Takeaway: "There will always be a market for outrageous prices as long as the buyers are looking to grow, which for big companies, that's what they do."
In this podcast, Kevin M. Short, Author of "Sell Your Business For An Outrageous Price", talks about:
Kevin Short is also the Managing Partner and CEO of Clayton Capital Partners, a St. Louis-based investment banking firm specializing in merger and acquisition advisement.
Kevin Short: Thanks Noah, glad to be here.
Noah Rosenfarb: So how do you get the, I love the title. I think it's wonderful because it's descriptive of what so many owners want. How did you come up with the concept and tell me what has gone into the book?
Kevin Short: Yeah. I've been in the M&A business for 25 years representing the privately held companies, family-owned businesses between $10 and $200 million in value. So I have been doing deals for a long time. Along the way when we would use our typical auction process, which means we don't put a selling price on our companies at any point, any of our deals, there would be deals when we would say, "Okay, next Friday, we want your offers." We might get 10 offers on a company. It’s not unusual to get 10-15. When that happens, we had a few cases where the first place bidder was twice second place bidder. I remember one in particular in the steel processing business they offered us eightmultiple of their EBITDA, their cash flow in effect and everybody else was offering four or five times EBITDA. So while we were perplexed as to why would they do that, obviously, we moved forward and closed the deal.
When I saw the president or the buyer six months later, I said, "How is it going?" because I figured by that time, he had figured out that he paid twice what he needed to and he said, "Well, it's going really well. Do you have any other sellers like that?" which caught me off-guard because I thought he was going to complain and I said, "Tell me what's going on?" He said, "Well, we got rid of the union and we merged buildings and we took some of their products and put it through our worldwide platform, and put some of our products through there just to reach some channel. We have had made our money back in six months." I went from thinking I had sold that thing from an eight times the multiple and then figured out that he, based on what he made with it, we sold it for about six months of earnings.
It was really eye-opening moment and as I go back over my career and as I have watched ever since that happened, those moments do happen occasionally and really what it comes down to is those buyers have figured out they can make a lot more money with my client's company than my client was, usually because it's some form of competitive advantage that you are picking up or some kind of synergy. That's what began the thinking process is, why does this happen? So we spent a number of years talking to buyers all over the country, all over the world actually, finding out what drives their valuation. When they have the right synergies and when they are a billion dollar company buying a $20 million company, they can afford to pay up to get a hold of the company because of what they'll do with it after closing.
So unfortunately, a buyer does not tell you that. They don't say, "I can afford to pay you a lot more money." They will try to get it cheaper as a rule and that began the journey of how do we figure out how to prepare a company. How do we figure out if a company is a candidate to get an outrageous price? So all those things were baked into the process, it took five years to write the book that was released recently by AMACOM books in September. Such went into was figuring out why do buyers pay up this much money, who is the candidate for it, and what can you do to prepare your company to make sure that you get that kind of appraisal. Those were the fundamentals that went into the book.
Noah Rosenfarb: Well, that's great. Five years, that's a long journey. Thank you for being persistent and putting out this intellectual property into the marketplace. I appreciate it.
Kevin Short: It's our pleasure. I actually enjoyed it a lot. I had an editor co-writing with me and we did a ton of research once we got into it. It was hard to articulate because it's hard to describe what I feel when I look at a company and it has the competitive advantages that we think we could leverage into a bigger price. It's hard to describe that on paper, that's why it took a long time.
Noah Rosenfarb: I think that the core thesis of the book goes into the four pillars that owners need to have in place to fetch this extraordinary price. You referred to the first one which is a competitive advantage. Why don't you walk me through kind of a definition of competitive advantage and then maybe you could share a story of a company and the competitive advantage they had?
Kevin Short: Competitive advantage, the concept of competitive advantage was invented by a Harvard professor by the name of Michael Porter. We lean heavily on him in our book and referred to him often because he's written a great deal about where are competitive advantages in your company. Our simple thinking about it is, "Are you doing something that is causing the big players in your industry, are you causing them a lot of pain in their business or are you an opportunity or a lot of gain for them?" We have done deals with both. So we represented a company that was in the business of manufacturing signpost for highway signs. The big competitor was Tyco. Tyco owned about 95% of the market in that sector and my client figured out, if Tyco was selling the signpost for about $1,700 a ton, my client has figured out a way he could do it for $600. So we worked with him for two years to gain the attention of Tyco and to make them pay attention to my client, because my client was barely on the radar-screen. We developed a plan to get their attention, more along the line of kicking Goliath in the kneecap, like in David and Goliath scenario.
So we would have these very public sales for $900 a ton. The signpost business is a public bid business so all of the states around the country were aware that this time, he was selling for $900 and for years, they had been paying $1,700. So they got the attention of the buyer, they called up, and basically threatened my client, "You screwed up the prices of the industry and all those types of things." My client was very well financed and was able to do this over a number of months. Eventually, they said, "We just need to buy you and put you out of your misery." We said, "No, we’re not for sale." We continued to have the sales and sell the product, and eventually they called and said, "We want to buy you." I said, "Well, we’re not for sale and if we were, we would want to be sold for multiple of the earnings we are going to have after we grow our business over the next few years."
Any growth in that sector was going to come from them and so the company was worth about probably $2 or $3 million. It’s that small. What we said to them was, "We think this company is going to make $5 million per year at the end of the next four years with our growth. So if you want to multiply four multiple times $5 million and pay us $20 million we will sell to you." Of course they thought that was ridiculous and hang up the phone, and we continued to have sales. Over time, we continued to kick them in the kneecap, which was our strategy on this deal - not every deal - but on this deal it was. They would keep calling up and saying, "All right. We are willing to raise our offer to $4, to $6, to $8 to $10. This happened over a year. Ultimately, we closed the deal for $14 million and that was a classic case of we were able to leverage the pain we were causing them. We caused them margin and uncomfortable meetings with customers, we were able to leverage that into a $14 million cash price. That was one of our early outrageous price deals.
So the first pillar is you've got to be doing something that's going to cause the big buy. You need a big buyer, which is the second pillar. You have to be able to cause them a lot of pain or give them an opportunity for a lot of gains. We've done both a lot of times. The second pillar is you have to have a buyer that's very big. At the end of the day, if you are going to be paid an outrageous price, buyer has to go to a bank and finance a deal. They'll never get a loan because no bank is going to approve a price that's twice the average multiple in that industry. So you need a buyer that does not need to go to a bank. That leaves you with the big buyers. So often our buyers are billion dollar players and our sellers are $20, $30, $40 million. That’s the second pillar, a big buyer.
Noah Rosenfarb: Come back on the competitive advantage side and clearly in the example of the steel processors, they could sell it at $900 and make money and their competitor selling at $1,700. The competitor presumably Tyco who bought them was able to reduce their cost based on whatever technology they had or innovative way they did business so Tyco could make money from it not just wipe out, you know, swat a fly. But maybe share another example where there was that opportunity for gain, where one of your clients, they developed some intellectual property that had a lot of value. They couldn't exploit the value without the opportunity of that billion dollar giant.
Kevin Short: In the case of the steel signpost guy, surprisingly to us, when Tyco closed the deal, they dismantled the equipment, the technology and basically threw it away. And then they turned around and raised their prices to $2,400. So they eliminated the competitive pressure which got rid of a pain and turned it into a gain. So Tyco is still selling those signposts for a whole lot more money than they were before because there is no competition. In that particular case, it was both. We did a deal with a company that was in the highway construction business. They specialize about $115-million company. We sold it to a very large buyer out of Europe. They were building the roads in national parks.
When I first saw the deal, I'm thinking, "Road builders are not very sexy. People don't care. They don't buy them very often. Until we learned that they were building these roads and parks, national parks, federal. The rules for that, the requirements were significant. So when you are in Yellowstone National Park building a road you cannot move any dirt from its original location more than a 100 ft away. That makes it really hard to excavate and build roads, A. B, your trucks cannot leak any fuel or oil on the ground because that's a big deal. You’ve got to be on top of that. There’s just a whole litany of rules and regs about how you do that business. So it's not as simple as dig a road and lay down concrete or asphalt.
They had corners of market on that and they were known as the only guys in the country approved to do that. So when this large multinational road builder came along, we said to them, "We are willing to sell to you. It's going to cost you this." They paid a lot more money for that than what somebody else would have paid to own that business because it gave them an opportunity for significant gain. This buyer also owned quarries all over the world and they were able to leverage their quarries that had assets into all of these parks also. So it became a multiplier effect.
Noah Rosenfarb: So let's talk a little bit about the buyers because that's the second pillar. You mentioned the giants but presumably not all of the buyers have to be giants as long as they have the capital. So share with me kind of the range of buyer stories of who's on the buy side willing to pay an outrageous price?
Kevin Short: I don't know that we have ever sold to a buyer that was less than a billion dollars in size because of the amount of cash it takes to do it. Even in a normal company, say a few $100 million, their investor is going to look at them cross eyed if their odds are paying twice the multiple because they probably have made other acquisitions in this arena, and they have paid four or five, and now all of a sudden they want to pay an eight or a 10, it’s hard to justify. If you have a board of directors, if they answer to you, you have share holders, if you've got a big company that maybe isn't a billion dollar player but it's owned privately, then they can pretty much do what they want to your point. But as a rule, it's going to be the big companies that are using petty cash in effect to pay for these companies and they can get the extreme synergies out of them.
Noah Rosenfarb: So when you define an outrageous price, I think you kind of double the industry standard multiple, that's outrageous, right? Where do you see pricing right now or over the course of the last two years, multiples are high in general. Is the margin between an outrageous price and a market price swimming in this hot market?
Kevin Short: No. I can't say that because there is no data to support outrageous price activity. As far as I know, we’re the only firm out there pushing for that and focusing on it. So there’s no data to compare that. In my experience, first of all to your point, the average multiples have gone up. If you are in a right sector and you've got a very pure, clean company, what you could have sold for four, three years ago could go for a six today, so multiples are up for clean companies in the right sector. The outrageous price is really a function of what you are willing to hang in there for and play poker for because at the end of the day the buyers will say internally, "We would like to pay four or six whatever it is for this company because that's the industry average, but if we had to, we can make so much money with this. We can go up quite a bit." What you are really playing on is how much they are going to make with it, which is independent of the market.
Noah Rosenfarb: Yeah, when you are thinking about helping an owner attract an outrageous price, do they need more than one buyer that want to pay it or can you just focus on an exclusive buyer?
Kevin Short: Generally in the outrageous world, you are only going to have one or two buyers willing to go that route. Often, we’ll wrap the outrageous price process. We’ll wrap it with a typical industry and banking sale process. Some clients come to me and say, "I'm only going to sell if I get the outrageous price over the eight multiple or nine, whatever it is." Others will come to me and say, "I'm willing to take a five but I'd like you to take a shot to get me a ten and do them in parallel." I can do them in parallel as different processes. To your point, you’re managing one buyer differently than the rest of the pack.
Noah Rosenfarb: So I was with a potential client the other day and I didn't dig into their financials but my read of this situation was maybe they are making $1 million a year of EBITDA and yet he tells me, "I’d only sell my company for $15 million." Well, that’s beyond outrageous, right, because it just doesn't…
Kevin Short: Right.
Noah Rosenfarb: I was telling him, "The values don't compute," and his attitude was, "No, if you look at my intellectual property and you take these five multibillion dollar international companies, if they were to acquire my intellectual property and apply through their chain, their distribution model, they'd make dozens of millions." I think he's dreaming. What do you say to an owner like that?
Kevin Short: We've got to do the math. I don't walk into Tyco or any of these other big companies and just make up numbers. I build a model. So you are talking about your client, I've got to build a model that I can defend and the model says, "With your distribution channels, we think this product line, which today is doing this amount of money, to do this amount of money through your distribution channel with this much margin." I've got to build a financial model to put in front of them because I can't just make up numbers because they'll ask me out of the office. So if I can build a model that can support that dozens of millions of dollars can be made, then we've got a real chance to get in front of the big dogs and ask them for a big price.
Noah Rosenfarb: Let's talk about the third pillar, which is the seller, because I would imagine every seller would like to have an outrageous price but it's not without, I would assume some downside in the sense of either time, planning, advanced planning, making sure the business has the competitive advantage and there is a buyer in the marketplace for it. So what does the seller need to be thinking about and how do they get prepared to sell for an outrageous price?
Kevin Short: It's very interesting to watch my clients. There are some of them, once I explain the process to them, I give them the image that, "Think of yourself being in Vegas on TV playing this high stake poker games because that's exactly what's going on." The buyer isn't going to roll over and write you these big checks without testing you to see if they can get it cheaper. They will call your bluff. You've got to be able to sit there and not blink and not give away any signals that you are willing to sell it for a lot less." I had a client who wanted $6 million for his business. I did a lot of homework on him, figured out his competitive advantages, figured out the big buyer and I said, "I think we can get you a lot more than that but you are going to sit tight because it's going to be a bumpy ride because I'm going to ask him for $20 million." We closed the deal at $18 million but a couple of times when they offered me 10 or 12 or 14, I said, "No, thanks" then hung up the phone.
He had to trust me that was reading the tea-leaves correctly, read the behavior and eventually he got his money. But there were times the buyer calls up and said, "We can't pay you this kind of money," and I had coached him to say, "Okay, fine" and we’ll continue rolling out our plan, which is what they were worried about. We’d develop a strategy about how to grow with their expense. You've got to have the stomach lining to do that because if you get nervous in those situations or the psychologist call it paddling out, if you paddle out in the middle of that conversation, the buyer is going to sense it and see it, and they are going to back away.
Noah Rosenfarb: Part of that play is making sure that you are staying powered as you are gaining ground and not treading waters. Would that be a correct statement, that the business itself has to keep growing or kicking Goliath in the knees as you call it?
Kevin Short: The case I just was talking about, they had actually come close to selling the business to the only billion dollar player in the industry. They were going to sell it to them for a four multiple which was $6 million price tag. The deal fell apart at the 11th hour and they hired me a year later to figure out how to get them back to the table. It took us a year to close the deal, but that's when it closed for $18 million. During that period of time, the EBITDA didn't move up an inch. So we sold the same company with the same matrix for 18 versus six because we had a theory as to what the buyer was going to do with it and we played that out.
Noah Rosenfarb: Terrific. So what is it about the sellers that you’ve seen that gives them the fortitude to hold out when they do get an offer that on the surface is way above market, some might refer to it as outrageous but you are telling them to sit tight and wait for more? What are those important personal qualities?
Kevin Short: They've got to be able to trust my rate or whoever the investment banker is because you really have to trust them that they know what they are doing. I have never had one of these happen where they wanted a six, they got an offer at ten and I turned it down and blew up the deal. That has never happened because I'm careful how I do that. They have to be able to trust me to do that. Not all entrepreneurs can trust their advisers to that level. Secondly; they've got to be able to convince themselves whether they sell or not that they will be okay, that they are not playing poker with scared money because if they have to have the $6 million, it's really hard to gamble for 18 and get there if you are going to go broke in the mean time. So the seller has to be pretty strong willed, strong back boned and have an adviser team they trust implicitly.
Noah Rosenfarb: The fourth pillar is the adviser and the advisers to the owner. So talk about what's the right team for the owner. Who do they need to have in place?
Kevin Short: The critical components are the investment banker and the attorney because no matter what kind of a job or how good of a job the investment banker does, the attorney will be involved doing all the paperwork and will have a lot of access to the buyer's attorney. At some point, the buyer's attorney is going to say to the seller's attorney, "This is nuts. I can't believe my client is going to do this." If my client's attorney flinches and says anything remotely like, "Yeah, my guy would have taken a lot less" or anything like that or just rolls his eyes even, we’re dead. That would go right back to the buyer and they will pull that price off the table. You got to have a team that gets along well. This is high stakes poker. There has to be a lot of trust or else it won't work.
Noah Rosenfarb: How would the owner identify both the banker that could do this for them and the lawyer that could do this for them?
Kevin Short: Let's start with the investment banker because that's who makes this happen. Find an investment banker who could speak the language of getting outrageous prices and can prove it. It's one thing to talk. It's a great theory but it's very difficult to pull off. You want proof. You want to talk to clients who have experienced this as references. Secondly, once you find the investment banker, then they will lead you to the attorney because the investment banker is going to be really clear, "If you want me to try to get you this kind of a price, then there is only three or four or five attorneys that I can do this and work with. I don't want a new attorney on the job."
Noah Rosenfarb: So to the owner that says, "Gary has been my lawyer for 25 years. We went to high school together. He's been my lawyer. He's got to close this transaction." What do you say?
Kevin Short: Well, in a nice way, the answer is tough. We get paid a lot of money to make these outrageous prices happen and I'm not going to bet my fee on Gary, the high school friend. So either we get straight and we get the right kind of attorney on the team and he could take Gary to dinner and give him money, for all I care, but you got to get the right guy on the team. This is not the time to have third stringers on the team.
Noah Rosenfarb: So how do you think that bankers should get paid if they get an outrageous price? Should they get an extra reward?
Kevin Short: Absolutely. Here is my thinking on that that my client, like, if you and I agree that your business is worth $10 million and we end up closing the deal at $8 million, I haven't done a very good job and I should be paid under the market, my percentage should be under the market. But if you think it's worth 10 and I think it's worth 10 in an average deal we get 20, then my fee up to 10 should be fairly low. My fee between 10 and 12, 12 and 14, 14 and 20 should be pretty good. So that I end up with a whole lot of money and you are really glad to pay up.
Noah Rosenfarb: Is that how your firm works? Do you have a tiered fee schedule that kind of incentivizes you to go over bogy?
Kevin Short: Yeah. Our mind is to put our money where our mouth is.
Noah Rosenfarb: Yeah, that's great. So share with me some of the probably your best story about someone who sell into these four pillars, perhaps before you wrote them and classified them and quantified them, but another owner that you worked with, and walk me through the advice you gave them, the pre-sale process and then the sale process.
Kevin Short: Yeah, the best one because it's really hard to quantify our value, right? So we ended up with a 12 multiple. Who is to say that we could have done that on a regular day, right and that they could have done it themselves? That's one of the downsides to hiring an investment banker is it's really hard to quantify how much money more it brought to the table. So we only really have one example that we can prove our value and that's the one that actually agreed to sell and came to us when it fell apart. We sold it to the exact same buyers, the exact same sales, exact same EBITDA or three times the amount, 18, so success. That's by far the very best example of being able to prove it.
What went into that was this company was in the medical waste business. In their region, if you go into a doctor's office, the sharps containers on the wall, the red container where they put all the needles. This company picked those up, sanitize them, and dispose of them, and they own the market. They literary had a 100% of the market and at the hospitals, they call it red bag service where they are taking all the trash out of an operating room and waste and they dispose of it appropriately. So they own that market and so when I first met him I said, "Why do they care about, why would they buy you because you are really small compared to them?" The buyer was a billion-dollar company. He said, "I don't know, but they really wanted to," then they walked away.
I said, "How were you able to keep them out of your market because they have been trying for five years to gain customers in your market and you've been able to keep them out?" He said a variety of things but he said, "We have a very effective sales system and services and pricing and everything else." I said, "What do you think they are most concerned about because buying you takes up a new market but it's not that much money." He said, "I don't know." I said, "Any chance that they are worried that you could expand someday and begin to take away their market share?" He said, "I don't know." I said, "Why couldn't you go?" to the big company was headquartered in Chicago. I said, "What's to keep you from going after the Chicago market and eroding their market share quickly like you did in your current market?" He said, "I don't know." I said, "Well, let's find out."
So we had to develop a credible test to get their attention. In the hazards waste business, when you go onto a new city you have to apply for a permit. There are three public hearings. It will cost you $200 to apply for the permit. So when we went to Chicago, we pulled the permit, the next the buyer who had been there the year before called and said, "What are you doing expanding to Chicago?" He said, "Well, I’ve had an investment banker. We are going to expand to six cities in the next year," and he reels off to six cities, that happens to be the six cities that were the largest for this company. He said, "We are going to go after them and try to grow, we are just not here making a living."
The buyers said, "You are crazy, you are going to hurt yourself. Why don't we restart the conversation about buying you again?" We worked this all out with him. He read the script perfectly. He read his lines. He said, "I have no interest in selling anymore. I think the company is going to grow a lot." So they went away. They kept calling back and eventually, he said, "Just call my investment banker. He'll handle the cost." For three months we said, "No interest" and eventually said, "You got to have a number." I said, "Yeah, but you are not going to like the number. You are going to get mad at me and you are going to hang up the phone." Eventually they said, "Just give us the number."
Similar to the story I told you earlier about this signpost company, I said, "We will sell to you for an industry multiple which is four times what we think we are going to be making in the next three years where our run rate would be EBITDA." They said, "What? What is that?" I said, "Basically the price tag is $20 million" coincidentally. Of course they weren't happy and called me names and hung up the phone. But they called back a week later, they said, "You are nuts, we are not going to give you $20 million for that business. But your client already agreed to sell to us last year for $6 million. But we will give you $12 million if you will sell the business to us. "I said, "No, thanks," and I hung up.
Now, I called the client, and this is where the trust factor comes in. I call him and said, "Good news. The price is coming up. Bad news, I have just turned it down." I said it was $12 million. He swallowed his tongue because he would have been happy with six. I said, "Trust me. I have set up basically some safety valves in case, so they wouldn't go away completely." They called back a few days later, raised their offer to 14 and ultimately when they agreed to 18, they then called him after they agreed to 18 and said, "We can't do this" but I already coached him that they will call and try to pull the price off the table and to his credit, when they called and said, "We can't pay you the $18 million." He said, "Then forget it" and he hung up the phone. They called back 30 minutes later and said, "We’ll do the 18." That's a great story because we had a benchmark to measure against of what they were willing to pay and what he was willing to take.
Noah Rosenfarb: Share, if you will, a story where either someone got scared in the poker game or maybe the buyer did walk away, and what you attribute it to?
Kevin Short: I have never had any buyer walk away. If we start the process, you have to get to a certain point. The fact that I think that the buyer is willing to pay an outrageous price is a theory that I can support with a financial model, that doesn't mean the buyer cares. So we have had situations where a client hired us. We put together the story and we said, "We think there is a low probability this will work," but we went ahead and tried and the buyer said, "I don't care." They had no interest. They weren't looking to buy. They didn't care about my client. They didn’t buy into our theory. No pain or gain. So that happens. So we get hired to test a market. I've never had anybody exceed the average multiple and then not close the deal because at that point it's already obvious that they've got something going on behind the scenes and they make someone to close this deal.
Noah Rosenfarb: How important is clean due diligence when you are trying to get an outrageous price? Are people willing to overlook things that other buyers wouldn’t?
Kevin Short: Yeah. You would be surprised because they are so rabid. Assuming it's not one of the critical fundamentals of the deal, they can overlook it because they are already overpaying, what's the difference about a few issues? But the issues can't involve any of the competitive advantages.
Noah Rosenfarb: So, as you think about the future of outrageous prices, where do you see thing going? Do you think this is where we are headed, like maybe we have been in the tech industry where small companies get swallowed by big companies at outrageous prices?
Kevin Short: Yeah. There will always be a market for outrageous prices as long as the buyers are looking to grow, which big companies, that's what they do. How many of them a year can be done? It's not a lot. I tell most of my clients when I start a conversation, "Until we find a compelling story or reason, you are not a candidate for it." I can't even give you any averages but because of what I do, I see a number of them. But in general for a number of companies that sell, it's a very small percentage to get an outrageous price. As long as you are talking about ordinary companies, I'm not talking about companies that are curing cancer or have the latest and greatest technology. I'm talking about regular ordinary companies.
Noah Rosenfarb: So, let's try and bring it into a strike zone for some of the listeners. We are talking about companies that are making a $1 million to $3-$5 million a year that can be, you know.
Kevin Short: I'd say 1-10.
Noah Rosenfarb: Okay. They've got to have this competitive advantage where instead of getting a three to let's even say an eight multiple, they are going to be able to double it. They've got to be able to identify that strategic acquirer. There are certainly no private equity firm or financial buyer that's looking to or willing to pay an outrageous price. Is there?
Kevin Short: By definition they just can't because they are there for a return on investment and you can't pay twice the average multiple and get a return on your investment.
Noah Rosenfarb: Yeah. So, what do you want to share with our listeners about maybe the research that you put into the book and your 25 years of experience working with owners, helping them sell their business and hopefully shooting for an outrageous price when the option might be available? What do you think are some of the best things you've learned?
Kevin Short: That the competitive advantages often are a surprise to my client, that they have been operating this business, they've been so focused on the next sale and the next payroll that they didn't realize that they have developed a competitive advantage that has great value. Their competitive advantage may only be valuable to a buyer within a deal in the produce industry. The big produce player in the country had locations all around the perimeters of United States. My client happened to be dead in the middle of the United States. We figured out a model that said that this buyer was deadheading across the middle of the country with empty trucks and it has cost him X number of millions of dollars a year in wasted cost.
So we went to the buyer and said, "If you had a location here that has this much EBITDA, we can add to the EBITDA with the fuel savings you are wasting today and other efficiencies we saw and you can pay this price. We are not going to sell for anything less than that," and they did it. But there is only one buyer who had that donut shaped distribution grid. Most of them were laid across the entire country and that buyer was $2 billion player. He could afford it. All these planets have to be in alignment to pull this off. The question is how do you figure that out?
We've done deals with companies that were in the circuit-board manufacturing business, which is very competitive and was doing $200 million of sales. The ownership team came in, bought it. They fired their unprofitable customers and went from $200 million to $100 million in revenue. Then they went on and got new customers and built it back to $200 million. It looked like the company hadn't changed but their profitability tripled. Their competitive advantage wasn't the fact that their EBITDA had gone up so much. It was the fact that they had a management team that had the intelligence and backbone to fire half their customers after sales and had the ability to replace it. We can all fire customers but to find customers that the margin is a lot higher is a real skill. So we convinced a big player to buy them and they were going to deploy this management team's philosophies and their sales techniques across their worldwide channel. Our client didn't think of it as kind of an advantage and it truly was. They thought they were just running the business smartly.
Noah Rosenfarb: For our listeners that are owners of companies that are making a $1 million, $2 million a year, they are thinking about what are they going to do in the next 3-5 years to transfer their business. How should they figure out if they are a candidate for preparing for an outrageous price?
Kevin Short: Not to be self-serving, but I think the book Help will guide you through this process to think about it. They can call me. If they haven't ever sold their business and they haven’t gone through this process, they are going to have a hard time believing that this is even possible and it may not be. But nobody wants to waste your time. So we wouldn't be taking on unless we think it's viable. So I would read the book. I think it's an easy way to get your head around it, it's what important. Talk to me when the time is right and have me put them through the paces to see if that's a possibility.
Noah Rosenfarb: Great. So for listeners who do want to get in contact with you, what's the best way?
Kevin Short: Two ways, if you want to read more about the book go toThinkOutrageous.com, which is kind of fun. It's a website about all things that are outrageous in business or ClaytonCapitalPartners.com is where you can reach me also.
Noah Rosenfarb: All right, terrific. Kevin Short, the author of Sell Your Business for an Outrageous Price. Hope all of our listeners enjoyed the title, the concept. Go ahead and get it. Read a copy of the book and clients are people you think might want to sell their company for an outrageous price. Thanks for coming on the show. To all our listeners, hope you’re enjoying us and feel free to reach out. Let me know if you have any guests that you'd like to hear on the show. Give us your comments and feedback. Make sure to like us on iTunes. Thanks to much and to everyone; have a great day.
- How to exploit your company's competitve advantage to get the highest price;
- Finding the "big buyer" that will pay up;
- Characteristics of advisors that are critical to getting outrageous prices;
- Aligning investment banking fees to incentivize them in getting the highest selling price; and
- Success stories on deals selling for crazy high prices.
About the Guest
Kevin is the author of Sell Your Business For An Outrageous Price. This book synthesizes Kevin’s experience in selling mid-size companies ($10MM - $250MM in value) for twice the multiple of the industry average.Kevin Short is also the Managing Partner and CEO of Clayton Capital Partners, a St. Louis-based investment banking firm specializing in merger and acquisition advisement.
Article at: How to Sell Your Business for a Crazy High Price:
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Noah Rosenfarb: Hello and welcome. It’s Noah Rosenfarb, your host to the Divestopedia Exit Strategy Podcast. Today, our guest is the author of "Sell Your Business for an Outrageous Price". His name is Kevin Short. He is also the managing partner of Clayton Capital Partners, a leading middle market M&A advisory firm based in St. Louis. Kevin, thanks so much for joining us today.Kevin Short: Thanks Noah, glad to be here.
Noah Rosenfarb: So how do you get the, I love the title. I think it's wonderful because it's descriptive of what so many owners want. How did you come up with the concept and tell me what has gone into the book?
Kevin Short: Yeah. I've been in the M&A business for 25 years representing the privately held companies, family-owned businesses between $10 and $200 million in value. So I have been doing deals for a long time. Along the way when we would use our typical auction process, which means we don't put a selling price on our companies at any point, any of our deals, there would be deals when we would say, "Okay, next Friday, we want your offers." We might get 10 offers on a company. It’s not unusual to get 10-15. When that happens, we had a few cases where the first place bidder was twice second place bidder. I remember one in particular in the steel processing business they offered us eightmultiple of their EBITDA, their cash flow in effect and everybody else was offering four or five times EBITDA. So while we were perplexed as to why would they do that, obviously, we moved forward and closed the deal.
When I saw the president or the buyer six months later, I said, "How is it going?" because I figured by that time, he had figured out that he paid twice what he needed to and he said, "Well, it's going really well. Do you have any other sellers like that?" which caught me off-guard because I thought he was going to complain and I said, "Tell me what's going on?" He said, "Well, we got rid of the union and we merged buildings and we took some of their products and put it through our worldwide platform, and put some of our products through there just to reach some channel. We have had made our money back in six months." I went from thinking I had sold that thing from an eight times the multiple and then figured out that he, based on what he made with it, we sold it for about six months of earnings.
It was really eye-opening moment and as I go back over my career and as I have watched ever since that happened, those moments do happen occasionally and really what it comes down to is those buyers have figured out they can make a lot more money with my client's company than my client was, usually because it's some form of competitive advantage that you are picking up or some kind of synergy. That's what began the thinking process is, why does this happen? So we spent a number of years talking to buyers all over the country, all over the world actually, finding out what drives their valuation. When they have the right synergies and when they are a billion dollar company buying a $20 million company, they can afford to pay up to get a hold of the company because of what they'll do with it after closing.
So unfortunately, a buyer does not tell you that. They don't say, "I can afford to pay you a lot more money." They will try to get it cheaper as a rule and that began the journey of how do we figure out how to prepare a company. How do we figure out if a company is a candidate to get an outrageous price? So all those things were baked into the process, it took five years to write the book that was released recently by AMACOM books in September. Such went into was figuring out why do buyers pay up this much money, who is the candidate for it, and what can you do to prepare your company to make sure that you get that kind of appraisal. Those were the fundamentals that went into the book.
Noah Rosenfarb: Well, that's great. Five years, that's a long journey. Thank you for being persistent and putting out this intellectual property into the marketplace. I appreciate it.
Kevin Short: It's our pleasure. I actually enjoyed it a lot. I had an editor co-writing with me and we did a ton of research once we got into it. It was hard to articulate because it's hard to describe what I feel when I look at a company and it has the competitive advantages that we think we could leverage into a bigger price. It's hard to describe that on paper, that's why it took a long time.
Noah Rosenfarb: I think that the core thesis of the book goes into the four pillars that owners need to have in place to fetch this extraordinary price. You referred to the first one which is a competitive advantage. Why don't you walk me through kind of a definition of competitive advantage and then maybe you could share a story of a company and the competitive advantage they had?
Kevin Short: Competitive advantage, the concept of competitive advantage was invented by a Harvard professor by the name of Michael Porter. We lean heavily on him in our book and referred to him often because he's written a great deal about where are competitive advantages in your company. Our simple thinking about it is, "Are you doing something that is causing the big players in your industry, are you causing them a lot of pain in their business or are you an opportunity or a lot of gain for them?" We have done deals with both. So we represented a company that was in the business of manufacturing signpost for highway signs. The big competitor was Tyco. Tyco owned about 95% of the market in that sector and my client figured out, if Tyco was selling the signpost for about $1,700 a ton, my client has figured out a way he could do it for $600. So we worked with him for two years to gain the attention of Tyco and to make them pay attention to my client, because my client was barely on the radar-screen. We developed a plan to get their attention, more along the line of kicking Goliath in the kneecap, like in David and Goliath scenario.
So we would have these very public sales for $900 a ton. The signpost business is a public bid business so all of the states around the country were aware that this time, he was selling for $900 and for years, they had been paying $1,700. So they got the attention of the buyer, they called up, and basically threatened my client, "You screwed up the prices of the industry and all those types of things." My client was very well financed and was able to do this over a number of months. Eventually, they said, "We just need to buy you and put you out of your misery." We said, "No, we’re not for sale." We continued to have the sales and sell the product, and eventually they called and said, "We want to buy you." I said, "Well, we’re not for sale and if we were, we would want to be sold for multiple of the earnings we are going to have after we grow our business over the next few years."
Any growth in that sector was going to come from them and so the company was worth about probably $2 or $3 million. It’s that small. What we said to them was, "We think this company is going to make $5 million per year at the end of the next four years with our growth. So if you want to multiply four multiple times $5 million and pay us $20 million we will sell to you." Of course they thought that was ridiculous and hang up the phone, and we continued to have sales. Over time, we continued to kick them in the kneecap, which was our strategy on this deal - not every deal - but on this deal it was. They would keep calling up and saying, "All right. We are willing to raise our offer to $4, to $6, to $8 to $10. This happened over a year. Ultimately, we closed the deal for $14 million and that was a classic case of we were able to leverage the pain we were causing them. We caused them margin and uncomfortable meetings with customers, we were able to leverage that into a $14 million cash price. That was one of our early outrageous price deals.
So the first pillar is you've got to be doing something that's going to cause the big buy. You need a big buyer, which is the second pillar. You have to be able to cause them a lot of pain or give them an opportunity for a lot of gains. We've done both a lot of times. The second pillar is you have to have a buyer that's very big. At the end of the day, if you are going to be paid an outrageous price, buyer has to go to a bank and finance a deal. They'll never get a loan because no bank is going to approve a price that's twice the average multiple in that industry. So you need a buyer that does not need to go to a bank. That leaves you with the big buyers. So often our buyers are billion dollar players and our sellers are $20, $30, $40 million. That’s the second pillar, a big buyer.
Noah Rosenfarb: Come back on the competitive advantage side and clearly in the example of the steel processors, they could sell it at $900 and make money and their competitor selling at $1,700. The competitor presumably Tyco who bought them was able to reduce their cost based on whatever technology they had or innovative way they did business so Tyco could make money from it not just wipe out, you know, swat a fly. But maybe share another example where there was that opportunity for gain, where one of your clients, they developed some intellectual property that had a lot of value. They couldn't exploit the value without the opportunity of that billion dollar giant.
Kevin Short: In the case of the steel signpost guy, surprisingly to us, when Tyco closed the deal, they dismantled the equipment, the technology and basically threw it away. And then they turned around and raised their prices to $2,400. So they eliminated the competitive pressure which got rid of a pain and turned it into a gain. So Tyco is still selling those signposts for a whole lot more money than they were before because there is no competition. In that particular case, it was both. We did a deal with a company that was in the highway construction business. They specialize about $115-million company. We sold it to a very large buyer out of Europe. They were building the roads in national parks.
When I first saw the deal, I'm thinking, "Road builders are not very sexy. People don't care. They don't buy them very often. Until we learned that they were building these roads and parks, national parks, federal. The rules for that, the requirements were significant. So when you are in Yellowstone National Park building a road you cannot move any dirt from its original location more than a 100 ft away. That makes it really hard to excavate and build roads, A. B, your trucks cannot leak any fuel or oil on the ground because that's a big deal. You’ve got to be on top of that. There’s just a whole litany of rules and regs about how you do that business. So it's not as simple as dig a road and lay down concrete or asphalt.
They had corners of market on that and they were known as the only guys in the country approved to do that. So when this large multinational road builder came along, we said to them, "We are willing to sell to you. It's going to cost you this." They paid a lot more money for that than what somebody else would have paid to own that business because it gave them an opportunity for significant gain. This buyer also owned quarries all over the world and they were able to leverage their quarries that had assets into all of these parks also. So it became a multiplier effect.
Noah Rosenfarb: So let's talk a little bit about the buyers because that's the second pillar. You mentioned the giants but presumably not all of the buyers have to be giants as long as they have the capital. So share with me kind of the range of buyer stories of who's on the buy side willing to pay an outrageous price?
Kevin Short: I don't know that we have ever sold to a buyer that was less than a billion dollars in size because of the amount of cash it takes to do it. Even in a normal company, say a few $100 million, their investor is going to look at them cross eyed if their odds are paying twice the multiple because they probably have made other acquisitions in this arena, and they have paid four or five, and now all of a sudden they want to pay an eight or a 10, it’s hard to justify. If you have a board of directors, if they answer to you, you have share holders, if you've got a big company that maybe isn't a billion dollar player but it's owned privately, then they can pretty much do what they want to your point. But as a rule, it's going to be the big companies that are using petty cash in effect to pay for these companies and they can get the extreme synergies out of them.
Noah Rosenfarb: So when you define an outrageous price, I think you kind of double the industry standard multiple, that's outrageous, right? Where do you see pricing right now or over the course of the last two years, multiples are high in general. Is the margin between an outrageous price and a market price swimming in this hot market?
Kevin Short: No. I can't say that because there is no data to support outrageous price activity. As far as I know, we’re the only firm out there pushing for that and focusing on it. So there’s no data to compare that. In my experience, first of all to your point, the average multiples have gone up. If you are in a right sector and you've got a very pure, clean company, what you could have sold for four, three years ago could go for a six today, so multiples are up for clean companies in the right sector. The outrageous price is really a function of what you are willing to hang in there for and play poker for because at the end of the day the buyers will say internally, "We would like to pay four or six whatever it is for this company because that's the industry average, but if we had to, we can make so much money with this. We can go up quite a bit." What you are really playing on is how much they are going to make with it, which is independent of the market.
Noah Rosenfarb: Yeah, when you are thinking about helping an owner attract an outrageous price, do they need more than one buyer that want to pay it or can you just focus on an exclusive buyer?
Kevin Short: Generally in the outrageous world, you are only going to have one or two buyers willing to go that route. Often, we’ll wrap the outrageous price process. We’ll wrap it with a typical industry and banking sale process. Some clients come to me and say, "I'm only going to sell if I get the outrageous price over the eight multiple or nine, whatever it is." Others will come to me and say, "I'm willing to take a five but I'd like you to take a shot to get me a ten and do them in parallel." I can do them in parallel as different processes. To your point, you’re managing one buyer differently than the rest of the pack.
Noah Rosenfarb: So I was with a potential client the other day and I didn't dig into their financials but my read of this situation was maybe they are making $1 million a year of EBITDA and yet he tells me, "I’d only sell my company for $15 million." Well, that’s beyond outrageous, right, because it just doesn't…
Kevin Short: Right.
Noah Rosenfarb: I was telling him, "The values don't compute," and his attitude was, "No, if you look at my intellectual property and you take these five multibillion dollar international companies, if they were to acquire my intellectual property and apply through their chain, their distribution model, they'd make dozens of millions." I think he's dreaming. What do you say to an owner like that?
Kevin Short: We've got to do the math. I don't walk into Tyco or any of these other big companies and just make up numbers. I build a model. So you are talking about your client, I've got to build a model that I can defend and the model says, "With your distribution channels, we think this product line, which today is doing this amount of money, to do this amount of money through your distribution channel with this much margin." I've got to build a financial model to put in front of them because I can't just make up numbers because they'll ask me out of the office. So if I can build a model that can support that dozens of millions of dollars can be made, then we've got a real chance to get in front of the big dogs and ask them for a big price.
Noah Rosenfarb: Let's talk about the third pillar, which is the seller, because I would imagine every seller would like to have an outrageous price but it's not without, I would assume some downside in the sense of either time, planning, advanced planning, making sure the business has the competitive advantage and there is a buyer in the marketplace for it. So what does the seller need to be thinking about and how do they get prepared to sell for an outrageous price?
Kevin Short: It's very interesting to watch my clients. There are some of them, once I explain the process to them, I give them the image that, "Think of yourself being in Vegas on TV playing this high stake poker games because that's exactly what's going on." The buyer isn't going to roll over and write you these big checks without testing you to see if they can get it cheaper. They will call your bluff. You've got to be able to sit there and not blink and not give away any signals that you are willing to sell it for a lot less." I had a client who wanted $6 million for his business. I did a lot of homework on him, figured out his competitive advantages, figured out the big buyer and I said, "I think we can get you a lot more than that but you are going to sit tight because it's going to be a bumpy ride because I'm going to ask him for $20 million." We closed the deal at $18 million but a couple of times when they offered me 10 or 12 or 14, I said, "No, thanks" then hung up the phone.
He had to trust me that was reading the tea-leaves correctly, read the behavior and eventually he got his money. But there were times the buyer calls up and said, "We can't pay you this kind of money," and I had coached him to say, "Okay, fine" and we’ll continue rolling out our plan, which is what they were worried about. We’d develop a strategy about how to grow with their expense. You've got to have the stomach lining to do that because if you get nervous in those situations or the psychologist call it paddling out, if you paddle out in the middle of that conversation, the buyer is going to sense it and see it, and they are going to back away.
Noah Rosenfarb: Part of that play is making sure that you are staying powered as you are gaining ground and not treading waters. Would that be a correct statement, that the business itself has to keep growing or kicking Goliath in the knees as you call it?
Kevin Short: The case I just was talking about, they had actually come close to selling the business to the only billion dollar player in the industry. They were going to sell it to them for a four multiple which was $6 million price tag. The deal fell apart at the 11th hour and they hired me a year later to figure out how to get them back to the table. It took us a year to close the deal, but that's when it closed for $18 million. During that period of time, the EBITDA didn't move up an inch. So we sold the same company with the same matrix for 18 versus six because we had a theory as to what the buyer was going to do with it and we played that out.
Noah Rosenfarb: Terrific. So what is it about the sellers that you’ve seen that gives them the fortitude to hold out when they do get an offer that on the surface is way above market, some might refer to it as outrageous but you are telling them to sit tight and wait for more? What are those important personal qualities?
Kevin Short: They've got to be able to trust my rate or whoever the investment banker is because you really have to trust them that they know what they are doing. I have never had one of these happen where they wanted a six, they got an offer at ten and I turned it down and blew up the deal. That has never happened because I'm careful how I do that. They have to be able to trust me to do that. Not all entrepreneurs can trust their advisers to that level. Secondly; they've got to be able to convince themselves whether they sell or not that they will be okay, that they are not playing poker with scared money because if they have to have the $6 million, it's really hard to gamble for 18 and get there if you are going to go broke in the mean time. So the seller has to be pretty strong willed, strong back boned and have an adviser team they trust implicitly.
Noah Rosenfarb: The fourth pillar is the adviser and the advisers to the owner. So talk about what's the right team for the owner. Who do they need to have in place?
Kevin Short: The critical components are the investment banker and the attorney because no matter what kind of a job or how good of a job the investment banker does, the attorney will be involved doing all the paperwork and will have a lot of access to the buyer's attorney. At some point, the buyer's attorney is going to say to the seller's attorney, "This is nuts. I can't believe my client is going to do this." If my client's attorney flinches and says anything remotely like, "Yeah, my guy would have taken a lot less" or anything like that or just rolls his eyes even, we’re dead. That would go right back to the buyer and they will pull that price off the table. You got to have a team that gets along well. This is high stakes poker. There has to be a lot of trust or else it won't work.
Noah Rosenfarb: How would the owner identify both the banker that could do this for them and the lawyer that could do this for them?
Kevin Short: Let's start with the investment banker because that's who makes this happen. Find an investment banker who could speak the language of getting outrageous prices and can prove it. It's one thing to talk. It's a great theory but it's very difficult to pull off. You want proof. You want to talk to clients who have experienced this as references. Secondly, once you find the investment banker, then they will lead you to the attorney because the investment banker is going to be really clear, "If you want me to try to get you this kind of a price, then there is only three or four or five attorneys that I can do this and work with. I don't want a new attorney on the job."
Noah Rosenfarb: So to the owner that says, "Gary has been my lawyer for 25 years. We went to high school together. He's been my lawyer. He's got to close this transaction." What do you say?
Kevin Short: Well, in a nice way, the answer is tough. We get paid a lot of money to make these outrageous prices happen and I'm not going to bet my fee on Gary, the high school friend. So either we get straight and we get the right kind of attorney on the team and he could take Gary to dinner and give him money, for all I care, but you got to get the right guy on the team. This is not the time to have third stringers on the team.
Noah Rosenfarb: So how do you think that bankers should get paid if they get an outrageous price? Should they get an extra reward?
Kevin Short: Absolutely. Here is my thinking on that that my client, like, if you and I agree that your business is worth $10 million and we end up closing the deal at $8 million, I haven't done a very good job and I should be paid under the market, my percentage should be under the market. But if you think it's worth 10 and I think it's worth 10 in an average deal we get 20, then my fee up to 10 should be fairly low. My fee between 10 and 12, 12 and 14, 14 and 20 should be pretty good. So that I end up with a whole lot of money and you are really glad to pay up.
Noah Rosenfarb: Is that how your firm works? Do you have a tiered fee schedule that kind of incentivizes you to go over bogy?
Kevin Short: Yeah. Our mind is to put our money where our mouth is.
Noah Rosenfarb: Yeah, that's great. So share with me some of the probably your best story about someone who sell into these four pillars, perhaps before you wrote them and classified them and quantified them, but another owner that you worked with, and walk me through the advice you gave them, the pre-sale process and then the sale process.
Kevin Short: Yeah, the best one because it's really hard to quantify our value, right? So we ended up with a 12 multiple. Who is to say that we could have done that on a regular day, right and that they could have done it themselves? That's one of the downsides to hiring an investment banker is it's really hard to quantify how much money more it brought to the table. So we only really have one example that we can prove our value and that's the one that actually agreed to sell and came to us when it fell apart. We sold it to the exact same buyers, the exact same sales, exact same EBITDA or three times the amount, 18, so success. That's by far the very best example of being able to prove it.
What went into that was this company was in the medical waste business. In their region, if you go into a doctor's office, the sharps containers on the wall, the red container where they put all the needles. This company picked those up, sanitize them, and dispose of them, and they own the market. They literary had a 100% of the market and at the hospitals, they call it red bag service where they are taking all the trash out of an operating room and waste and they dispose of it appropriately. So they own that market and so when I first met him I said, "Why do they care about, why would they buy you because you are really small compared to them?" The buyer was a billion-dollar company. He said, "I don't know, but they really wanted to," then they walked away.
I said, "How were you able to keep them out of your market because they have been trying for five years to gain customers in your market and you've been able to keep them out?" He said a variety of things but he said, "We have a very effective sales system and services and pricing and everything else." I said, "What do you think they are most concerned about because buying you takes up a new market but it's not that much money." He said, "I don't know." I said, "Any chance that they are worried that you could expand someday and begin to take away their market share?" He said, "I don't know." I said, "Why couldn't you go?" to the big company was headquartered in Chicago. I said, "What's to keep you from going after the Chicago market and eroding their market share quickly like you did in your current market?" He said, "I don't know." I said, "Well, let's find out."
So we had to develop a credible test to get their attention. In the hazards waste business, when you go onto a new city you have to apply for a permit. There are three public hearings. It will cost you $200 to apply for the permit. So when we went to Chicago, we pulled the permit, the next the buyer who had been there the year before called and said, "What are you doing expanding to Chicago?" He said, "Well, I’ve had an investment banker. We are going to expand to six cities in the next year," and he reels off to six cities, that happens to be the six cities that were the largest for this company. He said, "We are going to go after them and try to grow, we are just not here making a living."
The buyers said, "You are crazy, you are going to hurt yourself. Why don't we restart the conversation about buying you again?" We worked this all out with him. He read the script perfectly. He read his lines. He said, "I have no interest in selling anymore. I think the company is going to grow a lot." So they went away. They kept calling back and eventually, he said, "Just call my investment banker. He'll handle the cost." For three months we said, "No interest" and eventually said, "You got to have a number." I said, "Yeah, but you are not going to like the number. You are going to get mad at me and you are going to hang up the phone." Eventually they said, "Just give us the number."
Similar to the story I told you earlier about this signpost company, I said, "We will sell to you for an industry multiple which is four times what we think we are going to be making in the next three years where our run rate would be EBITDA." They said, "What? What is that?" I said, "Basically the price tag is $20 million" coincidentally. Of course they weren't happy and called me names and hung up the phone. But they called back a week later, they said, "You are nuts, we are not going to give you $20 million for that business. But your client already agreed to sell to us last year for $6 million. But we will give you $12 million if you will sell the business to us. "I said, "No, thanks," and I hung up.
Now, I called the client, and this is where the trust factor comes in. I call him and said, "Good news. The price is coming up. Bad news, I have just turned it down." I said it was $12 million. He swallowed his tongue because he would have been happy with six. I said, "Trust me. I have set up basically some safety valves in case, so they wouldn't go away completely." They called back a few days later, raised their offer to 14 and ultimately when they agreed to 18, they then called him after they agreed to 18 and said, "We can't do this" but I already coached him that they will call and try to pull the price off the table and to his credit, when they called and said, "We can't pay you the $18 million." He said, "Then forget it" and he hung up the phone. They called back 30 minutes later and said, "We’ll do the 18." That's a great story because we had a benchmark to measure against of what they were willing to pay and what he was willing to take.
Noah Rosenfarb: Share, if you will, a story where either someone got scared in the poker game or maybe the buyer did walk away, and what you attribute it to?
Kevin Short: I have never had any buyer walk away. If we start the process, you have to get to a certain point. The fact that I think that the buyer is willing to pay an outrageous price is a theory that I can support with a financial model, that doesn't mean the buyer cares. So we have had situations where a client hired us. We put together the story and we said, "We think there is a low probability this will work," but we went ahead and tried and the buyer said, "I don't care." They had no interest. They weren't looking to buy. They didn't care about my client. They didn’t buy into our theory. No pain or gain. So that happens. So we get hired to test a market. I've never had anybody exceed the average multiple and then not close the deal because at that point it's already obvious that they've got something going on behind the scenes and they make someone to close this deal.
Noah Rosenfarb: How important is clean due diligence when you are trying to get an outrageous price? Are people willing to overlook things that other buyers wouldn’t?
Kevin Short: Yeah. You would be surprised because they are so rabid. Assuming it's not one of the critical fundamentals of the deal, they can overlook it because they are already overpaying, what's the difference about a few issues? But the issues can't involve any of the competitive advantages.
Noah Rosenfarb: So, as you think about the future of outrageous prices, where do you see thing going? Do you think this is where we are headed, like maybe we have been in the tech industry where small companies get swallowed by big companies at outrageous prices?
Kevin Short: Yeah. There will always be a market for outrageous prices as long as the buyers are looking to grow, which big companies, that's what they do. How many of them a year can be done? It's not a lot. I tell most of my clients when I start a conversation, "Until we find a compelling story or reason, you are not a candidate for it." I can't even give you any averages but because of what I do, I see a number of them. But in general for a number of companies that sell, it's a very small percentage to get an outrageous price. As long as you are talking about ordinary companies, I'm not talking about companies that are curing cancer or have the latest and greatest technology. I'm talking about regular ordinary companies.
Noah Rosenfarb: So, let's try and bring it into a strike zone for some of the listeners. We are talking about companies that are making a $1 million to $3-$5 million a year that can be, you know.
Kevin Short: I'd say 1-10.
Noah Rosenfarb: Okay. They've got to have this competitive advantage where instead of getting a three to let's even say an eight multiple, they are going to be able to double it. They've got to be able to identify that strategic acquirer. There are certainly no private equity firm or financial buyer that's looking to or willing to pay an outrageous price. Is there?
Kevin Short: By definition they just can't because they are there for a return on investment and you can't pay twice the average multiple and get a return on your investment.
Noah Rosenfarb: Yeah. So, what do you want to share with our listeners about maybe the research that you put into the book and your 25 years of experience working with owners, helping them sell their business and hopefully shooting for an outrageous price when the option might be available? What do you think are some of the best things you've learned?
Kevin Short: That the competitive advantages often are a surprise to my client, that they have been operating this business, they've been so focused on the next sale and the next payroll that they didn't realize that they have developed a competitive advantage that has great value. Their competitive advantage may only be valuable to a buyer within a deal in the produce industry. The big produce player in the country had locations all around the perimeters of United States. My client happened to be dead in the middle of the United States. We figured out a model that said that this buyer was deadheading across the middle of the country with empty trucks and it has cost him X number of millions of dollars a year in wasted cost.
So we went to the buyer and said, "If you had a location here that has this much EBITDA, we can add to the EBITDA with the fuel savings you are wasting today and other efficiencies we saw and you can pay this price. We are not going to sell for anything less than that," and they did it. But there is only one buyer who had that donut shaped distribution grid. Most of them were laid across the entire country and that buyer was $2 billion player. He could afford it. All these planets have to be in alignment to pull this off. The question is how do you figure that out?
We've done deals with companies that were in the circuit-board manufacturing business, which is very competitive and was doing $200 million of sales. The ownership team came in, bought it. They fired their unprofitable customers and went from $200 million to $100 million in revenue. Then they went on and got new customers and built it back to $200 million. It looked like the company hadn't changed but their profitability tripled. Their competitive advantage wasn't the fact that their EBITDA had gone up so much. It was the fact that they had a management team that had the intelligence and backbone to fire half their customers after sales and had the ability to replace it. We can all fire customers but to find customers that the margin is a lot higher is a real skill. So we convinced a big player to buy them and they were going to deploy this management team's philosophies and their sales techniques across their worldwide channel. Our client didn't think of it as kind of an advantage and it truly was. They thought they were just running the business smartly.
Noah Rosenfarb: For our listeners that are owners of companies that are making a $1 million, $2 million a year, they are thinking about what are they going to do in the next 3-5 years to transfer their business. How should they figure out if they are a candidate for preparing for an outrageous price?
Kevin Short: Not to be self-serving, but I think the book Help will guide you through this process to think about it. They can call me. If they haven't ever sold their business and they haven’t gone through this process, they are going to have a hard time believing that this is even possible and it may not be. But nobody wants to waste your time. So we wouldn't be taking on unless we think it's viable. So I would read the book. I think it's an easy way to get your head around it, it's what important. Talk to me when the time is right and have me put them through the paces to see if that's a possibility.
Noah Rosenfarb: Great. So for listeners who do want to get in contact with you, what's the best way?
Kevin Short: Two ways, if you want to read more about the book go toThinkOutrageous.com, which is kind of fun. It's a website about all things that are outrageous in business or ClaytonCapitalPartners.com is where you can reach me also.
Noah Rosenfarb: All right, terrific. Kevin Short, the author of Sell Your Business for an Outrageous Price. Hope all of our listeners enjoyed the title, the concept. Go ahead and get it. Read a copy of the book and clients are people you think might want to sell their company for an outrageous price. Thanks for coming on the show. To all our listeners, hope you’re enjoying us and feel free to reach out. Let me know if you have any guests that you'd like to hear on the show. Give us your comments and feedback. Make sure to like us on iTunes. Thanks to much and to everyone; have a great day.
Article at: How to Sell Your Business for a Crazy High Price:
For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at info@buysellflbiz.com or 239.738.6227. Also, visit our Florida Business Exchange website at www.fbxbrokers.com and my personal website at www.buysellflbiz.com.
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