Investment Bankers Josh Curtis and Michael Butler Reveal Little Known Strategies To Help You Increase The Value Of Your Business (#30)

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

Jeffrey Feldberg: [00:00:01] And I'm Jeffrey Feldberg. Welcome to the Sell My Business Podcast.

 Steve Wells: [00:00:06] 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 account.  Most business owners believe that business value is determined during the liquidity event.

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How did we do this? We spent millions of dollars and years of time to uncover strategies that level the playing field. The end result is the 12-week Deep Wealth Experience.

We've created a proprietary solution that is relentless, resilient, and gets results. Learn how to master the art and science of a liquidity event. We've leveraged the same strategies that took us from 7-figures to 9-figures.

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Visit www.deepwealth.com/success to book your free call.

That's www.deepwealth.com/success. 

Jeffrey Feldberg: [00:01:39] Welcome to episode 30 of the Sell My Business Podcast. 

 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.

His career has been dedicated to facilitating strategic initiatives for both private and public companies with revenues ranging from a few million to over a billion across all industries in the US. Prior to leading Footprint Capital, Mr. Curtis served as a vice president and CFO with Insource Spend Management Group in Hilliard, Ohio. At Insource, Mr. Curtis directed the company's strategic growth initiatives, including acquisitions, strategic partnerships, and alliances. He led the company through two synergistic acquisitions and ultimately through the sales of Insource to AFS Logistics.

Foregoing his work at Insource, Mr. Curtis has 10 years at GBTQ and Fifth Third Bank in Columbus, Ohio. He served in a director role at GBQ capital, a boutique investment bank owned by GBQ partners. He started in business valuation practice and became an essential contributor to the formation, development and success of the merger and acquisition practice.

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. Mr. Curtis currently serves on the board of directors of Great Lakes Assemblies, Golf Shore Assemblies, and Indiana Assemblies. In addition, he is on the advisory board of Silver Threads and Telecommunications and Technologies Group.

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.

These roles, which included numerous acquisitions and exits bring a wealth of experience to any engagement.

Michael and Josh, welcome to the Sell My Business Podcast. We're delighted to have you with us. Why don't you start by briefly telling us a bit of background about each of you and also about Footprint Capital.

 Josh Curtis: [00:04:37] So, Footprint was founded under the premise of providing tailored solutions, customized advice to clients. And most of the time those clients were seeking some form of liquidity, some form of exit, or growth. And for us, as we looked at the industry, most of these services were focused on larger companies.

And for us, what we really wanted to do at Footprint was tailor those solutions to smaller businesses. They brought that process for larger companies to this size. And, even from founding the name Footprint, we really are focused on legacy. We'd like to think about, what did someone do in the past that has really left a lasting impact. Or what does someone want to do in the future to leave a lasting impact? And, we've tried to build a team of people with diverse backgrounds that provide different perspectives to our client. We found that while many people want to achieve the same things, the nature of their business or the way that they want to go about it is different.

And the more perspectives we can have that have, transaction or business ownership experience, the better the solution for our client.  

Michael Butler: [00:05:46] This is Michael, from my perspective, Josh and I have known each other for a little while.

But I've got a varied and diverse background starting out in public accounting, audit and consulting, I became a chief financial officer for a company, in the distribution and manufacturing space. And in that role, we did several acquisitions of other companies. We were then actually acquired and I survived the acquisition and was the chief financial officer for the new company.

And, did that for a while. But then, took a turn and spent 20 years, as a corporate executive in a big corporate America. I did several acquisitions of companies that added to our business. I ultimately spent 11 years as a partner in a venture capital firm, acquiring and exiting companies along the way, and then joined Footprint a number of years ago.

 Steve Wells: [00:06:31] Josh or Michael, is there a particular sector that you concentrate in or a particular size of company?

Josh Curtis: [00:06:39] I would say from a sector perspective, we're industry agnostic. What we found is we can apply the same fundamentals, the same principles to a client in any industry. Given the geographies with which we focus, predominantly here in North America, there are certain sectors that we seem to be introduced to more.

But it's really more based upon what that owner wants to achieve from a size standpoint, I would say the bulk of our transactions are in the, one to 10 million of EBITDA range. So, while somewhat broad, we call it the lower end of the middle market 

 Jeffrey Feldberg: [00:07:15] At Deep Wealth, we have business owners come to us who go through the Deep Wealth Experience because they're smart enough to say I have a successful business. I know that the skills that built my business, aren't the same skills to either exit my business, or have some kind of liquidity event, perhaps I want to raise capital and continue to grow the business and I have one chance to get it right.

So, as we speak to those business owners who are thinking, yes, there is some kind of liquidity event in my future. Maybe it's a year from now, maybe it's five years from now. You've seen what works, what doesn't work.  What advice would you have for those business owners who know that at one point in the very near future, a liquidity event is going to be happening?

  Michael Butler: [00:07:56] I think preparation and is key and that's exactly what you guys are doing at Deep Wealth is preparing people for that process and not for them to necessarily do it on their own, but to be educated consumers of everything that's going to go on with their company,  from choosing an investment banker, or business broker, whatever the case may be.

 It's also just preparing the company and how a buyer is going to look at their company and so the more time that people give themselves to prepare their company, things are going to go quite well.  On the flip side, if someone, comes to us and says, I’ve got a health situation or a marital situation or any kind of situation that's going to cause them to exit quickly.

It's going to be a fire sale kind of price. And it's not going to be from a term on price point of view, not going to be as attractive. If you give yourself even, a couple of years to prepare, much can be done into your business to, fill the gaps that might exist in your business.

And those could be a variety of different things from customer concentration issues to having the owner being the dominant player in the company. So, what's, you're doing is ideal as a means to better prepare for the road they're going to be taking on. And like you said, Jeffrey, many people do this once in a lifetime.

 There are several that may do it a couple of times in their lifetime, but most often we're talking to people who've never been through a, a liquidity event, or an exit and, helping them, understand the terminology, the process, and all those sorts of things is where we, frankly, earn our money.

Josh Curtis: [00:09:19] A component of that is also having the right advisors around the table. And, we've got horror stories about situations where, they want to use their attorney who's been their general attorney for a long time.

He's a family friend, but he's never done a transaction. And, we found clients, to be wildly unprotected. So, the process to get really bogged down by someone who can't keep up with some of the terminology and, or, the speed with which the other firms moving. The same on the tax side, we've had clients that, if they're rolling over equity, for example, and desire to do that tax deferred, that can be complicated.

And I think having advisors that specifically focus on transactions, is one other benefit that I would say, we bring to bear in transactions. 

 Steve Wells: [00:10:05] As you mentioned, this is probably the first and maybe the only transaction, if it's going to be an exit, let's say, for most business owners.

And so they don't know what they don't know and, they may be good at building a business, but selling or exiting or finding some liquidity opportunity is not their expertise. So, what are some of the things that you've seen that are surprising to the people you deal with or mistakes that they're making that can be avoided?

Josh Curtis: [00:10:31] There's some real basic ones. I think, financial reporting is a simple example, right? I think, we have certain prospects that we've talked to over the years that, are running a lot of personal expenses through and things that they're not comfortable divulging.

And they try to say, yeah, I manage the business to a breakeven and you ask them to support, those add backs, if you will. and they can't do it or they won't do it. So, I think trying to run a clean business. A big base of our clients do have personal expenses in the business.

But I think it's being thoughtful about how a, buyer's going to view those normalizations and what does that tell them about the nature of the individual and maybe how they're running their business. I think, contracts and agreements. And I think, from a legal diligence perspective, there's a lot of companies that aren't really very well buttoned up.

They don't have all their contracts organized, maybe some aren't signed, some are dated things of that nature.  

Michael Butler: [00:11:29] I think of objectivity, the, one of the things that we bring to the table is having seen many businesses that are exiting and many businesses along our careers, in either other facets, we come in with a fresh perspective and an outsider's perspective.

It's difficult to look at your own company and find the warts. And sometimes we have to be, somewhat the bearer of bad news about situations. We had one, situation where, when it comes down to it, the person had built a super strong company, but had not done a great job on the sales and marketing side.

And, as a result of that, we turn that into a positive from the standpoint of the opportunity that exists going forward. But it can be tough to talk about that as a business owner, if it's something you didn't do and leaving no opportunity for the buyer, is, what, what all buyers want to see.

They want to see that there'll be able to improve a business once they acquire it. But having that kind of perspective is valuable as an outsider and is difficult to have if you are working in the company every day and it's your baby. 

Jeffrey Feldberg: [00:12:24] Michael and Josh some terrific points that you've brought up.

Let's do a deeper dive. Depending on who you speak to. In the M&A world up to 90% of transactions fail. They never see the light of day. Now I know in speaking with you offline, you were sharing that at Footprint Capital, you've done something interesting because you've actually inverted that. Not only is it not 90%, but 98% of the transactions that you're working on cross the finish line. So, success isn't an accident. And Michael, maybe it's that story that you're illustrating of how you took someone's weakness and you turn that into a positive for a buyer. I'm wondering what kind of advice that you can give to our listeners of what makes the difference and what you're going to do that business owners on their own simply can't do, or aren't able to do.

 Michael Butler: [00:13:16] I think the one thing we can attribute our high success rate to, is we do our homework upfront. We get a chance to meet our potential customer, and it's not always a given. We don't try to rush in with an engagement letter and get them signed up right away.

We want to understand their business first. We want to make sure that they are both from a business point of view and a personal point of view, ready for a transition to make sure they understand what they're getting into. And the fact that it's going to be a long road. We, talk about the fact that it can be six, nine, or even 12 months before it gets to the end. We've had several transactions that have gone on hold as a COVID and they've, restarted now.

It's been a long period of time on a number of transactions we've been involved with. So, to that end, knowing the good and the bad of the business upfront and making sure there's also a reasonable expectation of the value that we see in the marketplace for a business like theirs and what's in their head.

 A lot of times they'll be, country clubs, stories of people that have other friends or peers in the same business or other businesses. And they talk about the great exits they had in the high multiples they received. You never hear usually about the bad ones on the other side of the equation, that average out to maybe a lower number, but we want to make sure that, as we look at the company, there's an alignment between what we see in the market and what's in the owners head in terms of what that business will ultimately sell for, and that misalignment can cause problems in terms of whether we'd ever be able to find them an appropriate, buyer that would offer those kinds of pricing terms. 

 Josh Curtis: [00:14:40] I would add that, expectations is a critical factor there, but I would also say a big portion of it is how do you tell the story?

And for us, what we do is we get in, we really understand the company. We really understand the owner. We really understand the market and we understand how to position that story to prospective buyers. And, we have a great example of a project where we're just about to sign a letter of intent on.

Where, our client, prior to knowing us accepted an offer for $22 million, they signed a letter of intent. and for one reason or another, our client ended up getting cold feet. A portion of that was meeting us and us putting doubt in their mind that this was really the right value. And, we got under the hood and came to understand the business, how they were positioned in the financials. This company was cash basis. And when you looked at the growth that they had, when you looked at the last 12 months of financial statements on a cash basis, the performance was materially different than if you looked at the current run rate of that business on an accrual basis, And what we've done is we went in and completed a quality of earnings report.

Footprint did not do that, but we, introduced a few third-party CPAs that were capable of doing a quality of earnings report. They did a quality of earnings report, which really put a stamp of approval and clarity on the numbers to that buyer. Then we also positioned all of the metrics of that business, the KPIs that they were running it on and how those KPIs had improved over the last few years and where those KPIs were growing.

And what we were able to do is we got offers from a number of different parties by running a process. And in that process, it looks like we'll accept an offer in the high forties. And you think about the value creation that just running that process. Going about it in a methodical way, true proven, methodologies. Created more than a two X the value that they were going to accept on their own. Not everyone's like that. I wish they were, but I think it's a powerful example of how adding discipline to a process, can create value. 

 Steve Wells: [00:16:56] Josh a great point. We've heard, as I know you have too many stories of a business owner accepting an offer without even soliciting and they say, Oh, that's a pretty good deal. and they take it. We always cringe and I know you do when you hear that, because that's got to be a low offer. I've never heard of that working out. You've really talked a lot about preparation, how important that is for the business. Before you get hold of them what can the business owner do to prepare themselves for you, emotionally or even strategically? What kind of things can they do to that makes your job better and makes you more successful for them? 

 Michael Butler: [00:17:35] Knowing the most common value detractors in a business, is important. And let me run through a couple of those that are just top of mind. One is that we see quite often is customer concentration issues, where someone has more than 10% or 15% of their business with one customer.  That's a risky situation.

You lose that customer. It's a material impact to the top and the bottom line. So, preparing for that by obviously diversifying your customer base of course, or whatever you can do to, contractually, tie up that customer. So, the risk of loss is not there for a future buyer.  The second thing we see quite often is owner dominance of the business, an owner that can't even take a vacation is problematic. If, we asked this question of somebody and they told us they took, 10 plus weeks of vacation a year and they do it, in locations, they can't even be reached by a cell phone. If you can take that much time off and still, feel comfortable that your business is staying afloat on your second-tier employees are keeping things together. So, that kind of, switching, responsibilities and, information and relationships to the second tier of management, is very important to do. There's also quite a bit that can be done around tax planning, with enough time.

Josh Curtis: [00:18:47] I can't stress the organization enough, I think having audits, from a financial statement perspective is imperative.  Managing contracts and documentation. The more well-defined systems and processes of business says generally the better it's run and the more value it has.

Ideally those would be documented. Ideally, those, practices would be inherent, in the organization trained as new people come on. as Michael said that the less owner reliance, the better, the more recurring revenue, the better, the lower the customer concentration, the better, there's definitely a handful of things that owners can focus on before, talking to any firm like us.

Jeffrey Feldberg: [00:19:27] What's interesting, Josh and Michael, and I'm sure you see this as much as we do. We speak to business owners. And one of the things that they often say is, Hey, I am busy, I'm tired. I don't have enough time. I don't need a broker. I don't need an investment banker. I'll save the money. I'll save some of that time.

I'll just wait for somebody to approach me. And you gave that example how, in that one instance, by simply working with you, by making the right choice, A business owner went from a 22 million dollar offer into the forties, which is absolutely phenomenal. So, from a business owner's perspective, when they're looking at investment bankers, how do they know that the investment banker that they're speaking with is a real deal or somebody that they should stay away from? 

What should I be asking? What should I be looking for in terms of, yes, this is the right choice or keep on looking? 

Josh Curtis: [00:20:15] I would first, determine chemistry with that investment banker. Ultimately, most owners go through this one time.

 We'll spend a meaningful amount of time with our clients, really get to know them.   I know when they wake up, I know when they take their kids to school. I could tell you anything and everything about their day. I could tell you what's going on with their wife.

We know it because of the intimate relationship that we develop with our clients working through this process. So, that chemistry really, to me is number one. Number two, it's where did you get to this group? For me, I would always stress, talking to multiple firms.

 You want to know what your options are. It's hard to gauge, the fit of one firm when you don't have anything to compare it against. So, we would usually say, talk to a few parties, see what they say.

But I think where that introduction comes from. Does it come from a trusted advisor? Was it somebody that you found on the internet? We've had all different types of introductions and ways that owners have found us. and I think, for those that come from a wealth advisor or a CPA or an attorney, I think we already come vetted to those parties.

Those that may have found us on the website or, though, an event like this, don't know us as well. And I think in those situations, references. We hold our references near and dear, and we'll really only provide those references to parties that we know have a genuine interest in engaging Footprint.

But I think that's definitely the best way is talking to former clients of ours that have gone through the process, that have lived it firsthand and being able to talk about it openly, with the prospect.

Steve Wells: [00:21:54] When you've engaged the client, and you said this process can take a year and for tax planning reasons, maybe it needs to crossover a tax year.  Are there specific tools that you use to extract value or to help this process go along? 

Michael Butler: [00:22:08] Certainly our background and experiences are our number one tool and we've got a, a systematic way that we'll, go through and understand the business. But we have used actually a tool that was featured on your podcast, earlier, called CoreValue.

And CoreValue is a very interesting tool that helps business owners identify value gaps in their business.  It does a nice job of trying to put a value on that gap is an example. The easiest example I believe to understand is financial statements.

If someone just has internally generated financial statements, and they're not audited, they're not reviewed, they're not looked at anybody at the outside, that's going to cause a buyer to have, less confidence in those financials. CoreValue will establish a value for having your company audited. They'll give you an idea that the impact it would have on your ultimate exit. And again, of course that's an estimate, but with that, that amongst other things, the other things we've mentioned, like the recurring revenue and customer concentration, the other kinds of, value gaps there.  CoreValue looks at 18 different areas and we use it as a way to get to know our customers better in addition to what we do through our interview process, and also our research. 

Josh Curtis: [00:23:20] We have a lot of prospects that we hear in the market, prior to meeting them that are looking for a valuation.

And we always say, what’s the purpose of that valuation because we have other business valuation shops that we work with. Footprints is not formally conduct, valuations that would be used for IRS or other purposes. And we often find that these company owners that are thinking about going down the road of a transaction or wanting to start thinking about preparing, want to start with a baseline value.

 We also do that internally. And so, what we'll say is, okay, a good baseline to start with is what is the business worth? Understanding that certain parameters and, while it's not a formal software tool, our own internal models, really allow us to get a very close read on what is that worth? We look at transactions that have happened in the market. We look at public comps, and apply those down to smaller businesses. There's a lot of data out there that we can access that most business owners wouldn't really be able to apply to their own company to determine what it's worth.

So, I think that's another element that is important as you get started in this conversation is, developing that baseline of what is it worth and how does that correlate to what that owner's expectations are? Because too often, we meet owners that we tell them their businesses worth 10 million and they say it's worth 20 and they have 20 in their head and, whatever that's based on, isn't from our perspective based on facts.

 Michael Butler: [00:24:47] There's not just one value for a business. Values differ by the potential buyer. A financial buyer.  value the businesses in a certain way. They may not have any synergies to add to that. A strategic buyer, such as one that has, let's say, a similar customer base, or is in an aligned industry, and can really utilize the, either the customers or the technology of the seller is in a much better position to pay more money.

Because the company is worth more to them in terms of the, the old concept of the one plus one equals three. Getting that in your mind, and obviously we always see to, to have, all types of buyers at any kind of, process to ultimately result in a number of great offers for a business owner.

Josh Curtis: [00:25:29] And I think the other thing we know for certain, is that while we can estimate market value, we don't truly know what the market's going to bear until we run a competitive process and take that business to market. Because that's the way to truly find out what is it worth. 

Jeffrey Feldberg: [00:25:46] Let me pick up on that because at Deep Wealth we are big believers on the preparation side. When you do the preparation, right, you set yourself up for success, but part of that success comes from the ability to attract many different buyers in an auction process. Having said that there are some advisors out there, even investment bankers who will say, Hey, don't even go with an auction.

You're limiting yourself. It takes more time; it takes more money. And it's not where you want to go. So, to those business owners out there who are deciding number one, what should I be doing? But big picture wise, what is the actual process itself going to look like? How do you weigh in on the auction?

Josh Curtis: [00:26:26] I think we absolutely believe in the auction. To go back to the example, I referenced where the client had accepted 22 million.  So, we went to market, we ran a competitive auction. I think we went to 120 buyers all vetted by our client. We came up with the list, they’ve provided input to it, approved those names.

We went to 120 buyers. We got somewhere in the vicinity of 60, some odd, confidentiality agreement signed. The final tally was 14 offers, indications of interest. The range of those was 22 million to 55. So, talk about a wide market range.

That tells you how buyers view things differently. Certainly, there's some similarity in terms of, those offers that we put the most weight on, but I think as you think about the value of running an auction, is it really tells you how are buyers viewing our business? What should we consider when selecting a buyer?

What are the intangibles that each of those buyers bring? You don't know what your options are and how they feel until you go through the process.  And in a certain point for us, we find that our clients start to focus less on the Delta in dollars and more on the other aspects of that transaction.

So, whether it's the cultural fit, whether it's what the legacy is that they're going to leave, what it means for their employees. There's a certain point in every process almost every time when we run a competitive process where our client says, this is my preferred buyer.

Jeffrey, we're big believers in the auction. And, sometimes we may call it a modified auction, right? Where we, instead of going to 120 go to 10 or 20 or some smaller number, but we definitely believe you've got to drive a competitive process with different types of buyers to see how are they going to view value.

 Steve Wells: [00:28:18] And you've mentioned there’s not just the number, there's a lot of things around a number employees, how, the payments are structured and let's say even earn-outs.

What's your experience and have you had anything to say about the earn-out.  I know some people want to keep some stock, but say someone wants to get out and having an earnout. Has that ever been problematic?

 Josh Curtis: [00:28:38] We have tried really hard over the years to make the earn-outs in our deals be the most certain they can be. And what I mean by that is having as few variables go into that earnout as possible. If we can make it sales-based we're going to make it sales-based. If we can make it gross margin based.

We're going to make it gross margin based. And if it has to be EBITDA or some other net income, cash flow-oriented calculation, we're going to try to really make a very clear definition of what's included in that and what is excluded from that. 

So, we have a transaction we closed earlier in the year that included, 63 million at close and it had an $8 million are now in our, client's going to earn every dollar, that 8 million, based upon the performance of the business this year. I have one we're working on right now and what we've tried to do is tier that earn-out, so it's not an all or nothing proposition, you can earn a small percentage of it. So, at least it's additive. But I think fundamentally we always have the philosophy that earnouts should be the cherry on top. If you were relying on that earn-out to get to the base value that you need to live the life you want, or to execute the financial objectives that you have, or otherwise, that is not an acceptable deal, because we cannot count with certainty, those contingent dollars. 

Michael Butler: [00:30:05] We had a transaction I was involved and it had a nice, attractive or announced, but we did consider the cash at close being an acceptable number by itself. And so, we went in to the earn-out with our eyes wide open. And as a result, different than Josh has experienced in the example he gave, we'd actually didn't earn any of the earn-out because the acquirer ended up selling to someone else and they ended up de-emphasizing this part of the business.  There really were no plans at the close of that, but it's something that happens subsequent to the close and with that de- emphasis of the business, it just wasn't, the right resources weren't put towards the business.

 The employee team, the good people were stripped out and taken elsewhere and, the business did not perform.  It's really not a great situation, but if you go in expecting that kind of situation and being happy with the cash close that's a good way to do it.

Another comment on earnouts in this COVID period, there's some uncertainty about what's going to happen. Some are actually, doing well in this kind of environment. Others are not, if you have a retail business as an example, could be very problematic. A lot of, acquirers or asking the sellers to take on some of that risk share some of that risk through an earn-out structure.

Going forward, and so we've seen, many more earnouts being suggested in the marketplace and being part of the terms. So, that's, unfortunately a sign of the times, 

Jeffrey Feldberg: [00:31:23] Michael, you took the words right out of my mouth in regards to COVID because we are in an interesting time, as we record this interview. When COVID started, everyone thought we would be well beyond it, but here we are. And it looks like it's not going anywhere. I have a two-part question, but the first part is how have you, as a firm at Footprint capital, how did you adapt to COVID? Have you had to do anything differently on your side, and what's that been like? 

Michael Butler: [00:31:45] Prior to COVID, it was clearly a sellers' market. There's a lot of buyers out there for businesses, multiples were an all-time historic high. So, things were good. As we went into COVID, there was a period of time where no one knew what to do. And as a result, paralysis happened, things got put on hold, till some clarity was starting to occur. Our business was impacted by it. Transactions were put on hold that we were working on. New business wasn't as, as prevalent.

And, as we are now appearing to be coming out the business has picked up with the on-hold projects have restarted, which is great. What's quite interesting though, is the values, the EBITDA multiples out there have not changed considerably. It's still, we believe continues to be a sellers’ market.

The buyers who were out there in the marketplace are now, quite aggressively. Picking up the ball and, and restarting business. In fact, they feel like they've had, six months or so of, of sitting on their hands. So, they're now ready to make an investment. 

Josh Curtis: [00:32:43] I think it's very circumstantial, I think in certain instances, we're meeting clients face to face, other than the wearing of masks and maybe a little social distancing in conference rooms, we're not doing things differently.

We're taking, the exact same approach to our processes. In other situations, we're having many more zoom meetings, we may be normalizing their earnings, doing an analysis of how did COVID impact them. What does that look like and how should we think about, what the fundamental change, if any, in the business was it temporary?

It's all situation specific. but I think our approach to value, and what the market's doing, I think is fundamentally the same. The market is very active. There continues to be record levels of liquidity. I think private equity and corporate buyers, remain very healthy, very engaged, and there remains not enough transactions to fulfill the capital, chasing them.

Michael Butler: [00:33:39] And one other, a new term that's popped up on the horizon has been, EBITDAC, which is the earnings before interest, taxes, depreciation, amortization, and COVID. So, we're doing calculations like that to identify the COVID impact on a business, to normalize it going forward.

Steve Wells: [00:33:55] And Josh you hit on a point that maybe you could expound on for our listeners is more of a point of education. We've heard as well that in some instances there's a lot of money out there that needs to be deployed and be purchasing companies and has been pent up.

So, it creates a pent-up capital. And so that's, bolstered the seller's market. So, explain to our viewers how those financial markets work and you talk two different kinds of buyers and that would be a financial buyer versus a strategic buyer. And why sometimes the business owners or wait for that strategic buyer to just knock on their door may not be the best buyer, and how debt comes in to a transaction sometimes and how the seller has to be oriented toward the debt that the potential buyer may be putting on the business.

Josh Curtis: [00:34:44] Yeah. I think, over the last couple of decades, the proliferation of private equity, has really opened up an Avenue for business owners to transition that really didn't exist in a meaningful way prior to that. And that existence of private equity really has created a market for businesses it continues to be like nothing we've seen in the years prior. How most of those private equity firms work as they raise a fund, they have 10 to 12 years depending to deploy that fund, with their average fold period being somewhere between four and six years.

They basically needed to get in and out of that investment within the time horizon of approximately 10 years. They may not invest in that business until the second or third year of their fund. And, maybe in it six years, that capital takes, eight or nine to work.

There are various terms, the capital overhang of funds that have been raised, there's been a consistent theme that many private equity firms have not been able to deploy the committed capital allocated to them. So, in other words, if they raised a $500 million fund, some of these funds haven't been able to deploy that entire %500 million.

So, what we're seeing is we're seeing a lot of funds that have capital that they're unable to allocate, which causes to some extent, people to get a little more aggressive, because there's some notion of there and then I don't know how fact-based it is, use it or lose it.

LPs limited partners don't want to allocate capital that they're paying management fees on that doesn't ultimately get put to work. So, what you're seeing right now is, in this market where there's not enough platforms for private equity firms to buy, those private equity firms are definitely stretching the limits of what makes sense.

And we're seeing some be very aggressive right now. Certainly, our clients need to keep an open mind relative to what some of the other considerations might be based on how much equity they're rolling. And Steve, to your question, most of these private equity firms are putting debt, some, an aggressive amount of debt on the business.

And when our client contemplates a rollover, we're always making sure that they're getting the benefits of that leverage. So, in other words, and just in round numbers, if it's a $20 million enterprise value with $10 million of debt on it and our clients rolling over 30%, our expectation is that our client pays $3 million for that equity.

So, they have essentially bought 30% of a $20 million business for $3 million. And, in some situations, private equity in our clients’ minds are putting, leverage putting debt on the business at a level that they're not comfortable with. And I think a lot of that is you have a baby boomer generation, oftentimes that have operated their companies for a long time with no debt.

And, we did a transaction a couple of years ago. And our client had two options, to roll over his 20%. The transaction value was about $14 million. And, we really got down to two buyers and the buyer he ultimately selected, it was a family office that was going to pay cash for the business.

And he preferred to roll over approximately $3 million for his 20%, instead of, what was going to be about a million dollars for his 20%, because he just wasn't comfortable with the amount of leverage that the other buyer wanted to put on the business. And he preferred to put up more capital and run the business as he had in accordance with past practices. 

Like everything in transactions, it's all very circumstantial and situation specific, but at a high level, the amount of capital is really continuing to drive, strong multiples.

And, the amount of leverage for clients, we see can be a big creator of value in their roll over equity, but some definitely view it, with a negative tint based on their conservatism. Michael, what might you add there? 

Michael Butler: [00:38:43] I think that, the one thing you touched on that might be interesting to bring up as well is that private equity because of that lifecycle of the fund and that need to turn over the investments. someone who aligns with private equity is going to have to go in knowing that their company will ultimately be sold in that four to six year on average time period from the time it's acquired.  The family office example, you brought up family offices generally, speak about the fact that there's no timeframe on their money, it might be a 20-year investment. And so, if that's of concern to an exiting owner, that can steer a decision, as to what's the right type of buyer to go with. And by the same token, a strategic, investor someone who's, let's say, in a similar or related business, might also have a long-time horizon as well.

So, at that time horizon question is an important one to know ultimately what’s going to become up the business in the future. 

Jeffrey Feldberg: [00:39:33] Speaking of time, as we begin to wrap things up, I do have a question for you. And I'm curious, particularly putting myself in the shoes of a business owner, who hasn't gone down this path yet.

And most business owners, if they're open and honest about it, it's scary. A lot on the line. You want to get it right? So, you have a phenomenal success rate at the 98%. You shared some of your secret sauce ingredients of getting to know the business owners, getting to know the business, the preparation that you're doing, looking at the marketplace itself, what would be one or two other secret sauce ingredients that really distinguishes Footprint Capital from other choices that are out there.

 Josh Curtis: [00:40:12] I think, very honestly, this probably has less to do with the client and more with us is, we only take on projects where we have that alignment in terms of the stated objectives and the according value. I think I would advise all of your clients, all the prospects that we have.

And all your listeners here that, they want to make sure that they understand can that investment bank, can that business broker, be confident in the stated objectives, because I think there are a lot of firms, that exists that they want to get a certain amount of listings or active clients  that they're working on at a given time, hoping some percentage of those close. And our process is the total opposite of that is we only want to invest time in situations that we have in certain outcomes. So, I think, as we talk to our clients, when we're interviewing them as much as they're interviewing us, and I think if that's not happening for business owners where they don't feel that the investment bank is interviewing them, that's something that maybe should give them pause.

 I think the other secret sauce ingredient is, the fit, like I mentioned before. I think, that working relationship is paramount and, given the amount of time and resources that we dedicate to a project and that our client will dedicate to a project, you got to establish trust.

And for us, trust is the backbone of everything that we do because we are focused on that end result. And we really need our clients that when there becomes a challenging situation, we've been in situations where there are partners, two or three different partners. we sold a business last year, the had four family members and each of them owning 25% and all with wildly different perspectives, all of them working in the business on a full-time basis.

It takes a level of trust with each of those people for us to be able to navigate the complexities of getting the deal done with different perspectives. 

Michael Butler: [00:42:10] The only thing I'd add to that is just, the experience factor that we talked about, people were generally doing this for the one and only time in their life, but we do this for a living. This is what we do all we do. And as a result of that, knowing market terms, knowing what can go wrong, knowing by our expectations, knowing things that can occur that can go wrong, at every step of the process is important. And lastly, another thing that we've not touched on here, and just as a final thought is, because we're doing this full time and taking some of the burden off of our client's shoulders, not taking them out of the process, they can continue to focus on their business.

The worst time to have a bad quarter is right when you're selling your business. And, if you get so wrapped up in this process that, it's all you think about and all you're doing, and you're not talking to your customers, you're not keeping your business, on the same great pace it's been on in the past, stumble at that time it  can derail, a transaction or at least cause, someone to want to adjust the price downward  if that were to occur. So, having someone else focusing on that and helping in that process that's been around the block is we think crucial. 

Steve Wells: [00:43:18] I've got a fun question for both of you.

So, you can both answers independently as something we ask all our guests. And Josh, if you can start first, what would you tell the younger Josh? I don't know how far back, but the young Josh, if you could go back to him and say, listen, here's some advice I want to give you in business or in life.

Josh Curtis: [00:43:36] That's a good question.  I would definitely say trust your gut. I think there've been, certain times in life when, you hesitate. Whether it's the gravity of the situation, or, maybe doing it for the first time or what have you, but I think you definitely got to trust your gut.

And then I think secondarily, its reputation matters. And I think, we've evolved as a firm, over a long time to this formula, that's driven our success rate. And I think the reputation that we have, with those former clients, with those referral partners, is paramount to our success.

Michael Butler: [00:44:11] From my perspective, looking back at my career and I've got a little bit more time on the planet than Josh does, and a nice way of saying I'm older. But to that end, I spent, five years as a CPA spent five years as a chief financial officer. I spent 20 years as a corporate executive and 11 years as a venture capital partner.

My advice would be not spending as much time in corporate America and have gotten into investment banking at an earlier time in my life. I think all those things have contributed to who I am today and the perspective I bring to my role. But I really enjoy doing what I'm doing.

And, I want to continue doing it for a very long time. I wish I had started earlier than I had. And so, it's been a fun career and an interesting one at that. And everything, like I said, has been helpful in the fairly new gig for me, but, also, would have been great to have spent more time on it.

 Jeffrey Feldberg: [00:44:57] Michael and Josh, your passion for what you do comes through in spades. And we really appreciate both your time and your insights that you've shared with us today. And as we head out of this interview and back out there, wishing that both of you stay healthy and safe. Thank you so much for your time today.

Michael Butler: [00:45:13] Thanks for having us. 

Josh Curtis: [00:45:14] Thank you so much for having us I sure enjoyed it.