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Welcome to the Growing EBITDA Podcast, where we unlock the doors to management and technology

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insights in the middle market.

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Join us as we explore innovative strategies to drive revenue and EBITDA growth, interviewing

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industry leaders and technology experts.

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Whether you're looking to streamline operations, understand the latest tech trends, or lead

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your company towards exponential growth, you're in the right place.

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Stay tuned and let's grow together.

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So, James, we're talking about sell-side due diligence today, right?

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Getting ready to sell, how to prepare to sell a business.

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And sell-side diligence, for those who are less familiar in some parts of the world,

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particularly in Europe, we refer to this as vendor due diligence.

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In the US, actually kind of a new phenomenon about 10, 12 years ago, maybe 15 years ago

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now, people started doing more sell-side diligence.

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Don't ask me why there's a different name in the US than there is for it in Europe.

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Also don't really know.

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I've heard that there's some compliance reasons why it's done in Europe a lot more than it's

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historically been done in Europe a lot more.

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No compliance driven reasons here in the States, but certainly something that about 15 years

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ago started to catch on and these days has become a big part of the transaction advisory

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business for many firms, including TriVista.

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So hopefully this will be an educational overview for folks who are less familiar with it.

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It's certainly not done on every deal still to this day.

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Probably never will be done on every deal across all work streams, but glad to chat

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with our listeners about it and hopefully give them a few nuggets about what it is.

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Sound good?

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That sounds great to me.

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So I thought to get started, what might be fun was I threw it into our friend, ChatGPT,

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right?

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I think I asked it, define sell-side due diligence.

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So I'm going to read what Chat said.

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Sell-side due diligence is the process where a company preparing for sale conducts a thorough

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review of its financial, operational, and legal aspects to address potential risks,

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ensuring a smoother transaction for buyers.

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And like all things that ChatGPT gives me a response to, shockingly accurate and unbelievably

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swift and helpful at the same time.

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So if you want to become an expert on sell-side diligence, certainly head over to ChatGPT

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and you'll probably learn more there than you will on our podcast, right?

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Yeah.

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But I will say, you know, it's interesting that I was reading this as you prepared some

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show notes.

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And I like to say that I think part of the conversation we're going to have today is

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that technology piece.

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And I found that to be interesting that it was left out of the definition for ChatGPT.

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So I think our podcast listeners are going to get a little bit of an education that maybe

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didn't tee up for them.

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I think maybe your feelings are a little bit hurt that ChatGPT, a technology platform,

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failed to include technology diligence.

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Turned against its own.

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You're a little burned by that, turning against its own?

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Yeah.

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Well, they're worried that it's going to take over the world, right?

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That's hilarious.

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That's good.

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I think one of the things, Mike, I get this question a lot from kind of friends when you're

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out and about and talking to folks like, hey, what do you do for a living?

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And trying to explain what you do for a living sometimes can prove challenging.

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So I think one of the things that's interesting is to put it in another set of terms, it's

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like a health check for your business.

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Like how am I, where am I, how am I doing?

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And you know, I think that's an interesting way to kind of talk about it for the, as we

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tee this up throughout the conversation, I think of this as like everything's in that

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pursuit of a health check.

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Yeah.

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I think a health check in anticipation of selling a business, right?

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So not necessarily a general health check.

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You know, we wouldn't call those a sell-side due diligence, but a health check in anticipation

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of getting ready to sell your business or bring your business to bring a business to

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market.

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James, the analogy that I like to give to folks who are newer to this workstream or

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less familiar with this concept is, you know, like many things in private equity, I like

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to tie it back to flipping houses, right?

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Or selling homes because there's a lot of kind of parallel metaphors and analogies that

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can be applied there that I think everybody understands.

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And the one that I would offer here is almost every real estate agent in the world encourages

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their clients to stage their home before they sell it, right?

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And sometimes that can be a little bit of a sticky conversation because the real estate

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agent has to tell the seller of the home.

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You know, it's kind of like saying, hey, your furniture and your decor, the way you've

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decorated this home or maintained this home is not really up to snuff, right?

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So we're going to bring in some new stuff, make it a little bit fancier, maybe just tailor

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a few things that's going to make it more appealing to a broader set of buyers.

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And the reason that you're doing that, quite frankly, is you're just trying to make it

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look better so that more people will come in and be impressed with it and ultimately,

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hopefully pay you a higher price than you otherwise would have gotten for it or maybe

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make for a smoother, quicker transaction than maybe you otherwise would have, right?

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And I think that's the perfect analogy for sell-side due diligence, where it can be kind

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of a bit of a sticky conversation, right?

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Most of the time when folks are being brought in to do sell-side diligence, it's typically

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going to be in conjunction with bringing in your investment banker who you've hired to

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help you sell the process.

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So again, they're acting kind of like the real estate agent.

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And oftentimes, if they think that there is some part of the story about the business,

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some part of the selling narrative that they're trying to craft and deliver to the market

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to get people excited about buying this asset, if there's some part of it that's maybe a

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little bit more complex to articulate or a little bit harder to understand, going through

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sell-side diligence exercises really just helps kind of make that business look a little

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bit prettier to maybe a broader set of buyers who hopefully get a little bit more competitive,

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a little bit more excited.

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And ultimately, because all this stuff, just like staging a house, right?

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That costs money.

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You want to make sure that you recapture those costs when the transaction goes through.

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Same thing with sell-side diligence.

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It does cost money to do it, but done right.

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Hopefully you should be able to get some return on that investment.

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So we're going to talk a lot about this today.

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But I think if all people listen to is that first couple of minutes and think about it

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as kind of staging a house, but put it in a context of an M&A transaction, that's a

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great way to package it up and think about it.

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So let's talk for a few minutes here about who should care about this target audience

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with our podcast.

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By the way, I'm pretty sure we have like 15 listeners now.

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So we're moving up in the world.

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Probably going to be famous here pretty soon.

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But our podcast really is geared towards a couple of different types of folks, right?

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And I'm talking about our podcast generally.

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So private equity investors, CEOs of private equity-backed businesses, CEOs and direct

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reports of people who maybe are leading private equity portfolio companies or who are aspiring

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at some point to maybe transition from corporate America into private equity-backed, the private

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equity-backed ecosystem.

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And bankers certainly are going to be interested in some of this stuff.

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They're probably going to be more familiar with the concepts than some of the other folks

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who may be listening, but hopefully they'll learn something along the way.

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And then last but not least, founders who may be thinking about selling their companies.

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Founders oftentimes, they're just less familiar with transactions because they oftentimes

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have never sold a business before.

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It's the very first and oftentimes only time they're ever going to do that in their careers.

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So they're a lot less familiar with things like sell-side diligence compared to those

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of us who live in the transaction and private equity ecosystem on a daily basis.

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We're doing that kind of stuff all the time, right?

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But I think that's who should care about this.

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Key topics we're going to cover today, we're going to do a high-level intro to sell-side

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diligence, kind of explain what it is at a very basic level.

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We're going to talk about how to prepare to go through a sell-side due diligence exercise,

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common pitfalls.

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And there are a few important ones that I'm excited to chat about and kind of how to avoid

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those pitfalls.

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And then last but certainly not least, we're doing all this kind of work to ensure a smooth

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exit process, right?

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So we'll talk a little bit about what that exit process looks like.

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Did I miss anything, James?

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James Westendorf No, I think you covered it, man.

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Excited to jump in.

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Adam Bilyeu Great.

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So let's get started.

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Section one, introduction to sell-side diligence.

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James Westendorf Maybe it'd be helpful since you kind of gave

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that intro and I really liked the overview.

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Maybe I could walk you through some questions that come to mind that kind of round sell-side

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diligence.

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We could dive in a little bit deeper on from the intro if that works for you.

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Adam Bilyeu Yeah, let's do it.

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James Westendorf So I know we gave the GPT kind of summary

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review of what sell-side diligence is, but maybe we could just spend a couple more seconds

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and you in your own words, you can kind of tell us what is sell-side diligence?

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Adam Bilyeu Yeah.

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So for starters, it's kind of a multifaceted question, right?

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Because there's different, we call them work streams, all of them optional, totally discretionary,

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but there's different work streams that would pick apart kind of different components of

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a business during a sale process, right?

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And I think I want to reiterate just for those who are less familiar, there's two types of

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diligence out there that surround an M&A transaction.

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Buy-side due diligence, which is the investors or the company who is looking at acquiring

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an entity, they're going to be hiring advisors and experts.

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Maybe they have some of them in-house, maybe some third-party experts, consulting firms,

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et cetera.

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They're going to hire folks and build a team to assess a business that they're looking

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at buying, right?

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Hence the buy-side, the buy-side of the transaction, the buy-side due diligence work streams could

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include legal, operational, compliance, technology, accounting, financial, you know, could be any

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number of different components of that.

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We call those work streams.

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On the sell-side, that's where you've got the company who's positioning itself to be

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sold.

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They're just conducting what is honestly not dissimilar work from what the buy-side diligence

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folks are going to be doing, but they're conducting it on themselves, right?

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So it's really that self-assessment.

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It's kind of that inward look, if you will.

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And by hiring third-party advisors, right, sell-side due diligence is not something that

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you can do really in-house, right?

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I mean, you can obviously get your own house in order, back to the staging commentary.

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You can sweep up the floors a little bit if they're dirty.

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You can hire a new head of sales if that's some initiative that's important for the business,

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just as one random example, maybe buy a couple of new pieces of equipment in anticipation

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of making yourself more attractive to potential buyers.

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Certainly you can do that stuff in-house.

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But when we talk about sell-side diligence, we're almost always talking about third-party

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advisors that you're bringing in to help get that company ready for sale.

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And I think a common misconception for those that are less familiar, a lot of people are

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going to be like, well, wait, isn't that my investment banker?

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Not surprised that people might think that.

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Absolutely, you're going to be bringing in your investment banker to help sell your business.

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But the investment banker's job is really one of kind of an intermediary.

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In fact, in our industry, we call them oftentimes intermediaries.

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And they're responsible for, you know, they have expertise in going through an M&A process.

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They have databases of prospective buyers.

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Oftentimes these folks will be very industry-focused.

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For example, you'll have aerospace and defense specialist investment bankers.

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You'll have industrial specialists.

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You may even have industrial distribution specialists or consumer or food and beverage

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specialists, whatever the case may be.

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Oftentimes that's how they structure those firms.

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They're going to be coming in to really kind of help walk you through the process and hold

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your hand from kind of soup to nuts.

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So what they do is they're going to help put together a data room of all the important

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information they're going to help put together.

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What's called a SIEM or a confidential information memorandum, which basically articulates what

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the business is, what its strategies look like, how it's going to grow and why it's

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attractive to potential investors or buyers of that business.

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And then they're going to do the outreach, manage all the meetings, help with negotiation

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of key aspects of diligence and also help with negotiation of key aspects of the purchase

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agreement and ultimately kind of hold that business's hand all the way to the transaction

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close and they get paid to do that.

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What they tend not to do though is even if they have industry and sector expertise, maybe

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it's industrial distribution, that's the specialty of that particular investment banking team.

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They're not operators.

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For starters, they're also not accountants.

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They're not lawyers.

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They're not compliance experts.

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They don't have any environmental engineers on staff that can go and assess to make sure

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that the soil at the facility sites are that nothing bad has been done there.

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Things are leaching into the soil that shouldn't be.

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So what they might encourage their client to do, their client being the business that

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wants to sell itself, is to bring in some outside experts.

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Before we sell the business, to help craft the narrative and to potentially produce some

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reports that could be included in the data room in the future and shared with prospective

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buyers that help reinforce their value proposition when selling the business.

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For example, you might have an industrial manufacturing business that's been built up

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over acquisition over a number of years.

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Maybe it started at 100 million in revenue.

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Now it's a $500 million revenue business a few years later.

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How did they get there?

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They bought a bunch of their competitors and they did a roll up.

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Well, maybe they still had six or seven manufacturing facilities, but the next phase of growth was

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consolidating that down to three manufacturing facilities, center of excellences, if you

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will.

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And in order to do that, there's obviously going to be costs on the relocation and consolidation

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and closure of some facilities, maybe the erection of a new facility.

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There's going to be costs associated with moving production and maybe making some staff

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redundant but hiring some new staff.

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But there may be a strong value proposition around why they would do this.

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Ultimately, there's some net savings to be had.

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Just as one example, you might want to bring in, in that sale process, some experts who

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have credibility in that space to say, hey, yes, we actually believe and here's all the

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detailed analysis that we've done that if you did that, your profitability would improve.

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Maybe you would go from a $50 million EBITDA business to a $20 million EBITDA business through

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those consolidation and cost reduction activities.

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In a sell-side diligence exercise, that would be an example of an operations-focused sell-side

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diligence exercise.

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That third-party advisor might be able to come in and craft a very nice document that

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you could share with prospective buyers that would go, hey, listen, I know this is an X

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million EBITDA business today, but if you go and you make a couple more investments

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and give it a little bit of time, we think that this business without any top line revenue

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growth is actually going to operate more like X plus some number.

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So you should be even more attracted to buy this business that's really more profitable

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than necessarily meets the eye today.

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That's an example of an operations diligence workstream.

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There could be other examples.

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On almost every transaction these days, people are doing accounting and financial diligence,

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typically referred to as quality of earnings analysis or Q of E. That's being done on almost

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every sell-side transaction these days.

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What I just described is a little bit more operationally focused and we see that in some

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transactions where maybe there's a little bit more of a complex story to articulate,

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but an example nonetheless of what you might want to do.

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If you were a food and beverage manufacturing business, maybe you would want to do a food

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safety diligence exercise pre-closed just to make sure that people weren't going to

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find any surprises.

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It's oftentimes likely that on the buy side, when you go to sell the business, even if

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you've done the sell-side diligence, oftentimes those folks are going to want to come in and

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do their own diligence as well.

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But what you can position this as is, hey, look, here are the skeletons in the closet

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and don't take that always as a negative context, but here's the realities of this business

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as attested to by a third party because you want to educate the buyers.

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The buyers, at the end of the day, most buyers of businesses know that they're never buying

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a perfect asset because there's no such thing in the world as a perfect business and buyers

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are comfortable with that.

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What scares the pants off of them though is they don't want to find out things after they've

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bought a business.

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Disclosures are obviously a very important part of an M&A transaction, but beyond disclosures,

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like legal disclosures, making sure people can understand and appreciate the value of

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what they're buying and also make their diligence exercise a little bit easier on the buy side

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typically has some positive outcomes for folks.

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So hopefully that's a little bit more clarity, James.

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I think I probably got a little long-winded there, but some additional thoughts on what

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is sell-side due diligence.

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James Westenberg I appreciate it.

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I think it's good to have that definition because a lot of times, again, when I talk

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to folks and I say I work in diligence sometimes, the thought is always that buy side, right?

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Assuring that you're buying something that you expect to buy some of the parts that you

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mentioned around the quality of earnings is always brought up because a lot of financial

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folks understand that.

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But I feel like there's a lot of misconceptions and lack of understanding on the buy side

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of it.

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And I think one of the things that, you know, the name of the podcast is Growing EBITDA.

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And I think one of the main things about a sell-side diligence, it doesn't really grow

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your EBITDA, but it allows that maximization, if that's a word, I'm going to make up a word,

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but it allows you to maximize the exit value, right?

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So maybe you could talk a little bit about how you've seen or the understanding of why

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a sell-side could help you maximize that exit value.

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Adam Bolling I think I want to take issue with one thing that you just said though,

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slightly different opinion that I have, where you said it can't really grow EBITDA.

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I actually think that it can.

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And my argument would be another common misconception about sell-side diligence is the timing of

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when you want to go and do something like this.

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Some work streams make a lot of sense to start two months before you go to sell the business.

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The quality of earnings analysis that I just mentioned would be a great example of this,

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where you can't do that eight months in advance, seven months in advance, 12 months in advance,

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because it's going to be outdated when you go to sell the business.

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So you really kind of got to start doing that like right before you go to sell the business

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because you want fresh data, fresh numbers.

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Otherwise, you'd be paying them to refresh that every month as the transaction got closer.

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With some work streams, particularly around the operations, a sell-side operations due

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diligence, we actually encourage people to do that a little bit further out from the

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sale than I think meets the eye for most folks.

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We typically are encouraging folks eight to 12 months before you want to sell an asset,

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you should be doing some of the more operationally focused work.

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And that's where I think you have an opportunity to actually improve EBITDA.

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For example, you may have some operations experts walk through your production facility

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and they come out and they go, hey, listen, you guys have built a great business.

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But typically, we see people in this sector of this size and scale generating 18% EBITDA

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margins.

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You guys are only generating 16% EBITDA margins.

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And through our quick assessment, we actually think you have a labor productivity issue

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on your factory floor.

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And if we did a focused two or three month improvement project, we might be able to reduce

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the amount of labor that you need to build your widgets and actually improve the profitability

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of the business.

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Now, we may find some other things that are a little bit more long range in nature like,

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hey, at some point in the future, you may want to think about consolidating sites or

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you may want to go through a route optimization exercise.

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Maybe if you're in the logistics business, more of a distributor in that example.

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So there could be some quick wins, which may in fact result in some actual hard dollar

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EBITDA savings before you exit, which by the way, I think most people are listening to

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this podcast, this podcast about growing EBITDA.

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That's very important because you're going to get paid some multiple of that some short

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period of time down the road.

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You might not actually get paid for the future potential EBITDA, although I'll give some

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examples of where you can actually get paid for some of that too.

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So I just want to take quick issue there that I do think it's something that can impact

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EBITDA in the very near term, but that's not always necessarily the case.

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So back to your question, James, about how does this create value at exit?

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So it's actually been our experience that you can drive some pretty significant value.

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And the reason that that is, is I mentioned in my example a few moments ago, the example

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where you had a business that had been built up over time, mainly through acquisition,

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and there was a big and kind of known opportunity to consolidate some of those sites and reduce

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a lot of costs in the business and in turn drive EBITDA up.

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Somebody might not pay you a hundred cents on the dollar for the future value, but you

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may be able to get them to pay you 20, 30, 40, 50 cents on the dollar.

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Because if they're looking at that business and going, hey, this really isn't a $50 million

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EBITDA business.

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This is really a $70 million EBITDA business.

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Somebody's just got to go do all that heavy lifting.

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And yes, there's some risk involved.

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So I'm not going to treat it like it is a $70 million EBITDA business today.

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But if the plan is known and it's sound and it's been attested to by maybe a third party

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with credibility and doing that kind of implementation work, you oftentimes can get people to pay

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you for some of that.

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And if you can get paid for $10 million of that at a 10 times multiple, I mean, you could

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be talking about $100 million of enterprise value.

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Now the difference would be on the flip side of that coin rather, if you just went to sell

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your business as a $50 million EBITDA business and you said, hey, we got all this opportunity

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out there to save costs by consolidating some sites, I think the buyer universe, many of

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them will have the ability to tease that out and kind of test and pressure test that during

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their buy side diligence.

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But why make it hard for folks?

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If there really is a huge lever that can be pulled, you should try as the seller to get

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paid for some of that.

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Don't let the buyers find it and think that that's their upside.

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Bait the hook for them, set the table, send them the menu of options.

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And what you can create there is a situation where you're not relying on some small subset

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of buyers who do have the expertise to be able to tease that out during diligence on

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their own.

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You're actually broadening your buyer universe because there are some folks who might not

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think like that.

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If you have the ability to lead them to water through a sell side diligence exercise, you

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should certainly do that.

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The whole thought process around this, whether it's operations sell side diligence or financial

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through the Q of E or compliance or whatever the case, technology, whatever the case may

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be, really that you're doing this because you're trying to set the table to make yourself

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look more attractive to a broader set of buyers who think you're a really great business.

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If you can do that and get that material in the hands of the right buyers, the theory

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is and we've seen this play out time and time again, is that you're going to make it easier

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for them to do their initial assessments.

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Getting from, oh, that's an interesting business to we're interested in that business from

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a buyer perspective is easier, faster, better.

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Their ability to go from, hey, I'm interested in this business to, hey, I really understand

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the value proposition here and I want to pay you for this business and acquire this business.

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You tend to be able to keep more people into the process longer and the deeper that you

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go with more parties, it keeps the exercise more competitive.

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Just ask any investment banker if you're better off having one or two buyers chasing your

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asset versus six or seven.

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Supply and demand kicks in and obviously the more demand that you have from a broader buyer

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universe, the higher likelihood you're going to have that you close the deal and the higher

393
00:22:16,620 --> 00:22:20,000
likelihood that you have that it's going to be a bigger number than it otherwise would

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have been.

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The whole thing is driven by this idea of setting the table for buyers, making it easier

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for them to understand where the business is going, make it easier for them to understand

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where the opportunities to create additional value lie.

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In doing so, you can keep more of the buyers at the table longer because they have reduced

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risk themselves.

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They don't have to spend as much money on diligence so they can go deeper into a process

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without getting burned on fees themselves.

402
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They can understand the business better and ultimately, hopefully it creates more competitiveness

403
00:22:50,480 --> 00:22:55,660
on that deal which in turn often results in not just higher terminal value or enterprise

404
00:22:55,660 --> 00:22:59,660
value or purchase price for the sellers because you have a more competitive process but hopefully

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also you've been able to unlock some potential EBITDA upside and you're getting folks to

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pay you for some value that they're ultimately going to have to take the risk of creating

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longer term.

408
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That makes sense.

409
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When we think about the sell side and we've talked a little bit about what it is and why

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folks do it.

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I think we've talked about now kind of the value side and I know you've touched on it

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a little bit but just because we're going to go in a little more detail in the next

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section maybe it's good to talk about because you talked about the quality of earnings can't

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be done too early because you're kind of tripping over yourself as the new financials come out.

415
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Maybe just for the group, the key components that are part of a sell side diligence and

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then we can maybe dive into a couple of them in our next topic.

417
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Yeah, absolutely, so we've talked about quality of earnings, financial and accounting, sell

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side diligence.

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We've talked a little bit about operational sell side diligence.

420
00:23:51,780 --> 00:23:54,540
That could include things in the broader supply chain too.

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An example of that might be let's say you've got a $200 million revenue business that imports

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a lot of product from China.

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By bringing somebody in from the outside and asking some intelligent questions about the

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business maybe you uncover that, hey, you only have one supplier for the raw materials

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that make up 50% of your sales and maybe it's a supplier that's in some faraway land, China,

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Indonesia, Vietnam, wherever the case may be.

427
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Again, doing that early gives you some time to start thinking about maybe we should second

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source this, right?

429
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Like take off the table concern that buyers are going to have that you have supplier concentration

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risk by starting to demonstrate that you're building out that capabilities.

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00:24:28,420 --> 00:24:31,620
When I talk about operational diligence, a lot of the examples that I used were kind

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of four walls, manufacturing, production oriented.

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It extends well throughout the supply chain.

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If you're dealing with businesses that have widgets, you might be dealing in more of a

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00:24:40,460 --> 00:24:45,380
business services environment where you may be thinking more about human capital management

436
00:24:45,380 --> 00:24:49,820
opportunities or a lot of technology opportunities, making sure you got the right system to drive

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00:24:49,820 --> 00:24:55,900
efficiency across your sales force or your labor force, whatever the case may be.

438
00:24:55,900 --> 00:25:01,260
There's those kinds of operations and supply chain, value chain oriented work streams.

439
00:25:01,260 --> 00:25:03,860
Then you get into some niche work streams, right?

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Compliance.

441
00:25:04,860 --> 00:25:10,140
You can do a food example by doing food safety due diligence or HR due diligence, right?

442
00:25:10,140 --> 00:25:14,180
Making sure that maybe you've had some OSHA violations, making sure that you've got the

443
00:25:14,180 --> 00:25:18,300
proper protocols in place to prevent that from happening in the future and making sure

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00:25:18,300 --> 00:25:23,220
you've tied off with legal that any outstanding legal situations that the business may have

445
00:25:23,220 --> 00:25:26,340
had under your ownership have been run to ground.

446
00:25:26,340 --> 00:25:30,460
Really just kind of thinking about each functional area in the business from all the back office

447
00:25:30,460 --> 00:25:31,460
functions.

448
00:25:31,460 --> 00:25:34,980
Even this again, it's not all these functional areas on every deal.

449
00:25:34,980 --> 00:25:39,020
It's really about where are some risks and where are some real opportunities to drive

450
00:25:39,020 --> 00:25:42,220
value and making sure that you're focusing on those.

451
00:25:42,220 --> 00:25:45,220
Almost every deal, you're going to have that quality of earnings analysis because everybody

452
00:25:45,220 --> 00:25:48,940
needs to understand how much profit the business generates, how much EBITDA the business generates,

453
00:25:48,940 --> 00:25:52,840
how predictable are the cash flows, how the historical performance has been trending.

454
00:25:52,840 --> 00:25:54,280
That's done on almost every deal.

455
00:25:54,280 --> 00:25:58,740
Almost every other diligence, sell-side diligence work stream that is, is totally discretionary,

456
00:25:58,740 --> 00:26:04,140
to conclude, Ops, supply chain, technology, cybersecurity, food safety, human capital

457
00:26:04,140 --> 00:26:08,340
management, talent management, those sorts of focus areas.

458
00:26:08,340 --> 00:26:11,180
There's different firms out there, obviously, as you know, James, there's different firms

459
00:26:11,180 --> 00:26:13,520
out there that specialize in all of those.

460
00:26:13,520 --> 00:26:16,740
There really is almost no one out there who does all of those.

461
00:26:16,740 --> 00:26:19,420
It'd be very difficult to be an expert in all of those things, which is why you see

462
00:26:19,420 --> 00:26:23,020
this deep, broad pool of service providers who serve this space.

463
00:26:23,020 --> 00:26:27,180
Mike, another topic for another day maybe is where that alignment of those services

464
00:26:27,180 --> 00:26:29,020
is most beneficial.

465
00:26:29,020 --> 00:26:33,580
For example, in our space, we know that when folks go in to do an operations diligence,

466
00:26:33,580 --> 00:26:37,700
having the technology diligence aligned to the operations really allows you to show that

467
00:26:37,700 --> 00:26:38,700
business enablement.

468
00:26:38,700 --> 00:26:44,100
So that's a future episode for folks where we talk about why certain services align well

469
00:26:44,100 --> 00:26:46,620
and how that can drive value.

470
00:26:46,620 --> 00:26:52,620
So I know that I'm recently coming off of a sell-side diligence and did one with a client

471
00:26:52,620 --> 00:26:53,620
recently.

472
00:26:53,620 --> 00:26:54,860
Maybe we can get a bit tactical.

473
00:26:54,860 --> 00:26:57,580
What questions do you have for me kind of at the tactical level?

474
00:26:57,580 --> 00:26:58,580
Yeah.

475
00:26:58,580 --> 00:27:02,820
So it might help some folks to understand, you know, how do you prepare for going through

476
00:27:02,820 --> 00:27:03,820
one of these exercises?

477
00:27:03,820 --> 00:27:04,820
Yeah.

478
00:27:04,820 --> 00:27:08,780
So if anybody's ever been on a buy-side diligence, we all know that there's a lot of documentation,

479
00:27:08,780 --> 00:27:11,180
there's a lot of pressure, and there's a tighter timeline.

480
00:27:11,180 --> 00:27:15,220
I think it's the same type of things, but with a little bit more of a relaxed timeline.

481
00:27:15,220 --> 00:27:17,460
But there's a lot of important pieces to have.

482
00:27:17,460 --> 00:27:20,040
Mike, you touched on it earlier, and it's a great comment.

483
00:27:20,040 --> 00:27:24,420
Having your financials in an organized manner that folks can be able to understand them

484
00:27:24,420 --> 00:27:27,340
and clearly understand what they are.

485
00:27:27,340 --> 00:27:30,620
And a lot of times we go into folks of just making sure you have good, clean data on your

486
00:27:30,620 --> 00:27:36,060
financials that allow those outside parties to understand where you are on your journey.

487
00:27:36,060 --> 00:27:39,820
Another piece that I think as a former person that worked in corporate that sometimes we

488
00:27:39,820 --> 00:27:44,380
have a challenge with is really good documentation, trying to gather that documentation.

489
00:27:44,380 --> 00:27:49,540
What you're trying to do is capture what we like to call artifacts or pieces of information

490
00:27:49,540 --> 00:27:54,460
that allows a third party to quickly ingest and understand what you do in your business.

491
00:27:54,460 --> 00:27:59,380
So gathering all that documentation, whether it be training guides, whether it be communication,

492
00:27:59,380 --> 00:28:02,780
whether it be just kind of some things you've captured along the way, helping paint the

493
00:28:02,780 --> 00:28:04,780
picture of what you have.

494
00:28:04,780 --> 00:28:09,780
And the last piece, hopefully you have this, is around your compliance documentation.

495
00:28:09,780 --> 00:28:12,700
Where you on your journey have there, you mentioned OSHA earlier, is there any OSHA

496
00:28:12,700 --> 00:28:14,320
compliance issues?

497
00:28:14,320 --> 00:28:17,500
Do you know that you have gaps and kind of putting that together?

498
00:28:17,500 --> 00:28:21,860
One of the ways that folks connect and are able to share that information, because you're

499
00:28:21,860 --> 00:28:26,180
not going to have the outside groups come into your systems and servers, is creating

500
00:28:26,180 --> 00:28:30,580
what's called a virtual data room, or just really a place in a repository where you can

501
00:28:30,580 --> 00:28:34,520
store files and share them securely with an outside party.

502
00:28:34,520 --> 00:28:37,700
To the point that you made around bankers, if there's a banker in the process, they're

503
00:28:37,700 --> 00:28:40,700
very familiar with the VDR and standing that up.

504
00:28:40,700 --> 00:28:43,940
If you're doing this directly, the firm that you reach out with that does this should be

505
00:28:43,940 --> 00:28:45,520
able to help you set that up.

506
00:28:45,520 --> 00:28:49,240
But it's really kind of a place where you can work with your team and say, as we gather

507
00:28:49,240 --> 00:28:53,780
these components, these artifacts, these elements, let's put them in this central place that

508
00:28:53,780 --> 00:28:55,740
we can then share with the outside party.

509
00:28:55,740 --> 00:28:59,300
And sometimes the outside party will drive a bit of what they're looking for, but really

510
00:28:59,300 --> 00:29:04,140
your team has the ability to start to load those files in a safe and easy way.

511
00:29:04,140 --> 00:29:07,460
And then the part of that, and the reason you're doing that, is you really want to build

512
00:29:07,460 --> 00:29:08,460
that narrative.

513
00:29:08,460 --> 00:29:11,020
Now, I'll tell you, there's some bias around there.

514
00:29:11,020 --> 00:29:15,660
A lot of times businesses really want to focus on a certain outcome from the sell side.

515
00:29:15,660 --> 00:29:19,620
You mentioned it, Mike, hey, we know we have some operational improvements we want to do

516
00:29:19,620 --> 00:29:20,860
and we drive towards that narrative.

517
00:29:20,860 --> 00:29:25,160
And so they start to land some of those artifacts that really align to the narrative they have

518
00:29:25,160 --> 00:29:26,260
in mind.

519
00:29:26,260 --> 00:29:30,740
Hopefully, if you're working with a good quality provider, they'll start to request things

520
00:29:30,740 --> 00:29:35,000
that either you A, don't have, or B, don't speak to the narrative you're trying to talk

521
00:29:35,000 --> 00:29:39,580
about because this is the time to have those honest conversations when you're going through

522
00:29:39,580 --> 00:29:44,700
the sell side process, be open and honest about those challenges because it stays, for

523
00:29:44,700 --> 00:29:48,740
lack of a better term, in the family as part of that transaction.

524
00:29:48,740 --> 00:29:50,820
And so you can have those conversations.

525
00:29:50,820 --> 00:29:53,340
Those aren't going to be shared as part of the SIM that you mentioned earlier.

526
00:29:53,340 --> 00:29:55,940
They're not going to be shared with the outside groups.

527
00:29:55,940 --> 00:29:57,180
Those stay with that group.

528
00:29:57,180 --> 00:29:59,820
And again, as long as you're working with a quality provider.

529
00:29:59,820 --> 00:30:04,300
You know, as you're talking through that, James, I realized one of the things that I

530
00:30:04,300 --> 00:30:08,780
didn't touch on in my intro and that isn't really kind of covered in this next section

531
00:30:08,780 --> 00:30:12,060
we're now in talking about preparing for sell side diligence, just kind of like as you're

532
00:30:12,060 --> 00:30:13,140
doing it.

533
00:30:13,140 --> 00:30:15,060
But I think it's related enough.

534
00:30:15,060 --> 00:30:20,140
What jumped into my mind was there's one thing we talk a lot about too with sell side diligence

535
00:30:20,140 --> 00:30:21,860
and that's charm school.

536
00:30:21,860 --> 00:30:26,900
And especially if you've got a management team who has never gone through a process

537
00:30:26,900 --> 00:30:27,940
before.

538
00:30:27,940 --> 00:30:31,740
And especially if you've got a management team and you know, I'm a big believer in this

539
00:30:31,740 --> 00:30:34,020
who has equity in the business, right?

540
00:30:34,020 --> 00:30:39,620
Who is going to be aware that a process is taking place that we are selling the business.

541
00:30:39,620 --> 00:30:45,700
People generally in businesses are nervous when kind of unknown outsiders come in and

542
00:30:45,700 --> 00:30:47,240
ask a lot of questions.

543
00:30:47,240 --> 00:30:48,240
Some of them intelligent.

544
00:30:48,240 --> 00:30:51,820
Let's just say all of them are intelligent because nobody would ever ask an unintelligent

545
00:30:51,820 --> 00:30:54,180
question in an M&A process, right?

546
00:30:54,180 --> 00:30:57,460
But people just get a little bit skittish, a little bit nervous when these sorts of things

547
00:30:57,460 --> 00:30:58,740
happen.

548
00:30:58,740 --> 00:31:00,020
That's just in general.

549
00:31:00,020 --> 00:31:04,340
When people know it's part of an M&A process, they get even more nervous.

550
00:31:04,340 --> 00:31:10,880
And then the next level there is people who have oftentimes the case, the first time they're

551
00:31:10,880 --> 00:31:15,060
ever going to have a significant monetization event, right?

552
00:31:15,060 --> 00:31:20,780
Maybe you've got a COO who owns 1% or 2% or 5% of the business, maybe the first time they've

553
00:31:20,780 --> 00:31:27,460
ever going to get a big bite at the apple from a wealth generation and creation perspective.

554
00:31:27,460 --> 00:31:29,980
You can kind of see the picture that I'm painting, James, that you could have some folks who

555
00:31:29,980 --> 00:31:34,260
are obviously very proud of what they've built, but can be very nervous in those settings,

556
00:31:34,260 --> 00:31:35,260
right?

557
00:31:35,260 --> 00:31:39,420
And the last thing that you want as the seller of the business is for the first time ever

558
00:31:39,420 --> 00:31:44,540
in that executive's career, let's take that COO as the example, some people coming in

559
00:31:44,540 --> 00:31:48,300
and asking a bunch of really good questions that he or she doesn't have a really good

560
00:31:48,300 --> 00:31:49,300
answer for.

561
00:31:49,300 --> 00:31:52,900
And listen, I'm not talking about encouraging people to hide things, right?

562
00:31:52,900 --> 00:31:56,260
You'll never hear us be proponents of, hey, if you know something's wrong, you shouldn't

563
00:31:56,260 --> 00:31:57,260
disclose it.

564
00:31:57,260 --> 00:32:00,700
We don't, maybe try and fix it, right, this kind of our mentality.

565
00:32:00,700 --> 00:32:06,380
But if you've got a less experienced from an M&A perspective executive or group of executives,

566
00:32:06,380 --> 00:32:11,100
making sure that you're coaching them up on what this process is going to look like, making

567
00:32:11,100 --> 00:32:15,020
sure it's not the first time that they've ever heard questions like, tell me about the

568
00:32:15,020 --> 00:32:19,660
detailed analysis that you did around your consolidation strategy, right?

569
00:32:19,660 --> 00:32:23,940
You want to make sure that the answer isn't, well, we think there's a 20% cost savings

570
00:32:23,940 --> 00:32:25,060
by doing X or Y.

571
00:32:25,060 --> 00:32:29,900
You want it to be, we came up with the idea to do this because of X and Y and Z input

572
00:32:29,900 --> 00:32:30,900
factors.

573
00:32:30,900 --> 00:32:32,340
We did A and B and C analysis.

574
00:32:32,340 --> 00:32:38,700
By the way, would you like to see the output of that and our logic around why we think

575
00:32:38,700 --> 00:32:42,540
that this next phase of the business's maturity or by going and doing whatever it is that

576
00:32:42,540 --> 00:32:44,900
they're going to go try and do is a good idea.

577
00:32:44,900 --> 00:32:49,380
I mean, that is just so much of a better response from an executive, from the seller's perspective.

578
00:32:49,380 --> 00:32:51,380
It's also a much better response from the buyer's perspective, right?

579
00:32:51,380 --> 00:32:54,740
And the buyer is going to sit there and be like, geez, we tour a lot of businesses every

580
00:32:54,740 --> 00:32:55,740
year.

581
00:32:55,740 --> 00:32:58,220
Very few are able to articulate it as professionally as that person did, right?

582
00:32:58,220 --> 00:33:00,340
So there's an element here of charm school too.

583
00:33:00,340 --> 00:33:02,140
We call it charm school internally.

584
00:33:02,140 --> 00:33:05,140
Different groups needed a little bit more than others, but that oftentimes is kind of

585
00:33:05,140 --> 00:33:08,940
one of the unspoken benefits of doing a process like this too.

586
00:33:08,940 --> 00:33:09,940
So food for thought.

587
00:33:09,940 --> 00:33:13,140
Can I add on to your unspoken benefit real quick?

588
00:33:13,140 --> 00:33:17,700
If you have underperformers in your organization, they stick out like sore thumbs and a sell

589
00:33:17,700 --> 00:33:21,900
side diligence because they can't answer those questions and then's the time to make the

590
00:33:21,900 --> 00:33:25,580
change so you can have someone in who's enough ingrained in the business.

591
00:33:25,580 --> 00:33:28,340
And I think maybe it's interesting to maybe talk about for a second.

592
00:33:28,340 --> 00:33:31,180
You mentioned earlier, I just want to mention it again.

593
00:33:31,180 --> 00:33:35,420
The time to start preparing could be a year before you're thinking about that transaction.

594
00:33:35,420 --> 00:33:39,340
Use that time to potentially swap out some of those resources or get in the resources

595
00:33:39,340 --> 00:33:43,120
that are better aligned to what you're driving towards as your business.

596
00:33:43,120 --> 00:33:46,700
Because I can tell you, sitting across from multiple people that have all gone to charm

597
00:33:46,700 --> 00:33:51,140
school, they're very charming, but there's not a lot of value or actuality in what they're

598
00:33:51,140 --> 00:33:52,140
saying.

599
00:33:52,140 --> 00:33:55,380
And so ensuring that there's alignment of the management team and your communication,

600
00:33:55,380 --> 00:33:58,900
but then also making sure you have quality individuals who can drive that message and

601
00:33:58,900 --> 00:34:02,900
to your point, might articulate the value that's been there.

602
00:34:02,900 --> 00:34:04,420
Because we all know we do great things.

603
00:34:04,420 --> 00:34:05,980
Sometimes we're poor in communicating them.

604
00:34:05,980 --> 00:34:08,140
And I think we've seen that time and time again.

605
00:34:08,140 --> 00:34:14,060
So I would encourage folks six to 12 months before you're ready to think about that transaction,

606
00:34:14,060 --> 00:34:17,340
start to get your folks involved, start to let them know, and then get a third party

607
00:34:17,340 --> 00:34:19,980
to come in to help you kind of double check some of that.

608
00:34:19,980 --> 00:34:22,900
And you may learn a lot about your internal talent on the journey as well.

609
00:34:22,900 --> 00:34:23,900
Yeah.

610
00:34:23,900 --> 00:34:29,060
So we've covered a lot of ground, James, but maybe last on this topic of preparation, how

611
00:34:29,060 --> 00:34:31,340
can companies address potential risks?

612
00:34:31,340 --> 00:34:32,340
Yeah.

613
00:34:32,340 --> 00:34:38,760
I think with a sell side, the major risk is lack of transparency, maybe a little bit too

614
00:34:38,760 --> 00:34:43,580
much of putting your thumb on the scale with some things, and then a lack of preparedness.

615
00:34:43,580 --> 00:34:49,020
I think one of the things that is important to discuss is knowing that there's a large

616
00:34:49,020 --> 00:34:52,660
time commitment that goes into sell side diligence.

617
00:34:52,660 --> 00:34:55,660
Being honest, there's a lot of time that goes into it and it is a lot of work.

618
00:34:55,660 --> 00:34:58,820
I know we're selling it as a great opportunity and I think it's something very important

619
00:34:58,820 --> 00:35:01,260
that organizations should do.

620
00:35:01,260 --> 00:35:07,460
Not properly allocating time for that process can have great effects on your organization,

621
00:35:07,460 --> 00:35:12,140
A, because it's a time suck and B, because it doesn't produce a result that's valuable

622
00:35:12,140 --> 00:35:13,140
to folks.

623
00:35:13,140 --> 00:35:18,100
And I think another risk going into this is assuming a sell side diligence is going to

624
00:35:18,100 --> 00:35:19,100
fix everything.

625
00:35:19,100 --> 00:35:23,700
I think you mentioned earlier, Mike, and I respect the comment around that it can affect

626
00:35:23,700 --> 00:35:27,860
EBITDA, but there's also this idea that I go through to a sell side diligence and all

627
00:35:27,860 --> 00:35:29,460
is going to be right in the world.

628
00:35:29,460 --> 00:35:32,780
There's some work that has to be done at the end of a sell side diligence to be able to

629
00:35:32,780 --> 00:35:34,300
drive that value.

630
00:35:34,300 --> 00:35:38,100
And so you also not only need to allocate time to do the process, you need to allocate

631
00:35:38,100 --> 00:35:42,340
a little bit time coming out of the process for those quick wins and easy fixes.

632
00:35:42,340 --> 00:35:45,380
And I think we talked to a lot of folks that think coming in, and you know, we hear the

633
00:35:45,380 --> 00:35:49,260
phrase all the time, put the lipstick on the pig is going to make it all better.

634
00:35:49,260 --> 00:35:50,740
That's a lot of times not true.

635
00:35:50,740 --> 00:35:55,660
And so I think maybe in our next section, we could talk a little bit about how we mitigate

636
00:35:55,660 --> 00:35:56,900
some of those risks.

637
00:35:56,900 --> 00:35:57,900
Yeah, absolutely.

638
00:35:57,900 --> 00:36:04,140
You know, I think if you go back to my analogy from the beginning about house staging, right,

639
00:36:04,140 --> 00:36:08,140
the reality is, is that again, I think most good realtors, real estate agents would tell

640
00:36:08,140 --> 00:36:12,380
you don't call me the month you want to sell your house, right?

641
00:36:12,380 --> 00:36:16,080
Tell me six to eight months before you're thinking about selling and let's have a conversation

642
00:36:16,080 --> 00:36:20,440
about it because maybe I would have encouraged you to paint your house white because nobody

643
00:36:20,440 --> 00:36:23,020
buys baby blue houses anymore.

644
00:36:23,020 --> 00:36:27,140
Or maybe let's improve the landscaping, maybe do a little bit of touch up painting because

645
00:36:27,140 --> 00:36:29,100
some of those things can go a really long way.

646
00:36:29,100 --> 00:36:33,260
If you can get an extra 5% for the home and it's a million dollar house, you're talking

647
00:36:33,260 --> 00:36:38,900
about 50, $60,000 when maybe spending five or 6,000 over the next couple months to kind

648
00:36:38,900 --> 00:36:43,020
of, no pun intended, get your house in order could be a really good plan, right?

649
00:36:43,020 --> 00:36:48,080
But you can't expect the realtor to walk through on the first of the month when you're trying

650
00:36:48,080 --> 00:36:49,740
to sell by the end of the month.

651
00:36:49,740 --> 00:36:52,980
The realtor says, hey, I think you should repaint that fence because it's, you know,

652
00:36:52,980 --> 00:36:54,320
10 years past due.

653
00:36:54,320 --> 00:36:57,540
The chances that you're going to be able to find a painter, get a painter, get on their

654
00:36:57,540 --> 00:37:02,020
schedule, have them do a good job the first time before you can sell it, get it listed

655
00:37:02,020 --> 00:37:04,940
and have that transaction close in a 30 day period, it's just not going to happen.

656
00:37:04,940 --> 00:37:08,740
In an ideal world, you know, calling some folks well in advance of when you want the

657
00:37:08,740 --> 00:37:12,200
transaction to occur, it just gives everybody a little bit more time to prep and be more

658
00:37:12,200 --> 00:37:15,820
thoughtful and be more ready, more time for charm school where that's needed.

659
00:37:15,820 --> 00:37:16,820
Yeah, great point.

660
00:37:16,820 --> 00:37:20,220
Can I make a personal tie to this one, Mike, which is interesting.

661
00:37:20,220 --> 00:37:24,540
So recently moved, I'm part of that move, my wife's mom is a realtor.

662
00:37:24,540 --> 00:37:29,180
And so we obviously engaged her ahead of time, to your point, and prepared for that.

663
00:37:29,180 --> 00:37:32,980
And so we asked her for some tips of like, hey, my wife's on maternity leave for six

664
00:37:32,980 --> 00:37:36,780
months, we need to move within this window, so we need to sell a home, buy a home, move

665
00:37:36,780 --> 00:37:39,740
with a three month old, all in this short window.

666
00:37:39,740 --> 00:37:40,860
And you know what's interesting?

667
00:37:40,860 --> 00:37:45,940
She said, hire a home inspector, tell them that you're selling the house, that you've

668
00:37:45,940 --> 00:37:49,260
sold the house and have them do the inspection as if the house has been sold.

669
00:37:49,260 --> 00:37:52,740
Wasn't on the market, hadn't done anything, hired a home inspector.

670
00:37:52,740 --> 00:37:56,140
And what we did is we used that as a punch list, remediated everything from that home

671
00:37:56,140 --> 00:37:57,300
inspection.

672
00:37:57,300 --> 00:38:01,500
And coming out of our second home inspection, which was that transaction, we had zero items

673
00:38:01,500 --> 00:38:02,500
on the punch list.

674
00:38:02,500 --> 00:38:05,700
Now, some of them were probably more detailed and a little more granular than we needed

675
00:38:05,700 --> 00:38:06,700
to do.

676
00:38:06,700 --> 00:38:08,540
But we definitely had that assurity and comfort.

677
00:38:08,540 --> 00:38:11,540
And so it really made me think about the office and work at that point.

678
00:38:11,540 --> 00:38:14,700
And I found it interesting that that was the one tip she gave us for a quick transaction.

679
00:38:14,700 --> 00:38:15,700
Tim Cynova Absolutely.

680
00:38:15,700 --> 00:38:18,700
Yeah, and try and hire the most thorough home inspector.

681
00:38:18,700 --> 00:38:22,780
Yeah, you want to throw a commercial in here.

682
00:38:22,780 --> 00:38:26,860
But but yeah, you know, you want to hire the most thorough home inspector you can find,

683
00:38:26,860 --> 00:38:27,860
right?

684
00:38:27,860 --> 00:38:31,620
You want the guy that every real estate agent in town is hoping you don't hire when you're

685
00:38:31,620 --> 00:38:33,180
trying to buy a house from them.

686
00:38:33,180 --> 00:38:34,180
That's the guy that you want.

687
00:38:34,180 --> 00:38:35,800
And by the way, that's the guy you want on the sell side.

688
00:38:35,800 --> 00:38:37,180
And that's the guy you want on the buy side.

689
00:38:37,180 --> 00:38:38,780
You want to work on both sides of it for you.

690
00:38:38,780 --> 00:38:40,380
So but yeah, great, great example.

691
00:38:40,380 --> 00:38:41,380
Great example.

692
00:38:41,380 --> 00:38:43,100
Trey Lockerbie So maybe we can talk a little bit about some

693
00:38:43,100 --> 00:38:46,820
of the pitfalls and and how folks kind of are able to avoid them because we talked about

694
00:38:46,820 --> 00:38:47,820
the risk.

695
00:38:47,820 --> 00:38:51,220
So let's just pull that through to this talk about some things that we've seen in the field

696
00:38:51,220 --> 00:38:52,220
maybe.

697
00:38:52,220 --> 00:38:53,460
What kind of questions you think our users would be interested?

698
00:38:53,460 --> 00:38:55,100
Tim Cynova Yeah, I got some questions for you.

699
00:38:55,100 --> 00:38:58,500
What what are the common mistakes that you see during sell side oldest?

700
00:38:58,500 --> 00:39:01,860
Trey Lockerbie So there's there's so many that that are challenging.

701
00:39:01,860 --> 00:39:07,140
I'm going to go from an operations and a technology perspective, maybe to kind of separate a little

702
00:39:07,140 --> 00:39:10,820
bit in this section to talk about some of those mistakes.

703
00:39:10,820 --> 00:39:17,460
So one of the biggest mistakes is the documentation is outdated and not the most recent information.

704
00:39:17,460 --> 00:39:22,700
To walk you through the process again, I start to engage this outside group and the information

705
00:39:22,700 --> 00:39:25,980
comes in, then I start to review that information.

706
00:39:25,980 --> 00:39:30,700
If I'm the external party, and I'm looking at old documentation, you can imagine that

707
00:39:30,700 --> 00:39:34,220
I'm now spun up on some story that isn't really in existence.

708
00:39:34,220 --> 00:39:38,300
One of the common mistakes is sharing old information or not reviewing the documentation

709
00:39:38,300 --> 00:39:40,300
that that's sent over.

710
00:39:40,300 --> 00:39:44,580
Another common mistake we see a lot of times is I'm hoping that all these businesses have

711
00:39:44,580 --> 00:39:47,300
a management meeting where the senior leaders get together.

712
00:39:47,300 --> 00:39:52,420
But communication on the management team is super important for two reasons.

713
00:39:52,420 --> 00:39:56,180
Reason number one, there are going to be folks at the business who are unaware that this

714
00:39:56,180 --> 00:39:59,860
is happening and that a transaction is going to happen.

715
00:39:59,860 --> 00:40:03,780
So they've not been informed of this change.

716
00:40:03,780 --> 00:40:09,340
And you need to inform your management team that this is happening so folks can be prepared.

717
00:40:09,340 --> 00:40:13,300
But there are folks that you don't want to alert that you're going through a transaction.

718
00:40:13,300 --> 00:40:17,380
So that clarity of communication is super important.

719
00:40:17,380 --> 00:40:24,340
Another one is when you start to look at your sell side diligence and start to work through

720
00:40:24,340 --> 00:40:28,380
the pieces and components of it, it loses steam.

721
00:40:28,380 --> 00:40:31,980
Because at the beginning, everyone's on board, then you kind of get in this monotonous, I

722
00:40:31,980 --> 00:40:34,560
got to go through information and iterate.

723
00:40:34,560 --> 00:40:39,740
Someone internally has to be the internal champion to drive that process forward, to

724
00:40:39,740 --> 00:40:43,380
ensure it continues with the same energy that you had at the beginning.

725
00:40:43,380 --> 00:40:47,180
And also helps protect you of the information you don't want getting to the rest of the

726
00:40:47,180 --> 00:40:48,700
team getting to the team.

727
00:40:48,700 --> 00:40:54,140
I think internal ownership, executive communication and alignment is a really common mistake that

728
00:40:54,140 --> 00:40:55,140
we see a lot.

729
00:40:55,140 --> 00:41:01,820
So how do you think about, there's a lot of conversation when we do these work streams

730
00:41:01,820 --> 00:41:07,380
around what number is going to be the number that we put in to the materials, right?

731
00:41:07,380 --> 00:41:11,000
To the final report, bearing in mind that you're going to share these final reports

732
00:41:11,000 --> 00:41:14,300
oftentimes with your buyer, your prospective buyer group.

733
00:41:14,300 --> 00:41:18,720
And by numbers, I mean, what is the adjusted EBITDA number that we're going to go with,

734
00:41:18,720 --> 00:41:22,460
with the Q of E financial due diligence team members?

735
00:41:22,460 --> 00:41:26,520
If it's operations diligence, what is the savings number that we're going to use, right?

736
00:41:26,520 --> 00:41:29,960
If it's maybe commercial sell side diligence, which I'm realizing now, we haven't talked

737
00:41:29,960 --> 00:41:32,080
at all about commercial sell side diligence today.

738
00:41:32,080 --> 00:41:36,060
For our listeners, that would include what's the market size for these products?

739
00:41:36,060 --> 00:41:37,620
How fast is the market growing?

740
00:41:37,620 --> 00:41:38,620
What are the tailwinds?

741
00:41:38,620 --> 00:41:39,620
What are the headwinds?

742
00:41:39,620 --> 00:41:40,620
Right?

743
00:41:40,620 --> 00:41:41,620
There's a whole work stream around that.

744
00:41:41,620 --> 00:41:45,100
And in the case of that, what is the market growth rate that we're going to align on?

745
00:41:45,100 --> 00:41:48,380
The experts that you're bringing in from the outside, they're going to do a bunch of work.

746
00:41:48,380 --> 00:41:51,900
They're going to give you a recommendation, but this is a collaborative back and forth

747
00:41:51,900 --> 00:41:52,900
process.

748
00:41:52,900 --> 00:41:56,340
So it's a little bit of a dialogue at the end of the day around, well, we believe those

749
00:41:56,340 --> 00:41:59,780
numbers, but maybe the conversation is that those numbers are a little bit more frothy

750
00:41:59,780 --> 00:42:03,540
or maybe we should be a little more conservative, whatever the case may be.

751
00:42:03,540 --> 00:42:08,860
How do you think about alignment on some of the value opportunities that are being uncovered

752
00:42:08,860 --> 00:42:11,420
through the process and how you're quantifying those?

753
00:42:11,420 --> 00:42:13,300
And how that might impact the sale process?

754
00:42:13,300 --> 00:42:17,340
I think it's interesting when you, when the output, let's, we start with the output, right?

755
00:42:17,340 --> 00:42:18,820
You talked about that SIM.

756
00:42:18,820 --> 00:42:23,900
So when I receive that SIM, I'm going to start to review that, make very basic assumptions

757
00:42:23,900 --> 00:42:26,860
of the business based on what you provide to me.

758
00:42:26,860 --> 00:42:30,340
Number one, if you're overestimating in the sense that you're overestimating in future

759
00:42:30,340 --> 00:42:34,620
projections within the SIM, and then I engage you and start to push on those and they fall

760
00:42:34,620 --> 00:42:39,020
apart, it's not a good look and it's a tough interaction at the beginning because we're

761
00:42:39,020 --> 00:42:41,700
already kind of starting in a tough place.

762
00:42:41,700 --> 00:42:46,220
But I think the other side of it is if folks are expecting to see something come out of

763
00:42:46,220 --> 00:42:49,500
a sell-side diligence and they're not able to achieve the numbers they're looking for

764
00:42:49,500 --> 00:42:54,620
because the numbers just don't add up, I have to be comfortable with the answer of no and

765
00:42:54,620 --> 00:43:00,100
adjusting my internal feelings and those estimates to align with market realities.

766
00:43:00,100 --> 00:43:04,900
And so I think one is, is a gut check on yourself to know, hey, I got to be honest.

767
00:43:04,900 --> 00:43:08,300
And the second is, you know, it's coming because the outside parties are going to go and review

768
00:43:08,300 --> 00:43:09,300
these things.

769
00:43:09,300 --> 00:43:12,420
So you might as well take the pain upfront and not have it be part of the deal process

770
00:43:12,420 --> 00:43:13,420
and build mistrust.

771
00:43:13,420 --> 00:43:16,820
Trey Lockerbie So when you think about other risks, right?

772
00:43:16,820 --> 00:43:20,100
This is we're talking about common pitfalls, how to avoid them here, right?

773
00:43:20,100 --> 00:43:23,940
When you think about other risks, what other operational risks are oftentimes overlooked

774
00:43:23,940 --> 00:43:24,940
in this process?

775
00:43:24,940 --> 00:43:26,420
Dr. Justin Marchegiani Yeah, I think we have a tendency to look at

776
00:43:26,420 --> 00:43:28,060
the basics, right?

777
00:43:28,060 --> 00:43:31,100
And some of the things that aren't looked at is some of the supply chain components,

778
00:43:31,100 --> 00:43:32,100
right?

779
00:43:32,100 --> 00:43:37,340
So we went in and did a sell-side diligence on indirect procurement, which is interesting

780
00:43:37,340 --> 00:43:41,020
because you think you would do a diligence on direct procurement, but this group had

781
00:43:41,020 --> 00:43:43,820
a lot of consumables and wanted to have the indirect.

782
00:43:43,820 --> 00:43:46,020
And they're both sides of the same coin.

783
00:43:46,020 --> 00:43:49,780
And so I think sometimes folks get hyper focused on one of the things they want to look at

784
00:43:49,780 --> 00:43:52,640
because they sit with the management team and say, what are our issues?

785
00:43:52,640 --> 00:43:56,240
They bubble up an issue and then they assume that's what you need to have in sell side.

786
00:43:56,240 --> 00:44:00,700
So I think some of the operational risks are not looking at all your operations.

787
00:44:00,700 --> 00:44:03,140
And then the other side is the value stream mapping.

788
00:44:03,140 --> 00:44:06,540
When you go do that value stream mapping, not looking at all your value streams and

789
00:44:06,540 --> 00:44:10,780
how they interact with each other and really teasing those out sometimes can leave some

790
00:44:10,780 --> 00:44:15,300
glaring misses that if not asked about aren't found.

791
00:44:15,300 --> 00:44:17,500
Now I think there's some ways to solve that.

792
00:44:17,500 --> 00:44:20,780
Having your team that's doing the sell side diligence come on site, interact directly

793
00:44:20,780 --> 00:44:23,220
with your team and have those conversations.

794
00:44:23,220 --> 00:44:25,140
But I'll go back to an earlier point.

795
00:44:25,140 --> 00:44:30,620
If I'm only engaging a small group of folks and oftentimes senior leaders within the organization,

796
00:44:30,620 --> 00:44:34,060
senior leaders don't know all the issues that happen on their team, especially in higher

797
00:44:34,060 --> 00:44:38,420
and mid size organizations, they struggle to know some of those challenges.

798
00:44:38,420 --> 00:44:42,820
So you could not be engaging the right folks at the right level due to some of the secrecy

799
00:44:42,820 --> 00:44:45,380
honestly that's needed part of the transaction.

800
00:44:45,380 --> 00:44:50,220
So I think really having your team bubble up those issues, engage the lower level teams

801
00:44:50,220 --> 00:44:54,300
that may not be in a have direct contact as part of the sell side diligence, but to at

802
00:44:54,300 --> 00:44:58,860
least petition those teams to capture those challenges is a way to have a mechanism to

803
00:44:58,860 --> 00:45:02,140
bring that to a larger group because you're not going to be able to go on the floor sometimes

804
00:45:02,140 --> 00:45:04,580
and have those direct conversations.

805
00:45:04,580 --> 00:45:10,500
So what happens James, if you bring in an outside advisor, they go through your business

806
00:45:10,500 --> 00:45:15,360
and they come back and they say, hey, you got a decent business, but there's a skeleton

807
00:45:15,360 --> 00:45:19,240
over there or hey, we toured your six sites.

808
00:45:19,240 --> 00:45:22,300
What's going on with number six over there?

809
00:45:22,300 --> 00:45:27,940
Like, why does that one look at smell a lot different from the other ones?

810
00:45:27,940 --> 00:45:31,420
You know, and I think a lot of people are, listen, every no business is perfect, right?

811
00:45:31,420 --> 00:45:33,620
This is kind of one of the mottos that we have around here.

812
00:45:33,620 --> 00:45:34,900
We've never seen a perfect business.

813
00:45:34,900 --> 00:45:36,360
It likely doesn't exist.

814
00:45:36,360 --> 00:45:39,860
So I think a lot of people worry about, hey, somebody is going to come in and they're going

815
00:45:39,860 --> 00:45:44,420
to find out some of our less attractive features.

816
00:45:44,420 --> 00:45:49,060
And you know, the service providers, you know, anyone worth anything will tell you at the

817
00:45:49,060 --> 00:45:53,700
onset that, hey, listen, we'll write this report and we believe it to be a collaborative

818
00:45:53,700 --> 00:45:54,700
exercise.

819
00:45:54,700 --> 00:45:55,700
We want to have your input.

820
00:45:55,700 --> 00:45:58,880
But at the end of the day, if we're going to put our brand on it, for example, if TriVista,

821
00:45:58,880 --> 00:46:03,420
if your team, James, you know, on the technology side says, hey, we did IT, a sell site, IT

822
00:46:03,420 --> 00:46:07,540
due diligence, and here's what we found, you can't, you might be able to add like a little

823
00:46:07,540 --> 00:46:12,540
dusting of powdered sugar, but you can't totally advertise the business as something that it's

824
00:46:12,540 --> 00:46:13,540
not, right?

825
00:46:13,540 --> 00:46:16,440
If they've under invested in cybersecurity, you can't come out and say, oh, they got the

826
00:46:16,440 --> 00:46:18,920
best cybersecurity protocols in the world.

827
00:46:18,920 --> 00:46:23,540
Because quite frankly, your brand in the marketplace would be, your credibility would be lost quite

828
00:46:23,540 --> 00:46:27,060
quickly and that's not what anybody's trying to achieve or none of the service providers

829
00:46:27,060 --> 00:46:28,820
would take on these work streams in the first place.

830
00:46:28,820 --> 00:46:32,300
Their revenue is not attractive enough to take on that level of risk.

831
00:46:32,300 --> 00:46:38,260
So what happens or maybe phrase differently, why is that level of transparency important?

832
00:46:38,260 --> 00:46:42,540
And I think as a headline, people should definitely prepare themselves that you bring in a bunch

833
00:46:42,540 --> 00:46:46,160
of outside, quote unquote, experts, whether or not they're actually experts is for the

834
00:46:46,160 --> 00:46:49,420
client to decide, I guess, ultimately, but you're bringing in a bunch of experienced

835
00:46:49,420 --> 00:46:50,940
folks to come and pick apart your business.

836
00:46:50,940 --> 00:46:54,740
What happens when they find out that there are some issues, some red flags or some yellow

837
00:46:54,740 --> 00:46:55,740
flags?

838
00:46:55,740 --> 00:46:56,740
What do you do?

839
00:46:56,740 --> 00:46:58,420
And why is this so important to allow this?

840
00:46:58,420 --> 00:47:01,660
Why would you encourage people to be comfortable with this as an outcome?

841
00:47:01,660 --> 00:47:06,020
You know, recently I was traveling and sitting in the lounge and randomly Scandal, the show

842
00:47:06,020 --> 00:47:11,180
was was on the TV and running and it was, I forgot about the format of Scandal.

843
00:47:11,180 --> 00:47:17,860
It was happy niceness at the front, then a problem, then a discovery, and then later

844
00:47:17,860 --> 00:47:21,420
the client or they were trying to fix for wasn't completely transparent and they had

845
00:47:21,420 --> 00:47:24,580
to like scramble to solve problem number two, right?

846
00:47:24,580 --> 00:47:25,580
And I think it's interesting.

847
00:47:25,580 --> 00:47:28,040
It's a bit like that kind of multi-level.

848
00:47:28,040 --> 00:47:32,020
If you're not honest, your sell side diligence team are the fixers.

849
00:47:32,020 --> 00:47:35,100
They're there to help you and support you and bring that along.

850
00:47:35,100 --> 00:47:39,100
If you don't tell them where the issue are, those skeletons or even micro skeletons are

851
00:47:39,100 --> 00:47:40,740
at that need to be solved.

852
00:47:40,740 --> 00:47:42,500
It's hard for them to help you fix.

853
00:47:42,500 --> 00:47:44,220
An example is cybersecurity.

854
00:47:44,220 --> 00:47:49,700
A lot of time folks don't have a great cyber position that where they're are in their journey.

855
00:47:49,700 --> 00:47:51,520
And so there's two ways to handle that.

856
00:47:51,520 --> 00:47:56,580
Number one is you remediate before transaction or number two is we find a way to position

857
00:47:56,580 --> 00:48:00,300
the cyber journey, i.e. there's a plan to get this remediated.

858
00:48:00,300 --> 00:48:02,300
Here's the pieces and components we've done.

859
00:48:02,300 --> 00:48:05,020
We're 14 months out from getting this done.

860
00:48:05,020 --> 00:48:09,420
That type of honesty, when I received that document, I go, okay, they may not be where

861
00:48:09,420 --> 00:48:13,020
they need to be today, but at least they have a thought and a plan to get there.

862
00:48:13,020 --> 00:48:17,140
The challenge is when you're not transparent, there's A, it's not reviewed and B, there's

863
00:48:17,140 --> 00:48:18,380
no plan to remediate.

864
00:48:18,380 --> 00:48:22,540
So now you're in the middle of a buy side diligence most likely, or an internal review

865
00:48:22,540 --> 00:48:26,060
by the team scrambling to put together that plan.

866
00:48:26,060 --> 00:48:29,300
And if we've done this correctly, 12 months in advance, I already have it.

867
00:48:29,300 --> 00:48:32,380
So that time to close the deal is shortened.

868
00:48:32,380 --> 00:48:35,560
The value back to the ownership team is shortened.

869
00:48:35,560 --> 00:48:39,520
The confidence of the buyers to say, wow, these folks were really direct.

870
00:48:39,520 --> 00:48:43,300
We went through a buy side diligence and nothing came out of the buy side diligence that I

871
00:48:43,300 --> 00:48:46,460
didn't see in the sell side or in the SIM.

872
00:48:46,460 --> 00:48:50,380
Imagine the comfort you feel as you go through because you're right, no business is perfect,

873
00:48:50,380 --> 00:48:51,380
but we can all be honest.

874
00:48:51,380 --> 00:48:56,380
Yeah, I mean, we've had this thing for years that on the buy side diligence, that what

875
00:48:56,380 --> 00:49:00,100
we want to see is we obviously want to read about the business in the SIM, look at the

876
00:49:00,100 --> 00:49:02,140
data about the business in the data room.

877
00:49:02,140 --> 00:49:07,660
We want to have what we've observed about the business from afar through the data review

878
00:49:07,660 --> 00:49:15,260
process, to kind of map to what we're hearing management talk about the business and also

879
00:49:15,260 --> 00:49:20,460
map it to what we're seeing actually happen in the business, whether that's on the factory

880
00:49:20,460 --> 00:49:22,260
floor, throughout the organization.

881
00:49:22,260 --> 00:49:26,660
It's kind of triangulating those three things, data room, management's words, what's actually

882
00:49:26,660 --> 00:49:28,540
happening in the business.

883
00:49:28,540 --> 00:49:33,500
If you're not kind of coordinating those three things, you got to remember most people who

884
00:49:33,500 --> 00:49:35,840
can buy businesses of scale, right?

885
00:49:35,840 --> 00:49:40,020
Most people who have somewhere between 20 and several hundred million to a billion,

886
00:49:40,020 --> 00:49:43,580
or several billion dollars in some cases to go and buy a business, they're usually pretty

887
00:49:43,580 --> 00:49:45,580
sophisticated buyers of businesses, right?

888
00:49:45,580 --> 00:49:49,380
People don't tend to generate that level of wealth without a reasonable amount of sophistication

889
00:49:49,380 --> 00:49:53,780
or be able to manage that amount of wealth without a reasonable amount of sophistication.

890
00:49:53,780 --> 00:49:57,180
Just being transparent and making sure people are forthcoming about what people are buying

891
00:49:57,180 --> 00:49:58,540
because they're going to find it anyway.

892
00:49:58,540 --> 00:50:01,540
We have found, and I think most investment bankers would agree with this, is that generally

893
00:50:01,540 --> 00:50:05,460
speaking, unless there is like a really nasty skeleton in the closet, something that would

894
00:50:05,460 --> 00:50:11,540
scare off most folks, most buyers aren't going to overthink things that I think a founder

895
00:50:11,540 --> 00:50:15,980
certainly or maybe a less experienced operator owner of a business is going to worry about,

896
00:50:15,980 --> 00:50:19,180
like, oh, I don't have the latest, greatest ERP system.

897
00:50:19,180 --> 00:50:20,580
Oftentimes, that's fine.

898
00:50:20,580 --> 00:50:25,660
But don't try and advertise your not latest, greatest ERP system as the best thing since

899
00:50:25,660 --> 00:50:28,700
sliced bread because people are going to find that out.

900
00:50:28,700 --> 00:50:32,980
You're much better off saying, hey, we don't have the sexiest ERP system in the world,

901
00:50:32,980 --> 00:50:36,620
but it works for us for these reasons as attested to by these experts.

902
00:50:36,620 --> 00:50:40,380
We actually think that we can triple the size of this business without having to go through

903
00:50:40,380 --> 00:50:43,900
an ERP change or flip side of that coin.

904
00:50:43,900 --> 00:50:45,240
We've outgrown our ERP system.

905
00:50:45,240 --> 00:50:46,700
We know we need to make a change.

906
00:50:46,700 --> 00:50:51,220
We've gotten some experts involved who have helped develop a plan and put together a cost

907
00:50:51,220 --> 00:50:54,340
budget and really vetted that against other benchmarks.

908
00:50:54,340 --> 00:50:59,300
We think these numbers and this timeline is very achievable for those reasons.

909
00:50:59,300 --> 00:51:03,580
Then a buyer goes, well, jeez, yeah, I prefer not to have to go through an ERP upgrade process

910
00:51:03,580 --> 00:51:06,900
because that could take a year or two, but jeez, these guys seem to be really thoughtful

911
00:51:06,900 --> 00:51:07,900
about it.

912
00:51:07,900 --> 00:51:08,900
They've got the numbers.

913
00:51:08,900 --> 00:51:10,620
I can bake that into my financial model.

914
00:51:10,620 --> 00:51:13,300
Less risk for me and less work that I have to do as a buyer.

915
00:51:13,300 --> 00:51:16,340
I don't have to go diligence that entire thing on my own.

916
00:51:16,340 --> 00:51:21,180
Maybe I can hire an expert to come in and just review that sell-side diligence work

917
00:51:21,180 --> 00:51:24,100
product and say whether or not they think that's good, bad or indifferent.

918
00:51:24,100 --> 00:51:29,300
I think that's what's lost on a lot of people sometimes is how much money the buyers can

919
00:51:29,300 --> 00:51:30,300
save.

920
00:51:30,300 --> 00:51:34,000
I think what's lost on people is how much money buyers will spend to do diligence on

921
00:51:34,000 --> 00:51:37,660
target acquisitions that they may not even end up acquiring.

922
00:51:37,660 --> 00:51:42,040
If you think about it from that perspective, if you've got 10 buyers for your business

923
00:51:42,040 --> 00:51:46,740
that are interested, if each one of them would have to go and spend a couple million dollars

924
00:51:46,740 --> 00:51:51,620
on outside experts to build their diligence teams out to look at that business, that's

925
00:51:51,620 --> 00:51:55,900
tens of millions of dollars being spent, but only one of them is going to prevail.

926
00:51:55,900 --> 00:51:59,580
All nine other buyers, and nobody knows who's going to prevail at the onset, all nine other

927
00:51:59,580 --> 00:52:04,480
buyers, they're having to take on what's called deal risk exposure or transaction expense

928
00:52:04,480 --> 00:52:09,160
exposure, where if you've packaged up a really nice, really thoughtful sell-side diligence

929
00:52:09,160 --> 00:52:13,820
packet for them and you're giving them that work, maybe you've taken on the risk to spend

930
00:52:13,820 --> 00:52:18,660
the money and you're helping them get ramped up to speed and educated faster on your business.

931
00:52:18,660 --> 00:52:20,620
They don't have to spend several million dollars each.

932
00:52:20,620 --> 00:52:22,340
Maybe they can just spend a couple hundred thousand dollars each.

933
00:52:22,340 --> 00:52:23,720
They can get deeper into the process.

934
00:52:23,720 --> 00:52:27,080
You have more of an opportunity to convince them that you've got this great business.

935
00:52:27,080 --> 00:52:28,340
They should want to partner with you.

936
00:52:28,340 --> 00:52:32,360
It drives up the competitiveness and hopefully, ultimately, that all leads to a higher transaction

937
00:52:32,360 --> 00:52:37,520
price and a faster transaction process too, which is really important.

938
00:52:37,520 --> 00:52:41,980
Time kills all deals is a saying that we have and that continues to play out every single

939
00:52:41,980 --> 00:52:42,980
time.

940
00:52:42,980 --> 00:52:47,820
Thanks for tuning into this episode of Growing EBITDA.

941
00:52:47,820 --> 00:52:52,900
If you liked this episode, hit subscribe or follow us on LinkedIn for updates.

942
00:52:52,900 --> 00:52:55,100
Got a topic you'd like us to cover?

943
00:52:55,100 --> 00:52:56,100
Drop us a message.

944
00:52:56,100 --> 00:53:07,740
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