call us up and say you've come highly recommended. Several people have said we should work with you, but you're not industry experts. So, we're not sure that we're going to interview you. We have been advised strongly that we should only deal with industry experts.

Jeffrey Feldberg: [00:22:07] There's two camps that you're bringing up in the argument.  And they both make the case that an industry specialist is where you want to be because they know the industry inside and out, and they'll just get you a better deal.

They know all the players and a generalist will say, well, hey, not so quick. A specialist may miss some of the players. They don't have that kind of experience that I have. And I'm just more well-rounded. So, it's confusing for a seller. So, please continue with what your experience has been and why so-called conventional wisdom Isn't so correct. 

Peter Kubasek: [00:22:37] As Josh was saying, you really want to trust your advisor. You want an advocate. Having worked at Nestle and the Loewen Group and my partners worked at major Wall Street firms. When you hire an industry specialist, you're dealing with someone that if you are an 800-pound gorilla is going to be working for your best interest because you have a deal for them today.

You had a deal for them yesterday, and you will work with them next week, next month and next year.  So, even though they're an intermediary, not an advocate, if you're an 800-pound gorilla, you're able to manage them because they can't risk losing your business. If you're a one-time seller or a person that's got a business that's worth less than $400 million, which is 99.7% of all businesses, an industry specialist is potentially not universally, but potentially going to be treating you as a piece of candy for their normal clients. So, they will take your business and think through themselves, who do I need to show this to so that they will do more work with me. It's not necessarily what's the best for you. It's what's best for them. So, we are hearing that more and more. People are recommending industry specialists because the assumption is it's going to be hard to find buyers.

It is not hard to find buyers today. There is close to $5 trillion chasing M&A deals. And every deal that we've taken to market during COVID has had more bidders than any deal we had ever presented in our history. So, there's more people chasing. There's more trillions chasing so that you need an industry specialist so you find everyone is just not accurate. The next part of it again as Josh and Michael both said trustworthy. I was on the phone with a YPOer recently and a very bright person growing like crazy. They will sell for a fortune 15, 20 times revenue. They did not feel like they had contemplated the whole notion of intermediary versus advocate.

And what we were trying to explain was you desperately need an advocate because when you're talking about a deal that's going to be that hot. For a strategic buyer that might be the perfect buyer. They might pay twice what someone else might pay if you're able to present it. The secret sauce and the green shoots and all the synergistic value. And if you do it as an advocate, not an intermediary

Jeffrey Feldberg: [00:25:30] So, Peter, thank you for that. You've really opened up one of the better-kept secrets in the investment banking industry. And that is not all investment bankers, but there are some investment bankers who push comes to shove their best friend is the buyer because exactly like you're saying Peter, they do a book of business with that buyer. And if you're a one-time transaction, they're not going to put themselves out for you. They are in business to be in business and something to be wary of. So, thank you for opening up on that and making the community well aware of be careful who you have as your advisor and look for some conflicts of interest while you're going through that.

Josh, I know you'd like to say something, so please, what that, what would be some of your thoughts?

Josh Curtis: [00:26:13] I just had one real-life example to share to Peter's point. I wholeheartedly agree on the industry specialization and we have an example as a firm. One of our partners had a friend who was selling a software business and he did not consider us, felt like the friendship but did not feel like we were deep experts in software. Instead, he wanted us to help sit alongside him, help coach him about how the investment bank was doing, give him perspective. So, we agreed to do that for the friendship. And one company, in particular, tried to preempt the process at about 10 million more than the seller expected to sell the business for about $35 million at the time.

 We said you need to see this through. You need to continue the process for, do you need to receive the other bids? He said the investment bankers tell me I should take it. He knows this firm really well. They can close quickly. We said, no. See the process through, get the other bids, take it forward.

Lo and behold, he got 10 million more incrementally by weight, and by seeing the process through and had he done what that industry expert investment bank and software had told him to do he would have left $10 million on the table.

Jeffrey Feldberg: [00:27:28] Josh, what a great story. An excellent example of how you really need to be careful who you're bringing onto the scene as an investment banker to represent you.

And to round things out Michael, any taboos of the industry that you can think of, or you can pass along of seller beware in this case.

Michael Butler: [00:27:45] I guess the one thing that comes to mind is the unsolicited offer that you receive as a seller from a buyer that all of a sudden comes in out of the blue.

You're not out there looking to sell your business, but someone who shows up who's interested in your business provides an unsolicited offer. And they encourage you, because of time, because of additional expenses, because of other things to take that offer and don't take this to market.

When you go through what we call a full process where you involve many buyers. And our goal as an organization is always to bring several qualified buyers. Several qualified offers from which an owner can ultimately choose, which one makes the most sense, and which one we can, use against one another to get the best offer in terms of price and everything.

So, reacting to the concept of if you do it without an investment banker, without an advisor it'll be faster. It'll be easier. It'll be less costly.  Can run you into trouble and end up getting you, not the best terms, not the best price for your business of that once in a lifetime type event that you do as an entrepreneur, selling that business.

Josh Curtis: [00:28:48] We have a real-life example of that as well, where we have a client who accepted an offer for $22 million. We met that client articulated to them why their business was worth more. They withdrew through from the LOI.

And we are under the letter of intent for 40 million today. And we actually got an offer from the same buyer. We did not end up going with them, but from the same buyer for $40 million,

Jeffrey Feldberg: [00:29:13] What a salient point, because most business owners at first blush will say, I want my competition to come and buy me out. It's quicker. It's going to be cheaper for me. I don't have to prepare, I don't have to hire an investment banker, pay commissions. It's just there and I'm going to get a great deal.

But as we hear time and time again, I've yet to hear of an unsolicited offer, where it's the best offer. That's typically going to be the opposite of that. And ironically, it's the seller's hard-earned money that they're handing over to the future buyer, they're not even realizing that they're doing it.

it's a little bit of a loaded question, but I'll ask it anyway.

Imagine that a family member, a very close family member of yours is going to be selling a business. And they can't use you to do the deal and they're going to be working with an investment banker and actually, you can't have any interactions other than behind the scenes. So, you can't tell them who to go, what to do or anything like that.

And the question is this. When it comes to selecting an investment banker and the agreement between a seller and an investment banker, what would be some of the areas that you'd be giving advice behind the scenes on of either not having in the contract or being very careful of, or negotiating something that typically isn't negotiated.

Michael Butler: [00:30:29] A couple of things that are not so much contractual, Jeffery, but more emotional or more of a field type of thing. Number one is chemistry. How does the relationship feel with the potential investment banker? Does it feel good when you're having a conversation?

Does that person, number one seem knowledgeable, but also seem like the kind of person you want to work with long-term. These are not overnight transactions, as we've all pointed out, you're going to have to be working with this person in the trenches for many months, if not, maybe even a year, let's say so you want to align yourself with someone you're going to feel comfortable speaking with during that period of time. It's not someone that doesn't feel like they get you as a seller or as a person.

And number two, attention to your deal. It's always important to know how many deals they have on the table.  They may use somebody that develops the business and they pass it to a team behind the scenes that you've not met. And you may never speak to that person again.

At least with our firm, the way we do business you're going to be working with us through the entire process. We're proud of that fact. We only take on a certain number of engagements due to that fact. But making sure that there's proper attention to your deal things need to happen quickly.

Items needs to be reacted to quickly and you want someone who has got your best interest at heart, but also is not so overwhelmed that they can't give you the kind of attention that is necessary to bring things to a close.  And the final thing I'll say is that in many cases, the intermediary be it investment banker, business broker, M&A advisor is playing a quarterback kind of role.

They're working with the M&A attorney. They're working with the CPAs, they're working with the tax advisors, all those kinds of things. You need to have someone who's a leader and is confident and can be synergistic with those relationships.

Jeffrey Feldberg: [00:32:08] Michael, some great points there.

And thank you for sharing. And you're absolutely right. The mindset and the chemistry that's going on between all the parties is you know, everything. One of the things that I like to say is, imagine we're back to traveling the pandemic is over. You're sitting next to your investment banker on an airplane and you're on the tarmac.

You're getting ready to take off. Captain comes on and says, we have a mechanical difficulty and you can't go back to the gate and you're stuck for the next 10 hours on that airplane with that investment banker advisor. Are you running for the Hills after five minutes because he can't stand that person or that do the 10 hours go by fairly quickly?

Anyone else on particular contract deal terms or items that aren't discussed out there, but something that a seller should be aware of?

Peter Kubasek: [00:32:51] I know it's self-serving to say this as a bunch of investment bankers, but what we've said throughout my deal process that Michael and Jeffrey have helped out on is that you really need to set a reasonable hurdle of expected value. And if the advisor gets you more than that, give them a substantive portion of it above that number. So, the simple reality is we are all human, and if you have a hundred-million-dollar deal and you're going to make 2% for the next $10 million, is it worthwhile to you as a human being to have 110 million where you get 2.2 million or you have a hundred percent chance of closing at a hundred million and you get 2 million. You really want your investment banker to be getting a million or a million and a half of that extra 10 million.

So, it's very substantive to them. And they're thinking in a much different way about the incremental dollars. Two stories that Josh shared about getting almost double what the client expected, a regular investment banker that doesn't have a significant bonus doesn't generally do that because it’s risk-reward.

So, seriously, consider when you're investing into the option of hiring an investment banker that you give them a bonus over a fair value.

I think one other point you need to make sure that you're dealing with the people you're dealing with and you may want to put in a clause if the senior people that wooed you disappear, the agreement disappears.

So, it fully motivates for Footprint and ArkMalibu that's a condition that would be easily met. But a lot of investment banks you're won by the A-Team and you're served by the C-Team. You don't want to be served by the C-Team.

Jeffrey Feldberg: [00:34:52] For our listeners. Peter is really putting it out there in a very real and honest way. And it also highlights why when you're finding not only investment bankers, but other M&A advisors. You need to come from a place of trust. Of people that you can trust. People who have integrity and honesty. And Peter sharing what he's sharing again, and I know Josh and Michael, you would say the same thing. You're not going to hear that with a lot of other investment bankers that are out there. And Peter’s words to our community, those two things that you mentioned. That's what I did in my liquidity event. I made sure that the investment bankers were more than compensated when they went to above an established value.

Now, the value wasn't just what they're saying, that this is a top-end. It was verified. It was validated. And I had confidence that when you get past that number, it's going to be well earned. But again, it goes back into the WII.FM. The what's in it for me. And my other philosophy is when you help enough people get what they want, you get what you want.

And so when you help your investment banker, just go above and beyond with what I call the waterfall compensation. So, for every dollar over the top dollar, what you should be getting that you're sharing generously with your investment banker, it gives you a real likelihood of being able to obtain that. It's just human nature and it is what it is.

We don't make the rules, but if you know the rules, you can put them to your full advantage. Any other thoughts on this topic before my next question?

Josh Curtis: [00:36:20] In a slightly different theme is the benefit of rolling over equity. I know Jeffrey, we've talked about that on a prior podcast. But I think that's one, one consideration that we really urge clients to consider. And particularly if you have a business today that maybe isn't back to performing at the level that it once did one way to drive potentially the highest or a higher value today is through showing confidence in the business, going forward through an equity rollover. And it also allows you to capture hopefully in three, four, five, six years at exit if you partner with private equity, a much higher value for that remaining interest. And there's a lot of nuance potentially around, the structure of that rollover and what that looks like. I think now is a very unique time, depending on how your business has performed and what value you're able to capture, really looking hard at a rollover

Jeffrey Feldberg: [00:37:17] Josh another value point. And we had a terrific podcast on the rollover and what that looks like.

And certainly, something to consider. What we share at the Deep Wealth Experience is that for an investment bank or the currency isn't money, the currency is trust and time. Trust in the sense that if you can't trust the seller and the seller can't trust the investment banker, without trust, there's no foundation nothing's really going forward, and both in life and in business, our reputation and our integrity is everything. You cannot buy that. But time also in the sense of you can't manufacture more time.

You only have so many hours in the day and you can only as investment bankers do so many deals in a given year. And so when you take on one particular client, effectively, you're saying no to other clients. And Peter, back to your point, when the business owner who shows up, if they're not so generous in terms of what they want to pay for a retainer or what they're going to be looking at in terms of a success fee, it's going to be weighing in the back of your mind of do I pursue this opportunity or do I pursue other opportunities?

Because if we're honest about it, all of you are in business to be in business just as a seller is in business to be in business. I would love to hear your feedback and some thoughts that you can share with business owners who maybe haven't heard the best advice or aren't coming from the right place and think that everything should either be close to free or as little as possible and why that's going to hurt them in the long run.

Peter Kubasek: [00:38:41] My mother, who had a very limited formal education used to always talk about relationship. And she used to walk me through that you get what you pay for. And if you are quote-unquote, taking advantage of someone then you're going to get what you're paying for. So, I don't think if you pulled a fast one and hired Footprint or ArkMalibu, that you would get poor quality work, I think you'd get excellent work.

The vast majority of investment bankers, if you convince them to sign a $25,000 retainer and a 1% of purchase price, and the purchase price was nowhere near what anyone expected.

Then the additional effort that's needed to dive into the numbers, to dive into the company, to recreate the green shoots, to help with synergistic value, to protect you on your due diligence, to protect you on the going forward relationship, your employment agreement, et cetera, et cetera. It's going to cost you millions and millions of dollars because the people are all human.

And they are not going to do anything, but get the deal closed. They're going to pay for it. And that is going to hurt you in the long haul. The number of times that we have been introduced to people that literally said, I pay my lawyer a thousand dollars an hour. And I don't want to hire you at your $150,000 retainer and X number of points and a bonus.

I just want to pay you a thousand dollars an hour. What I need you. And I laugh. And I say that does not work in my world because the advice I'm going to give you potentially in one minute could be worth $10 million and getting paid a hundred bucks or even full hour, a thousand bucks and giving you tens of millions, doesn't seem like it's a fair transaction.

And my partners and employees, when they're looking at their bonuses are not going to be excited that I spent 20 hours with you or 200 hours with you and walked away with $20 or $200,000 versus a full share of what is reasonable for delivering tens of millions of dollars of value.

Jeffrey Feldberg: [00:41:07] Well said, Peter. And for our listeners, what you're hearing Peter talk about is something that you really should be taking to heart.  Treat everyone fairly. Get the absolute best advisors that you can, the dollars that you spend will be a rounding error relative to the ROI and the increased value that you'll receive from having the world's best talent surrounding you and, on your team, because your buyer is certainly doing that.

Particularly if you're dealing with a PE fund who do this day in and day out, they're having the best of the best on their team. And you have to have your advisors go up against them. Josh, Michael, any thoughts on that in terms of PE funds and their talent versus the talent that a seller needs to get the deal done?

Josh Curtis: [00:41:51] I think there's no question that when you do something all day, every day, it's like practice in anything. No matter what we do in life, whether it's athletics or academics, the more we practice, the better we're going to be at something. And for us, we do deals all day. Every day. Peter does deals all day, every day.

It's impossible to expect a client who runs his or her business day in and day out to be as good at M&A as someone who does it daily. And I think when you look at certain prospects who want to approach a fee and in some, shortcut way, I'll call it.

I think it's very short-sighted in terms of what are they really trying to accomplish?

And we run into situations a lot where a client says why I have these two buyers that I've been talking to. And, I feel like I should pay you less because I brought these buyers. And for us, it defies logic because finding the buyers is not the difficult part of our job.

There are plenty of buyers and we have very proven and systematize ways of finding buyers. We would have found the same buyers that our client claims to have brought to the table. So, I think the way you want to look at something is aligning interests. And I think, private equity firms are definitely very sophisticated, very knowledgeable, and they're certainly going to do what's best for them through that first part of the negotiation.

So, I think it's vital to have somebody on your team that can stand toe to toe with them and helps you get the best deal.

Jeffrey Feldberg: [00:43:28] Thanks, Josh. Now, Peter, I think it was you that had referenced earlier of a multiple of revenue versus a multiple of EBITDA, which is what most people are familiar with. And for our community. Where does it make sense? And where do you typically see multiples of revenue as opposed to multiples of EBITDA?

Peter Kubasek: [00:43:46] So, Michael has forgotten more about that question than I may ever know. So, I may defer to him and then answer that anything that he misses, but Michael and I have been friends for a number of years and his experience of venture capital and growth in tech.

So, I will push that over to Michael.

Michael Butler: [00:44:03] Thanks, Peter. Appreciate it. That definitely is coming from my previous world. I was a venture capital partner and, in that regard, we made early-stage technology investments, and none of the companies we invested in ever made any money. And that'll be shocking to some people, but the reason they didn't make any money, we said any money that's sitting around or any money you're dropping to the bottom line should be immediately reinvested in sales, marketing, distribution, product development, in order to grow the top line.

And so, our companies in my venture capital portfolio we're constantly reinvesting money into healthy markets and growing the top line. Our goal was for those companies to grow a hundred percent year over year. If you think about that growth, that's pretty difficult to sustain for a very long period of time, but clearly, it's a great goal for a startup or newer organization.

So, those organizations sell as a multiple of the top line, not the bottom line. Because the bottom line in many cases is zero or maybe even potentially negative because we're putting more money into the company as an investment. Businesses such as SAAS businesses, software as a service type business that have recurring revenue flow.

And in many cases, great profitability associated with those businesses, but they're taking every one of those profitable dollars and throwing it back into that top line. So, those companies will trade at that multiple of revenue. Peter referenced one earlier in the Podcast, five times.

And as he mentioned as well, sometimes that can even be on the lower side. Many of these cases be quite higher on a revenue multiple, but when you get into a company, that's more of a tried and true. Less disruptive. And I hate to say it this way because it sounds derogatory. Let's say boring kind of business. Someone who is manufacturing machine parts or doing some sort of distribution business or something like that.

Something that is for years, thrown off a nice profit for the owners and the management. Those are the types of businesses that trade as a multiple of EBITDA. And we've described that concept earlier in the podcast. So, that's the differentiation between the two and as you might guess, there are sometimes businesses that fall between the two extremes. There are some component SAAS some component product sale or something like that.

And those are a little bit hybrid and they can be challenging to value sometimes. But in essence, aggressively growing companies sell for that a multiple of revenue in many cases in the technology space.

Jeffrey Feldberg: [00:46:20] Michael thank you for your insights and your experience with that.

And, Michael brings up a terrific point in terms of investment bankers. As you're looking to find one look at what they're doing before they became an investment banker, what's their background? What do they do? What's their experience because it all parlays into how it's going to help you.

And actually, it's a nice tie into my next question.  All of you are in high-pressure situations where everything counts. What do you do from a mindset perspective, from a physical perspective to stay at the top of your game? And where I'm going with this is for business owners to learn from the best to see what you're doing, compare themselves to that and see how they might be able to get their game up to that level in terms of making sure that they're fit and relaxed and mentally having the capacity to make the tough decisions and move the business forward.

So, who would like to start with that of what are you doing to keep invigorated and refreshed and raring to go?

Josh Curtis: [00:47:18] For me it's gotta, you gotta be doing something. You're excited about jumping out of bed every day and doing right. And so, I think for me and what I've seen from Peter and Michael is just a real passion for what we do every day.

And I think coupled with that, you've got to have some balance in life as well. You've got to have things that allow you to release stress. For me, lifting weights and playing soccer and things of that nature are ways to release stress. And then I think you also need, at least for me, a balance of family time, I have to have these buckets relatively full in all capacities.

Yeah. Certainly, there's times where you know, given the world that we live in transactions where those transactions need to take priority and, conference calls till 11, 12 at night occur. Absolutely.

But then there needs to be a give back in those other areas that potentially have been lacking.

I think from my standpoint, that's how I view the world and I'd want clients that, that have similar perspectives that have things that are important to them. And that they're really driven by what they're doing in their business every day, because for us that comes through with prospective buyers when they see that passion and feel that dedication of the seller.

But then I think both in terms of through the process, as well as to be happy afterward you definitely need to have that balance.

Jeffrey Feldberg: [00:48:37] Wonderful. Josh. Thank you. Thank you for your insights, Peter, how about you?

Peter Kubasek: [00:48:41] Great insights, Josh. 

So, I, a hundred percent agree. You got to love what you do. You have to have a higher purpose.

So, as all three of you heard me talk endlessly about stewardship and the concept of are you an owner of the assets? You have a closed fist around the asset, or are you a steward where you have an open hand where it's flowing through you? So, I have a passion to help our clients and friends be generous givers. A deal that closed just recently, the client gave away $10 million and it was exhilarating to see them changed and to see them make an impact.

You also heard me talk about every day I write down 20 things I'm thankful for. 20 years or so ago. Some of my mentors commented. I was a little negative because I worked every day at finding problems. I let that bleed into my overall life and I was always looking at the problem wanting to solve it, but I was finding problems.

So, I really changed the mentality of being thankful and taking the time each day to have joy. I take the time to listen to King David's Psalms and Proverbs every day. As it rolls over my spirit, I am convinced that one of the wisest men, Solomon, whoever lived had some stuff to say, and I can learn from that.

Although some people that might deal with me look at me is, I'm all-knowing. What I really am is knowing the source of knowledge and seeking that, which is the Psalms and the Proverbs and wise people. And then lastly, it’s taking time to do stuff, other stuff that you enjoy.

So, I worked out early this morning with my oldest son, and we enjoyed the conversation and he's only doing it because he loves me and he wants me to survive for another 30 years. And I do it because he's asking me to do it. And I would love to spend time with my great-grandchildren. So, it's doing the little things, the blocking and tackling when I'm on the podcast with three fit, skinny guys, I’m the outlier.

So, I obviously have a lot more to work on in that degree.

Jeffrey Feldberg: [00:51:11] Peter, I think you're being hard on yourself and for our listeners who obviously can't see us, like we're seeing each other, Peter, you are your own worst critic there, but on the flip side, thank you for sharing those wonderful insights.

And what makes you tick and Michael rounding out to you? How about yourself? What are you doing on your side?

Michael Butler: [00:51:29] Thank you. Tough comments to follow there from both of you.  I think I'm certainly a big advocate for exercises. Both of my friends know here as a result of that and that is how I spend some spare time and try to keep myself healthy.

And mentally, I think, impacts you in a very positive way. Gives you the mental energy to be able to push through things. I formally have been lucky enough to run some marathons in the past and if you would look at me, I'm not a marathon runner, so it was a challenge for me.

And just finishing was the goal for me, not any kind of placement, but in that regard, having that mental toughness if you're out running a marathon for three to four hours the same sort of thing applies. I can say that from a recent experience here, we had a deal that we were closing on 12/31 of this past year.

And it went up until nine o'clock in the evening on 12/31 before it got closed. And being able to push through that when you were clearly just mentally and physically done to do it for the client to do it for the goal of getting it done, by 12/31 and setting a worthy goal for ourselves.

But I do share Josh and Peter's concept for the passion. I've been lucky enough to be on the other side of the table when I've been selling a company or buying a company. And I wasn't an advisor I was actually the buyer or the seller in that regard. It's pretty gratifying to get that transaction accomplished.

So, I like to have that feeling for our clients, ultimately

Jeffrey Feldberg: [00:52:43] Michael, thank you. And thank you for speaking, like the true professional that you are.

So, as we wrap things up here, I'm going to ask each of you to think of one thing. So, if it was going to be one year from today, what is it that you would stake your name on that you think is going to happen but isn't being talked about out there today, or perhaps even goes against the grain.

And Josh, why don't we start with you.

Josh Curtis: [00:53:08] I would say probably something around taxes. I think we're all here looking at potentially capital gains changing. I think people need to be prudent. And taking that very seriously. And if they plan to transact in the next, one to five years that you should contemplate capital gains, potentially going to ordinary income rates.  I would plan around it.

However, I guess I also wonder if the government's really going to be able to get a change to that level accomplished.

Jeffrey Feldberg: [00:53:40] Thanks, Josh.  Interesting. The taxes come up again in the podcast. Peter, how about yourself?

Peter Kubasek: [00:53:45] The first thing that hit me is that is I believe that 2021 will be the all-time record for transactions completed. So, even more than 2007, even more than 2015, 16 there's so much pent-up demand from 2020, and there's so many people that want to be the next Warren where they made a fortune in 2009.

And they made a fortune in 2000 and whatever when there's a downturn that there will be more deals done in 2021 than any time in history.

Jeffrey Feldberg: [00:54:18] Wow. What an insight. Thank you, Peter. Thank you for sharing that. And Michael why don't you take us home on this one. What are your thoughts? 

Michael Butler: [00:54:24] Thank you.

Tough question for sure. But the one thing that I've thought has been overdue for a couple of years already is I think public equities will find a way of not being the greatest asset class that they've been for the past couple of years. I do believe that there's going to be, and this is not meant to be any kind of political statement on the new administration that's in place, but I do think there's a reckoning that will happen with public equities.

And the reason I bring that up is the fact that I think middle-market businesses that we all operate in are going to be increasingly the better place for people to place a bet with their investment dollars going forward. So, even though we know that there's a lot of buyers out there, I think there will continue to be more buyers out there.

And I think some sort of correction in the equities markets we'll drive dollars increasingly to our arena in a positive way for our point of view. So, that's just an inkling I've had for a while now.

Jeffrey Feldberg: [00:55:14] Wow. Another terrific insight, three terrific insights, and all in different directions.

So, something to think about, it'll be interesting in a year from now to revisit and see where all this ended up going well, Josh, Michael, Peter, as we wrap up this podcast, a sincere thank you to each of you for taking time out of your day out of your schedule, and to really put it all on the line and share with us. What's often not heard out there what business owners really need to know before they bring on an investment banker. Before they start a liquidity event of advice, that's really words to the wise and something that's going to help them throughout the process and help them lock in the future that they both know and want.

And so, with that, I'm going to thank you all so much. For our listeners in the show notes, I'm going to have contact information and links that you can reach out to Footprint and ArkMalibu and hear it straight from the source. And for everyone thank you so much for being a part of the Sell My Business Podcast.

Please stay healthy and Safe.

Josh Curtis: [00:56:12] Thank you, Jeff.

Peter Kubasek: [00:56:13] Thank you.

Michael Butler: [00:56:13] Thank you.