Today's podcat features Kevin Short. Kevin is the CEO of Clayton Capital Partners, a mergers and acquisition firm based in Saint Louis, Missouri.
Kevin is an advocate of what he calls The Outrageous Sale. This is where a seller is able to sell their business for a value that is far higher than other companies in their industry.
After listening to this podcast you'll learn:
- What an outrageous sale is.
- How you can position your company to take advantage of an outrageous sale.
- What to do if your business is not one that qualifies for an outrageous sale.
- If you're an advisor what you should be talking with your clients about to get them ready for the outrageous sale.
Narrator: Welcome to the Sustainable Business Radio Show on podcast where you'll learn not only how to create a sustainable business but you’ll also learn the secrets of creating extraordinary value within your business and your life. The Sustainable Business is all about creating great outcomes.
Here’s your host, certified financial planner, student, entrepreneur and private business expert, Josh Patrick.
Josh: Today’s podcast features Kevin Short from Clayton Capital Partners, a mergers and acquisitions firm that specialize in what Kevin calls ‘the Outrageous Deal’. This is where a company is able to be sold for several times what typical businesses are sold for within their market niche. Kevin is going to speak with us today about what it takes to create that outrageous deal and what makes these companies different than other companies who get what the market averages are. Let’s get right to it and find out whether your company might qualify to be one who gets an outrageous deal.
Hi Kevin, how are you today?
Kevin: Great, Josh. How are you?
Josh: Good. Thanks so much for joining us this morning. Let’s start of, what do you mean by selling a business for an outrageous price?
Kevin: We define that as selling a business for twice the average multiple for a particular industry. If you're in the metal fabrication business and they sell for a four multiple of the profit of the company, as generally what happens in the industry, so an outrageous price would be selling for an eight multiple of that same profit.
Josh: In other words, you're trying to just figure out how you can sell a business for twice what a normal business in that market would sell for?
Josh: So, if you're selling your business, does timing have something to do with this?
Kevin: Well, it depends on the type of timing you're thinking of. Timing the economy, timing the M&A markets have a little bit to do with it that but there’s four pillars to an outrageous deal because the question I often get is, “Well, why wouldn’t you want to do this? Why doesn’t everybody sell for twice the average multiple?” Well, first of all, it wouldn’t be the average anymore.
It’s not as easy as the title might sound. There are only certain types of businesses that qualify for it. So, what are the basic foundations? We call them pillars. One is, the company has to be doing something that’s pretty unique, that has a significant competitive advantage. That’s important. You have to be making products cheaper or you have to have a customer base or, you know, like the article you wrote about in the New York Times - that company had done a great job in a very plain Jane business. They’ve done a great job of locking up a significant geography that the other players wanted.
So, (1) you’ve got to have a competitive advantage that’s hopefully scalable or valuable to the right buyers. (2) There have to be buyers in your industry that are billion-dollar companies, that are acquisitive – that are looking to buy for one reason or another. I'll give you an example. We're doing a deal right now for a company in an industry where they are the largest player in the business and they only do about $20 million a year in sales. So, they don’t have an opportunity to get an outrageous price because there is no billion-dollar player in their particular segment.
Josh: So, let’s just stop there for one second if we can. Why does a billion-dollar business allow you to get an outrageous price? What’s different between them and a $50-million business that may buy me?
Kevin: Okay. So, there’s a fundamental difference – the $50-million, it’s all about financing. The $50-million business might be able to pick up some significant synergies of buying your $50-million dollar business but more than likely they're going to have to go to the bank or to their investors to fund the acquisition. And when they explain to the bank or to their investors that they're going to be paying twice the average industry multiple, the bank and the investors won't get that and they’ll walk away from the deal.
But if we're selling to Tyco, a multibillion-dollar, multinational firm, and they want to spend $40 million for something that’s really worth 2. They don’t have to justify to anybody other than the internal people. And so, they’ve justified it based on the synergies that they have speculated on and built their financial models around.
One of the ways we learned, a good example is what got me into writing this book and what was I saying? I sold a business, when we did our auction process, when we asked for bids, one company bid at 8 multiple, everybody else bid 4 multiples – five of them and we had one outlier. We closed the deal with the buyer who willing to pay eight times. This was 15 years ago. It never made sense to me why they were willing to offer so much. Big company, smart guys – the whole bid. So this wasn’t a mistake. When I ran into the president of that buyer, six months later, and I asked him, “How’s it going with the deal?” He said, “Well, you know, we got rid of the engine.” He said, “We merged their operations in with our operations. We put a lot of our products down through their distribution channels and we put a lot of their products down through our channels. We have made our purchase price back in six months.”
So that woke me up. I was embarrassed frankly because I missed that completely. Luckily, we still got the eight multiple but the truth to it is we didn’t get an 8 multiple. We did, if you look back at the previous year. But we got about half of one multiple based on what that company’s making six months later. So, that was the beginning. That [inaudible 00:05:24] as to how do we figure out what a buyer’s going to do with the business because they don’t tell you and how do we turn that into a financial model as to what it potentially can be worth.
In their case, they didn’t care that they paid twice as much. They were funding it internally so they didn’t have to convince anybody else and they knew based on their plan that they would make that money back quickly. That’s what my practice is today is helping sellers see if they qualify, see if they have four pillars. And then once they do, then launch in a plan to prepare and [inaudible 00:05:57] and get to the table that buyer that can pay the outrageous price.
Josh: We've covered pillar 1 and pillar 2, what would 3 and 4 be?
Kevin: So, pillar 3, one of the more important ones. They're all important independently. Pillar 3 is, “Is the owner built for this?” Is the owner willing to sit at this high stakes poker game and bet the farm like you see it at a Vegas Texas Hold‘em Tournament because that’s in effect what they're going to have to be doing at some point. Buyers aren’t going to pay this kind of a price without putting the sellers through the wringer to make sure that they can't get it for cheaper. So, the seller and I have to assess whether they're built for this. That’s pillar 3, the active ability or the stomach lining to ride this out.
Josh: So, in other words, Pillar 3 is “if the seller is unable to see the deal disintegrate in front of their eyes or at least appear to disintegrate in front of their eyes, you're never going to be able to sit there and talk to a potential buyer with a straight face about why they're not going to sell to them.”
Kevin: The psychologists call it puddling out. If you can't handle sitting in a negotiation without puddling out of your chair, then you shouldn’t get into that. And so, I've got to assess that. And if I've got a client who can't handle that, then we've got to make sure we keep them off of the front line or maybe we don’t do it all.
Josh: How do you assess it? Because all buyers are going to tell you that, “Off course I can do that.”
Kevin: Actually they don’t.
Josh: Oh really?
Kevin: The clients that I'm dealing with—absolutely. These are generally people that are self-aware. They’ve been in business for themselves for a long time - the blow hard that you might be describing, I get it. And so, a blow hard might be okay if we could manage that bravado in a limited fashion. But the guys that know themselves that they're just regular folks that, you know, the millionaire next door personality that we all read about, they’ll say, “You know what? I couldn’t do this. This doesn’t feel right for me.” So, we've got to have our conversation about that. As the deal unfolds, there will be opportunities to see this in action and I may have to adjust the strategy.
Josh: It certainly makes sense to me. So, what would pillar 4 be?
Kevin: Pillar 4 is, even if you have the first three pillars—first of all, the fourth pillar is about your advisors. I'd like to think that there’s an exit planner, financial advisor in the mix that understands outrageous price. You’ve got to have an attorney who understands it and you’ve got to have an investment banker that can launch this and manage the process. If the attorney and the investment banker don’t – if they're not in perfect sync then it won't work.
I've had attorneys say to me, “What do you mean you're going to get an eight multiple for this business? Nobody’s going to pay that” and I tried to explain to them, “Here’s the reason why.” But if they're cynical about it and that comes through to the buyer’s attorney when they're working with them one on one, it’ll kill the deal. The buyer will get confident that they get the deal cheaper because of the signals or the body language or the non-verbals they're getting from the attorney. So, the fourth is the advisory team.
Josh: So, when you talk to somebody about representing them in selling their business, do you like to bring your own team into the fold? Or do you first try to work with their advisors?
Kevin: Well, I work with their advisors. I worry about the attorney. I would prefer to work with their advisors because they will be trusted. And when you do an M&A with entrepreneurs, they need to have trusted advisors around them because they haven’t done this before. So, introducing them to a brand new team is a little bit difficult because there’s not going to be any experience with them. So I would prefer to use their own team.
The difficulty is where you get assigned an attorney who knows how to do an outrageous deal or who is good at M&A in general because often they're not. So generally, it’s based on M&A experience for the attorney and whether or not they do outrageous price work, which they don’t more than likely. The question is, “Are they willing to step back and let us handle that part of the transaction - the actual selling and negotiating the terms?”
Josh: So the other advisors have to be able to keep their egos in check, is what you're saying?
Kevin: Yeah. Everybody does because egos blow up deals more than anything.
Josh: That’s an interesting thought. I mean, I can see why that would happen. That makes a lot of sense to me. Obviously, every business is not capable of getting an outrageous price because you’ve got these four pillars or four activities that owners have to create. What is the most important element in selling that we can get higher than expected multiples?
Kevin: Start with the first one. You’ve got to be doing something different. Most businesses are. I start from the position that if you're not doing something a little different you probably don’t have a business. A little often, my clients don’t know what they do different. If you say, “Why do you have the customers you have? Why do you enjoy the margins that you make?” They often will say, “Well, they like us. We have good customer service people. We have good service.” Maybe that’s simple but good customer service people and good service is hard to come by today. It’s very hard.
We have sold people based on their culture. They get an outrageous price based on their culture because the buyer wanted them to inject that culture into their business. So, it can be something as ambiguous as culture can get you an outrageous price. And often, the people who are in the middle of that culture that created it don’t realize it’s different because they don’t have any comparison.
Josh: So for our listeners today, what should they be doing? Or how should they be looking at their business to figure out if they even qualify for an outrageous price? And more importantly, if they don’t, what should they be doing to make sure they get an outrageous price?
Kevin: Good question. So the book addresses that because the book talks about what an outrageous price is. And then it goes into “how do you create the potential for that to happen?” So we have some checklists and some analytics for them to walk through. They can also call me, I'm not going to charge them, to ask them some questions and try to dig into “Does it have this potential?”
They need to begin to just think about if they have competitive advantages. And if they don’t, can they create them? Should they buy another location in a different geography that would be important to the buyer? Should they take on different vendors, different products to sell? Do they need to hire more salespeople? There’s a variety of things that I will see on the other end of a deal that is valuable to a buyer that an owner doesn’t necessarily know because they don’t get into those conversations.
Some of it is fundamental. The exit planners will help them get their act together, get the books in order, get all the legal issues in order. Some of it is fundamental. But the larger issues that are more ambiguous, you need some help thinking about “How do you create value that a buyer will pay for?” because one competitive advantage may be valuable to you. You may make more money but a buyer may not care.
Josh: That could very possibly be. So, what you're saying is, I mean, you probably should be thinking about what you're competitive advantage is way before you decide you want to sell your business?
Kevin: Correct. And try to polish it, improve it, and expand it.
Josh: And it might even be a good idea to find somebody to help you think about that?
Kevin: Yup, absolutely. And eventually, once you find it, begin to build your team of advisors. Hopefully, a year or two before you decide you want to go to market.
Josh: It seems to make sense to me that if you want to sell your business for an outrageous price, you need to educate your team what an outrageous price is and what the strategy is going to be. And I would think that would take a little bit of time to get people who are not familiar with this to say, first (a) Can we believe it? and (b) What role do I need to play?
Kevin: Yeah. Time is important. Sometimes, we’ll build a strategy that we don’t know if it’s going to work or not. We built a strategy for a company one time and Tyco was the target. Tyco was the only entity in the world that would care about what this company did and would be willing and able to pay the price. You can't just walk in the door and say, “Guess what, I'm going to sell you this business for twice what it’s worth.” It took us two years to prepare them – to bait the hook and begin to pull them into the boat. And you’ve got be really patient and careful with that. That’s to see if they'll even react and bite. So you need time, sometimes, to execute the strategy.
Josh: Kevin, we have a little bit more than one minute, how would someone buy your book? And more importantly, how would someone find you if they have some questions they'd like to talk with you about?
Josh: So, again, the name of the book is Sell Your Business for an Outrageous Price.
We've been speaking with Kevin Short. I can tell you that I've had several conversations with Kevin over multiple years. If you're interested in selling your business to a third party, he’s a great guy for you to talk to.
Kevin, thanks so much for your time today. I really appreciate it. I hope we have a chance to speak soon.
Kevin: Absolutely. Thanks, Josh. I enjoyed it.
Josh: You’ve been listening to Sustainable Business Podcast where we talk about what you need to do with your business if it was to be here 100 years from now. If you like what you heard and want more information, please contact me at 802‑846‑1264 ext 2 or visit us on our website at www.stage2solution.com or you can send me an e-mail at [email protected].
This is Josh Patrick. Thanks for listening. I hope to see you soon for another edition of The Sustainable Business.