Taylor Gentry on What Drives the Most Value in Business Transactions
Taylor Gentry joins the Family Money Podcast to discuss valuation drivers that lead to successful exits in the SMB space. And for those contemplating exits from their business, or perhaps going through it currently, this is an informative discussion on what buyers are truly looking for and what drives value, and how the business operates within its market.
Episode Highlights:
04:19 - Why Taylor wanted to work on investing in companies directly
05:24 - How Taylor tried to figure out what he wanted to do
06:38 - Terminology used in the investment banking industry
10:43 - Common industry fees
13:53 - How investment bankers add value to the entire transaction
14:15 - Types of buyers
18:20 - How family offices fit into the buying equation
23:29 - The seller’s experience
25:36 - Best type of business to purchase
29:58 - Valuable pieces of a business that doesn’t show up on the balance sheet
33:05 - Common mistakes made in business acquisitions
35:10 - Underestimated aspects of a sale
38:32 - Advice for potential sellers
42:08 - What’s life like post-sale for an owner?
Resources/Links Mentioned in this episode:
About the Guest Taylor Gentry
Taylor joined Endeavour in 2015. Previously, he worked as an investment banking analyst at RBC Capital Markets in New York. While at RBC, Taylor focused on M&A advisory and capital raising for clients in the Consumer and Retail sectors. Taylor graduated magna cum laude from the University of Oregon with a B.S. degree in Accounting and a minor in Economics. He lives with his wife in Portland, OR.
Transcript
DISCLAIMER: This transcript is automatically generated by Descript. Please excuse any errors.
[00:00:00] Rick Thomas: Hey, everybody I trust your summer is going well. And that you've had a successful first half of the year. So far from the Family Money Podcast. This first season has been a lot of fun and we're heading into the final stretch with just a few episodes left. Before we conclude this first season for the sixth episode, I'm excited to share a recent conversation with, without a doubt, one of the smartest individuals I've had the opportunity to meet.
[00:00:26] Taylor Gentry is with Endeavor Capital, a private equity firm here in Portland, Oregon after graduating Magna cum laude from the university of Oregon in accounting Taylor headed to New York to work on the street, initially as an investment banking analyst for RBC capital market. Focusing on M and a advisory and capital [00:00:45] raising for clients in the consumer and retail sectors.
[00:00:48] In 2015, he returned to Oregon joiningEndeavor Capital in Portland, where he currently serves as senior associate. The focus of our interview is on valuation drivers that lead to successful exits in the SMB space. And for those contemplating exits from their business, or perhaps going through it currently, this is an informative discussion on what buyers are truly looking for and what drives value and how the business operates within its market.
[00:01:15] I'm sure you'll enjoy this conversation as much as I did, and you will gain some key takeaways to help you in your efforts in guiding your business and ultimately achieving a successful exit with that on with the show.
[00:01:29] [00:01:30] What took you to New York after school? What did you learn and what,
[00:01:33] Taylor Gentry: what brought you back here?
[00:01:34] Yeah. Yeah. Thanks Rick. And thanks for having me on here. I'm happy to dive into it. Coming out of school, I moved to New York and started working for an investment bank and an investment bank, you know, fundamentally focuses activity on three primary activities. They help companies raise debt, help companies raise equity, and help companies with mergers and acquisitions.
[00:01:59] So buying and selling companies. And what the experience allows you to do is get really good access to deal flow and really high profile financial transactions and allowed you to [00:02:15] learn about the capital markets. And so learn how debt works, learn how mergers and acquisitions work, learn how large corporate companies evaluate acquiring other corporate company.
[00:02:28] And so, you know, it was a lot of hours don't get me wrong. I was working you know, 9:00 AM to midnight or two in the morning. And learning a ton though. So that the pitch for an investment bank is we give you, four to five years work experience in a two-year time period. And so the benefit is you get to learn really quickly, which is something I've always really prioritized.
[00:02:53] And then it opens up doors to really move to really a really broad [00:03:00] range of kind of what they call exit opportunity. So you can go work in hedge funds or venture capital or private equity, or go work for a large corporate organization if you want to. And coming out in New York I went on a little bit of a journey, looking at everything from hedge funds to venture capital, to private equity.
[00:03:19] And ultimately I landed on really kind of three things. One I knew I wanted to get back to the west coast. I'm originally from Portland, Oregon, where we are now and I've made it back to. Two, I wanted to work with smaller companies. So I was working with Mattel the largest toy company in the world on their acquisition of mega brands, which was a Canadian based publicly traded toy company.
[00:03:43] And so I wanted to work with smaller [00:03:45] companies that I could get my arms around more and have more of an impact on and then three is I really wanted to invest in companies directly. And so in my time in New York, I was playing this kind of intermediary role as an investment banker where you're a broker between two parties or you're brokering this transaction or you're brokering a transaction between the company and public equity investors or public debt investors when you're helping them raise debt or raise equity and so, you're playing this intermediary role, basically doing work for a fee.
[00:04:19] And what I wanted to do was get onto the investing side, where I could invest in companies directly partner with those management teams and then help those companies grow in scale. [00:04:30] So that's when I found Endeavor Capital and moved back to the west coast and had been with the firm for six years now.
[00:04:36] Rick Thomas: Yeah. Very cool. I'm curious, did you know that this was the area you wanted to really dive into and become a professional at coming out of school or was it the experience? At the investment banker in New York that really kind of opened the door about what this was about and where you could go with it?
[00:04:59] Taylor Gentry: Well as you know, I've always had a passion for investing and just a fascination with investing. I just think that there's so many ways that you can invest capital and interesting ways to invest [00:05:15] capital. So, so that's always been on, on my horizon; it's something I've really been interested in, spend a lot of time reading about working on thinking about it.
[00:05:23] the private equity, what do you model in particular, it really was New York that kind of opened my eyes to what that was and what that looked like. And, you know, as I mentioned, I spent probably six months just calling people going on informational interviews to try and figure out what I wanted to do coming out of New York including the smaller end of the spectrum venture capital, where you're trying to make. 20 bets hoping that two of them really pay out and the public equity side of the market and investing in public companies. And ultimately I've found really what I like to do, which is to invest in private companies that are larger than this kind of venture [00:06:00] capital space, where you're kind of betting on an idea.
[00:06:03] I really like finding companies where it's an operation that's been working so far, and there's an opportunity to enhance that business through better systems, better processes, you know, maybe some additional professional management in the business. Usually it ends up bolstering the team and building out a team in a more robust way and helping that company continue to grow in scale.
[00:06:26] And then we can kind of sell that business together in order to recognize a return.
[00:06:30] Rick Thomas: You and I had a conversation, a couple of conversations and kind of leading up to this and helping me understand the terminology.
[00:06:38] And I appreciate your patience, investment bankers. You, as I've heard you say [00:06:45] that, that can. Depending on the market and the size of companies that can have different labels. So talk about that some more. What might an investment baker at one level be called something else at a different level?
[00:06:58] Taylor Gentry: Yeah. Yeah. So it is kind of this bizarre world and terminology that gets used. You basically have a group of folks that are investment bankers. And it's a really broad term because that can mean everything from an investment banker who sits in New York and only works on transactions that are over a billion dollars.
[00:07:21] And that same title is used on someone who sits in Portland and only works on transactions that are [00:07:30] $10 million in value and it can span everything in between. Oftentimes. You think of, you know, bank of America as a corporate bank, but it also has an investment bank working on these transactions. And so they can be both in a large bank, like a bank of America, or it can be a really small organization that is independent individuals who have come together and are working in a, you know, a boutique investment bank.
[00:08:00] So you've got a really broad range of size of transactions that investment bankers will work on. But then kind of, I'd say below that in size usually is kind of how it's thought of is [00:08:15] a group of folks that kind of refer to themselves as business brokers, if you will. And they'll tend to work on everything from a single location, restaurant business, in terms of selling a single location restaurant business to a business that might be up to $10 million of value and, you know, may even go to 20 or $30 million of value. So you can see that there's this overlap between, you know, there isn't a bright line that says business brokers in this bucket and investment bankers in this bucket, they're effectively doing the same activity of buying you know, helping companies transact. So helping ownership, transition, helping companies sell themselves. But you know, investment banker business broker, intermediary, these are all the [00:09:00] types of terms that can be used to describe these folks that serve a really valuable purpose in terms of helping a company get ready to take itself to market.
[00:09:11] Rick Thomas: Great. And to what extent, and you and I have talked in the past about different firms in Portland. And to what extent, how deep they go into wrapping themselves around a company that's getting ready to go to market. and let's say they may be doing brand work or marketing work. And how common is that? Or is that fairly unique and out of the mainstream?
[00:09:37] Taylor Gentry: Yeah, I'd say it. It is fairly unique. You know, some of these groups have developed a little bit of like a consulting [00:09:45] practice in addition to an investment bank where it's Hey, you business owner are not ready to sell the business.
[00:09:51] Let's do some consulting with you and do some, you know, longer term life planning and figure out where this company needs to be to achieve your goals related to retirement or otherwise. And in that process, Over the next three to five years, we're going to help you navigate the broader wealth management process.
[00:10:13] And then we'll also have the capability to sell the business on your behalf and then manage the, you know, manage the cash that you received from the transaction. So they kind of can wrap it into one. I'd say the vast majority of them though, do tend [00:10:30] to focus on the intermediary role and effectively they get paid a success fee upon the transaction happening.
[00:10:37] And they'll take a percentage of the total transaction value as their fee.
[00:10:43] Rick Thomas: in terms of that fee, is there a typical range that it runs that's kind of industry standard or does it really, is it all over the map and it depends on the vertical or the market vertical or whatever.
[00:10:54] Taylor Gentry: Yeah, it does range very widely. Though there is a kind of standard formula that folks refer to and they call it the Lehman formula. So Lehman brothers as folks know went under, but they had kind of a standard formula and I'd have to look up exactly what it is, but I'm pretty sure it's [00:11:15] like 5%, they get 5% of the first million dollars of transaction value.
[00:11:20] 4% of the next million dollars, 3% of the next 2% of the next 1% of the next million dollars of value. And so, you know, in a smaller transaction, it's a higher percentage because they're solving for a dollar figure in that scenario. And then as the size of the transaction goes up, the percentage fee kind of goes down of each incremental dollar that is earned, but it's all A negotiated and B varies widely based on the individual transaction and the particular broker intermediary investment banker you're working with ,
[00:11:53] Rick Thomas: one last question on that, then I'm going to jump into some of the things we've outlined that we wanted to cover around the [00:12:00] market. is the Investment banking, broker firms that are around that do offer these consulting services.
[00:12:09] Is that a function of how competitive the markets become or is it more it's more of an opportunity that, Hey, they can create a substantial income stream for the firm and some are just going that way.
[00:12:26] Taylor Gentry: Yeah, I think there's a couple pieces to this. So one, you mentioned kind of the competitiveness, of the industry, if you will. I think the market's become extremely competitive because you have kind of call it business brokers who are working in this maybe less than $10 million [00:12:45] of transaction value area. And they're trying to move up because the larger size transaction, they do, the more money they're able to make off of each transaction.
[00:12:55] And, you know, candidly, the transactions take about as much time on the really small end as they do on the bigger end. It's more complex, but
[00:13:02] Rick Thomas: it's a rule of life by the way.
[00:13:04] Taylor Gentry: Yeah, exactly. They take about as much time. So if you're working on these things you tend to want to work. As big of transactions as you can.
[00:13:13] And then you know, concurrently, you've got investment banks that may have played in the $50 million transaction size range, starting to come down and move into 30, 20, maybe $10 million range even because it's opportunities for fees. And so. [00:13:30] I think the market is very competitive, would be point 1, point 2 around kind of the consulting piece of it.
[00:13:37] I don't know that it's necessarily tied directly to the competition dynamic. As much as it's tied to, we are developing a relationship. You know, if I'm an investment bank, I'm developing a relationship with a client and I have the opportunity to develop that relationship over three to four years.
[00:13:53] There's not going to be a question around who they are gonna go with, to sell the business at the end. Number one, and number two we think we can add value to the growth of that business and broader planning to really provide a full service to the client that, you know, in a just a transaction relationship. Isn't quite [00:14:15] there.
[00:14:15] Rick Thomas: So let's talk about. The types of buyers that might be out there. So let's say I'm thinking about going to market with my firm and what's the broad spectrum of the types of buyers that, that might be interested.
[00:14:31] Taylor Gentry: Yeah, no it's a great question and it's complicated because you'll see, you know, some general rules or some general guidelines that I'll talk about. And then you've got things that inevitably break those guidelines or break those rules. And so, for example, if you're a firm that has, you know, more than $50 million of revenue for the most part and you're going to sell the business, for the most part, that business is going to be [00:15:00] acquired by private equity firms, or strategic buyers. So strategic buyers would be, you know, you're in the food industry and Campbell soup is going to come acquire you and add you to their massive portfolio of brands and kind of bring you into the corporate organization.
[00:15:16] A private equity firm has gone out and raised capital from large institutional investors. This is university endowments, insurance companies. You know, a variety of folks and will, state pension plans are a big funder usually. And they will invest in companies grow those companies or, you know, partner with those companies for, you know, five to 10 years or three to five years often the case, and then sell those companies three to five [00:15:45] years later recognize your return and return the capital back to their investor base. So in that larger space, you know, 50 million plus of revenue it's generally strategics and private equity firms because it's a big dollar figure that folks have to come up with in order to do that transition.
[00:16:03] Below call it $50 million of revenue and really kind of like 25 to 50 million you're in kind of the same space where you've got other flavors of private equity firms and strategic buyers that are just on a smaller scale. So instead of having a $2 billion fund or a billion dollar fund, a private equity firm might have $150 million fund that they're investing out of. [00:16:30] Below, I don't know the exact number it's gray here, but 25 million of revenue, the world really opens up pretty broadly. And what I mean by that is. You still have strategics. That'll be interested in that business. You still have private equity firms that are interested in that business, but you start getting into this.
[00:16:49] What I call kind of fundless sponsors and search fund world. And these are folks who may not have the capital committed today, but maybe out on their own, looking for a deal and are going to raise the capital concurrent with signing up the deal. And so they might, they come to you and say, okay, we're going to buy your business.
[00:17:08] Here's the valuation, but they don't have the money actually committed to be able to do that yet. They've got a group of folks that are kind of [00:17:15] call it soft, circled, or soft committed that they're going to take the deal to and fund the deal with. and below that kind of 25 million of revenue or 10 million of revenue scenario, you've got these individuals and search funders that can make that transaction happen. Below maybe 10 million of revenue.
[00:17:32] And you start getting into a dynamic where individuals are looking to buy a job potentially. And so that's kind of. How you would start to break the market down is largely driven by size, but all that said that isn't to say that Campbell soup, isn't going to buy a $7 million revenue business because it's high growth and they're really looking for growth right now.
[00:17:56] So I think that's kind of the broad spectrum of folks that could [00:18:00] be potential buyers for businesses that are producing cash, Fully operational, et cetera today, opposed to a VC type play, like a venture capital type play that is really betting on an idea. And so you can see it's a wide spectrum, but the size does kind of put you into a specific bucket more or less.
[00:18:20] Rick Thomas: Right. In terms of those potential buyers, where would you fit family offices? Because I've heard that designation come up a number of times over the last several years. And is that already implicit in some of these, or is that kind of a subsegment?
[00:18:36] Taylor Gentry: Yeah, that's a really good question. So family office, from my experience in vantage point, playing a couple of different ways. Oftentimes they will invest [00:18:45] in private equity firms directly. And so then the private equity firm is making the acquisition, but more and more family offices are trending towards doing deals directly. So instead of investing in a private equity firm that is going to invest in.
[00:18:59] 15 companies in a given fund, the family office is investing or buying companies directly that they'll own, and they're doing the deal themselves. So they would be equivalent to a private equity firm or, you know, a small private equity firm or a small strategic for the most part, there are very large family offices too, but for the most part, kind of a smaller private equity firm that certainly could do a transaction in this same way.
[00:19:23] Rick Thomas: Yeah. I'm curious. With family offices that you've had any interaction with,[00:19:30] do they tend to hold onto the companies longer?
[00:19:33] Or yeah, their behavior, any ownership, behavior, any different than
[00:19:38] Taylor Gentry: it's a really good point. So family offices do tend to have kind of a distinct advantage in general.
[00:19:44] You know, this is overgeneralization here. So there is that caveat, but family offices do have the ability to hold investments theoretically into perpetuity. And what I mean by that they don't have a requirement to return capital back to an investor base. It's usually the family that is kind of independently wealthy from either selling a former business generational wealth, whatever it may be.
[00:20:09] And they're investing this capital for a very long time horizon in it generally is with a [00:20:15] view towards multi-generational wealth creation. And so continuing to build wealth for, you know, there. Children or otherwise to be able to continue to grow their wealth private equity firms in general, I would say, do tend to operate on kind of a three to five-year cadence.
[00:20:33] So they're looking to invest in companies, be invested for three to five years and then sell the company. And part of that is the funding dynamic. And so a private equity firm goes out, raises a fund. That fund has a life to it. And usually it's a 10 year fund. And so folks are committing for 10 years to be invested in that fund.
[00:20:50] And after 10 years that private equity firm has to return the capital to its investors. So generally how that breaks down is you've got a 10 year fund [00:21:00] for five years. You're investing in for five years. You're a quote unquote harvesting or selling companies that you're invested in.
[00:21:05] Endeavor specifically, we do tend to take a longer term view. And so a typical firm at three to five years, our hold periods are quite a bit longer than that. And that's how we believe in kind of creating value is part of the ability to hold through not only economic cycles, but also through some of the bumps in the road that happened as a result of.
[00:21:27] Really the size of market we're playing in even businesses at 50 million of revenue, plus it's not up into the right every year. And so we need to invest in the right team, the right structure, the right infrastructure, to be able to continue to grow and scale the company. And that can take [00:21:45] time.
[00:21:45] Rick Thomas: What does that hold period look like down at the lower end? W where the search fund people tend to play.
[00:21:52] Taylor Gentry: Yeah. So that smaller end of the spectrum is a little bit longer than kind of a traditional private equity firm of three to five years, but it is still on a clock. And what I mean by that is if you are a search funder and you've gone and raised money from folks for the most part, you are buying a business with the intent of growing that business and selling it because that's how you get paid.
[00:22:18] You get paid a little bit along the way. Sure. But really what you're playing for is the ability to return a lot of capital to the investors and take a portion of the proceeds from the [00:22:30] sale as well. And so it's longer than three to five years. I don't know that the numbers, I haven't seen stats on it, but if I was to be guessing, it's kind of like a six to eight year thing would be average.
[00:22:41] Would be my expectation. But the goal is to kind of come in, drive growth and then ultimately exit opposed to the really smaller end of the spectrum or in that either in the family office scenario or this kind of area we hadn't really talked about yet, but a. self-funded searcher where it's an individual who's gonna, you know, deploy their own capital or capital of close friends and family where they aren't taking outside money that has an expectation of a return. They may have a much more, either a much [00:23:15] longer term hold period or potentially a perpetual hold period. And there's some real advantages to having that perpetual hold period with regards to the ability to compound capital from an investor standpoint.
[00:23:28] Rick Thomas: Sure.
[00:23:29] I'll make sure we come back to that. in terms of the seller's experience, Across the spectrum that you've kind of laid out. Is it going to be materially different? In terms of what they experienced going through the process, you know, from bottom to top.
[00:23:45] Taylor Gentry: Yeah. It really depends on what you're after as a seller.
[00:23:49] And what I mean by that is if you're going to stay in the business, post-closing keep running the business and you're selling either a minority or a majority interest in the business, [00:24:00] knowing who those partners are and what your role is going to be. Post-closing what that's going to look like is arguably the most important thing in the process, because yeah, you're going to make money out of the deal, et cetera, et cetera. But if you get yourself into a situation that you are regretting having done the transaction that's kind of the worst place you can be. And so interviewing those firms and understanding what life looks like post-close is really critical.
[00:24:28] I'd say the larger you go or the bigger the company and the larger, the private equity firm that is doing the transaction. A little bit of the sharper the elbows become. And what I mean by that is We're based here in Portland, [00:24:45] Oregon, and investing companies in the Western half of the U S we do have a west coast style and approach to things in terms of finding middle grounds being cordial and you know Finding partnerships that work for both sides.
[00:25:02] If you take a business and just auction it to the highest bidder oftentimes you have private equity firms out of New York that are fairly aggressive in terms of not only the economic terms that they push for, but also their interactions with you as you are negotiating documentation and going through the process.
[00:25:25] And so you know, we really pride ourselves on our ability to meet sellers where they're [00:25:30] at and find a transaction and partnership that works for all of us.
[00:25:36] Rick Thomas: so from a buyer's point of view in terms of in recent times, what are the, either the verticals or the types of businesses that you see the most activity with?
[00:25:49] What's going to be the type of business that I'm going to have, the highest degree of success really. Getting my money's where it's for all the years of work that I've put into it versus one that, you know, I'm going to be stuck with it.
[00:26:01] Taylor Gentry: Yeah. No, totally. And it's a really tough question. Right. And from an industry perspective, you know, at Endeavor, we invest. A really broad range of industries that includes healthcare, [00:26:15] manufacturing and industrials. We do a lot of manufacturing distribution, so transportation, logistics, businesses consumer and retail specialty retail, businesses business services.
[00:26:27] So, so the spectrum is really broad in terms of types of companies we'll partner with them to spend time with. And so in terms of. within each of those verticals or segments, there are more attractive industries. So for example, technology is, you know, white hot right now and has been for the last 10 years as a result of some of the characteristics of the businesses, they tend to get valued off of revenue instead of off of earnings.
[00:26:53] So we often are looking to value things off of earnings. But I think. You know, at a high [00:27:00] level right now, there's a really big emphasis on the quality of revenue. And so what I mean by the quality of revenue is do you have a diversified customer base? You know, if you end up with a business that has 50% customer concentration, it's just a different risk reward analysis to look at that business and figuring out a way to make a partnership work than a business where the top customer is 3% of revenue. Because if that top customer goes away, when it's 50% of revenue that has a meaningful impact on future earnings and cashflow and then two is some form of recurring revenue.
[00:27:41] For a firm like us, it's tough for us to invest in a [00:27:45] general contractor business, for example, where the businesses to go out, identify land, build a building, and then sell that building. For example, where you've got each year you need to go out and basically. Start over from scratch a little bit in terms of developing that revenue base.
[00:28:05] And so, businesses that tend to, show better are ones where you wake up January 1st. And you say, if I don't do anything this year and just do exactly what I did last year, am I going to end up with the same revenue at the end of the year? And if you have that kind of a business, what that allows you to do is focus growing into new accounts, new products, new services, et cetera, and maintaining the base. And so that you've got [00:28:30] additive growth opposed to really needing to go re win every piece of revenue that you had last year. So the comparison I like to make is that general contractor business versus kind of a property management business where you show up on time, do the work at high quality on a monthly basis.
[00:28:46] You can continue to generate that revenue stream
[00:28:50] Rick Thomas: on that recurring revenue do you go as far as you're requiring that to be contractually bound or is a history of a long-term relationship typically good enough to pass muster.
[00:29:03] Taylor Gentry: Yeah. Yeah, no, that's a good question. I'd say really you want it to be defensible.
[00:29:08] And so a lot of that comes down to, you know, what kind of. IP or intellectual property, is there [00:29:15] around the product or service being delivered that ensures that customer is going to continue to buy and keep coming back. And, you know, contracts are great and contractual is certainly better. That said, if you're a, you know, $25 million revenue business and you went.
[00:29:32] company that you're servicing, that's a $2 billion revenue business, just the unfortunate reality of how the world works is that contract while it looks good on paper, doesn't actually mean that much more or less when there a grilling can squash you. So contracts are great, but I'd say more equally important is the relationship and value you're providing to that customer and the track record of performance with them.
[00:29:58] Rick Thomas: Yeah. Right. [00:30:00] Okay. What are some of the other drivers for value or quality and a business that you look for that don't necessarily show up right away on the balance sheet or the income?
[00:30:11] Taylor Gentry: The first one that is absolutely critical. It's really the team.
[00:30:14] And what we look at first is who are we backing here? And is this the team that's going to take this to the next level? Where does the team need to be augmented and supplemented? And are we aligned on what the team needs in order to continue to grow and scale the business? We'll spend time on kind of systems, processes, infrastructure those types of things.
[00:30:36] And then, you know, next is really about growth and, you know, everyone right now is really starved for growth. And so if you're [00:30:45] growing it 10% a year profitably that can really add a lot of value to the multiple that folks are willing to pay. And so when I say multiple what I mean by that is oftentimes how we will value a company is we will look at This term called EBITDA.
[00:31:01] So the EBITDA stands for earnings before interest taxes, depreciation, and amortization used very frequently in our business. But EBITDA times a multiple will get to the total value of the company. So companies generating $10 million of EBITDA. So you put a 10 times multiple on that. That'll get to a hundred million dollars of valuation.
[00:31:27] To put it in context. It a 10 times multiple [00:31:30] is starting to get high, depending on what industry you're in. You know, more normal would be kind of six to eight times range. But it's dicey to even talk about it given how much it can vary based on the industry that you're talking about.
[00:31:44] Number one, and then number two, it's very company dependent based on the growth profile of that company. I'd say that's the startup, some of the other more qualitative factors that we would start to like and then try to value companies based on these various inputs and Managing risk and reward.
[00:32:02] Rick Thomas: Right. How, and is it in a transaction acquisition where let's say if identified there's a quality team their incentive is wrapped into the new deal in [00:32:15] some way. So there's a payoff for them.
[00:32:18] Taylor Gentry: Yeah. So this is really critical and most firms, really operate in this way where they will put together a management incentive plan. And so that incentive plan will vest based on certain characteristics or certain things happening in the business. So oftentimes we'll put together incentive plans where incentive equity best based on time and performance.
[00:32:42] And so time is, you know, it might best over five years or performance. Is it best based on how much value is created kind of during our hold period or our investment period together. And the key there is we're really want the team that we're partnering with to be aligned [00:33:00] in drilling the value of the business and making sure the compensation is aligned accordingly.
[00:33:05] Rick Thomas: So, Taylor, what are some of the common big mistakes, no brainers that people need to be aware of? If they're looking to go to market that they can avoid.
[00:33:15] Taylor Gentry: I think there's a couple things to touch on here. The first is if you're going to go to market, you have to know that you want to and are willing to sell the business.
[00:33:26] Now that can depend on transaction value can depend on a couple of other things, but if you want to really just go test the market to figure out what your value is, it's not going to show that well. And what I mean by that is folks who are looking to sell their company there's an emotional piece [00:33:45] that needs to get kind of reckoned with in the process to make sure that they're okay, really giving up at least a part, if not all of their baby in that process.
[00:33:55] And so that'd be the first piece. And then the second piece is to really make sure that you're fully prepared to hit the market. and the reality there is that so many processes fail because it's unclear what the owner wants. And so it'll come to market and say, Hey, I'm open to everything from a full buyout to a partial buyout.
[00:34:16] So a minority partner, a majority partner, or a majority partner. Yeah. I'm open to, you know, very little money off the table or a lot of money off the table. And one of the challenges that [00:34:30] can create is that firms don't know how much capital can be put to work on a given deal. So, you know, a deal that might work for a billion dollar fund may not work for a $250 million fund.
[00:34:44] And so, a company that is of a certain size may be looking for majority investment from a billion dollar fund, but a minority investment from a $250 million fund. And if the fund doesn't have the ability to kind of put you in a bucket, they're unable to kind of really deal with it and they could put something on the table, but it's hard for folks to engage in something like that. Given how busy everybody is right now.
[00:35:10] Rick Thomas: Yeah. What's the thing that's most underestimated by the seller.[00:35:15]
[00:35:15] Taylor Gentry: it definitely is the amount of time that this takes. And so I think you really need to plan for at least a year to do all of the prep, all of the courting process, contact all the buyers, deal with all the buyers simultaneously and be ready to go.
[00:35:31] And so it takes a really long time to get prepared and it takes a lot of dedication and. Commitment to the process because you have to not only manage the process, but you also have to run the business effectively and deal with the prep and deal with the buyers all at the same time. And so the risk there is that you get too focused on the process and don't, you know, running the business and manage the business. And if the business doesn't perform on a monthly [00:36:00] basis through the process, because you're providing buyers updates every month as you go along you can really get stung and buyers will come back and start eating away at the price that was initially proposed.
[00:36:12] If the business. Starts to underperform expectations. And so that prep process requires looking at the business on a very granular basis and partnering with intermediary to do the work required, to get the information prepared in a way that buyers can consume it.
[00:36:33] Rick Thomas: Yeah. Interesting. I'm curious, let's say the business begins performing above and beyond what they had anticipated. Is it common to have some [00:36:45] type of review or escalation allowance in the valuation as a result of that? Or is that really that's just gravy for the buyer.
[00:36:53] Taylor Gentry: So there's two pieces to this, right? So on the one hand, It is gravy for the buyer, right? Because they're picking up a business that is trending up into the right. On the other hand, it's also gravy for the seller because the gravy, the seller gets to take any cash that's created between now in close as long as it gets converted to cash, they get to, you know, reap the benefit of having grown the business during that time.
[00:37:18] That said what it really does is when a business is growing between when you maybe sign an LOI to agree on terms and you close, it really [00:37:30] puts the seller more in the driver's seat of that transaction. And what it allows them to do is say, Okay. We signed up to a transaction at this level. And as you move through the months, if you have increased earnings during those months, you have the opportunity to go back to the buyer and say, well, earnings are now X when they were Y.
[00:37:50] And. we think we should be compensated for that in some way. Usually it's not pre negotiated. But oftentimes there is movement as a result of performance changes between signing, you know, getting to agreement on terms and actually closing. Now you try to keep that time period limited, right.
[00:38:09] You know, maybe 60 to 90 days to try and limit some of this back and forth. But the same [00:38:15] thing works the other way. If a business starts to deteriorate two months prior to close and it wasn't expected to be that way that is changing the expectations and really the business that the buyer is buying.
[00:38:28] And so there's often times additional conversations around that.
[00:38:32] Rick Thomas: Couple areas I want to hit before we close, Taylor. One, what are a few things that you would advise every potential seller to do, to make sure they're successful.
[00:38:42] Taylor Gentry: I started to touch on this, but I think the first one is really to prepare mentally to turn over the business. And, you know, if you bring in a minority partner, that's a little bit of a different story, but if you're selling a majority of the business, there is a mental preparation process that kind of needs to happen and you really need to [00:39:00] get comfortable with before it makes sense to really engage this in earnest, because if you're not comfortable with it you won't have the motivation to commit the amount of time that's required to, to make this happen.
[00:39:12] Rick Thomas: Yeah. Yeah. And let me clarify on that one. I mean, is it really just come down to. get over the fact that you're not going to have decision making control in the business anymore. Is it as simple as that?
[00:39:23] Taylor Gentry: Yeah it's not a hundred percent as simple as that there are elements of it.
[00:39:28] It's more about even if you are going to continue to run the business, the reality is that if things don't go well with new ownership in the picture, oftentimes you're going to have to let go of control.
[00:39:40] Now, if something exotic and this has happened in the market or otherwise, you know, there are lots [00:39:45] of other, you know, there are lots of things where this could not be the case, but for the most part, there needs to be kind of a self-awareness where if things aren't going well there has to be an ability to recognize that you may not be the right person to lead this business, even if you founded it own it and your a 40 or 60% owner in the business and having that level of self-awareness really takes you kinda to that next level from a partnership perspective, to say. Am I the right CEO for this business and if not, can we get the resources in here to run this business, to allow it to continue to grow and benefit not only me as a, you know, individual owner, but also the partner I brought [00:40:30] in from a financial perspective as well. I think that mental process and kind of getting comfortable with that when this business is everything you've ever known is part of the process here to get ready to sell.
[00:40:43] A couple other things here is in selling a company, really. I'd say maybe have a couple conversations with folks directly, like, you know, an endeavor of the world and talk to a couple parties that would be potentially really good partners. Especially locally.
[00:41:01] At endeavor, that's really how we operate. We invest in companies in Western half of the U S we have offices here in Portland, but also in Seattle, Denver and LA. And so we spend a lot of time meeting with owners kind of directly[00:41:15] and we even encouraged folks to, to get an advisor. And so we can kind of do a, an investment in a company without an advisor coming in, but it oftentimes helps sellers who haven't been through this process before to have an advisor by their side, who can help get the financials in line potentially prepare what's called a quality of earnings report that looks at earnings and tries to adjust for one-time items that may be there and really puts a stamp on those to say, those are legitimate one time items. The banker or business broker will help write kind of a confidential information memorandum, a CIM, we call it.
[00:41:54] And that's kind of an overview of the company that will help folks get educated on the business quickly. [00:42:00] And then ultimately they, you know, have the connections and intermediary has the connections to be able to get you introduced to folks that could be the right part.
[00:42:08] Rick Thomas: Excellent. Lastly, and maybe it's to close from what you've observed in the various owners that have sold what's lifelike post-sale for an owner. What are the things that you really see going on?
[00:42:22] Taylor Gentry: I think that the real key here is that to the extent possible, if you can figure out what life is going to look like post-close during diligence or pre-close or before signing an LOI, it really gives you a leg up. You know, these, this is a really broad ranging question in terms of, are you still gonna run the business?
[00:42:41] What's your cadence and interaction [00:42:45] with the team that is running the business. Are you there every day? Are you not there every day? Are you now sitting on the board and advising from that level with quarterly board meetings? What's your interaction with your new financial partner that you've brought into the business?
[00:42:59] Daily call. I mean, you know, here at endeavor, we're certainly not signing up for daily calls with the folks that we partner with in terms of pigeon parenting. But you know, we're always available to the extent needed. And so, you know, that degree of flexibility and understanding what that looks like and really what you're after as a seller, it is really important.
[00:43:21] Do you want to sell the entire business and just walk off into the sunset? if you do that, what are you going to do with your new found time and freedom?[00:43:30] And is that something you want, a lot of folks who have kind of run businesses think they can play golf every day. And a lot of them end up, doing that for two months. Find out that they're bored. And so you know, thinking through all of those pieces and really making sure that you're on the same page with the partner that you find in who you're selling the business to or, you know, receiving investment from it and from our perspective, it's a lot more about making sure that we're aligned than it is there's a right or wrong answer.
[00:44:03] Because we don't really believe that there is a right or wrong answer. If you can play golf every day, you know fantastic. And you should go do so if that's what you want to do, but let's make sure we talk about that and are aligned on what it's going to look like for [00:44:15] that to happen.
[00:44:15] Rick Thomas: So as I suspected that there's so much ground here that we haven't covered just in this conversation that I've definitely captured. Taylor I'm gonna, I'm going to ask your permission to loop back around and let's do this again.
[00:44:31] Taylor Gentry: Yeah, that'd be great.
[00:44:33] Rick Thomas: Man this was a great conversation. I really appreciate the time and lending your mind share today. And again look forward to getting you on the interview again and let's dive a little deeper in a few areas, but thank you again. Appreciate it. And I'll leave your contact in the podcast notes if or however you want to be contacted if anybody wanted to follow up.
[00:44:58] Taylor Gentry: That'd be great. [00:45:00] Please feel free to reach out.
