Stellar Investment Banker Alan Scharfstein Reveals Everything You Need To Know For A Successful Liquidity Event (#65)

Jeffrey Feldberg: [00:00:05] Welcome to the Sell My Business Podcast. I'm your host Jeffrey Feldberg.

Are you thinking about an exit or liquidity event?

This podcast is designed to help you increase the value of your business, and at the same time, give you the certainty to capture the maximum value in your liquidity event.

At the heart of the Deep Wealth Experience is the nine-step roadmap of preparation. Learn and master the same strategies that had me say no to a seven-figure offer, and a short time later, say yes to a nine-figure offer. In the words of a business owner who went through the system, "the Deep Wealth Experience was hands down, the best program I've ever participated in."

To learn more about the 90-day Deep Wealth Experience, please visit www.deepwealth.com/success.

Welcome to episode 65 of the Sell My Business Podcast.

Alan Scharfstein is the founder and president of the DAK group. A trusted advisor to thousands of middle-market business owners for over 30 years. He guides clients as they navigate strategic options for growth and expansion, as well as to pursue successful exit strategies.

Alan founded the DAK group in 1984 to address the need by middle-market business owners to have a high level of investment banking expertise comparable to what large corporations receive on Wall Street, yet able to meet their very different needs. Alan built the DAK group on catering to the nuances of the middle market.

A skilled M&A strategist, strong negotiator, and expert at transaction execution, Alan is passionate about ensuring his clients realize the maximum value for their business with each transaction Alan has personally been involved in negotiating over 650 transactions in a wide range of industries throughout the US and abroad. Mr. Scharfstein brings to middle-market M&A a unique combination of financial sophistication, large corporate, transactional and operating experience, and the skills necessary to succeed in an entrepreneurial environment. Prior to founding DAK he served in several executive financial and manufacturing positions with PepsiCo. He was also a senior executive with Universal Folding Box, a privately held packaging manufacturer. Mr. Scharfstein is a frequent lecturer on the sale of privately held businesses, valuation, and negotiation strategies. He has been quoted and written about in publications, such as the Wall Street Journal, Business Week, Financial Times, and Time. Mr. Scharfstein received a BS in Economics and MBA. From the Wharton School of the University of Pennsylvania and holds a series 7, 17, and 24 licenses.

Alan is an avid cyclist and believes that the steeper the climb, the more enjoyable the ride. Alan is a long time Vistage member and a top-rated Vistage speaker for over 10 years

Welcome to the Sell My Business podcast.

 For our listeners, you are going to hear some things that you just don't hear. And that's why I'm excited for you. Alan, I'm getting ahead of myself. Why don't we start with the story behind the story? What's your story of how you got to The DAK group? What's that all about?

Alan Scharfstein: [00:03:45] Great question Jeffrey. As I graduated from grad school, I went to work for Pepsi up in their world headquarters in Purchase, New York. Initially doing finance work and then moving over to run a manufacturing area for them.

After several years of Pepsi, I did something that all my friends thought was a little bit crazy, which was I became the top non-family person in a family-owned business and ran that business for seven years. Had a great time doing it, worked for a wonderful family, but I was always an entrepreneur.

And I decided that after seven years it was time for me to go out and buy my own business. And as I started that journey and started to talk to business brokers, investment bankers, and others, what I really found was that the intermediaries who really knew what they were doing were all doing the mega-deals.

They all want the billion-dollar Wall Street transactions. There were business brokers doing the much smaller transactions, but when you found really good privately-owned companies in the middle, there really weren't great people assisting them in that process. And I became so frustrated with the inability to find a really great investment banker built in the middle market. I concluded that there might really be an opportunity there. So, I started with that group to try to fill what I saw as a void in the middle-markets.

Jeffrey Feldberg: [00:05:07] I love that story. And for our listeners out there, I want you to hear something that's incredibly important. We talk a lot about this in the Deep Wealth Experience when it comes time to select your advisory team and your investment banker. And while it's not necessarily a prerequisite, I think it should be.

Alan started off as a business owner. He bought a business. So, he sat in the chair across from where your future buyer is going to be. Found the situation frustrating and now became an investment banker. But the important thing here is Alan has worn different hats. And as business owners, as you go through this journey, you have someone when you work with Alan, who understands, what's that and he's been there. You're going, he's already coming back.

And that's so crucial to have when you're looking for an investment banker and advisor, who's going to be helping you. And so Alan, for business owners that have been running their businesses for decades, in many cases like you and I were talking offline. How in the world, can you master something that you've never done before, at least when it comes to your liquidity event? And you have so much on the line, it's your biggest, largest, most important financial business decision that you're ever going to make for your liquidity event, but it's your first time out there.

So, I'm wondering Alan, from your experience, from your perspective, where are some of the common mistakes that most business owners are making right out of the gates that can either kill the deal or significantly lower the value of the business?

Alan Scharfstein: [00:06:35] Business owners make several mistakes when they think about the potential liquidity event for the business. First, they don't think about it far enough in advance, and they're responding to that knock on the door or the competitor who approaches them to buy their business. And if you haven't done your proper preparation, odds are you're leaving real money on the table.

The second thing is business owners often don't really understand what the value of their business is and what it's going to be worth to the buyer. And if you can't understand that you really don't understand how to really negotiate a deal, and how to get the most value from your business.

Jeffrey Feldberg: [00:07:16] And so Alan, for those business owners that are out there and they're thinking to themselves why wouldn't I want that knock at the door? Think about it. Somebody has come to me. I don't have to hire an investment banker. I'm going to save money. I'm going to save time. It's going to be quicker. Maybe they're even my competitor.

They know my business. Why not sell to them? Why is that also wrong from your perspective?

Alan Scharfstein: [00:07:39] Most business owners think that the buyer for their business is going to be a competitor. And they often think that a competitor is going to pay them the highest value for their business. In most cases, value is not going to be paid by a competitor. It may be paid by someone strategic to your business, but that doesn't necessarily mean it's a competitor.

And unless you run a competitive process. Unless you have multiple buyers that you're talking to. You're never going to know the true value of your business.

Jeffrey Feldberg: [00:08:08] Now, Alan, you're preaching to the choir here when you're talking about an auction. And in step number three of our nine-step roadmap, when it comes to your future buyer at Deep Wealth, we are all about an auction. However, there are business owners out there that I hear from, that have told me either an auction is a waste of time, or it slows things down or it's too much money.

Or there are even some investment bankers that will say the same thing. Again, Alan, from your perspective, what's in an auction that really favors the business owner?

Alan Scharfstein: [00:08:37] What an auction provides you is it really is the only thing that will guarantee you an efficient market. It's the only thing that will guarantee that you are getting the right value for your business. Interestingly enough, when a client retains us to sell a business, we typically ask them to write down on a sheet of paper the three most likely buyers for their business.

And most have a high degree of confidence that the buyer is going to be one of those three. We typically seal that in an envelope, put it away. And at the closing dinner, open that up. Over 80% of the time, the actual buyer who is willing to pay the most and make the best deal for that business was not one of those three.

Business owners are great at running businesses, you know your business. You understand it. You understand the dynamics of your business, but most don't really understand what the competitive environment is like and who, and where buyers can come from that will likely to pay the highest price.

Jeffrey Feldberg: [00:09:34] Alan, you bring up a really interesting point when it comes to buyers and you've been a buyer yourself, and you've been in their shoes. For the experienced buyer who's sophisticated and smart. And does this on a regular basis? What kind of tactics are they going to use to get the best deal for themselves, which is going to be at the expense of the business owners?

Alan Scharfstein: [00:09:56] Let's look at what a buyer is going to propose to a business owner. A buyer owner is probably going to take a look at your business. And they may say, let's pay you some sort of multiple of earning some sort of multiple of EBITDA, and that's a generally accepted way to value a business.

But I will tell you that if that's the only way you're looking at your business, odds are you're leaving money on the table.  What you really need to do as a seller is to understand what the value of the business is to the buyer.

And very often there is a gargantuan difference between the value to you as a seller and the value to a buyer. And there are many war stories of companies that were willing to accept much lower values than they were able to get once a competitive process was run.

Jeffrey Feldberg: [00:10:44] You're so spot on with that. As business owners, like you said, Alan are terrific at building a business. The same skill set that builds a successful business is not the same one that you need to have a successful liquidity event. And one thing that we often focus a lot on here at Deep Wealth is the preparation side.

And we're encouraging people who go through the Deep Wealth Experience that they come out with a blueprint of where they're going to add value in their business, based on our nine-step roadmap. One of those steps, step number four is performing an internal due diligence audit before you actually begin the liquidity event.

But I'm curious, Alan, from your side. When you're either working with clients who come to you or you're hearing some of the horror stories that are out there, where are the typical mistakes that most business owners are making when it comes to due diligence when they're going through the liquidity event? What are you seeing that just makes you shake your head and wonder what the heck is going on here?

Alan Scharfstein: [00:11:43] The first thing that a business owner wants to do is look at their business the way a buyer, and that may involve doing their own due diligence audit. Let's understand where are the weaknesses in a particular business. And let's understand how the buyer is going to view those.

And let's make sure that we control the narrative around those issues. So, whether it's an accounting issue, whether it's a legal issue, whether it's a customer concentration issue, let's understand exactly what those issues are. If we can address them in advance, let's do it.

If we can't address them, let's know what they are. Let's disclose them early and we can pretty much inoculate ourselves against those issues if we're able to disclose them properly and control the narrative.

Jeffrey Feldberg: [00:12:31] And Alan, what you just said now is really gold out there. And for our listeners, I hope you picked up on this. Alan was sharing that when you're going through diligence and perhaps you have what we would call a skeleton in the closet, and maybe for any number of reasons, you're not able to clear it up.

Alan is saying you have to disclose that. And the reason for that, and Alan, I'd love to hear your thoughts on this. The currency in mergers and acquisitions. It isn't money. For your investment banker and for your buyer it's trust. Alan has got to trust you as his client because his time is really his currency and he can only work with so many business deals at a time.

And if he's working with you, he's saying no to other opportunities, other possible deals. So, Alan, from successful investment bankers’ side of things, can you talk to us about trust and how that plays a role in your ability to go out and get the absolute best deal for a client?

Alan Scharfstein: [00:13:27] Trust is critical throughout a transaction. So, we need to be able to trust the information that a client is providing to us. And again, nothing should be held back because whatever there is that an owner is worried about in his business is going to come out. It's going to come out during due diligence.

And if we understand that, if we know it, we can understand how to position it. If it comes out at the wrong time, it destroys the buyer's trust in the transaction. It means that due diligence is going to be done with a much finer microscope than it would be done under other situations. And the other thing that I think is really important for us to all understand is that in many deals, the buyers are investing in the owners of the business.

As much as they are in the business itself. They're treating you as partners going forward because very often, they cannot run a transition to business without your help to get the business properly transitioned. And unless they feel that they can trust you, like they can trust the partner, you're never going to get the true value of your business.

Jeffrey Feldberg: [00:14:39] Some terrific takeaways there. The more trustworthy you are, the higher your enterprise value, the more likely you're going to have the actual deal get done. And the buyer not walking away. And Alan, another thing that you had said that I'd like to circle back on, you talk about the narrative and for a lot of business owners at Deep Wealth, what we really like to have them understand is that there's an art side to the liquidity event and there's a sign side to the liquidity event. And both are important. A liquidity event, isn't just all these complicated formulas in some kind of spreadsheet that gets you to the end goal. A liquidity event and the enterprise value is wrapped up as much in what kind of story you're telling? What's the narrative? How are you going to provide a better tomorrow for your new owner than what they might not be able to do without your business?

So, I'm curious from your side for business owners that are thinking about having a liquidity event, how do you create a great narrative that's based on the facts and the data that can also instill hope in the future buyer, that some wonderful things can be done with some additional capital and resources.

Alan Scharfstein: [00:15:46] Positioning a business is an art form, and the buyer needs to view your business as a distinct asset in order to command the premium price.  Buyers are really smart. We have a lot of smart buyers. Some private equity, some strategic, but we can't overestimate the insight that those buyers have into your business.

If we can control the narrative, we can paint the picture of the future. Odds are we can command a premium price for a business. The other item that we should really recognize is that as much as we want to present to the buyers, your history of your business, the finances of your business, the earnings of your business, the balance sheet of your business.

That's not what they're buying. Buyers are buying the future, not the past. So, we need really need to be able to have a compelling vision of where this business can go, where the opportunities are, how you can grow the business, and how the buyer is going to benefit from that growth. And if we can paint that picture for them, support it with economics, that we can get the buyers very often to pay for the future.

Not just the past.

Jeffrey Feldberg: [00:16:59] So, true. And for our listeners, I really hope you were taking notes on that one. Your narrative, as Alan says, is an art form and goes a long way to really help increase your enterprise value. Now Alan it's an interesting scene out there with all kinds of different buyers who are now here today that weren't here perhaps traditionally or in years past.

And we hear a lot about private equity that is out there in full force with all kinds of capital behind them in doing really, very interesting deals. But I'd like our listeners to understand what they're up against when they come up with a private equity buyer, in terms of the kinds of advisors that the private equity group is going to have. The lawyers that they have, the advisors that they have, the caliber of talent that's there, and what that means for a business owner who's looking to potentially have some kind of deal with private equity of how they can best protect themselves and get the best deal as the business owner.

Alan Scharfstein: [00:17:57] Private equity has trillions of dollars sitting on the sidelines that they're willing, able to invest. And they are a major player today in terms of buying businesses, investing in businesses, and the like. Private equity has on their team some of the best advisors you can imagine. Those are their attorneys, their accountants, their investment bankers. And others.

And from an owner standpoint, the important thing is to make sure that you have a team that can match up well against their team. You want sophisticated advisors who understand the art of doing a deal, who understand the negotiation of a transaction. And again, for most business owners this is the largest single financial decision of their lives.

So, you want to make sure that you have the right players on your side who can address the issues, the concerns of these players, and command their respect. Again, private equity has very sophisticated advisors. You need to have advisors that can match up with them.

Jeffrey Feldberg: [00:19:04] And for our listeners, once again, Alan is just really hammering home the points. All too often as business owners, we say well, you know what the Alan, hey, listen, my business lawyer, she's been with me since I started the company. Actually, is a friend of the family, knows my business really well.

Wouldn't it just be easier, less expensive, and quicker for her to represent me at the liquidity event? After all, one business deal is a business deal. What's the big difference here? And even on the investment banking side, I've been working with someone an adviser who has just been doing general kinds of things for me.

Why don't I use that person to go in there? And so, Alan, based on what you're saying right now with private equity and other buyers, where does that lead for that business owner who's thinking of not getting that dream team built out. Those specialists. Someone like yourself, who all you do are mergers and acquisitions day in and day out.

Where does that lead that business owner who's thinking they're going to save time and money?

Alan Scharfstein: [00:20:01] What a business owner who does that does, is he thinks he's saving money, but he's probably leaving very substantial dollars on the table. And even worse than that, he or she are typically putting their deal at risk because having sophisticated advisors, having experienced advisors dramatically increases your chances of getting the deal closed. And that's what we know. If we have a good deal, we want to get that deal closed.

Jeffrey Feldberg: [00:20:32] And for the business owners that they're thinking about this Alan, and looking to an investment banker. There's an old saying that you get what you pay for. And so, for business owners who are saying okay, I'm going to find an investment banker, but I'm really going to just ratchet it down and negotiate.

Maybe have no retainer or as little retainer as possible. And I'm just going to hammer home on what the percentage looks like for that investment banker. What would you say to speak to them about that of what is likely going to happen with that kind of attitude and approach?

Alan Scharfstein: [00:21:03] It's really important that a business owner chooses an investment banker who has a few qualities that are going to really help the deal and help the business owner in the process. First and foremost, the business owner has got to be comfortable with who he's choosing as his advisor. There are many discussions that go on in a transaction about objectives, about when to compromise, when to push, how to respond to a particular offer. You need to know that whoever you're choosing as your investment banker has your best interests at heart, not their own, not just trying to get any deal closed for a fee, but really understands what's the right thing for you as a business owner to get what's the right thing to achieve and that you trust is going to give you really good advice. So, that's number one. Number two, you want to make sure that you choose an advisor who has experience in businesses, your size, and for the most part, I think we're all talking about middle-market businesses that have been successful, that have grown over the years. But you wanted an advisor who focuses on businesses, your size. If you're middle market, you want a middle-market investment banker. And that investment banker should really understand the market. Understand what's typical for transactions of your type and one of the mistakes that business owners can make is if you choose a firm that specializes in a deal that's far too large. you're going to end up with a first-year MBA who is learning how to do deals on your nickel. So, you not only want a firm that has a great reputation. You want to know who's working for you.

Who's going to be on a team? How experienced they are? And understand that they have worked on transactions like yours. And have the sophistication of your transaction so that you really have a team that's up and running and knowledgeable from day

Jeffrey Feldberg: [00:23:03] Some terrific points there, Alan. And often when looking to select an investment banker, there's two different camps. In one camp are the specialists. They are industry specialists. They only do specific kinds of deals in that industry all day long. And the other camp are the generalists who go across different industries.

I'm wondering where you weigh in on for most business owners what is the better choice? The specialist, the generalist, and why that would be?

Alan Scharfstein: [00:23:32] I feel very strongly that the best investment banker in most cases is the generalist. And there are two real reasons for that. One is industry specialists tend to look internally at a very limited list of potential purchases. People they know. People, they're familiar with. Very often we find that the company that's willing to pay the highest price comes from outside the group of what I will call the low-hanging fruit. The second reason why I think people should be cautious about industry specialists is you as a seller are going to do one deal in all likelihood. You're selling your business. Once buyers are buying multiple businesses. There's often a little bit of a conflict that exists between the investment banker representing a seller, who's an industry specialist and the buyers because they want to do multiple deals with those buyers. They don't want to push too hard. They don't want to offend. They don't want to push the limits of a transaction. While if you have an investment banker who spans multiple industries, there's that real independence that you need to fight for you and get every dollar that you can in the transaction.

Jeffrey Feldberg: [00:24:52] And for our listeners, what you just heard that's not gold. That is platinum. Because you don't hear that a lot out there. And Alan is sharing that not all investment bankers are the same. They're not equal. And the investment bankers that have on speed dial the same group of buyers while that investment banker is not your friend.

In fact, their best friend is the buyer and not you. And so it's really seller beware, forget buyer beware. It's seller beware when it comes to looking for the right kind of investment banker. But Alan let's flip that. So, you very graciously have shared what to look for in an investment banker. But let me ask you the question as the investment banker.

What would make a business owner the world's best client for an investment banker? What would you love to see? If you could only make one call in the next few hours, it would be that one client, because they're doing all of these things that just makes it so much easier for you to get the deal done and get the best deal while you're at it.

What does that look like for you, the world's best investment banking client?

Alan Scharfstein: [00:25:54] World's best investment banking client is well-prepared for the transaction. They've done their homework in advance. They've done their due diligence on their own business. They have records that are accurate and provable. They understand where their business can go and what the opportunities are for the future of their business.

And most importantly, they trust us. They trust us to help guide them through the process. They listen carefully, they're smart, they understand, and they let us do our job. One of the biggest mistakes that business owners make is they get too engaged in the selling process.

And that has some really negative repercussions. One is they often take their eye off the ball. And the one thing that's really important to that business is to continue to focus on running their business and running it well during the sale process. The second thing I think is really important to recognize is that if we're doing our job right, as investment bankers we're fighting for the deal, we are dealing with the buyers.

We are dealing with multiple buyers. We are playing them off against each other. The business owner has got to live with these buyers after the deal very often. You can't afford to do the things that we do in terms of pushing for the right deal. But we really love our clients to do is to be there, be able to talk about their vision for the future.

Be able to talk about what the value of the combined businesses are. Be able to talk about how together the buyer and seller can really build something truly wonderful and have that discussion in a very strategic level, but stay out of the nitty-gritty of the transaction.

Jeffrey Feldberg: [00:27:44] What terrific advice, Alan, that you were just sharing with us today. And what you shared now is no exception. And what you've said is so true and most business owners don't realize this. When you're having that liquidity event at the start of it in diligence, you will have given as a business owner projection for your business.

And some of those projections are going to be during the liquidity event. And like you said, if a business owner is trying to orchestrate and run a liquidity event and be in the thick of things and be doing everything while their eye is off the ball is not on the business. Projections aren't going to be met and that's likely going to either kill the deal or significantly penalize the enterprise value.

So, business owners take note, listen to what Alan is saying. Prepare well in advance. Get out of the way, trust your investment banker who's going to do the right thing to get you the best deal. And that's oftentimes where you need to just sit back, listen, trust and know that the right thing is going to be happening.

Now Alan let's talk about the mindset and specifically mindset of the business owners. So, if you look back to some of the most successful business owners that you've represented, some of the best deals that you've done, what was the mindset of those business owners that differentiated them from everyone else?

Alan Scharfstein: [00:28:58] Business owners that are typically the most successful are those who have great people skills. Those are the business owners that people want to work for, that people are excited about. And they're typically great business owners. They're often great business buyers. In terms of helping to grow their business through acquisition.

And they are the type of people that everyone wants to be associated with. We had a client a few years ago where we did a series of, I believe, five acquisitions for this business, helping them grow their business. And this was just a great person who ran this business. I will tell you that we typically bought businesses for under-market value because people want it to work with them.

We had sellers, we were approaching, showing us offers from other buyers that were higher than ours, but still said they were willing to do a deal at our valuation level because they knew that they were associated with a great company and great people. So, I looked for the quality of the person and that is probably the greatest single attribute that you could look for in terms of a leader, in terms of someone who is going to be an ideal client.

Jeffrey Feldberg: [00:30:12] What a great story. And yet another example of the art of a liquidity event. That doesn't show up in a spreadsheet. What you're sharing here right now, in terms of how you communicate with people, the leadership skills, what your mindset is. But it does show up in the spreadsheet in a different way when it comes to either getting the right kind of deal or getting the best kind of enterprise value.

Alan, you're a successful investment banker. You've been doing this for some time. I know that you've done I'm going to say just under a thousand transactions over the years. That, that is a lot. When you look back over those successful transactions, are there two or three things that really stand out for you that made all the difference for business owners that were working with you in the liquidity event?

Alan Scharfstein: [00:30:55] I will tell you what makes a difference to be in those deals. And I will say that very often my clients, become my best friends after the deals are done. You're in a war together. You're dealing with some very complex issues. And the great thing is you meet incredible people doing what I do.

People who had the vision to build a business who had the nerve very often to walk away from the safety of a job. And those people are really unique individuals. So, these are people who I've gone skiing with, skydiving with, biking with, went through the Grand Canyon with. You really have the unique ability to find extraordinary people because the group of people who own businesses who are entrepreneurs are truly a unique group of people with really special characteristics.

Jeffrey Feldberg: [00:31:45] Those are wonderful stories that said, though that's as much a testament of you and for our listeners I really want you to think about this. Alan is talking about clients who have become friends years after the deal. And they're having that friendship. They're doing some wonderful things together.

And one of the things that I talk about at the Deep Wealth Experience when you're looking to not just an investment banker, but any advisor, here's the question that I think everyone, every business owner should be asking.

You're on an airplane. You're taking a trip with that advisor and the captain comes on over the PA system and he says, ladies and gentlemen, there's been a mechanical difficulty. We're not able to take off and we can't go back to the gate. We're going to have to sit here on the tarmac and you're there for 10 hours until this all gets resolved.

So, are you crawling, out of your skin in the first five minutes because you can't stand that person that's next to you? That advisor that's next to you. Or to those 10 hours just flashed by and before you know it, you're back in the air and on your way to your destination. And with Alan, it sounds like it's definitely the latter.

Someone where you have the chemistry you're talking, you're enjoying, and that's as much a part of building a successful liquidity event with your advisory team, then all the other parts that go along with that. I like to say when the team works, that's when the dream works and they go hand in hand with that.

Alan, speaking of the pandemic, as we record this interview, there's light at the end of the tunnel. And we're definitely getting there, but we're not quite there yet. And we've heard things like EBITDAC or EBITDA-C where the C is the Coronavirus. What are you seeing out there in terms of mergers and acquisitions as we go through this pandemic?

Alan Scharfstein: [00:33:26] I am truly amazed at the strength of the M&A market throughout this pandemic. We had a couple of slow months of March and April of last year, but since then, the velocity of transactions has been exceptional. With the exception of a couple of vertical markets, such as hospitality and transportation, which have been hit pretty badly.

But for most businesses, the transactions are still there. The buyers are still there. The valuation is still there. And I think if we look at the marketplace, what we're seeing is that there is continued activity from three basic buyer groups. We have the private equity firms who are in there, they've raised their trillions, they're trying to spend them.

And they are out there continuing to buy businesses very often acting as strategic buyers because they already have platforms in a particular business but acting as strategics. We have strategic buyers. Very often larger public companies and those companies are finding it very difficult often to grow organically.

So, they are looking at acquisitions as their key vehicle for growth. And finally, it's the non-US buyers, probably a third of our transactions are with buyers from outside the United States. And although we often look at our economy and question where we are and how things are going here. To those outside the United States, we are still the world's largest market.

We are the safest. We are the fastest growing. And for those buyers who don't have a foothold in the United States, they are anxious to buy US businesses. And the businesses that we're talking about, which are middle-market businesses are the businesses that they want because they can get into the US markets.

They can buy a foothold in here without betting the whole farm on it. And as a result of that, they find these mid-market businesses very attractive. And by the way, one of the reasons that many mid-market business owners like to sell to non-US buyers is because very often those buyers do a lot less tinkering with the business.

They will often leave management teams in place. They'll leave the professional teams in place and they will use that as a vehicle to jumpstart their business. And one quick war story for each Jeffrey, we were representing a business a few years ago, which was a really nice business. The owner had built it well.

We took a look at the industry and what multiples were being paid EBITDA and the like, and we knew that this was an industry with a five to six multiple. It was a conservative, the type of business. We did a global search for buyers and we've found a particular company, a French company, that found this business particularly attractive.

They had been trying to get into the US. They had failed on several occasions to enter the US on their own. And what they saw in this business was the fact that our client had very deep and long-standing relationships with its customers. And that French company felt that they could cross-sell their product into that customer base, but they needed those relationships.

So, while we looked at a business with a potential five to six multiple, which frankly would have been very pleasing for the owner of that business. When we really understood what the business is worth to that buyer. And we spent a lot of time trying to understand how the buyer is going to see the business, not just the way the seller is going to see it. We were convinced that the business was worth a lot more. That buyer ended up paying 13.5-time EBITDA for that business. More than twice the expected value. Now, did they overpay for it? I don't think so. They paid a lot. They paid far more than what anyone expected. But what they did get was they got exactly what they wanted.

They got an entree to the US market. They got immediate entree to that customer base. And in very quick order were able to sell significant additional product to the distribution system of this company.

Jeffrey Feldberg: [00:37:44] Alan, what a story. I'll say it again. What a story, because at so many levels, you check off the boxes. Take note. Value is an opinion. That's all, it is. Value as an opinion. It doesn't matter what your competition is doing. It doesn't matter what the industry is doing.

 In Alan's case, they just blew right past that they did over double that. And it goes back, Alan, to what you were saying earlier in our interview, where you never know, number one, where that buyer is going to come from. And then number two, what's really important to that buyer. And so as business owners, if you ever had any doubt, should I really pony up and pay the money for a professional, for an investment banker like Alan. This one-story, that's your answer. And it's an absolute yes, because again when you have the right professionals around you, the depth and the reach and the experience all begins to work to your advantage. So, Alan thank you so much for sharing that wonderful story.

And again, it's just goes to show that really beauty is in the eye of the beholder. And in this case, the French company found that incredible value to them, of being able to take their products and now have an immediate reach into a new market for them.

And is that something that you often do Alan with your clients in terms of training them and educating them in terms of stop thinking like a seller? Let's think like a buyer. Let's get inside the buyer's head of how they're viewing your company and what those sweet spots are?

Alan Scharfstein: [00:39:12] That's what we do in every deal. We take a look at the buyers. We try to understand where they are going to see the value. We try to monetize and model what that value is going to look like. And then we try to negotiate with them to capture as much of that as possible. Buyers will negotiate. Buyers typically do their own internal calculations as to what they can afford to pay, but what they're going to offer. If we're going to be insightful enough and smart enough to figure that out, we can often capture a significant additional value and combine that with the fact that you're running a competitive process. We're hopeful you have more than one buyer who's going to see some real value in this business.

That's what really gets the extraordinary values for a business owner.  Establishing value is an art form. You don't know always what that value is. The one thing you do want to know is that at the end of the day, you ran a process in a way that is going to allow you to maximize value.

You have the right advisors. They think of the business in the right way. You've run the full process. You know, when you go home and you take a look at your bank account with that wire that's appeared in your bank account, you know that you've done yourself, justice, you haven't left money on the table.

You know that you've done everything right to capture as much value in your business as you can.

Jeffrey Feldberg: [00:40:35] And Alan, I want to circle back to the auction because I know you're a big proponent of that. At Deep Wealth. We're a big proponent of that. And for the benefit of the listeners, can you explain to them what an auction is and why it really works?

Alan Scharfstein: [00:40:48] When we run a process, we run it in a very disciplined way. We understand how to keep the momentum of the process moving forward, which an auction does. We understand how to move the timing flow in the right way because time works in our favor if we're able to accelerate a process and we understand that buyers understand competition. Our buyers are really sophisticated.

They've gone through this process before, and they know when there's a competitive process going on if they want to be the ones who are going to get to the finish line, that they have to put their best foot forward, that they have to put as much money on the table as is possible for the right deal structure on the table.

Those are all critical elements to getting a deal done. The other thing that's truly important is to recognize that there are in this negotiation process there's a push there's a pull, there is the question of how do you capture not only the momentum of the process but the leverage and leverage shifts at different times in this process.

So, very often a business owner will take a look. They see a letter of intent, a letter of intent has a good number on top of it, and they say, that's a great deal. I'm willing to accept it. What they don't really understand is that the letter of intent is the beginning of the process, not the end. And there's a tremendous amount that's going to go on between that letter of intent and the close need to protect the business owner from the due diligence process. Not that the business owner has done anything wrong, but over my years of doing deals, Jeffrey said it's close to a thousand now, never have I had a situation where a buyer has said, wow, we've done due diligence on this business. It is so impressive. We would like to raise our offer.

Doesn't happen. Buyers use due diligence very often as a vehicle to reduce a lot. They start with the number in their letter of intent. And from that point, that's what can we discovered during due diligence that will allow us to chip away at that number? What we want to make sure of is by the time we commit to someone on a deal, by the time we give someone exclusivity that we have virtually every switch closed. We have every bit of due diligence done. So, that once an offer is on the table, we know that offer is sticking and we're not going to be subject to retraining or other types of tactics later in the game.

Jeffrey Feldberg: [00:43:20] So, true. We're competitive. Nobody likes to lose. Buyers have that competitive spirit. And from what you're saying Alan, and we've seen this ourselves at Deep Wealth, one buyer, if they know that they can get the edge over another buyer and clinch the deal well, an auction is going to help you do that, and that's going to help increase the enterprise value.

But let me ask you this, Alan, in the due diligence process, there's likely going to be for a large enough company a time when the future buyer wants to speak with clients, just to make sure that the company is the real deal and that they can check off that due diligence box.

So, from a timing and communications perspective, how should a business owner think about this and handle that very delicate situation? Where you don't want a client to know that you're selling the company, but the future buyer wants to speak to the client and even some employees or key employees. How do you deal with that?

Alan Scharfstein: [00:44:13] So, you deal with it very late in the process. That's going to be some of the very last things that happen. After due diligence. After financing. After we are certain that a deal is going to happen. That's number one. Number two, even then we want to be really cautious about how we handle that situation.

And there are lots of different techniques that we have. We recently had a transaction where what the buyer ended up doing at our insistence was a buyer wanted to speak to the key customers they wanted to speak to when we understood it, we understood their concerns. So, what we arranged to do was have a third party do what was termed the customer satisfaction survey. And the customer satisfaction survey went through various questions. We had scripted them all in advance. We had approved any question was going to be asked. And from that the buyer was able to glean what they needed to glean about the likelihood of the customer staying with the business, the customer's opinions on the business.

But I'll tell you one very interesting story that surrounds doing this type of due diligence. We were doing this very same due diligence on another business. And again, this was a very sophisticated buyer, private equity firms spending nine figures for a business. They wanted to do this.

And they went through these questions with the various customers of the business. And the questions went, something like can you tell me your opinion of this company? The opinion was terrific. We love doing business with them. Do you expect to continue? Yes, we do. Everything was going great in terms of the questions that this third-party firm was asking, and then they asked a little bit deeper.

They said that, can you talk a little bit about the competition in the space? And the customers said you know what? These guys are by far the best. We really don't like the competition. As a matter of fact, there are areas that the competition covers that this company doesn't cover it.

And boy, we wish they were there. So, the third-party firm dug a little deeper and said tell us about those products. And they describe the products which were very tangential to our client's products. And they basically asked the question if this company offered those products, would you buy it from. And the answer what the customer was in a nanosecond. The buyer was so excited by this because the buyer said not only are we buying this company, but we see this huge opportunity to grow its business within its existing customer base, simply by adding a few more products.

Our client took a look at it and he was ready to cry. He said you know what? If I had done this survey on my own two years ago, he said I would have a business that's worth 25% more than it's worth today. So, sometimes you learn a tremendous amount of the sale process that can be really helpful to you in terms of just running your business.

Jeffrey Feldberg: [00:46:58] Alan so true and you really are preaching to the choir. With our nine-step roadmap, we advocate that all the preparation must be done even before a business owner would hire someone like yourself, Alan, a terrific investment banker. That business owner is coming to you with the nine steps of preparation done.

Perhaps they've already done those surveys. They've done a deep dive on the business and in the industry, and they're getting all those insights. And just a great example of why preparation that's really where enterprise value comes from. It's not so much the process as it is the preparation heading into the process, but for our listeners, I hope you gleaned two important takeaways.

Number one, again, as business owners, if you're trying to do this on your own, in those difficult situations, would you have thought of bringing in a third party to navigate through those difficult buyer questions, or would you perhaps have let that buyer have access to your customers and who knows where that was going to go.

So, just another reason of why your advisory team, why the right investment banker is going to save the deal, save the business, get you that higher enterprise value, and really make a difference at the end of the day.

And Alan, thank you so much for sharing those insights and that wisdom. So, Alan, as we begin to wrap things up here, there's my favorite question of the podcast interview.

And I ask this of every guest and here's the question. I'd like you to think about the movie Back to the Future. And in the movie, you have the DeLorean car, which can go back in time to any point in time of your choosing. So, Alan imagine tomorrow morning, you look out your window and that DeLorean car is sitting right outside, waiting for you.

The door is open and Alan you can go back at any point in your lifetime. Alan, as a young child or the teenager or the young adult, whatever it may be. What would you be telling your younger self in terms of life lessons or wisdom or lessons learned or don't do this, or do that? What would that be for you?

Alan Scharfstein: [00:48:51] What I really wish I could do is take that DeLorean back to when I started back. Because when I started back, I was a one-person operation operating in the basement of my house with a crying baby upstairs and trying to figure out whether it really wasn't business here, whether you really could make money doing really quality, mid-market mergers, and acquisitions. Over the last number of years and nearly a thousand transactions, you learn a tremendous amount. You see so many different things, so many different businesses. I wish back then I had all the knowledge experience that I have today because I would have been better at what I did back then. But can't go back in time.

So, all I can say is that I feel pretty lucky today that I have had this experience that I've had. The experience of being a middle-market investment banker just allows you to see so many businesses and see so many entrepreneurs who have created valuable spaces and industries that you could never imagine. It's a testament to our free enterprise system. The way we have had so many entrepreneurs who have built so many unique businesses. And I feel really lucky that I've had a chance to help them monetize their life's work.

And for many business owners give them the opportunity to truly enjoy the fruits of their labor, to have the money, to have the liquidity, to do everything we want it to do.

Jeffrey Feldberg: [00:50:18] Alan. I not only love that story, but I love the passion that you're sharing with us right now in terms of what you do, how you do it, where it's taking you. And for our listeners, I hope you heard what I heard because this is from an incredibly successful individual, a business owner, like all of us, who's passionate about helping other people.

And after all, isn't that what business is all about? Where we solve painful problems for people. And we do it well enough that we let enough people get what they want. And eventually, we get what we want. And Alan, the passion of what you do the love for what you do just came through so loud and clear in that story.

And thank you for sharing that.

I'm going to put this in the show notes, Alan, if somebody would like to get in touch with you, where's the best place online for them to find you.

Alan Scharfstein: [00:51:02] They can reach me either through our website. It's dakgroup[dot]com DAKGroup[dot]com. Or you can email me at ascharfstein[at]dakgroup[dot]com.

Jeffrey Feldberg: [00:51:20] Alan, thank you so much. Thank you for taking part of your day and sharing it with us. And as we close out this interview, please stay healthy and safe. Thank you.

Alan Scharfstein: [00:51:29] Thank you, Jeffrey. It's been a pleasure being with you. I appreciate the invitation to join you.

Jeffrey Feldberg: [00:51:34] If you're not on my email list, you'll want to be. Sign up at www.deepwealth.com/podcast. And if you enjoyed this episode of the Sell My Business podcast, please leave a review on Apple Podcasts. Reviews, help me reach new listeners, grow the show and continue to create content that you'll enjoy. 

As we close out this episode, a heartfelt thank you for your time. And as always, please stay healthy and safe.