Morgan & Westfield Deal Talk
Exclusive Interview with Kevin Short
So, are you thinking about selling your business? What about selling it for an “outrageous” price? This may seem like a disruptive idea, but it is totally possible. If this sounds like a good deal to you, listen to this edition of “Deal Talk” with our guest, Kevin M. Short, the author of the book “Sell Your Business for an Outrageous Price: An Insider's Guide to Getting More than You Ever Thought Possible.” He’s also the CEO and managing partner at Clayton Capital Partners in St. Louis.
Jeff: Why simple sell your company at market value or its true value when according to our guest you could do much better. If you're looking for information on how your fellow entrepreneurs are selling their businesses at outrageous prices, you've come to right place.
From our studio in Southern California, with guest experts from across the country and around the world this is Deal Talk, brought to you by Morgan & Westfield, a nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.
Jeff: Welcome back to the web's number one content source for small business owners committed to building a business for eventual sale. On Deal Talk, it's our mission to provide information and guidance from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value.
Joining us to talk about an exciting book that every business owner with an exit strategy should not be without is Mr. Kevin M. Short. He's the CEO and managing partner at Clayton Capital Partners in St. Louis. He's also the author of “Sell Your Business for an Outrageous Price: An Insider's Guide to Getting More than You Ever Thought Possible.” Kevin Short, it's good to have you on Deal Talk sir, welcome.
Kevin: Thanks, Jeff, it's good to be here.
Jeff: Okay. You see this book and its title on the bookshelf there at Barnes & Noble, or wherever you choose to do your shopping. Maybe you do your shopping online for all that. And you see that and it's pretty eye-popping. You think, "Come on. This can't be." But you have got some information here that I really think is just intriguing as all heck. And we want people to buy your book, certainly to read all the details. But let's talk about it. To start with what I would like to find out, we're talking about selling businesses at outrageous prices, but in terms of percentage here how many businesses that are sold each year do you believe would you estimate are inadequately priced, or even priced far below their actual value, and why do you believe that?
Kevin: It's hard to draw an industry-wide percentage. Let me define outrageous price, because we have to define it so we can quantify what we're talking about.
Our job is to find that buyer who could make more money with us and convince them to pay us.
Jeff: Excellent.
Kevin: An outrageous price, as we define it, is when you receive two or more times the average multiple for your industry. So if you're in a service business that gives you an average of four times your profitability on an annual basis and you're able to sell it for eight times or more, same business, same everything, that's an outrageous price. Because the conventional wisdom says it's a worth, maybe a five on a good day. Why is that? What was even behind why I spent five years writing this book and doing the research? I've done close to 200 deals. And about 15 years ago an eye-opening moment when we took a company to market, and when we asked all the buyers that we had solicited to put their bids in. One of them, a publicly held company, submitted a bid for an eight multiple in an industry. And all the other buyers were around a four. And we'd literally, this was my first exposure to this whole dynamic, and we thought the buyer had made a mistake. And so we went to the process, went through due diligence, closed the deal, and we're feeling pretty fat and happy at that point that we'd outmaneuvered and outsmarted this big Fortune 500 company.
I ran into the CEO of the buyer about six months later and I said to him, "How's it going? How's the deal working out?" And he said, "Fantastic. In fact, if you had another one like that we'd buy it today." I've gone from thinking he might be a little upset with me because he's figured out he paid two times more than he needed to, to being curious. So I said, "Tell me what happened." He said, "We got rid of the union and then we shut down that one operation. We put a lot of their products down to our international distribution channel. We put some of our products into their customers. We have made back our entire purchase price in six months." I went from feeling pretty smug at that moment to feeling like an idiot because I thought I sold it for eight times earnings, and now I find out I sold it for one-half of a year's earnings. That was very interesting to me and it really woke me up. But it was the very beginning of the process. We got an outrageous price by complete accident.
So how did that happen? The underpinnings of our belief in why many companies don't get maximum value is because they don't use the auction process that the investment banker use. So our auction process does not use... we don't put a price on a deal. We go out to market, and we have the buyer's bid, and we work those buyers against each other. That generally protects us to make sure that we're getting the maximum price to market once it's spent on that company. So that's kind of a fundamental part of investment banking in general. So we had a buyer who was excited and anxious and wanted to get it because they knew what they were going to do with the business. So the underpinnings of all this are the fact that what you and I think about the value of the business is irrelevant. It's all about what is the buyer going to do with the business once they own it, and how much money will they make. If they're going to make dramatically more money because of owning your company then they can afford to pay more for the business. And that is the secret to the whole book. There's all kinds of things you got to do to prepare for that moment. How do you investigate? You can't just walk up to the front door of IBM and say, "I'm here to have you pay me twice what my business is worth." So that's what the book is about. Are you even a candidate for it, how do you go about doing it, what are some of the things to figure out, what's the due diligence you need to do now to make sure the deal doesn't blow up later. It's lots of research about the buyer.
I'll give you an example. So after that deal I told you about where we were embarrassed, that we thought we had figured it all out, I began to think more intently about the buyer and who can pay more. We did a producing deal, fresh produce processor, and they were in the Midwest and doing very well for themselves. We took them to market and we knew we had one buyer out there that we had determined, it's obvious that this company, the big company had ringed the U.S. with locations. So it looks like a doughnut. There's a big hole in the middle where it happened to be where my client was. So we did the math and we came up with a model, a theory as to how much money the perspective buyer was wasting with running trucks back and forth across the Midwest that were empty. We went to them after we went to market, and we went to that big buyer and we said, "My client today makes about seven million dollars a year in profitability. If you own him, you'll make 14 million." He said, "What are you talking about?" We went to our logistics about how they would save that much money in fuel. And eventually they bought the company and they paid us the initial multiple but they were multiplying a much bigger number than the profits my client was making. So they give you a few examples of what you and I think about the business and what conventional wisdom is, and what the valuation people say. None of that matters. It's what the buyer believes, and our job is to find that buyer who could make more money with us and convince them to pay us.
Jeff: Therein lies the key. By the way, if you just happened to be listening over maybe a colleague's shoulder you're listening to Deal Talk. My name is Jeff Allen. The man on the other side of the phone over there is Kevin Short, CEO and managing partner at Clayton Capital Partners and also the author of “Sell Your Business for an Outrageous Price: An Insider's Guide to Getting More than You Ever Thought Possible.” And we're talking to him because it just seems unbelievable that we can, in fact, sell our businesses for an outrageous price. We think we can get a good price and we've got kind of a number on our heads but Kevin's saying that number may actually be a lot lower perhaps than what you might actually get. And you talk about finding that buyer. What is it that most business owners don't understand about the processes of finding that buyer, Kevin? I mean is it just a lack of knowledge about the sales process, about the marketplace, about who the investors are out there, about the needs, about the demand, or is it something else?
Kevin: Most of my clients don't really understand some of the inherent competitive advantages they have because they're not always... The easy answer is "I've got a patent on this great technology or I've discovered a cure for cancer," something dramatic like that. We had a client who figured out a way to make steel sign posts that you see on the highway, the ones holding up the big green signs. He figured out a way with a new piece of equipment he could make those for $600 a ton, it's the way they're priced in that industry. The big competitor which happened to be ____________, they own the market and they were selling them for $1,700 a ton. So what he had done was he figured out with his equipment to make it for $600, he then began to go out and sell it for $900 a ton. He turned the whole industry upside down. This is all intentional. We help them put together the strategy to get ____________ attention and then began to reinforce it every time they kind of cool off in the idea of buying him, we would then go out and win more bids with that $900 price. Ultimately, they paid him about in this case seven times more than he's worth because they want to get rid of him and get him out of the industry. They destroyed the machine and had never put that equipment into practice. So, they wanted to eliminate him. And we had figured that out that even though he was a very small competitor, a two-million-dollar competitor in a hundred-million-dollar market, the potential for what he could do with that business was worth a lot of money to the buyer. Only one buyer would've paid that. And so we had to convince him.
You have to figure out the competitive advantage. And there's something underneath competitive advantage, you're doing something sustainable, had to be able to do it forever that could cause that big company a lot of pain, margin for example of customers, or just something that you're doing that if they owned it they could get a lot more gain out of it than you do.
Buyers today will not look the other way when they uncover bad problems in due diligence.
Jeff: Very disruptive is what it is. He came up with a real disruptive idea, this innovation, and he was able to undercut his competition by several hundred dollars and yet at the same time, he was able to make an additional $300 on top of what I guess it costs, $600 per ton initially and then 900. And then his competitor had to buy him out for strategic reasons, just to get him out of the way and then ended up destroying the equipment. That's an amazing story.
Kevin: So that's the underpinning. We had to take that and then you have to fashion a theory because I can't walk in front of your door and say, "Pay me seven times to get rid of it." I've got to basically throw some bait in the water and wait for them to move and to buy. And I've got to set them up to make sure I don't lose them. Because you only get one chance with these people before they go away.
Jeff: You know, Kevin every business is different, and so that's a story right there that you could probably tell over and over again and people wouldn't get tired of hearing it. It's just phenomenal. But there are a lot of other businesses out there, regular everyday businesses, they know that they have a competitive advantage, they may not be able to articulate it real well and I think that's kind of one of the keys here that you talk about is being able to articulate it in such a way that you're able to convince others. But what I'm wondering is, do you have any kind of information that you could share? I know that there's a section in your book that talks about proactive sale strategy. And is this something that all businesses could implement that they could take and put into place to help them get to where it is they want to be with that buyer on the other side of the table.
Kevin: Yeah, let me walk through that and then we ought to talk about the outrageous price process because it's also been reduced to a process and give your listeners something to think about.
Jeff: What do you think we should talk about first?
Kevin: Let's do the proactive sales strategy.
The smarter you can be about that buyer, the better you'll do with your closing table.
Jeff: Okay, sounds good.
Kevin: This applies to everybody.
Jeff: Okay.
Kevin: Step one you got to assess the company and the owner for sale readiness. Not everybody's ready, not everybody's built to go to market. They emotionally might not be ready. The company might not be ready. So you do that first. Second, you got to move right into what we call pre-sale due diligence. That dovetails into being ready to go to market. Many entrepreneurs live by their wit, survive by their wits, make a lot of money by their wits, but their books might be a shambles, their legal structure might be a shambles. The way they're setup from a tax perspective might be very, very expensive. All that needs to be examined upfront before you go to market so that you don't get any surprises. Buyers today will not look the other way when they uncover bad problems in due diligence. So make sure you have somebody doing pre-sale due diligence before you ever go to market.
Three in the proactive sales strategy, you've got to identify your competitive advantage or advantages. You've got to quantify what their value is to you, what would your value be in the hands of a big company, and are they sustainable? In fact, do you do it very well in ____________ is that going to play well across the globe if you were in the hands of a big buyer? You got to think through all that before you begin the conversation with the buyer.
And then the last step is identifying potential buyers that could take advantage of what you just talked about in step three with the competitive advantage. It's more in-depth than say, okay, IBM and Dell are good buyers here. Which division and who's the head of that division, and what's the latest scuttlebutt on that division. Did they just lose their sales force in the Southeast? Well, does your company have a great sales force in the Southeast and a great customer base? That by itself could be a competitive advantage for that buyer. You need to have a lot of competitive intelligence about those buyers. And even if you're not ready to sell today, I don't care if it's 5 years from now, begin to collect that competitive intelligence. The smarter you can be about that buyer, the better you'll do with your closing table.
Jeff: So the importance here really is to give yourself some time, all that due diligence, there's a lot involved. Let's face it, this is not something that's going to be 100% labor free. There's some labor intensity that is going to go on here but you know what, that's part of a running a business and part of running a business well. And we're going to continue our talk with Kevin Short. He's authored an amazing book that we're discussing today here on Deal Talk. The name of the book once again is “Sell Your Business for an Outrageous Price: An Insider's Guide to Getting More than You Ever Thought Possible.” And we're going to continue our discussion with Kevin when Deal Talk continues in just a moment.
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Jeff: Allen with you with my guest Kevin Short, CEO of Clayton Capital Partners in St. Louis and author of Sell Your Business for an Outrageous Price. Kevin, when we took off with the break there just before then we talked about the proactive sales strategy. Now let's talk about the outrageous price process and how we get to that outrageous number that we started talking about?
Kevin: First of all Jeff, I think as you started at the beginning of the show, not everybody's a candidate for the outrageous price process. So how do we determine that? Part of it is by going through these four steps. Number one we've got to think about how do we leverage the company's competitive advantage. Well, that goes back to what we did in the proactive sales strategy of determining what the competitive advantages were. Number two we've got to think about who the outrageous buyers are. So we had to figure out what's the competitive advantages are and who are the buyers that could benefit from that? And that means doing some homework, doing some digging, talking to some folks, sales reps people on the street that'll tell you what's going on inside that buyer.
Three, we had to focus on the seller. When you're trying to get an outrageous price, the buyer's just not going to roll over and give it to you easily. They're going to challenge you, they're going to try to make you blink and show your true colors. So, if you're not built for this, you may not want to do it. So we talked about that often. Our clients, the sellers of the business, has really got to be built emotionally for this.
And then four, you've got to have an advisory team that can perform, that understand how to get maximum, outrageous pricing. We've had deals fall apart because we had cut a deal with the buyer, and then the seller's attorney begins to talk to the buyer's attorney, and then seller's attorney... I don't know what he's thinking, this price is crazy. And the buyer relays it back to the acquisition team and they killed the deal. So we've got to make sure that everybody's on the same page. You've got to have an investment banker that knows how to play this because a lot of it is delivery, you've got to be a lot, in fact, you've got to build the models. I can't just make up these prices. I've got to put some logic underneath it to build by. And then they kind of believe me when I say we're not selling for a nickel less than this. Because it's many a time, I say 18 million as a price for something that is worth six, and they'll come back and say, "Well, we won't give you six but we'll give you ten." But depending on how they deliver that and at the moment as I'm reading the signals, I may say, "Great, that's a good idea. Let me take it back to my clients. Or most of the time I'll say, "Nope. No thank you, we said 18," and hang up and go away because I believe that they're going to come back, and they do. If I read the signals right they do come back and then they end up doing the deal for $18 million. The key is making sure you've got an advisor that knows what you're doing because you don't want... We had a client who just hired us. He had tried to sell his business to the player in the industry for six million dollars the year before he met us. And the day before closing the buyer backed away. So, a year later he hires us and says, "There's only one buyer in the world for my company. It's a very small industry. Can you get them back to the table and pay me my six?" I talked to him for a couple of days saying, "Why in the world would this billion-dollar company want you in the first place?" And we've discovered some things that he was doing that was very interesting, and he was able to keep them out of his market. So we launched a plan that we completely made up with the fact that we were going to expand him to other markets, which was the nightmare of the buyer. They were worried that if he took his expertise to other markets, he would really affect your market share. But ultimately for a company they had agreed to pay six million dollars for, they ultimately paid him 18 million dollars for it. But you had better be confident and you will read the signals to do that because if I was wrong if I mishandled that, he wouldn't have gotten his six million either. So having the right team is important.
Not everybody's a candidate for the outrageous price process.
Jeff: Now Kevin you're talking about having the right team and I think that's really important, and we stopped there for just a second. Can you tell us who some of the most critical players on that team might be? You had a story there, you talked about a couple of attorneys who started talking behind-the-scenes and actually that ended up kind of killing the deal. We also know, you and I both know that attorneys play such an important role really at the end of the day as part of our advisory team, but there are other key players on that team, maybe even people inside the company. Who are some of the most important people in that advisory capacity that we need to be able to rely on?
Kevin: Great point. Part of that preparation when you're thinking about doing this is putting the team together. That could be, having the right attorney's critical, having the right accountant upfront to help you with tax mitigation is critical. The investment banker is important, etc. Inside the company you've got to make a determination of -- Is there anybody in the business who works for the seller that the buyer is going to demand to talk to before closing? -- because we do not like our employees of our client's company talking to the buyer before closing because that's very disruptive. But if there's a key employee that's really critical, the R&D guys, the sales guy, manufacturing expert, if we all determine upfront that that's going to be critical later than we are big fans of getting those people under a stable in this agreement now before we go to market. That lays out a series of bonuses contingent upon them staying for two years after closing. That's really important. In that way, you can bring them into the loop at the appropriate time and they won't be so concerned or alarmed that the company is selling and they're going to lose their job. We have fans of when you give them that bonus you break it in three pieces. You give a third of the bonus the day of closing, a third a year later, and the balance in two years. If they lose their job through no fault of their own then those payments accelerate, and that becomes their money that keeps them whole while they're looking for their next job. It really releases a lot of tension.
Jeff: Great advice, Kevin Short. He's an author of Sell Your Business for an Outrageous Price. You're listening to Deal Talk. My name is Jeff Allen. Kevin, another great author we've had on our program recently, Bo Burlingham who penned the book Finish Big, and also as you know before that, Small Giants. I'm sure that you're familiar with them. He talked about the importance on the part of the seller to know who the buyer is, and not just who they are but why they want to buy their company. It's important that we know a little something about the folks that are approaching us to acquire our business, why they're doing it, their motivation. Would you agree with that? How important is it with respect to the process that we're talking here about selling your business for an outrageous price to know a little something about that buyer going in?
Kevin: You need to know as much as you can possibly find out if you know that. For example, inside Clayton Capital Partners we have a very active buy side practice that folks manage. We're in that practice, we're managing the acquisition strategies for big companies, and they'll say often, "If we have to, we'll pay a ten multiple because we're going to make so much money with this." What you tell the seller is we'll pay you a four because that's the industry multiple. But the buyer has already said behind closed doors, we'll go all the way up to the ten because we can make it work. So, you need to know as much as you can. The buyer will never tell you what they're going to do with the business or how much value it's going to bring to them. They're very closed mouth about what they're going to do. In fact, they'll continue to poor mouth the deal all the way after closing because they don't want you getting wind of the value that you're buying. So you've got to develop models and strategies based on what you know, and so how much money they're going to make with this company.
Jeff: Let's kind of jump a little to the happy ending. We know that the process could be long and that you'd take several years in some cases for some business to sell and get that outrageous price they're looking for, but that's a journey that is taken the right way perhaps at the end of the day. But how can we work to ensure that the sale process works smoothly with no challenges prior to closing so that each side gets what they want?
Kevin: I would strongly recommend getting the investment banker into the company, into the equation early so they can look at your financials, look at the information, and point out the issues that will be raised at the other end of the process. They have the most experience being in the trenches with acquisition teams.
Jeff: Sell Your Business for an Outrageous Price is by Kevin Short and you can get it at Barnes & Noble, barnesandnoble.com, amazon.com. Do get it. It's worth the read. It's absolutely fascinating. And if you own your own business, it's going to be something that's going to provide you with some food for thought. And then Kevin if people have any questions for you, I know that you're a pretty available guy and you may not necessarily be available the moment they call. But if they have any questions for you down the line that they think that maybe you might only have the answers to how can they reach you?
Kevin: Telephone is 314-725-9939. Our web address is Claytoncapitalpartners.com.
Jeff: There you go. Kevin Short it's been a pleasure. I sure do appreciate your time. I know that you're a busy guy and this has been a fascinating discussion. And perhaps at some point down the line, we might be able to have you back on again.
Kevin: Excellent. Thanks, Jeff.
When you're trying to get an outrageous price, the buyer's just not going to roll over and give it to you easily. They're going to challenge you, they're going to try to make you blink and show your true colors. So, if you're not built for this, you may not want to do it.
Jeff: Thank you. Kevin Short, author of “Sell Your Business for an Outrageous Price…” and managing partner and CEO at Clayton Capital Partners has been my guest. “Deal Talk” of course is always presented by Morgan & Westfield, the nationwide leader in business sales and appraisals. Learn more at www.morganandwestfield.com. My name is Jeff Allen. Thank you so much again for making “Deal Talk” a part of your listening routine. I hope to talk to you again soon. Take care.
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