Touchstone Talks: Ep 2 - Financial Preparations Impact Business Value

Woodworking is fun and guitar playing
is, of course, one of my.

Passions.
Yeah, yeah, it's a passion hobby.

You know, started when I was 12

and that's, in lots of bands
that, you know, I've been in many, many

when I was younger and teenager in my 20s
and all that. But,

you don't have time for it after a while.

Like, life gets in the way.

It does. Right?

You have kids, you have business,
you do all that.

So I. I don't play that often anymore.

Okay. Probably once.

If I pick it up once a week, I'm lucky.

I'm kind of, you know, at this point.

For those of you that are just joining
us, we're touched on talks

and we are meeting
with, partner Steve Pappas.

He gave me a.

Who? Yeah, is an woodworking

enthusiastic and has just shared with us,
some life lessons.

So, we're going to continue to, to talk

with him and his role at touchstone and,
how he works with owners.

Thanks. Thanks, I appreciate it.

You know,
one of the things I was thinking of today

as we were going to get together
was, you know, what is it

that, you know, that's important to me
in working with a client.

And one of the things that's important
is absolutely, kind of brutal honesty.

Honesty is important because,

you don't want to mislead a client with,

kind of giving them
what they want to hear.

That's, I think, a cardinal rule
that that that I live by.

And I think we live by at touchstone.

So if you have a client
that that they're either

let's say they're not ready to sell
or there's a lot of problems or,

or in many cases where, you know,
we would recommend, don't,

you know, just don't do it
and wait for, for a year or 2 or 5 years

or maybe whatever the situation is
and that that honesty,

I think is a fundamental cornerstone
of what

at least what I've learned and what Mike
Cammarata, who who founded touchstone,

he taught me, you know, he
he taught me when I joined touchstone

that it's extremely important
to have a high level

of integrity and professionalism
when it comes to working with clients.

And that goes a long way, even if
it is not in, you know, our best interest.

Often
it is not in our best interest. Right?

So many times
you and I have had clients where,

you know, we could have recommended acts,
something to do

which would have benefited us,
but that's never the right thing to do.

So that's important.

And also another thing too, is in the M&A
world, there are a lot of,

you know, we'll call it
not so savvy M&A people out there.

I saw a lot of that when I was
in the business brokerage world.

Business brokerage is really kind

of the level below the M&A,
where it for love.

Stop just a second.

And let's define our terms a little bit.

Because I don't know that

all of our listeners know the difference
between business brokerage and M&A.

Business brokerage is smaller,
more mainstream.

Main Street, it's all Main Street.

So I did I was a business broker
when I first got into this whole industry.

I was a business broker
first for ten years.

And and it's completely different.

It's the equivalent
to a residential real estate

person versus
a commercial real estate person.

That's, that's it's even more than that.

You're dealing with, you know,
think about walking down Main Street.

You have restaurants,
you have dry cleaners, you have pizzerias,

you have clothing stores,
you have you have a hardware store.

All of those types of businesses,
they're great businesses.

They're run by an individual typically.

And they the owner takes pride in it.

But but it is only being sold.

Typically the buyer is going to be an
individual, in most cases, 99% of the time

you're not dealing with corporations,
you're dealing with an individual buyer

who was essentially buying themselves
a career, buying themselves a job.

That whole world,
I did that for ten years.

And it's it's
it's like guerrilla warfare in a way.

You're in the trenches,
you realize how hard these people work.

They're survivalists.

They will do whatever it takes to
to survive and to make a profit.

The downside, is after

ten years of doing that,
you just get tired of,

you know, let's say, to put it mildly,

you know, their accounting practices
aren't the best.

Okay.

Many cases I would walk into,
business owner, a liquor store,

for example, or a wine shop
or would be, you know, whatever.

It doesn't matter.

And when you talk to them
about their financial records,

many cases,
they're like, hey, there's a box.

So there's a shoe box, and there it is.

There's all my receipts in there and that,
and that's it.

They meet with their accountant
once a year.

To have a tax return.

Tax return.

That's it. There's no there's many cases.

There's not even QuickBooks
or any type of, you know, counting thing.

It's some use sometimes they just use
an old fashioned one.

Right. System, which is ledger.

Ledger, which is checks. And

and again,

don't get me wrong, these are wonderful
people that have excellent.

They've put their kids through college.

They've done all the right things.

But it's a different world.

Okay.

And,
that's different than the we'll call it

the lower middle market M&A,
the lower middle market or business.

There's typically with $10 million
or more, 10 to 100 million

more like manufacturing companies
to distributors, B2B services

companies that really have things like,
a management team,

they might have a CFO in many cases,
or a controller,

a VP of sales.

If the owner smart, they've kind of
pull themselves out of the, you know,

maybe out of the day to day or certainly
out of a sales role in the company.

That's the world that I live in.

We live in that, that touchstone.

That so the two are are, important.

And there are many people

that are business brokers
that do an do a great job.

But, you know, I reached a point
in my life that I got tired of doing that.

And I really wanted to elevate into,
you know, larger transactions

and deal with companies
that really had a legitimate

accounting department and a legitimate,
you know, accounting firm

that would do financial statements
for them and all the normal things.

And that was kind of
a breath of fresh air.

Okay. Is that what attracted you to M&A?

Yeah, that's what attracted me
from being in a main street

to, I'll say, the M&A world.

Prior to that, just so people know and,
you know, I've told you this before,

but I came from the tech industry,
so I went, you know,

you know, I don't I'm
not the M&A advisor, M&A person that.

Has you're not a finance. Pro.

I'm not a yeah,
I don't have the MBA. Right. Okay.

I didn't go to Harvard.

Yale, and with a finance, major
then then get the MBA.

I want a completely different track.

I went to a technical high school,

the same technical high school that trains
plumbers, electricians and all that.

And I took electronics at the time.

And then I went off to to,
to get an electrical engineering degree.

Once I did that, went into the computer
industry, the computer industry back then.

This is in the 80s. This is

this is mainframe stuff.

This is not PCs.

The PC wasn't even
in, you know, invented yet.

It wasn't even been introduced
till early in, in the 80s by IBM.

And so I was a technician,
I installed systems, I troubleshoot

with them,
and I was in the whole industry for,

you know, God, probably 25 years.

Eventually I just got tired of it
and I wanted something different.

I knew someone that was a business broker
and I said, what is that about?

Like, what do you do?

I don't even know it even existed.
Like, do you?

Yeah. Do people do that?

And he said, yeah,
this is how it works and blah, blah blah.

So I so I just quit
my job and I jumped in with both feet.

And I was with this one individual
as partnership with him

for a couple of years.
And I went on my own.

But it is what's

really rewarding

in the whole M&A world to me

is we actually change people's lives.

I believe we we do their
they are ready for the next phase.

And that's very satisfying to me.

You know, as a salesperson in the computer
industry.

Yeah.

You know, you sell software,
you sell hardware.

You know, you're not changing anyone's
life.

This is this is satisfying.

Okay.

So helping with the exit is
is your favorite part.

It is okay.

It's my favorite part
because you have someone who is

taken over from a company
that was maybe built by,

started by their grandfather,
and then their father took over.

And now they are, now they are working

hard, to keep it going, to grow. It.

And then they reach a point in their life
where they have to make a decision.

Usually it's because of age.

They're reaching a point where
now they either transfer

the company to their their kids

and in most in many cases,
there's the kids don't want the business.

And that's becoming
a popular kind of common theme.

Now, a lot of the clients that come to us,
come to me,

you know, the conversation is my kids are,
you know, great.

We love them, but they're doctors.

Their lawyers are doing other things.

They don't want dad's aerospace,

you know, precision
marry manufacturing company.

So it's a it's a bitter pill
to swallow for them.

It's emotional.

But at the same time
we can do something for them to,

you know, kind of give them the value
they deserve

for building their business
and continuing that legacy for many years.

And, and I
that makes me feel really good.

Yeah. We do.
We definitely do build legacy.

You know, the companies grow
to a certain level that they're at now.

And the ideal exit is one
that lets that company continue to grow.

So that the, the founder and I mean,
we've got one that's three generations.

Yeah. You know, that's yeah.

That's and it's highly emotional,
I mean, and rightfully so.

And, and you know, a lot of lot of people
ask me, you know, oh,

you know, is the owner just interested
in, you know, the highest price

or they get the most money and,
you know, maybe in some cases, yes.

But I say the majority of the time
that's not the case.

I am surprised about the number of times

that the client,
when faced with all the offers,

picks the second highest.

Yeah. Yeah.
So because they liked them better. Yeah.

Like better they,

they felt more comfortable
turning their business over to them.

Yeah.

They thought they'd be better
to protect their employees.

Yeah.
Because their employees are their family.

And and we hear that often. Right.

So the employer.

These are my these are my

this is my family, my
you know, whether it's my management team

and then all the other employees
that are in, in on the shop floor

or whatever
they want to take care of them.

And that's an important thing.

They don't want in many cases,
not all cases, but in many cases,

they don't want the buyer to come
in, you know, like I'll mention, you know,

private equity, for example,
we sell, you know, quite a few businesses

to private equity.

But as long as it's negotiated upfront,
and they know the requirements

of our client,
the seller, the owner, you know,

they don't want to violate the,

you know, the, the,
the wants of, of our, of the owner.

They don't want to violate the fact
that the culture of the business is a

certain way,
and that matching that culture

is a big part of what in the old might.

Be the hardest part of diligence.

It is, right?

How do you make sure
the culture of one company

fits into the culture of the other?

And a lot has to do with calling,
you know, even calling and talking

to previous acquisitions
that that a PR firm, for example, or,

you know, a strategic company,
you know, if they're in a growth mode,

they're buying three or 4
or 5 companies a year and they're growing.

And one of the things
that it's important for, you know, the

the founder or the business owners
that's looking to exit

is to have conversations
with people that they are that

that the buyer
has already acquired in the past.

How did it go? How did you feel?

Did they, you know, screw you in any way?

Did they take care of you?

Did they take care of your people?

Those are really important things.

So it is multifaceted.

Is is, as you said,
it is not the highest price.

I've had many management meetings
where, you know, we're down to the top

4 or 5, potential buyers,

and we set the meetings up
so they can meet the owner and, and so on.

And, and we encourage them.

It's a two way street.

So they have to the, you know, the, the,
the buyer is going to come in and say,

hey, here's

all the great things we could do for you
and for your people, and here's why.

We're a perfect fit.

And then they

then the owners will get a chance
to ask questions to the potential choir.

And I've had situations where we've walked
out of that meeting and they've said.

No, not selling to.

Them, never selling to them.

I don't care what they offer
or not doing it.

And that proves me, you know
something to me that proves there's

some integrity with, you know, with
our client, it's not just about the money.

And they just, you know,
they want to feel that these people not,

you know, are going to be taken care of.

So that's a that's a big part of
I think the process.

Yeah.

The only time I've seen an owner pick
a buyer based on dollar

amount on like singly,
was one of the hardest to get closed.

Yeah.

Because the they were only motivated
by the dollars and cents.

Yeah.

And every negotiation
was more and more painful.

Yeah.

And you know and I
and I think us in our process

in my in on process,
it's really important for a client

to understand
all the different steps along the way.

And it's first of all, it's never easy.

Okay?

It's you know,
that's a fact that I'll tell everybody

it's never easy
at the end of the whole process,

they're usually going to say,
hey, I'd love that. Let's do it again.

They're never
you know. They're never saying. That.

They're never saying.

They're going to say, thank God it's over.
You know, say thank God it's over.

Especially when you get to the point of
Loi and then you have to get to a closing.

And there's all that due diligence
and all the things that are now,

you know, the buyer wants to see,
you know, triplicate of everything

under a microscope.

But if we've done our job properly
and if the buyer, I mean,

the seller is, is operating a legit
well oiled machine, you know, it's

there's a lot to it, but usually

you don't really hopefully uncover
any surprises.

You know, that's that's,
you know, the thing that can hurt a deal

at the end is if we didn't disclose
something or the seller client

didn't disclose something, that's that's
usually a the kiss of death in a deal.

Yeah, yeah.

We, we say between us go ugly early.

Or ugly early.

Ugly early.

So if there's a problem and you know it
and the business operates fine

with it, yeah.

You have to.

Be open and honest right at the beginning,
because.

And plus you eliminate all the people
that just can't stomach

that they're out of
they're already self out of the deal.

Right. Right. Okay. Self-selected out.

So you don't have to worry.

And you've kind of you've,
you've you've gone

and solve
that one hurdle right out of the gate.

And then from that point on now
you're dealing with,

you know, we'll call it more serious
buyers because, you know,

they already know the situation,
whatever it is, you know, like, gee,

you know,
maybe our customer concentration is X or,

you know, one example,
another good example that I've learned

is some, you know, precision
manufacturing companies for, for example,

they will
they also let's say one of their clients

or customers might be in the firearm
business, for example.

Okay.

And, and and there's a lot of PE firms
that are like dead set against that.

They will never.

And this part, it's in their bylaws
that all their investors will say,

I raised money.

They've raised. Money
on not supporting certain things.

Certain things. And that's fine.
That's they were that's their fund.

Well, I get to decide it. Right.
But you have to.

But the point is you said upfront, right.

Why bother getting down the path of weeks
later or months

later saying, oh, by the way,
this and now you've wasted all that time.

You want to go ugly early.
These are things.

Or if they've had financial hiccups
in the past.

You know, people will overlook it.

But it it limit like it just shapes
who your right buyer is.

That's right.

The other thing that always astonished me
is you can put out the same company

with the same numbers,
and you get feedback that clashes.

Clashes so widely.

So, you know, two small,
two big wrong industry.

Right. Love the industry,
hate the product. Right.

Like that.

Everybody's
coming from their own perspective.

And that and that that ties into,
you know, the three market place

principles that my Cammarata taught me
when when I first joined touchstone,

you know, dozen years ago now,
you know, basically rule number one,

each acquire,
each potential buyer will offer

and she value completely different
for the same identical business, right.

Same financials, just like you said,
same financials, same

product line, same employee,
same services.

Some will see value there.

Some walk okay.

And if and if they do make offers
eventually

they'll be all over the place because
the beauty is in the eye of the beholder.

Right. So that's how that was.

Principle number two,
the one with the most opportunity

will typically be your best buyer.

And that seems, common sense.

But it's important to understand
there are ones

that see opportunity
beyond the dollars and cents.

For example,
they might need the technology.

They might need the,
employees, the people.

They might need the geographic location.

These are things that not.
They might want the customer.

They want just just the customer's right.

Because maybe they make products

that they can cross-sell
into this whole whole other market.

Okay.

And then the third principle that's
really, I believe, you know, critical

in the way we bring a business to market

is that you'll never get the highest offer

from an acquirer
unless they know that there's competition.

That's that's a fundamental difference.

And that's what the difference is doing.

Let's say Main Street
and the M&A Main Street.

You typically put a price tag right.

So I have it right I have a restaurant
I'm asking you know $800,000

whether it's a list price,
you know ask and an asking price.

And then you get offers from there.

In in our world, the fact that
we don't put a price is really critical.

And the fact that we put buyers
in competition with one another,

that's so critical and a lot of business
owners go, why do you do that? Why?

Why not just ask?

Because if you ask, well, just use
random numbers.

You asked $10 million.

Now you've set the high watermark.

No one's ever going to go up.

And say they could have come in at ten,
510 or.

1111. We've been surprised, right?
I've been surprised.

We've had situations

where the value range might be 9 to 10
and we get $14 million offers.

Well, and it is back to those three things
that that create value.

They either wanted the location,

they wanted the customers,
they wanted the industry.

It added the opportunity
and value to them.

Yeah.

Or they looked at our numbers and said,

I see 100 ways to cut costs, right?

A synergistic buyer well will reduce
those expenses in many cases.

They might have already have a CFO
might already have, you know, accounting

department, all those things are ways
that they could trim and

and and make the EBITDA make the profit
much, you know, much higher.

And then also knowing there's competitors
because you know.

What he likes to lose.
No one no one likes to.

Now, once they've committed to wanting it,

then the fact that they have a competitor
or two that they know is kind of

in the market, you know, they're going
to want to sharpen their pencil.

And that makes a big difference.

I think definitely, definitely.

I want to touch on exit advantage.

Exit advantage
is something that touchstone does.

That's a little unique. Yeah.

So tell us about exit advantage.

So exit advantage is a program
that we've developed.

And it came about because

many of the clients coming to us
were coming to us.

Kind of at the
when they're ready to, to sell.

So, so a typical,
you know, call with an owner

might be, hey,
I've owned this business for 25 years.

I'm now 68 years old or I'm 70.

I want to sell.

And I'd like to get started immediately.

And I want to close
by the end of the year.

That's a very common conversation.

Our typical process is 9 to 12 months,
from soup to nuts to do everything.

And that's if everything goes right.

And and what I have noticed

is that if they only had come to us a year
before or two years or three years,

there are many things that they could
have done that were not complicated,

but they could have done
to improve the value of their business.

And they didn't do that.

So Exit Advantage is developed
and designed specifically

for business owners that aren't ready now.

They do not want to sell now,

but they have an intention to sell,
we'll say, the next 2 to 5 years.

Now it could be longer,
could be ten years.

But it doesn't matter.

But they're not ready today.

So my my concept or our concept is use

this valuable time
to prepare your business for an exit.

Because to maximize the value,
there are many things that you can do.

There are there are, you know,
we analyze over ten different

functional areas of the company,
not only financials.

What's operational management
teams report financial reporting,

you know, products and service.
You name it.

There's it's there's there's an assessment
that's done in all key areas.

And the reason is to identify areas
of weakness that need improving okay.

And if those areas could be identified
you know let's say five years early,

there's a valuable
time that that shouldn't be wasted

to improve that company.

Because in the end,

even if you never sell,
you have a better company, right?

Right.
What's the there's no downside, right?

And the thing is, you have to have,
you know, an ownership who feels

and recognizes that there are things
that they can improve in their business.

A lot of others
don't want to think about that.

Their their nose is on the grindstone,
and they're just trying to do the best

they can.

But if we could come in from the outside
and taking a perspective

from an acquirer's perspective,
because we know,

we know what acquirers look for, right?

We deal with them
every day, hundreds of them.

And if they could prepare their business,
then at the end when they do decide

if they decide to sell

and when they decide,
they have a much more valuable company.

And that's the basics.

We won't have to go ugly early.

We we don't have that right.
We we fix the ugliness. Right?

So if they have a customer concentration
that needs to be resolved,

or if they have financial, books
that are just messed up,

they need someone,
an outside professional, to help.

There are many times that we're going to,
you know, we're going to see what we get

at the end.

And, you know, if they don't do
exit advantage, they come to us.

It pretty pretty much is what it is,
right?

You just you're looking at you're
looking at last 12 months.

You're looking at.

And there's very little in the rear view
that you can do.

You can't fix you just items
you very little.

You could do some changing in the future.

But since you're going to market
in, you know, the next 90 days or so,

there's
no time to prove any of the improvements.

Where have you came five years before?

And we said, you know, you could do
you should do this, this, this and this.

Those are really important things to do.

On the priority list.

Now, you're not going to go
you're not going to everything

you need to take
the top areas, the. Ones that fix.

You really right, that need help.

And and if you can get those done
at the end of the cycle

when you've done them and it's now 3
or 4 years later, boy, you have

you've added millions, in many cases
millions to the value of your business,

where before
you just leave that on the table, right?

It just it just a fact.

So very few companies
that are in the M&A world

that I know do this and I just, you know,
we're officially launching it shortly.

We have a new website coming out
hopefully with next 30 days.

So it's going to be, I think,
a very popular program for our clients.

Absolutely, absolutely.

So we have one last signature question.

Okay.

You've had several careers, so
you've probably thought about this before.

If you weren't doing M&A right now,
what career would you be doing instead.

What career? Okay.

So that's a
that's an interesting question.

I mentioned my hobbies.

You know, hobbies are fun.

You know,
would I be a musician playing in a band?

You know, there's a high
likelihood of that happening.

Or the woodworking piece of it.

Would I be in, owning a mill
working company, or would I be involved

with that, that, you know,
that's that's a possibility.

But here's the problem with that.

Hobbies are great.

But when you turn them into a career,
it becomes a job,

a real right, because all of a sudden it's
not the luxury,

you know, the amount of time

I spend building a table,
I'd have to charge $20,000 for that table.

And in order in order for them to work.

Very expensive, very expensive too.

So, you know, all of a sudden
you have to turn a hobby into a business

and you know,
and then that changes the dynamics.

But if I absolutely wasn't doing this,
you would probably want to be one of those

two things.

Excellent.

Well, thank you for your time today.

It's been great to catch up.

Thank you. Thank you. Deb was wonderful.

Joe Rogan did call me,
but I decided to come here instead.

Some.

Baby, baby.