Preparing for a Successful Exit: Unlocking Maximum Value in Your Business with Channing Hamlet

Welcome to the podcast that’s dedicated to helping business owners prepare for an exit so that you can maximise the valuation and exit on your terms. This is the Exit Insights podcast presented by Succession Plus. I’m Daryl Bates-Brownsword and today I’m talking to Channing, Hamlet Channing’s from Objective Investment Banking and Valuation based in Southern California. Hey, welcome and thanks for joining me today, Channing.

Thanks for having me. It’s always fun to help educate the community about how to sell their companies for a premium. I think a lot of business owners don’t fully appreciate all of the elements. That come into a successful sale. So happy to be here.

Brilliant. And Channing, as an investment banker, you’ve got a lot of experience, and we uncovered this in a bit of a planning call, but a lot of experience of business owners coming to you. And when they do a deal, if they’re not prepared or fully tweaked their business in anticipation of an exit, end up leaving a lot of money on the table when the deal is done is what you’re sharing. And that’s something that’s near and dear to my heart, is helping business owners not only just get an exit out of your business, which is a great start because 80% don’t get a deal, but we’re looking for a successful exit. And entrepreneurs are competitive beasts, so they want to do what’s the best they can. So getting a successful exit would mean ideally with minimal earn out requirements on them and achieving a premium valuation if at all possible. And there’s a lot that’s within their control that they can do to influence the valuation they can get. And there’s a few things that are outside of their scope of influence and things that they aren’t control. Let’s explore, shall we? What are the things that business owners can do to proactively help their business sell so that they are one of the 20%? And then I guess once they’ve got that baseline covered, what are the things they can do? And some practical examples from you. If you’ve got some case studies to go, here’s what a business looks like that can sell, and here’s one that’ll sell and get a premium price, perhaps.

It’s interesting. I think generally speaking, it’s hard to sell a company. It’s a very complex and multifaceted process and it’s really hard to sell a company for a premium. And so there has to be something special going on to get a premium valuation. And I think we’ll spend some time talking about that. But one of the things I’ve observed over the years is when a business owner makes the psychological or emotional shift to view the business that they’re running. Or perhaps they founded as an investment. Of theirs rather than, this is like my lifestyle and I’m all wrapped up in it, and they start thinking about. This is probably my largest investment, and. I need to start making decisions to. Grow the value of the investment, rather. Than I need to make decisions to maximise my cash flow or make payroll next week. There’s kind of a mental. Shift that goes on, and they’re more ready to sell a company. And then there’s a lot of personal elements around how much money do I need to support my lifestyle? What’s the tax implications of a sale? What am I going to do personally, family, legacy, etc. etc. etc. And so when someone is not clear on a lot of those things and they’re not crystal clear on what they want out of a transaction, it’s hard to set up a successful transaction. So I love working with business owners that have taken the time and really put the effort in to have their personal house in order, so to speak, so that we can focus on the business. And then on the business side, there’s a whole host of different elements to think through around whether the company is even saleable or not, what it’s worth. Is it the right time to do a deal, etc., etc. etc.. And so there’s a lot we could talk about there.

Yeah, I think you said there were four things that you need to get a premium. I’ve got risks. Is it saleable value drivers? And what was the fourth one?

Yeah, really, I think we look at the saleability factors, which is risks, you know hat are the value drivers? And then the third one is what’s going on in the market. And just a quick story on that. I worked with a commercial printing business when I first started in investment banking and at that point in time, printing  was still a thing like the internet, digital marketing and all that stuff was in its infancy, and so companies were still printing glossy brochures, etc. Private equity and the public markets had built a number of companies that were on massive acquisition sprees and so when we sold this company, we literally had an auction with seven buyers, and we got them to bid like multiple rounds against each other and just kept ratcheting the price up and up and up. And we sold that company for a very high multiple for a printing business. 20 years later, internet, digital marketing, email, et cetera, like the printing sector had somewhat been commoditised by a lot of this technological shift, one and two a lot of the companies that had made acquisitions had gotten so big that they were not necessarily focused on buying small companies anymore. And so the company that we sold 20 years later, arguably a better company with better technology and better management. It was a battle and a struggle just to find buyers that are interested. And so now, when you have buyers that are barely interested, it’s really difficult to get a premium valuation. So that company sold for it was a better company that sold for a lesser multiple. I think this market timing and understanding of what’s going on in the industry. And how to capitalise on that is pretty important and so this goes back to what we talked about at the beginning of the call or the beginning of the conversation, when a business owner has made the mental shift that like, hey, this company that I run, that I started is an investment  and so I’m going to start paying attention to the market. And market values are high right now. They’re low right now I got tailwinds, I got headwinds, et cetera. Just understanding where you are in that cycle and what factors are likely to be changing to change that cycle can be part of the discussion. And I’d say one of the hardest things that we advise business owners on is should I sell this year or should I hold on? And part of that is what do you believe is going to happen in the future? And part of it is really looking at trends and having a good finger on the pulse of the market. And so that’s a third area is just sort of what’s going on with the market and economic environment. And then the fourth one is what process do you use to sell the company? I think we’ve had a lot of expertise and our whole profession exists by running a formal, diligent auction process to get multiple buyers interested in biding against each other, which you can drive the price up. You can drive the price up very significantly. The investment banker process isn’t right for every situation, but when it’s right, it can make like a really big difference and understanding that and being prepared for that can be a fourth value driver.

Yeah. And one of the takeaways I heard, and I guess perhaps reading between the. Lines is if I’ve done a lot of those things, like I keep good records, I’ve got all my human resource, my employment records, my contracts, my agreements, my supplier agreements, all of my processes. If my business is systemised and operating smoothly and predictably, I think was the word you used. And I’ve got a management team in place, so the business isn’t dependent on me as a key person. So they’re some of the key areas. And perhaps I’ve got some IP as well, which is proprietary to my business, or even if that’s a process, and I want to dig into that in a second, but if I’ve addressed those key factors, then I’m in a position to be opportunistic. So I may not want to sell my business for five years time, but if I see that there’s things happening in the industry, in the marketplace, around my industry, and for whatever reason, businesses in my industry are selling at a premium at the moment, I can take advantage of that because I’m ready. I’m already on the front foot, and then I can go explore and go, well, maybe I do sell my business now it’s three, four, five years earlier than I wanted. But yeah, things are peaking and it’s always hard to time the market. But if things are going off in my market at the moment, my industry, then I can take advantage. The alternative to that is if I see things, oh, look, my business is firing off at the market at the moment, then I have to get exit ready, which might take two years or three years, by which time the opportunity is passed, potentially, and then before you know it, I’m blockbuster.

Two thoughts for you. One is when a business is exit ready, the owners typically enjoy owning it. And running it more because it’s easier and less stressful. And then the second thing, over the last kind of 18 months, we’ve had a lot of economic and other volatility in the world. And so it’s hard to have confidence right now that, hey, this is a great time to spend the next nine months running an auction and selling my company. But what’s happening right now is there’s still a lot of capital out there. Private equity firms have more dry powder than they’ve ever had. And because of the economic environment, deal flow is down. So there’s a supply and demand imbalance on deals. Public companies are starting to face economic slowdown, and they have a lot of cash and capital. And so there’s this situation where a lot of companies are being approached by one or a handful of buyers. And so a lot of our clients have come to us with one or two buyers interested, and they’re kind of  like, hey, help me get a deal done. And when they’re organised and ready, you can mobilise and you can close a deal in three months, four months at a premium. We have a company that we’ve been talking to for the last two years. It’s an industrial components business and the CEO was kind of thinking about retiring at some point in the next kind of five to ten years. And he had started to cultivate relationships with a handful of buyers, and he got an inbound offer that was a premium valuation. And we mobilised a team, and that deal will close kind of 90 days from the time our firm had the. first discussion with the buyer. They were organised, they were ready, they were doing everything right, and they were able to take advantage of a unique opportunity to sell their company for a premium. So I think there’s really something to be said for that. On the flip side, another story comes to mind. Seven or eight years ago, I was introduced to a company, and there were three founders. There was a sales guy, a technology guy, and operations person that got together. And started A company, and they had built it up, and they were each making an income of north of a million dollars a year running this company. So they built a nice business that had 3 million plus of cash flow annually. They got an offer from a buyer which was like, hey, we’ll give you a little bit of cash and there’s an earn out, and we’ll give you. Some stock in our company. And I sat down with one of the three partners and do you have audited financials? No. Do you do this? No. Do you do that? No. Do you have a succession plan? No. The answer was like no to everything the deal they had on the table wasn’t great. And so we came to the conclusion with them, it’s like, hey, why don’t we help you build a roadmap of all the stuff to put together to sell the company and over a series of meetings, and they worked with some other consultants and CPA and attorney, and four years later, they showed up. One of the three founders was having some health issues, which prompted the sale of the business and so they showed up audited financials, good analytics. Each of the three positions had their succession plan in place, so they had a management team ready to take over. They had diversified away from one of their large customers, actually, by cutting back revenue at that customer and getting other customers

Right.

There was a very strategic and calculated process they went through to diversify their revenue base. They shifted their contracting from annual contracts to five year long term agreements. And they did all of these things to both prepare for sale and make the company valuable. And when they came to us to sell the company, we were able to run a very aggressive auction process and we had, like, I don’t know, 30 offers. And we ultimately narrowed it down through this auction process. We ultimately narrowed it down to two buyers, and our client was able to pick the buyer that, and they were both very good deals. They were able to pick the buyer where they felt like they wanted to work and continue to grow and build the business. The one guy that was having health problems retired right away, and the other two people worked for that new buyer. And I still work there years later. And so it’s a real success story and kind of a testament to the time and effort and preparation they did. And the business sold for five times. What the offer they had four years earlier, four years earlier was so this proactive strategic planning process that they put in place to address a lot of the issues turned out to be really amazing for them.

So you just slipped that in but let me just check. Did I hear that correctly? The difference between the valuation for a business that’s exit ready and not exit ready was five times. Five times the valuation by being exit ready. So if you’re on the front foot, exit ready, you can take advantage of an opportunity, you’ll be ready. And the other thing you slipped in is, best case scenario, is that a deal can be done in three months.

Yeah.

That’s significant. What’s the average? So many other businesses are on the market for a year, you’re just trying to get a deal.

I think, you know in speaking to my peers in investment banking, I think that if you Gantt chart or build a timeline, a sale process takes, call it nine months, two to three months to pull all the materials together and buyer’s list, financial modeling, write a SIM, confidential information memorandum, two to three months to market the business and get offers from buyers, and then 90 days to do due diligence and close a transaction. Often the due diligence and closing process can take longer if the company is not organised and so I think it’s a nine to twelve month process to sell a company. You know that certainly when we’ve had companies where there’s a lot of buyer interest and they’re really organised, you can reliably close a transaction in three to six months. You can reliably close a transaction in three to six months. So really there’s something to be said for being ready. So once you’re ready, you can move quickly because the transaction process is difficult and stressful.

Yeah. So that’s six to nine months of less stress and wonder and am I going to close this deal? Are they going to keep chipping away? Are they going to complete? But if you exit ready, the buyers can, they’re less concerned because it’s less risk. So they don’t dig as deep because you’re getting the information to them quickly, they’re satisfied and you address their concerns really quickly.

When you can send audited financial statements to a buyer and you can send them all of your material contracts and there’s not a series of discussions around like, oh, yeah, we never got a signature on this one, but we’ve been working with them forever and we don’t do audits, but our financials are close enough to write. Don’t worry about it. When you’re having those discussions, buyers are going to dig deeper because they don’t know what they don’t know and they dig deeper when it’s like, I got audited financials. Here’s all my contracts, here’s my employment records, here’s this, here’s that. The buyer stops digging and analyses what you have because you’ve given them great comfort, that you’ve given them great comfort that they have what they need to have in order to understand the business and understand the value and the risks. Things move much quicker.

Brilliant. So, Channing, let’s pull it all together, shall we? So there’s four things that you really need to think of or work with if you really want to sell your business at a premium price. And the first one is, you have to have addressed all of your risks. And these are the risks that are a risk to you as a business owner on a day to day basis. But they present a risk to a buyer buying your business, because they’re just looking for continuity.

And one thing on the risks, and you just said the right word, is continuity. And so, as a seller, what you want to be able to do, provide the buyer, is high confidence that there will be continuity no one wants to buy a business and then have the top customer leave the week after they bought it, and they overpaid by 50%. And so one way to solve those problems is to structurally solve them in the business, but another way to solve them we sold a company that their top customer was 35% of their revenue. Our client went to the top customer and basically said, hey, we’re thinking about selling our company A, can we use you as a reference? And B, can we extend our contract a couple of years so that we can provide continuity to the buyer? So when we would call buyers, they would say, is there one customer that represents a significant portion of your revenue? We’d say, yes, there is we already went to that customer, we have a long term contract with them. Here’s the name and phone number of the CEO of that customer. You can call him anytime you want and ask about the relationship. We proved there was continuity. We didn’t solve the problem. It was still 35% of our revenue. But we proved to the buyers that there were continuity, where most of our clients that have a large customer are like, well, we have a great relationship with the customer. Okay, great. Can you call them and tell them. You’re thinking about selling? No, we don’t want to screw something up with the relationship. Wait, which is it? Do you have a good relationship, or. are you nervous about having open communication with them? I think really sort of thinking about not necessarily solving the risk, but how do I provide continuity around the risk? Is another way to skin that cat. And often it could be easier.

Well, you’ve preempted everything and addressed it.

Exactly.

The risks are the first thing. The second one is know your value drivers. What are the things that bring value? And one of the ones that, the key ones is have a proprietary product. What are the things that bring? And another one I imagine is have a strong brand, which is really hard in a small business, but have people attracted to your business brand and not have them coming to the person or the individuals in the business, then you move.

On value drivers, another tip that we often give business owners is our firm does this. But there’s a lot of firms that do valuation work and will help understand and identify value drivers. We have a process where we can work with a business and give them a prioritised set of things they should work on to improve value. Another two things that I always encourage business owners to do, meet with investment bankers somewhat regularly, like investment banks will do free work for you, telling you, because they want to create a relationship. So they’re there when you’re ready to sell. They’ll do free work. They’ll tell you what’s going on in the market, what buyers are paying, what. they’re looking for, et cetera, et cetera, et cetera. And if you listen carefully to what they’re saying, that gives you the roadmap around building value. The example I gave you of the three guys, that’s exactly what they did. We explained to them what they needed to do to create a premium, and they did it over the next four years and five times more money. Having the mentality to do some research around the value drivers and talk to buyers, talk to investment bankers, pay attention to what’s going on on the market and see what you learn and bring that back to your company that can be really valuable.

Yeah, and that leads us nicely, and you’ve sort of covered it already, that the third one is understand your market dynamics, know what’s going on in your industry and the trends in your industry, and especially the trends in your industry about businesses being bought and sold. And if you know what’s going on there, then you can be on the front foot and anticipate a move and be ready. And the fourth one is, well, you’ve got all those things in place. Now. If you’ve got those things in order and you’ve got your house in order from that perspective, then there’s the process of actually selling your business. What process are you just going to put on the internet, on Craigslist or eBay or are you going to have an investment banker? Is the investment banker process suitable for you and your business? And your size of business is going to make a difference as well.

There’s a whole conversation around all the different flavors of the sale process. Do you run an auction? Do you run a targeted process? Do you work with one buyer? Do you do this? Do you do that? There’s a whole discussion around the pros and cons and what’s right for which circumstances. But if business owner has put some thought into it and really understands it. they’re ahead of the game, in my experience.

Totally. And look, the external factors you can’t control, but you can definitely take advantage of them and recognise them as opportunities or threats, and you can act accordingly. So Channing, look, thanks you’ve shared and just to recap, address the risks, know your value drivers, keep abreast of the market dynamics in your industry, and then pick the right process for your business and surround yourself with several advisors, exit planners, personal financial planners, tax advisors, and the right investment bankers and people to help you sell the business. But Channing, so pulling that together, is there one singular key message that you want listeners to take away after listening to this podcast.

I think. The saying failing to plan is planning to fail comes to mind. I think the people that we’ve worked with where we’ve had successful transactions have put a lot of time, effort and thought into building a business that’s saleable and valuable. It’s not easy and it doesn’t happen by accident. And so a lot of people say, look, I’m just going to build a great business and then someone will come. Along and buy it  and I think there’s some truth to that building a great business is sort of a core foundation of having a business that can be sold. But I encourage people to not do that at the expense of the rest of the research, to really show up and be prepared and kind of understand the process and understand what’s going on. And so I think planning is really important and then I think every single client we’ve ever had underestimates the level of scrutiny that buyers show up during the process as far as due diligence and crossing every T and dotting every I. And as soon as they find one thing that isn’t kind of pristine or there’s risks, they take advantage of that and so the planning and preparation just mitigates a lot of those risks before you even start the conversation.

Brilliant. And the key takeaway for me, Channing, I’m going to say this again because I think it’s super powerful. If you get your planning right and you do your planning up front, the likelihood is that you can increase your valuation by five times and half the time it takes to go through the sale process. So that’s all upside as far as know, less stress, massive valuation. You get to exit on your terms. You’re exiting like a boss. Channing Hamlet. Thanks for sharing your exit insights with us today.

Yeah, thanks so much for having me. I really appreciated.