If you are an entrepreneur, a business owner looking to sell your business, or simply interested in learning about acquisitions and how private equity works, this episode if for you. Channing is the Managing Director at Objective, an investment banking valuation firm with more than 25 years of experience in investment banking and business valuation. We discuss his journey, how entrepreneurs can identify the real value of their businesses and much more.
Connect with Channing Hamlet on LinkedIn https://www.linkedin.com/in/channinghamlet/
Connect with Ben Fraser on LinkedIn https://www.linkedin.com/in/benwfraser/
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Transcription
Introduction and Welcome
Ben Fraser: Hello, Future Billionaires. Welcome back to another episode of the Invest Like a Billionaire podcast. I’ve got a very interesting interview today. It’s going to be a little bit different than some of our other interviews.
The Importance of Maximizing Business Value
Ben Fraser: This is an interview with a longtime investment banker. We brought him on the show to talk about how to maximize the value of the sale of your business.
So this isn’t going to apply to everybody. It’s really going to be more focused for those listeners that are entrepreneurs. Entrepreneurs that are growing businesses or anyone that’s just interested in learning how, mergers, acquisitions, private equity works kinda on the inside, but he really has some amazing insights to help you learn how to identify what he calls value drivers in your business and have the potential to, you know, one ary, he said, the difference between $25 million sale and a $45 million sale by.
Then some of these things and being ready ahead of time. It’s a little bit nerdy. We get into the weeds of some of these things in how to identify these and how to increase the value of your business. But I think it’s really interesting. I know we have a lot of listeners that are entrepreneurs that are looking to sell their business one day so that they can convert that into passive income, passive investments, and eventually, be out of the business they’ve been growing.
So very valuable if you’re in that position. And I think you guys are really going to enjoy it. If you guys are enjoying this podcast. We really appreciate you leaving reviews, sharing it with a friend and letting us know what you think in the comments and, leave us feedback on our website, https://thebillionairepodcast.com/ Appreciate your listening. Hope you enjoy the show.
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Welcome back to another episode of the Invest Like a Billionaire podcast.
Interview with Channing Hamlet: Investment Banking Expert
Ben Fraser: I am your host, Ben Fraser, and very excited to have our guest today, Channing Hamlet.
Channing is the Managing Director at Objective, which is an investment banking valuation firm. And he’s been in private equity, investment banking for a very long time over 25 years experience in business and investment banking and work with a lot of different clients and very excited to have him on the show and I’ll explain why in a minute, but Channing, thanks so much for coming on and talking with our listeners here.
Channing Hamlet: Yeah, Ben, thanks for having me. I’m super excited about it. So I’m looking forward to diving in.
Ben Fraser: Yeah.
Understanding Private Equity and Business Sales
Ben Fraser: So when your kind of team reached out to us and I was looking through your bio, I thought this would be really cool to bring on because one of the focuses of our podcast is talking about alternative investments and, most people think real estate, the big one is private equity and a lot of people have interest in private equity.
What does that mean? It’s this kind of, sexy word that’s thrown around a lot, but what’s also really interesting too is. The more we’ve gone on with this show, the more listeners that we have that are business owners, entrepreneurs that have been building businesses for a long time and eventually will be selling and trying to create a liquidity event, they can then convert into more of an investment portfolio and.
This is probably going to be a segment in the show.
Identifying and Maximizing Business Value Drivers
Ben Fraser: That’s geared more towards that type of audience, but just, it’s going to be really interesting overall for just understanding what are the value drivers in your business, right? How do you maximize the value of your business and kind of prep it for sale and, coming from my background, which is more on the banking side and I financed, several small mid sized mergers and acquisitions.
A lot of people come to the table just thinking, I want to sell, so I’m going to sell this year. Let’s do it. But it’s really something that has to be, usually well thought out, planned. And there’s a lot of implications if you don’t do it well. So that’s what I wanted to bring you on, Janet, and you’ve worked with so many business owners and clients helping them sell their businesses, learning what that looks like, different ways of structuring.
So a whole host of things I want to get into, but with that, why don’t you share a little bit more on your background, how you got into what you’re doing and the kind of types of people that you’re working with and helping.
Channing’s Career Journey and Experience
Channing Hamlet: Yeah, like a long story short, I started my career in investment banking and or it’s a longer story than that, but it’s really started in investment banking.
And I worked for a larger firm on the East coast and the group I worked for had developed a real specialty in working with family owned and entrepreneur owned , private companies. And so I learned that sort of thing. How to work with a family business and a lot of the unique characteristics of that and how to help them sell their companies.
And I also had the opportunity to work with public companies and billion dollar mergers and fairness opinions and had this sort of general kind of corporate finance background early in my career. But, I really fell in love with working with these family businesses and, often, we’d work with them.
Businesses that had been around, 50, 75, a hundred years through multiple generations. And for whatever reason, the family decided it was time to change their family strategy from operating a company where much of their wealth was invested to selling that company and diversifying their assets and becoming an investor.
And helping them navigate that process of the sale was something that was just really rewarding and really fun. And working with families and entrepreneurs and private companies in terms of helping them have a big payday at the end of a process and how grateful they are and how we change their lives is really rewarding.
And so that really hooked me. In my early mid twenties when I started in investment banking and plenty of stories where a business owner would thank me for the work and persistence of helping them get their deal done. And just having that be really rewarding. It’s not really get me hooked early in my career, as opposed to working for some large public company, helping the shareholders and making money or whatever.
When in the family world or smaller world, where there’s a face and a name that you’re helping, way more rewarding. So I started in investment banking then I worked at a 300 million private equity firm. And while I was there, we invested in or bought about 20 companies. And so I really saw what private equity firms look at and how they think I transitioned out of that to do something a little bit more entrepreneurial and wound up in a kind of corporate development job for a couple of years.
And then for the last 20 years, I’ve been the founder of two, two different sorts of investment banking and valuation firms.
Ben Fraser: Very cool. So seeing both sides of the equation, both on the buy side and helping with the private equity firm, but also on the sell side in helping people sell. That’s where they were focused on now is helping these business owners get ready to sell to generate the maximum amount of value, right?
Cause there’s certain things that you can do to better position yourself. And I think a lot of business owners have this natural conflict, right? I saw a lot from the financing side when I did this, where you want to show as little income as possible, like on your tax returns.
So you pay less income tax. But when you’re doing that, you’re impairing the value because most valuations are done or one form of them is a discounted cash flow analysis. And if you’re showing less cash flow, then, you’re going to have a lower valuation. And so there’s this kind of natural conflict where, you want to pay less taxes and you don’t want to show how much you’re making, but you also want to get the maximum amount of value possible.
So talk about some of the challenges that you see. A lot of business owners run into when they’re making this transition from, I’ve been working, running this business for a long time, I’m making good money and, maybe the next generation doesn’t want to be in the business.
So I’m really having to think about my exit planning, how do I move on and what’s that process look like?
Channing Hamlet: It’s interesting. Our firm is called Objective and really there’s a sort of core foundational belief that business owners should make decisions based on their personal objectives.
And so this decision, and I think the issue that we face that’s most difficult is sitting down with a business owner who’s thinking about selling their business. And it’s Hey, do I sell it this year or do I wait and sell it in the future? And, really trying to get smart about what, is the company ready?
Are there things you can do to optimize the value? Are there risks or issues that are going to make it tough to sell? And then personally are you personally ready? And put all that into a basket and make the decision. It’s a very complex decision,
I think there’s a couple of just sort of fundamental themes that are really interesting.
The Importance of Data in Business Valuation
Channing Hamlet: One theme is most business owners don’t understand the level of data a buyer is going to require, whether it’s a private equity firm. For a strategic buyer, most business owners don’t understand the level of data that a buyer is going to require in order to get comfortable paying a premium for the business.
And so a lot of companies in the market, we work in the sub 100 million revenue market don’t necessarily invest in sophisticated systems and budgeting and KPI tracking and this and that. And it becomes difficult to sell the company for a premium. Because it’s hard to get access to the data and needed to provide real insights on the value to a buyer.
So I think a lot of companies just like to invest in the infrastructure and data and organization required to really have a clean package to sell to a buyer. One, two. Early in my career, when I worked in private equity we would invest in a company in our first meeting and really this would happen during the course of due diligence, but for sure in the first meeting after the investment, we would be talking to the management team about, what are the value drivers of this business?
What changes do we want to make over the next three to five years to really optimize the value of our investment? And we would identify a number of key metrics that we wanted to track. And we would ask the management team to report, not complicated, but to report on, half a dozen to a dozen metrics that we thought were like the key value drivers or strategic shifts we wanted to make in the business to optimize our investment.
And we meet with the management team quarterly or monthly, depending on how we set up our board meetings and go over those value drivers. And as my business school professors used to say, what gets measured gets done. I have yet to meet a private company that doesn’t have an institutional owner.
I have yet to meet a private company that can pull out a piece of paper and say, here are my value drivers. And here’s my progress over the last X number of years professional investors and private equity firms regularly use that tool and it works. And most private companies don’t really take the time to understand their value drivers and map them out and have a real strategic plan against them.
I think a lot of business owners get caught up in this under investment and infrastructure and get pulled into working in the business and don’t really take the time to work on the business. That, that’s like a second, a second theme. And then a third theme is that a lot of businesses have.
Inherent risks in them that make them difficult to sell, whether it’s customer concentration, key man risk, one or two salespeople have relationships with all the customers or the owner that wants to cash out as relationships with all the customers, or they have, legal issues with intellectual property or former employees or something like that.
And when the buyer can’t get comfortable with that stuff. Maybe they’ll buy the business. Maybe they won’t, but they definitely when they start seeing like a whole series of issues and risks, a premium is off the table. And I think a lot of business owners don’t really put the, just the net, net, a lot of business owners don’t seem to really take the time and effort to understand and optimize the value of their business.
Take the time to really step back and be ready for a due diligence effort in terms of. Managing a lot of the risks in the business. And then many of them don’t, on a personal level, fully know what they want. And when a company comes to us and they want to sell their business, they’re not clear on what they want.
They don’t understand and haven’t optimized their value drivers and they’re not ready to go through due diligence. Like the business can still be sold. However, the likelihood of getting a premium goes way down. And so a lot of these things that I’m talking about. It’s not something that you just do, it’s not like a homework assignment that you finish over a weekend.
It takes some real, real thought, effort and preparation. And so the most success we’ve had as a firm selling companies for a premium, the company shows up to an investment banker process, like well prepared and ready, and when they’re well prepared and ready it makes it a lot easier to, find that premium buyer and, negotiate and close the deal at a premium.
Ben Fraser: And we are saying, close a deal at a premium or sell for a premium. Depending on the size of the revenue or income of the business, that could mean many millions of dollars that you’re getting, as a premium, right? It’s not just, Hey, we get another $10,000 on the price.
These can be massive, massively impactful drivers from a total sales standpoint. Am I right in that?
Channing Hamlet: Yeah, I think when you look at it. Any particular industry, there’s a range of values that companies go for. And
the, for a five to 10 million EBITDA, and again, like I’m totally going to generalize here.
And different industries, different companies and different cycles trade on wildly different terms, but, for a sort of like a standard company that’s in the five to 10 million EBITDA range in this market. You would see those companies trading for between five and nine times EBITDA.
And so a buyer sits there and looks at all of the value drivers and risks, and if the value drivers are not well understood and communicated, and there’s a lot of risks, it’s going to be closer to five if everything’s well communicated. The business is organized with a great management team, it’s gonna be closer to nine.
And when you look at the difference between five and nine, on a $5 million e EBITDA business, that’s $20 million. That’s the difference between selling it for 25 million or 45 million. So there’s a lot of value that can be created by being strategic and thoughtful about prepping a business, prepping a business to sell and running the business so that you’re driving the value.
Ben Fraser: Yeah. Going back to one of the second points you made on value drivers, and can you just spend a little bit of time there? Because I think, coming from a finance background as well, a little bit more financial speak sometimes of, I think we all understand what that means. But as a business owner, you might ask what are you talking about?
Like my value drivers, am I offering discounts to my customers? Talk about what those are. Give some examples and how someone can create dashboards and those kinds of things.
Channing Hamlet: I have a, I have a, like a couple of checklists that I keep handy that whenever I’m meeting a new company, I either look at or keep in mind.
One is what I would call value drivers. And the other one is like value detractors or, quote unquote, salability factors. And the value drivers, like the first one, are really understanding the industry and the market cycle. There’s a lot of just a quick story, like in 1990, in the late 1990s, I sold a commercial printing business.
And at that point in time, there were seven public companies that were doing a consolidation play in the commercial printing industry. And if you had a commercial printing business that you wanted to sell, you could get seven offers. If you make seven phone calls and get seven offers, it is a very active M& A market.
And so we had this, , really well run commercial printing business. We sold it and got a really good, top of the market multiple, like between seven and eight times each time, which was a very high multiple. In the mid to late nineties for the commercial printing business. 20 years later, 20 years later, the internet has come along, and email marketing is mainstream.
People are not, companies are not printing glossy catalogs and brochures and annual reports. The printing industry has changed pretty massively. We got hired to sell a commercial printing business, which arguably was a better business. They had incredible technology. It’s like mass customization, technology, and it’s very efficient.
Their customers were like the who’s who of tech companies in the Bay Area. And what had happened in that industry is that it had been largely consolidated. The industry had some headwinds in the continuing shift from print to digital. And the offers we got for that business were four to five times.
So arguably a better company with a better management team, better technology, better customer base, et cetera, because the market had changed was worth 33 to 50 percent less. And so paying attention to what’s going on in your industry, is there consolidation going on, are there technologies that are changing, like really understanding where you are in that cycle is Not something that’s easy to manage, but it can be important in figuring out.
The Role of Management Team in Business Value
Channing Hamlet: Timing of when to do a transaction, the rest of the value drivers I have are like more in, in your control, management team, if you’re the owner of a business and you’re the man or the woman that runs everything. It’s unlikely a buyer is going to write you a fat check and then need to depend on you going forward.
And so a business that has a really good continuity with a management team that’s going to transition to new ownership is worth more than the same business that doesn’t have that. Management continuity. And so we see a lot of business owners under invest in their executive team. And then when it comes time to sell their business, they can’t really sell their business because they’re handcuffed to it by the new buyer for some period of time.
And so on, the management team and building a man, building a good management team is a real value driver, intellectual property. Intellectual property is a value driver. A lot of companies have a lot of really good proprietary technology, but they haven’t gone through the process of, copyright at and protect, define, et cetera.
And so if you haven’t done a lot of the work to characterize and protect your intellectual property, it’s harder to get value for it than if you have. I think really having clear differentiation from competition and having a clear picture of love. Why is it that customers hire you? What is it that you do uniquely that customers will pay you a premium for?
Being able to clearly articulate that is super important. Building barriers to entry in your business so that when a buyer is sitting down deciding whether to buy your company or not, there’s not a thought that they could build it themselves because you’ve built something that is really hard to replicate and thinking about how to do that as a value driver.
And then there are the basic value drivers that, you don’t need to listen to this podcast to know, if your revenue growth rate is higher or your EBITDA is higher, you’re worth more if you can demonstrate that as you’ve scaled the business, you have operating leverage and your margins grow, that’s worth that’s worth more.
And so I really just like understanding the basic accounting and financials of valuation in your industry. Is important. I think there’s so much research out in the world today on that. It’s relatively easy for business owners to get their arms around it. And then the other value driver that we spend a lot of time looking at is predictability of a business.
And have they built recurring and predictable revenue streams?
The Impact of Customer Concentration on Business Value
Channing Hamlet: There’s a lot of, just as an example, there’s a lot of companies that have service businesses. They have, they might have a technology or a product they sell, and then they have a service business. Along with it historically service businesses would provide service when the customers wanted it.
A lot of companies have now gone towards long term service contracts. So they have predictable and stable revenues. They’re doing the same thing. They have the same people, the same technology, same process, et cetera. But they’ve built a stable revenue stream instead of like a volatile up and down revenue stream that’s worth more.
And so is to engineer and build in. Predictability in the business is important. And one of the biggest drivers of predictability is having a standardized sales process with clear client acquisition metrics. If I spend this much, or I have this many meetings or I send this many emails, or I do this metric to get a lead.
And then I have a conversion rate from leads and my average sale is this. And you’ve mapped out your client acquisition process and you can make it. You can make it repeatable and then communicate to a buyer that it’s repeatable, a buyer is going to add a lot more comfort with the business that they could own it and continue to grow and build it.
And so building some standard processes around client acquisition is a huge value driver. Because if you can communicate that you have, if you can communicate that you have a handle on predicting and scaling your company and you have the formula to do it, that’s a heck of a lot easier than. I don’t know, my phone rings every once in a while.
And like I signed up more clients this year than I did last year. And I think I’m going to do the same thing next year. A lot of companies have some version of that story instead of, Oh, I have a sales team, each salesperson has a quota. They need to do a hundred meetings a year to get 25 leads, to get six clients, to get X million in revenue.
If you can boil it down to a process, it’s more valuable than if you don’t. And so those are some of them. Sort of core value drivers that we think about. And then there’s a number of like value detractors, customer concentration or any sort of concentration of risk on a customer or a vendor, or key employees buyers are going to be nervous that they won’t have continuity of the business under their ownership.
And so trying to engineer out those risks is important and customer concentration, there’s an interesting story on customer concentration that I have, but engineering those risks out. Is a big, it eliminates a big value detractor and risk litigation and legal issues are an obvious risk , account sloppy accounting.
A lot of companies are not formally doing accrual and gaap based accounting and fluctuations in the numbers from one period to the next, or they’re not doing, I don’t know that middle market companies need to do audited financial statements, but if you do audited financial statements, it gives the buyer a lot of comfort.
I think sloppy processes, reliance on key individuals , poor IT security over the last five years, like IT security, has become a big one. We’ve had a lot of clients that have had buyers now do cyber risk assessments and we’ve had clients that have not done well on the cyber risk assessment and it creates big issues in the transaction discussions.
Compliance with industry regulations and standards as a small company, you can often get it away with cutting some corners here and there. If you’re trying to sell to a sophisticated private equity firm or a public company. Someone there is going to understand the industry regulations.
And there, there’s not, those are not people that want to take risks with industry regulations. And so a lot of public companies, if you have sloppy practices or what have you, they can’t buy your company because if you wind up on the front page of the paper that you are not following such and such regulation in this one department, the media doesn’t.
Delineate that it was like one small department from an acquisition. They delineate that it was Microsoft was doing something wrong or Google was doing something wrong. And so Microsoft and Google and big buyers like don’t take risks with that stuff. And so just being totally dialed on that, like totally dialed on that stuff is super important.
And so I know I talked a lot, like those are some value drivers and value detractors that. They’re not all easy to do, but putting some thought into mitigating and building around those can make a huge difference when it comes time to the humans.
Ben Fraser: Yeah, I think those are so insightful and you think about if this is a family owned company that has been around for however many years and just as you naturally grow a company, you’re generally so focused on building the business and not, like you said, working on the business.
And a lot of times these things just. Happened by happenstance, right? I remember trying to finance certain businesses and they had these massive customer concentrations, if they worked with a government agency or something that was 90 percent of their revenue and they’re, they’re making a lot of money, but you can’t really sell a business with that type of concentration.
It’s that you don’t really think about these things until you take a step back and really take an honest assessment of them. What are the potential detractors that are going to create a discount in my business?
Channing Hamlet: Yeah. It’s interesting. The customer concentration one’s really interesting.
We worked with a company a couple of years ago where 40 percent of the revenue came from one customer. The management team, before we started the sale process, the management team went to that customer and they said, look, we’re thinking about doing a sale transaction. It’s going to be good for you because we’re going to bring in a buyer that has more resources, we can do more for you.
We’d like, you’re important, you’re our largest customer and you’re really important to us. What we’d like to do is sign a long term contract with you. And we’d like you to serve as a reference for us during the sale process.
Ben Fraser: Interesting. Yeah.
Channing Hamlet: So now I get on the phone with a buyer and we get on the phone with the buyer and buyers often ask, do they have customer concentration?
And I could answer it and say, yeah, they do. They have one customer that’s 40 percent of their revenue. They have an amazing relationship with this customer. We’ve already gone to the customer and told them that we’re in this process. We signed a long term contract and the CEO of that customer has offered to be a reference.
Here’s his name and phone number. You can call him anytime. And so the business is still customer focused, however, the management team was able to mitigate it by putting pieces in place around it. And so a lot of people I talk to that have customer concentration or vendor concentration or something like that sit there and say, look, I, I’ve built my business for 30 years and this has always been a core customer and it always will be.
And I know this is an issue, but I haven’t been able to manage it. But I have a great relationship with this client, we can transition them to the new buyer. Great. Can we call the client together and talk to them about the sale process? No, I don’t want to spook them. Oh, I thought you had a good relationship.
So the, but there are like, if you do have a good relationship. With whoever, whatever entity is, whether it’s a vendor or a customer, a key employee, whatever, and you genuinely have a good relationship. You should be able to go to them in advance of the transaction, communicate what you’re doing and put pieces in place around it to mitigate the risk and that works perfectly fine.
And that’s a lot easier than going and finding another large customer. If you’re not willing or able to put those pieces in place, then that’s a huge red flag for the buyer because. If you’ve had this relationship with this customer for a long period of time and you can’t put those pieces in place, how am I as a new buyer showing up going to do that?
And so there are ways to work around these issues rather than solve them from a classical business standpoint. It just requires some thought and effort and preparation in advance of a sale in advance of a process.
Ben Fraser: Yeah. It just, it sounds like just being proactive and identifying what these things are going to be up front.
And taking steps ahead of time, and that just makes it a whole lot easier to have that conversation with that, is going to be an issue, right? So it’s just making it not an issue and solving it ahead of time. Can you talk a little bit about what you see from, like, when you get engaged, someone saying, Hey, I’m thinking about selling my business to actually, inking a contract and selling.
What’s the timeframe? I know it probably ranges all over the board, but. What’s that timeframe that also layers in just what a due diligence process looks like with the private equity firm, right? You mentioned that they’re going to do due diligence. They’re going to want to see these things.
And for some people that might be a little scary I don’t know what that looks like. And, but hopefully if you’re doing some of these things on the fun end, it’s a little easier, but just. Shout a light of the path of what that looks like too.
Channing Hamlet: Yeah, I think of the traditional investment banking sale process, most firms like ours would tailor it to the specific circumstances of the client and the company and the industry and what they’re trying to accomplish.
The Process of Selling a Business
Channing Hamlet: But in general, it’s a six to nine month process. And Okay. Basically the way we do it is the first two months are spent putting the materials together. So we would, which buyers are we going to go to let’s build a really good defendable and supportable financial projection model. Cause most companies, like if we were starting a process right now, and we would build projections for 2024 and possibly 2025, and we’d want people to be giving us a multiple of the projected EBITDA at close or the projected EBITDA for 2024.
And so building a well thought out defendable and supportable model. And then we put together a confidential information memorandum, a SIM or the, like the quote unquote book. And the book is partly to describe the business, but it’s really to describe why the business is valuable. And so we put a lot of work into how we are going to position and explain this company that’s going to make it easy for buyers to see the value.
And we might even tailor the materials for different buyers or different types of buyers, but. That upfront preparation phase is one to two months, depending on how organized the company is when they come to us, then we would turn our attention to marketing the business. And we do it in a very discreet way and have a lot of methodologies to preserve confidentiality.
And so we don’t really share a lot of information until confidentiality agreements are signed. And then the marketing process, generally speaking, is about a two month process of reaching out to high food buyers. Signing a non disclosure agreement with them, distributing materials, answering questions, really selling them on the idea.
And at the end of that phase, we would ask for kind of initial offers, initial indications of interest IOI. And we would take the buyers that give us an initial indication of interest. And we would narrow that down to a smaller group that we would do the next phase. And in the next phase, we would provide more information.
We would host meetings between the management team and the buyers, one or two meetings between the management team and the buyers and push the buyers to give us offers in the form of a letter of intent. And you can typically get multiple, typically you can get a lot of offers or multiple offers, and it gives our clients the ability to figure out which buyers are the best fit for them and then what kind of transaction they want, and then also.
Which one, which are the best terms? And so you pick, typically you would pick one buyer and go into exclusivity and then negotiate and close a transaction which takes about 90 days. Sometimes you can have multiple buyers and do a parallel path, but typically you pick one buyer and do an exclusive negotiation period with them where they come in and do due diligence.
And then you negotiate the purchase contract and close. And that, that due diligence period is typically between 60 and 90. And then the due diligence is beyond what most business owners expect and most companies are not fully prepared for it. But buyers do seven to nine different streams of due diligence and they hire outside experts to come in and analyze the company and like they’re doing a couple of things.
One is. They’re trying to find problems so that they can either negotiate a better deal or really understand what they’re getting into. And they’re also making sure they fully understand every element of the business before they own it. So there are no surprises once the keys are handed over and the streams of due diligence are done like a business and financial projection piece, typically the buyer would do that themselves and or in conjunction with a consultant.
They’ll do accounting due diligence, the so-called quality of earnings. They’ll have a law firm come and analyze all of the company’s contracts and understand risks and issues and assignment provisions and so on and so forth. They’ll do taxes to make sure the company has paid taxes correctly. And that includes Sales tax, use tax, local tax, state tax, federal, et cetera.
They want to make sure they’re not stepping into a tax minefield. And some of those taxes, irrespective of what the purchase agreement says, some of those taxes, the liability can be transferred to the buyer. And paying taxes correctly and having good records on that is super important. The fifth one I have is they’ll do an employment practices study to make sure all of the various independent contractor and employment rules are being followed because those have.
Very potential, very sizable liabilities, and they follow the employee. They’ll do insurance. Sometimes we’ve had problems where our clients are underinsured and the buyer will basically say, look, you said your EBITDA was X, but you were underinsured and the premiums when we own it are going to be, 500, 000 more.
So that’s an EBITDA hit. So making insurance can be a big one. I talked about this earlier in the discussion with you, but technology and intellectual property are areas that buyers look really closely at. And for companies that have an element of technology, they’ll often hire, um, companies that do like penetration testing, cybersecurity audits, software code review, it’s super in depth and very tricky to do that type of due diligence.
And then some other things they look at for businesses that are highly regulated, like anything in healthcare, they’ll look at all of the HIPAA and consumer privacy regulations and make sure you have policies and practices to follow that. And then they’ll also do some work on acquisition integration, like what systems are we going to use and how does that all map to what we’re currently doing?
And if you’re selling to a public company in particular, or even a private equity firm, but a public company in particular. The CFO who has to provide audited financial statements every quarter to the public. So they, or they, before a company gets acquired, the CFO, has to sign off to be sure that they can get all the information and report correctly on a timely basis.
And so that can be a stumbling block for companies that have poor accounting infrastructure. So those are the streams of, I know I talked a lot, but those are. The streams of due diligence and, we’ve seen on a 50 or 75 million deal, we’ve seen buyers spend between one and a half and 2 million on outside experts doing all of this stuff.
So it’s well beyond just checking a bunch of boxes and looking at a few documents. It’s in depth and thorough.
Ben Fraser: Yeah. Yeah.
Advice for Family Offices Looking to Buy Businesses
Ben Fraser: That’s really helpful to get a framework. And this is how we round out the interview here. One of the last things that I’d love for you to comment on, cause you’re obviously focused Representing businesses looking to sell, but you’re interacting with buyers all the time, right?
That’s who you’re trying to get interested in these deals. And, some of our listeners are family offices and they are looking for businesses to buy. And in our kind of initial conversation, you said, you have some thoughts that would be helpful for family offices.
Think about it. What are ways that they can put themselves in a position to be a more attractive buyer, right? Because like you said earlier, there may be a case where this business is very attractive, that you’re selling, you’re going to have multiple offers, and a lot of times they’re family owned.
So there’s a natural affinity to wanting to work with a family office potentially, right? Because there’s that family dynamic, but a lot of times they make it more difficult for them to make the transaction happen. Talk about just a few of those things that you’ve seen.
Channing Hamlet: It’s interesting, like when I described the sale process.
And we reach out to a large group of buyers, sending them information out and asking for initial indications of interest. And when we analyze those initial indications of interest, there’s three kinds of primary criteria we looked at. What is the value range? Because, obviously our clients want higher value ranges.
Who is the buyer and what is their chemistry and culture? Are we a fit? Do we want to sell our company to them and then work for them going forward? And then the third one is like capability to actually close the transaction. And so there’s, we look at all three. And so I think in the market that we primarily work in.
Which is, entrepreneur owned or family businesses, where in most cases, the owners work in the business. And in most cases, they’re going to work for the buyer. Some period of time, perhaps a transition or perhaps longer. I think the family office concept resonates well.
Resonates well.
And so I think family offices that can really have a demonstrated track record of being family oriented and easy to work with could play really well in that, in that kind of framework I talked about price chemistry and capability. I think where a lot of family offices fall down is they’re not really set up or structured to move quickly and make decisions quickly.
And then they don’t necessarily have a transparent decision process. And so it’s often perceived to be very risky as a seller to work with a family office because there’s one rich family member that controls all the purse strings and they could wake up on a Tuesday and change their mind as opposed to a private equity firm that has.
A dedicated fund and a track record of buying companies and a timeframe on which to deploy their capital. And so when you look at a family office that has a lower velocity of investments and a pretty opaque decision making structure as compared to a private equity firm, that’s, pretty transparent and track record of doing deals and has money they have to work in a short period of time.
Often we, like all else being equal, often would advise our clients to choose the private equity firm because it’s easier to get a transaction done. And so I think for family offices that are wanting to jump into the private equity element, they have a massive advantage in that they’re often family oriented.
They can be patient capital, they can be strategic and value-added, and they have a really good story to tell. But often they shoot themselves in the foot because they don’t like it, they don’t market themselves as easy to work with and they don’t have a transparent and easy process. And so when you’re buying a company, if it’s a good company, the owner and seller has multiple different options.
And so as a buyer, you really have to sell yourself to the seller to win their hearts and minds. So they choose you. And I just have seen family offices, not put them. Time, effort and energy into that a lot of family offices are trying to hide and be under the radar screen and you don’t really know who they are and how they work.
And it’s like a giant mystery. And I think they’re not necessarily doing themselves favors when they want to go and try it by private companies because they’re setting up roadblocks.
Ben Fraser: Yeah, that makes sense. Channing, what are the folks that you’re looking to work with? What types of businesses, what kind of maybe financial parameters do they have to maybe meet or industries or just people that might have interest that, Hey, I want to, get an idea. I know you do valuations as well, which is maybe even prior to an engagement to sell, but you give estimations of value ranges, other things. And yeah, we need a little sense of that.
Channing Hamlet: We have two, we have two distinct practices. We have a business appraisal practice and that’s like a full service, a full service from financial reporting kind of tax related valuations, whether it’s a state and gift tax discount studies for trust strategies. We also do a fair amount of helping people plan ahead for a transaction.
What’s my company worth? What are the value drivers? Should I sell now? Should I sell later? I’m thinking about buying out a strategic partner or I’m thinking about selling equity to an employee. Like we do a lot of valuation work for those types of things. And there’s a wide range of companies we’ve worked for.
With it’s everything from entrepreneurs and the dog in the garage that raise their first round of capital that are granting stock options, all the way through to fairly sophisticated companies that are doing acquisitions. And then on the other side of our business, which is what I’ve spent most of the time talking about today.
Helping business owners sell their companies. Most of our transactions are lower middle market. They’re, they tend to be businesses that are valued between kind of 25 to a hundred million, in, in value. The largest transaction we worked on last couple of years is about 500 million. The smallest is 10 to 15, in that sort of lower idle range, we love working with family and non profit owned private companies.
We’re working with a concentrated group of shareholders where we can really. Dig in and roll up our sleeves and help them, accomplish a transaction that’s life changing. That’s super rewarding for us. And then we have a number of different industry areas that we’re good at. We do a lot in business services and particularly marketing services and technology and companies that do software and services into the healthcare and pharma world.
We do a lot in direct consumer e-commerce. We do a lot with SaaS, recurring revenue, and then we have manufacturing expertise. And we do, we’ve worked with a lot of companies that are doing highly engineered and precision components. So those are some of the areas where we’re successful.
And if someone’s interested in learning more about us, a list of a lot of the industries and types of projects we’ve worked on are on our website, and that’s a good way. A good way to look it up.
Ben Fraser: Awesome. Channing, thank you so much for coming on. This was super insightful and I’m sure this show will get a lot out of it and we’ll put all those links to the show notes so people can learn more about Objective on your website. So thanks so much for coming on.
Channing Hamlet: Yeah. Thanks for having me. I really really enjoyed it.
Conclusion and Final Thoughts
Channing Hamlet: And love love educating business owners on, showing up ready so that when they do decide to do a transaction, they have a fighting chance of, Getting a premium. So thanks for having me.
Ben Fraser: Awesome. Thanks, Channing.
