Are you planning to sell your small or big business? If yes, finding the right people to help you out in this tedious process is essential. Today, Bob Roark is joined by Jude David, a Senior Broker with Raincatcher, to talk about how Jude helped the company and what they’re doing to help investors. Having seen deals that didn’t work, Jude ensures their clients that they can find quality buyers and shares the key ingredients to hiring a good brokerage firm and getting the right buyers. He also talks about the questions that business owners should ask before considering anyone to help them sell their company. Know more about what makes a good and bad business broker as Jude gives an analogy between brokerage and brain surgery.
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Hiring A Good Brokerage Firm With Jude David
We will be speaking with Jude David. He is out of Louisiana. He a Senior Broker with Raincatcher. It is a national M&A brokerage firm based in Denver, although he is in their Lafayette, Louisiana office. As a Louisiana native turned corporate attorney and investment banker, he is a passionate devotee professionally to corporate development through organic growth, business consulting, strategic planning, merger & acquisition negotiation acquisition, integration and other partnership or venture structures. Although Raincatcher is designed to operate in a team environment, his primary role is negotiating deals to closing in the back half of the transaction. Jude, welcome to the show.
Thanks for having me. I’m excited to be here.
Bring us up to speed. How did you get to where are you now as far as your background and your journey?
I was born and raised in South Louisiana, in a town called Lafayette. It’s about 120,000 people. It is big for Louisiana, but small by big-city standards. It is a good Catholic community. I learned to love God and family first and always work hard, but work to live and not live to work. That’s good community values that we have. I find some of the most successful people in life or some of the hardest workers I know, but they always find ways to put family first. Be good role models to their kids and that allows them to have the energy and the drive to be good at what they do. I’ve always tried to emulate that.
I practiced merger and acquisition law for a long time after graduating from MBA school and law school. I was very fortunate. I got in with some great people and had tremendous success. The right people, right place, right time and a whole lot of hard work added up to a ton of success in very early along in my career. I was put in a position where I had to swim or else I was going to sink. You got thrown in the deep end early and there’s nothing like experience when it comes to mergers and acquisitions. I’ve been very fortunate to have clients with tremendous character and talent to help form me along the way. They probably put way too much confidence in me early along and it allowed me to succeed.
By happenstance over the years, I’ve represented tremendously successful companies and business owners and celebrities. Over my time of being a lawyer, my firm represented Nick Saban. I was his primary point of contact. My colleague, Hank, handled all of his stuff and I don’t think you wanted me too close to that situation. Other ones I’ve represented were Jack Nicklaus and his family and some other sports celebrities as well. I represented J. Howard Marshall’s family estate. He was a billionaire oil tycoon. He married Anna Nicole Smith. His family owned 20% of Koch Industries. They are one of the wealthiest families in the world. By happenstance, a lot of these things came to me and I got tremendous experience early along.
Even more than that, I got to represent private equity groups, politicians, large companies, big-time developers and having all of that exposure allowed me to have some success. My favorite was representing humble and small business owners who are trying to grow their companies in the right way. They put the confidence in the people around them and anything else is gravy on top of that. How did I get here? In 2016, I got into a car accident. I got a neck and arm injury that left me feeling like I wasn’t able to do desk work day after day as I did before. Whenever you practice corporate law, it means on a very slow day, I might sit at my desk for eight hours. On the busy days, it’s a lot more than that. Over the years, I’d had several private equity groups and independent companies asked me to leave practicing law to go work with them. I’d never given any credence to that because I didn’t have any reason to. After I had my injury and surgery trying to repair it, I decided that I probably needed to make a switch and started putting some feelers out.
How did you and Raincatcher run across each other?
I was very fortunate that Marla and Jason found me. I’d put out some feelers mostly on LinkedIn. I considered a few private equity group positions, but most of those would have required a move. We don’t have much in the way of private equity in South Louisiana. The closest would be Baton Rouge and I had an offer there as well as New Orleans, but we love Lafayette. We want to stay here. I contemplated starting my own private equity group or even a brokerage, which is probably what I would’ve done if I hadn’t connected with Marla and Jason. Fortunately, they saw what I was looking for and they reached out to me. It was a tremendous happenstance for me that I got to come in and be a part of their team.
Whenever I talk to them at first, Raincatcher almost seemed like a startup at that point. I don’t mean that it was brand new, but it had a different vision before. It was a boutique business brokerage. Marla is our CEO. She purchased the company from the founder not long before I came on board. She had a different vision. She brought Jason on as well as an owner. The two of them together wanted a much larger scale, national business brokerage, much less of a boutique than it had been. They also saw the vision for adding a mid-market side as well to get into a little bit bigger deal. One of the things I didn’t like is that small business brokerage has a very well-earned reputation that’s worse than a used car salesman. That’s coming from a lawyer. I was concerned about leaving the practice of law because my reputation would get worse.There's nothing like experience when it comes to mergers and acquisitions. Click To Tweet
Marla and Jason had a tremendous vision for how to do it better. They saw that investment bankers and mid-market advisors have good practices and procedures in place on how to treat clients well and how to have a very successful business that is aimed at closing companies with the right buyers at the right price. They wanted to bring those same processes and procedures into small business brokerage. Given all of my experience with investment bankers in that M&A advisory space, it seemed like a great fit that I could come in and both help implement those procedures and build out the M&A vision for Raincatcher.
The other thing I love is that Marla and Jason wanted to do this right. They wanted to make sure that they took about six months off from even bringing in new leads for sales so they could build out those processes and procedures. You have to have something built so that as soon as it caught fire and we’d build out the team, then we can scale it and grow it into a large-scale national broker. For me, it allows me to use my entrepreneurial mind to grow a subset of the business in the merger and acquisition advisory space while having a perfect team to support me from the business brokerage side space as well. It is a perfect marriage for us. It gives me everything that I need and all the support that I need. Hopefully, I’m a good fit for them as well.
The thing that struck me and I’ve had coffee with Marla a couple of times. Her focus is on the business owners and she wants to make sure that they are properly taken care of. That’s been a repetitive refrain every time I talk to her and the same thing with Jason. I think about that as a core culture you bring to the table. As you look across your previous experiences and exposure to all of these other entities and individuals, athletes and so on. You always look at that it is not the age, it’s the mileage. You sound like you got a lot of mileage early on. What do you think your key takeaways and benefits to Raincatcher of all the mileage you have before?
There is nothing like experience in this game. If you’ve seen a lot of deals and you’ve seen all the games that people play, the gimmicks and everything else, it gives you a lot of experience to draw on. I don’t think there are any new situations that will ever arise in your career in merger and acquisition work. It’s only recycled situations that have happened before, either to you or to somebody else. Being able to draw on a lot of that experience I think helps. A lot of the people on the team will come and talk to me about what do you think about this situation or that one. Instead of having to wing it, a lot of times I can tell an anecdote and they can promptly start snoring. They realize and their eyes are glazing over because I’m telling another war story, but those war stories have a lot of impact. Whenever you can draw on them, it helps to be able to paint a picture.
As a business owner, I got some offers. One is more cash, one is an earnout and there is this discussion going back and forth. For you, having seen more than one of both of those. You can talk to them at length, “Here are the pros and cons of either approach I’m thinking.”
Earnouts are second nature for me. I’ve done so many of them over the years and every type of deal structure fits a particular need. I never think that we should allow buyers to dictate what the deal terms are going to be. A lot of brokers do it that way. Buyers will come to them with a listing that they saw and they’ll dictate what they think ought to be a reasonable deal. What I’ve found as long as I’ve been doing this is that the seller’s broker is in the position of dictating to the buyer what the deal terms ought to be. I never saw that aspect of the deal before I started this. If we can’t find a deal structure that makes sense because the price is off, earnout or equity can be a great discussion to have, but there are other reasons as well that you might look at the various deal structures.
For instance, if somebody is excited about the buyer and they think that there’s a lot of opportunity for a second exit, that’s when I want to make sure that my client is going to stay on with the business and is going to have equity rolling forward in the company. I can’t tell you and I can’t emphasize enough how many times I’ve seen this. A buyer will come along and talk constantly about how the seller’s an idiot. This seller built a business and it’s an exciting business that the buyer now wants to buy. The seller is an idiot because they’ve been doing 8 to 10 things the wrong way for many years. The buyers, the first one to tell you how they’re going to change everything and it’s going to be a good situation after closing. You’d expect the seller doesn’t like that.
They hear from a buyer, “You’re an idiot and you’ve been doing things the wrong way.” The seller’s sitting back going, “This guy’s going to figure out how hard it is as soon as he closes the transaction.” I can help a seller in that circumstance, either find a new buyer or to figure out a deal structure that makes sense. Regardless of whether this guy is a jerk, you can get the deal closed and then not have to deal with them anymore. In that type of situation, I’m going to try to make sure that the seller and the buyer have as little contact as possible. After closing it, there’s an all-cash deal and, knowing how the deal structures work and being able to bend the deal. Those dynamics have helped us have some success.
You have the benefit of seeing deals that didn’t work.
I’ve got to tell you, over the years, I’ve done hundreds of these deals. I’ve got to say that the ones that didn’t work, I can count on one hand. The ones that did work and it turns out the seller was unsatisfied after closing is really small. You mentioned The Value Builder. We do work with them and they said 75% of sellers tend to be unsatisfied after closing with the deal that they did and that hasn’t been my experience at all over the years.
I heard those statistics as well. As you think about that dissatisfaction number, I wonder in your process, what are the key ingredients are that when you get the right buyer for the seller that it doesn’t occur as frequently for your client? What do you think that is?
Structuring the deal to fit the relationship between the buyer and sellers is probably the most important item. Making sure that the seller is set up for success, but we have a lot of tools at Raincatcher that we use to make sure that there’s no dissatisfaction after a deal closes. One of those is going to be making sure that we have the right financial advisor to help build out a vision for post-closing. What are you going to do with the money? What are you going to do with your time? Both of those are very valuable and a lot of people don’t know the answer to that question.
A big part of it as well as making sure that they’re ready to sell before they go to market, that they’re not trying to force a sale. Also, making sure that they’re comfortable with what their life is going to be like after they get to a closing. Not being a business owner anymore, not being the person that gets reported to at the company. For some people, that’s okay and for some people, it’s not. That’s not to say if it’s not okay, you can still sell your company, but you might do it more like a partnership. Bring on a 60% owner and grow the thing together. It helps you take some chips off the table. It helps you up to your chances of growth and put a little liquidity into the company to help you grow the company, but also it allows you to slow down a little bit in life and see what the next stage brings.
I think about the things that you’ve been talking about. I think about that business owner that has a pride of ownership. He has built this company. He thought, “I’ve done this all by myself. I am going to sell this and I don’t need a brokerage firm or an advisor to come and help me structure the business for sale.” You’re going to say, “There will be fees that you will be charged.” What are your thoughts around the business owner that is trying to do it themselves? That may be the only time they ever sold a business in their life.
I can’t even begin to tell you how wrong that is. It’s a misconception that we see all the time. People feel that they’re bringing in a broker to help them find a few leads. Those buyer leads will ultimately be somebody that they sell the company to. There is no trouble at all. They find these buyer leads, the company sells a month or two months later. That’s something that we have to tell every client whenever they come in the door or a potential client. It’s a very long process. It’s a very intense process. If you’re two or three years in advance of closing, you have a lot of runways to start exit planning now, start getting your company in shape to sell. That way it can hopefully speed up the process whenever you get there.
Most people don’t have that time. They’ve decided to hire a broker at the very last second. That’s only after trying to do it themselves and figuring out that this is something way too complex for me to do on my own. They only began to realize their broker’s value once they get towards the very end of this process and start realizing how complex it is. It’s so much more than finding a few buyer leads and then connecting and finding the right personality fit. The things that you don’t know in this game are what’s going to kill you.
From my lawyer days, I’ve seen clients all the time who come to me with a signed letter of intent in hand. They found a buyer on their own. They got completely taken advantage of and a signed letter of intent is in hand and you run into the risk of how do we undo this stuff without killing the relationship? Do we start over completely? Instead, do we try to renegotiate with this buyer and lose a little integrity in the process because we already have something in hand. I know it’s not a binding agreement to purchase, but you’ve already come to an agreement on what the key deal terms would be. What you don’t know is what kills you in the process. They try to hire a broker. I’ve had clients tell me that before, that it’s hard to hire a broker. There’s no definitive source out there that I can go to. I can’t get on Yelp and figure out who’s the best broker. It’s not like you’re trying to pick a restaurant for dinner. You’re trying to find something where there’s very little information.
With your experience and Marla’s experience, you have 100 businesses behind you. I’m thinking about the analogy for surgery. You go, “I’ve got a brain tumor,” and they go, “Go to this doctor, he has done it twice or you can go to this doctor who has done it more than 100 times.” I find it curious that people don’t necessarily look at their business the same way.
It’s a great analogy for business brokerage. It’s an even greater analogy for merger and acquisition lawyers. I use that one a lot. If somebody has a long-standing relationship with their corporate counsel, over time and that person has helped them with licensing in various states. They’ve helped them with lawsuits, defending frivolous matters and leases and whatever came up over the years, that was the lawyer they went to. They developed a great relationship. It’s a lot like their general practitioner doctor that they go to once a year for a physical. They feel very comfortable with that person. You better believe if you need lifesaving brain surgery or open-heart surgery, you’re going to find a specialist surgeon who does it every single day.
What’s amazing is with their lawyers, whenever they need a highly sophisticated merger and acquisition lawyer to navigate a very complex process that isn’t going to have one or two contracts, it’s going to have maybe 100 or 200 contracts that need to be negotiated. It’s not going to have three or four items of diligence. It’s going to have 1,000 items of diligence. They need somebody who’s navigated this system every single day of their working careers. Instead, they fall back to that same general practitioner they’ve always gone to. You’d expect a lot of small corporate lawyers very frequently will say, “I’ve done contracts before. I can help you with that.” It’s what they don’t know that kills them. I can’t tell you how many times that we’ve gotten two or three months into the process before the corporate counsel say, “I cry, uncle. I don’t know how to do this. I don’t know what I’m doing. I need help.” It’s a lot harder at that point in the process to redo it.When you've seen a lot of deals and seen all the games that people play, it gives you a lot of experience to draw on. Click To Tweet
When I think about the cost of doing it beforehand or the cost of legal fees and post-close, it is a whole lot more valuable to do it before.
Even the cost of doing it the right way, people don’t realize that even though your merger and acquisition lawyer might have a higher dollar amount per hour that they charge, if they take a third of the hours to do a transaction and you also upped the percentage chance that they’ll get the transaction completed, you’re saving quite a bit of money in terms of what you’re going to end up paying the lawyer even on the front end. Not to mention all the backend benefits that you’re talking about, but it’s significantly cheaper on the front end.
There’s a broad commentary that the business owners don’t know what they don’t know.
I couldn’t agree with that more.
From your perspective when you go, “What are the chief things that the small business owners will run across?” Is there a common theme on the things that they plainly don’t know?
Very frequently, they don’t have a clue about what their company’s worth. They’ll come to us needing evaluation. If you ask them what they think the company’s worth, they don’t even know where to begin. They’ve heard stories about companies in their industry selling and it might be a company ten times their size, but they’ll say, “That company sold for $20 million. Hopefully, something around that size.” You’ll start saying, “Their company is doing $100 million a year in revenue. Your company is doing $500,000 a year in revenue. It’s probably not quite the same.” It’s a little bit of a disconnect even to know what you might get whenever you go to market, but the idea of what it’s going to take to sell their company, the typical impression is this is going to be a process of a month or two.
It’s like selling a house.
We’re going to find a buyer. We’re going to hire a title attorney to essentially sign the papers that say we’re transferring the title over. That’s going to be it. It’s a very intense process. It’s going to take a very long time. Most people because it’s so simplistic in their mind versus as complex as it is in the real world, they are going to try to shop that service the way they do with anything else. They’re going to try to find the cheapest price they can get. They try to find as much as they can do on their own without relying on trusted advisors. We’re working against a lot of that internal notion that the owners have. What made them so successful as a business owner is being able to figure things out as they go and being able to figure out what works best for their business. We have to convince people to do is seed control. Take a step back and realize that this is an area where you need a trusted advisor. This is not trying to cure the sniffles. This is trying to do complex brain surgery.
I think about that as an analogy. What you’re looking for is the best of the best. That is what you are after. Even with surgery, you got the surgeon that’s doing the procedure. You got the anesthesiologist. You’ve got a bunch of other professionals, radiologists and everybody that’s involved. When you are trying to build your team, you want to have the best talent in each position. It’s like a football team and everybody has the same skillsets. That’s not going to happen.
It’s interesting that you used the analogy of selling a house because a lot of people do think of it that way. There are bad brokers in all kinds of different fields. I think most people have seen that there are good and bad brokers when you tried to sell a house. I’ve certainly seen it through my real estate work. If you find a great broker, they could probably sell your house with a few phone calls versus a lousy broker who’s going to take pictures of your house, let them sit on the internet for months or years and ultimately, they’ll drop the price several times in succession before selling your house for a bargain-basement price. You might not even be able to get them on the phone. It can be that bad sometimes.
Business brokerage is exactly like that. There are tons of brokers out there who seem to not care at all what their success fee is on the deal because if they’re not going to do that much work anyway, it’s a numbers game. Let’s sign up a lot of people and hopefully, we’ll close a few of them. Why not cut the rate to 4%? If I don’t have to do much work and I can earn a lot of business by cutting my rate to 4%, why not do it? That’s the mentality a lot of people have, but we don’t throw it out there on the internet and hope for the best. This is a problem of industries that are unregulated. You can have lousy service and great service, but not a lot of information to be able to determine who’s the best one.
Our clients come in thinking that we’re going to find a few leads for them. Their inclination is to find a broker who can do that at the lowest cost. Who is going to get me those leads of buyers at the very lowest cost? The best thing I can do is to help my client understand a few simple facts. One is most brokers are unsuccessful at selling companies. They have a track record of selling less than 50% of the companies they take in. That happens because they view their job description in a different way than I do. Number two is a broker should be the person who gets a company ready for sale and makes the best case they can about why the company should be sold, advocate the client along the way and carry the burden of selling the company. If you do all of that, you’ve earned your commission at the end of all of that. Those are a lot more steps than finding the right buyer for you.
I think about a couple of things that came to my mind. For the business out there that’s going, “I appreciate what you said.” Before I forget, how are they going to find you on social media?
You can find me on LinkedIn. I’m Jude David with Raincatcher. I don’t do Facebook or any of those things I would never have, but you can find me on LinkedIn. If you go to Raincatcher.com, we’ve got all of our profiles on there.
For that business owner, as they are trying to interview and understand the differential, what are the key questions that business owners should ask anybody they consider to contract to help them sell the company?
The hard thing about it is, you don’t know what you don’t know. You might ask these questions trying to poke some holes in the answers. If you don’t have at least a cursory understanding, you may not understand whether they’re giving you a good answer or a bad one. One of the things that everybody should know from their broker is what’s the valuation for my company? What can I reasonably expect to get if I take my company to market? How long is it going to take to do that? Tell me the steps. What do we do before we go to the market once we launched? Where is it going to launch? How am I going to find that buyer and negotiate the thing to a closing?
If anybody tells you that you’re going to be able to sell your complex organization that took you years to build and they’re going to do it for you in three months, they’re lying to you. It may sound great when they tell you that, but they’re lying to you. You should expect them to lay out a process like we do. We’ve got several steps before we go to the market. First is we do the due diligence so that we can find all the information that a buyer wants to know about your company. Second is we do an FAQ, which helps us to know everything about your company from a qualitative sense and third is we do a risk assessment so that we can find all the skeletons in the closet that a buyer’s going to uncover. You may not even know they’re there. It might be something in your finances that you think is totally accurate, but a buyer is going to look at it and they’re going to go running for the hills.
The worst thing I can do is let you go to the market and show that to a buyer and you lose them. Instead, we find that on the front end, fix it and make sure that we take your company to market and the best fashion that we possibly can. While we’re doing that, we go ahead and put together a confidential information memorandum, which is a marketing document that we present to buyers along the way. All of that’s on the frontend before we even go to market with your company. It takes us 6 to 8 weeks to even get your company on the market. Not only are we not selling it in two months, we’re doing all of this work on the frontend to make sure that we have success whenever when we do launch the company.
The goal of that is to be able to set quick deadlines whenever we launch, to be able to get information quickly. Hopefully, by the time we take your company to market, it’ll only be another four to six months to get from launching to closing. That’s about as quick as you’re going to be able to do it. Unless the company where you’re selling simply contracts or selling an online service with not much diligence. Those might go a little bit faster, but nearly every complex company with contracts and employees, you can expect a minimum of five months from the time you signed your engagement letter to closing. Even that would be pretty fast.
Let’s say I am your client and you go to your due diligence to get a buyer with your company. Half of your business is from one particular client. Given what you said you wanted and given what it looks like your company will get, you are not there. What happens when you run across the company that has a glaring hole in your bucket? What advice do you offer that business owner?Some sellers only begin to realize their broker's value towards the very end of the process and start realizing how complex it is. Click To Tweet
I wouldn’t immediately say, “We can’t deal with that.” I’m going to explain to them how it makes their company less attractive and how it’s going to have an impact on price. We have had that situation of even a single customer. We’ve had companies that we have listed where there is literally one customer and it can be very hard. We had a software company that had a single customer and we knew that would have an impact on value. We took it to market and there were tons of interested buyers. We negotiated a fantastic transaction. We had it closed in less than five months, start to finish. That was a software platform company. Those tend to be pretty exciting and people want them. We’ve had other ones that are a little bit more labor-intensive and they’re harder to sell.
If a client comes to me and we feel that there’s still a strong possibility of getting to the closing table, and since we work on the success fees alone, we better make sure there’s a strong possibility of getting to the closing table. I’m going to go ahead and explain that to the client, “Here’s what I think we can do. If you still want to move forward, we’re here with you. If we go ahead and wait, let me help you get into exit planning so that you can figure out how to build out your business a little bit rounder, in a way that’s going to smooth out some of those rough edges.” Believe me, a buyer is going to think that one customer is a very rough edge that needs to be smoothed out. It may take us six months or a year or even two years to help that client go to an exit planning route to smooth out those rough edges and hopefully, they come back to us and we help them sell the company at that point.
I’m thinking about that business owner that says, “I’m going to sell it on my own.” They went into this process unaided effectively. In your experience, what happens to the behavior and revenue of that company when the business owner is distracted by trying to sell it?
Even if you have a trusted advisor, it’s hard to keep your eye on the ball and I’ve seen that plenty of times. The reason we get paid pretty handsomely for what we do is that it is very labor-intensive to go sell these companies. Even if you know what you’re doing, it takes very dedicated concentration to be able to sell one of these companies. People that try to do it themselves end up taking their eyes completely off the ball for running their company. You typically see the company suffer, not necessarily immediately, but over time. They don’t realize how long and complex the process is. They don’t realize the impact it’s going to have as you get closer to closing. Very frequently, even if there is some success that they find the right buyer, they connect up and get into diligence, the company starts to show signs of suffering 4 to 6 months into the process.
They haven’t been reinvesting the way they should have. They certainly haven’t been monitoring and keeping their processes in place the way they should. They are generally taking their eye off the ball. It hurts them on the backend because they are going to get dinged on price if they see it. The buyer’s not as excited anymore. If the buyer still wants to close, they don’t want to do it at the same price. They had a projected 15% growth and instead of 15% growth, it was flat. People don’t like flat growth for a company. They definitely don’t like declines. They want to buy a company that has the secret sauce and all you got to do is add a little bit more money and more investment to make it and even bigger growth profile.
Do you think the business owners recognize the difference in buyers between what is strategic in financial buyers? Do you think they are aware?
I think they are. Most people have heard of private equity. It’s a four-letter word for business owners. You have to explain what it is. Even among brokers that I know, a lot of them don’t have a full understanding of what private equity is because it’s such a broad term. Strategics may not phrase it in that way, but they typically know that bigger companies buy smaller companies. We have a lot of education to do for our clients on who those strategics are and who the private equity groups are and what a sale process looks like to them. That’s something that’s part of the process for us being able to educate the clients a little better.
One thing that we didn’t touch on very much is for all the work you do for the business owners, you have a broad inventory or awareness of potential buyers for all those years.
We’ve got a tremendous buyer directory and it’s growing every day. Every time I go bring in a new list of strategic buyers for a new deal, that list grows. We also bring in new private equity buyers in each deal because there are a lot of private equity groups out there that focus on particular industries and even subsets of industries. In general networking, we’re constantly expanding that buyer database. Because we’ve been around for so long and we’ve been able to build out that database, the first stop for us whenever we’re trying to find buyers is to that database to get the information to those people. These are people that are actively looking for companies to buy. They are looking every single day trying to find companies to buy. We can sort them by your industry, by your business size and by your geography. Right off the bat, I launched a company that we sent out a buyer blast to 640 buyers that are right there in our directory where that company meets the criteria for those buyers. That’s a tremendous start and a tremendous resource.
I think that’s under-recognized and not valued properly by the potential business owners. I don’t think they have an idea of how important that might be.
It’s tremendously important. Even take a step back and say in the process of finding the right buyer, that’s tremendously important and we’re going to have much more success because we have that tool at our disposal. What the business owner doesn’t understand is finding the right buyer maybe 20% of the equation. They don’t realize that the remaining 80% of the equation is every bit as important.
For all of the years that you’ve worked with various business personalities, in the transaction phase, how important is the emotional state of the seller?
That may be the single most important factor. Personalities and emotions of both parties, although buyers tend to have less emotion because they’re not selling their baby. They’ve typically done this before. For sellers, very frequently our client is somebody who has spent their life building a company. It’s as important to them as their children or their children are. It’s their life’s work. I can’t imagine what it’d be like to go through the day-to-day without owning that company, without being the business owner. They’ve never done it before. They’ve never had the experience of selling a company before, it’s a massive unknown and they don’t know what to expect.
Unlike anything, if you have a massive unknown and a lack of information, it’s scary. It’s hard to keep your wits about you in the process. Compound that with a very long and excruciating process where you’re dealing with somebody who feels like they know how to do what you’re doing a whole lot better than you do. They think they can take your company to a whole new height that you’ve never been able to achieve. Very frequently, they think you’ve made mistakes and these steps along the way and they’re very happy to tell you about it.
On top of that, you keep negotiating terms like representations, warranties and indemnities and, “Here’s the money you might owe me back from the transaction if something goes wrong and things that they never even expected to happen.” You start adding all of that stuff together at the end of a seven or eight-month marathon process that was much harder than they thought it was going to be. Even if you tell them how hard it’s going to be, it doesn’t sink in until they get that far into it. Deal fatigue is a real thing. It sets in for people. It’s very hard to understand on the front end for us. It’s important to always make sure our clients are very informed of where we’re going, so they understand how hard this process is going to be.
It’s also very important that we handle as much as we can on our own and take that off of the owner’s plate. If we do that and we can help them to not have all these burdens every single day in the process, it means whenever we get to crunch time and it gets hard down the line instead of having deal fatigue. It’s like whenever you’re in the fourth quarter of the USC football game and you have a running back with fresh legs. You’re bringing in the workhorse who’s going to bring it home for you. That’s what we try to do for our clients. We try to keep their legs fresh that they’re ready to run and ready to make it work.
There was a statistic I was aware of that said in a certain price or revenue range, 80% of the business will not transact. You have a very much different experience with the people you represent.
It’s not my experience at all. We don’t typically see companies that come through our process and don’t close. In fact, I was talking to somebody about that and that’s always one of the questions that sellers are going to have for us, “What’s your percentage of your closing? What’s your closing rate or whatever it is?” I say, “That’s hard to even answer because I hope it’s 100%, but that’s the goal,” but because something’s been in my pipeline for five months and hasn’t closed yet, doesn’t mean it’s not going to close in the next three months. Somebody asked me that, “There’s only one deal in my pipeline that I think won’t close. That’s a very small percentage that I don’t think we’ll close all the rest are right on track to get to a closing. Who knows in the last two weeks, we went under a letter of intent with that deal and we’re marching towards a closing. I’m back to hoping it’s 100%.”
I think you got the question that people are trying to ask. If you are uneducated, not that you’re stupid, “If you know how to run your business, you’re not going to sell your business.” You go and try to take in asking intelligent questions with no perspective on the answer. It is like me asking a surgeon, “What particular scalpel size do you use?” If they said, four or seven, I wouldn’t know the difference.
I wouldn’t even necessarily know there are scalpel sizes, but I can tell you all about the deal structures that you might want to take a look at. It’s hiring the right person for the right job.One of the things that everybody should know from their broker is their company valuation. Click To Tweet
The best you can find for the job is what you should be doing. If you can’t tell who is the best one, you should do more homework.
People get afraid of hiring people on a commission or on a percentage basis. That’s the best way I can explain that to you is if I can get you 40% more deal value, wasn’t it worth it to you to pay 10% to me to do it?
You go, “May I have two of those, please?”
Let’s have as many brokers as we can get in the mix to get that deal value up. That’s being facetious of course.
Sometimes you’re like a head slapper and it always goes back to the point of the business owner. I’m a business and I admire them and I always have. The statistics after the 2008 market crash that about two-thirds of all jobs created in the US were created by the smaller business owners. The value of these people in the community are almost immeasurable. I’m a fan. Part of the reason that I have a blog is because I talk to business owners all the time. You have this wealth of experience. Let’s say if you can roll the clock back and still retain all of your experience and wisdom, what are the three pieces of advice that you would offer to this business owner based on all of the wealth of experience that you have?
There’s plenty I can talk about in terms of making sure that you negotiate the deal well and never lose integrity in the process. I think both of those are incredibly important. People lose sight of them, it’s because they can be good people, but this is the biggest decision of their life. This is the nest egg that they’re hoping to sock away. It can be very difficult for them to keep their wits about themselves while trying to get through the process. I think some of them even self-sabotage because they get scared, they want to go back to running their company. I think to hire the right people, have a great plan and keep your wits about you to make sure that you’re using integrity. You always use your business whenever you’re trying to go through the sale process.
Make sure you understand what your own goals are whenever you’re doing this. It’s very easy for people to lose sight of what it is they’re trying to achieve. For instance, if you started this process and realized, “I want $5 million to sock away for retirement. That’s going to be my goal in the process.” If you sat down and you had that thought go through your head and you decided that was your plan and you can keep your eye on that goal, then let some of that minutia go as it pops up during the sale process.
If you can’t keep your eye on that prize and know what your goal is, then everything affects you so much more. Every time somebody has a discussion about what’s needed in terms of contracts and purchase agreements and whatever else. It all starts to be personal and it starts to feel like getting attacked. That’s not the case. It’s how do I get to my goal and how do I get to the other side? Generally speaking, if you haven’t made the decision to sell your company yet, the big piece of advice would be sell in good times. This comes from a lot of experience because I see sellers all the time. They come in and they think to themselves, “I’m doing better now than I’ve ever done with my business. Why would I sell?”
They wait until that big four or five-year growth streak that their company is having is over. They start to say things like, “Growing this company has gotten so much harder or it is miserable to run this business. This business has gotten to be way too much of a hassle. I want to dump it. I need to move on to do something else. I’m bored. We’ve stopped performing as a company for whatever reasons. It’s gotten so much harder to have a good company and I want somebody else to take it now.” Buyers don’t tend to like companies that are hard to run that don’t have good growth potential buyers. Buyers want to find a company that’s growing, there’s a really clear path to success and they want to be able to do that with relative ease just like you. If you wait until that growth has stopped, it’s going to be a whole lot harder to sell your company.
I think about the business owners that don’t know the difference between a business and a job.
This isn’t your daily grind.
I’ve been harassing you for the better part of an hour. The short answer for the people, if you haven’t caught onto it, family-orientation, integrity, setting goals and getting professionals. If these were important to you, that’s been very much the focus of what we talked about since we started. There is no cost for reaching out. The best thing you can do is if you are thinking about marketing your company at some point, it is better to reach out sooner than later. Reach out to Jude and ask. There is no harm in asking. Jude, to close, we talked about family beforehand. You mentioned about faith ad integrity, what is the best piece of advice that you carried forward with you that you ever got?
I’d go for two of them. One is from a lawyer that I worked with early in my career. He said to me, “Never bluff.” If you’ve ever played Poker, you know how important it is to be able to have a good Poker face and bluff. He said, “When you’re negotiating, never bluff.” It’s great if you want to give ultimatums, but you better say what you mean and mean what you say. As soon as you lose credibility in the deal process, it gets a whole lot harder to move forward. I do that all the time. I don’t know another business broker anywhere who will advise their clients to walk away from a deal if it’s not right, but I can’t tell you how many times I’ve done that. It’s important to me if I feel like things are going sideways, to be able to tell a client, “You need to walk away.” That doesn’t necessarily mean we’re not going to close with this buyer, but it might mean that they need to know that you’re serious, that under their current circumstances with the attitude that they have on this deal, you’re not going to close with them. Either they come back and they have a better attitude or they don’t.
The other one I got was from the president of a private equity fund that I represented for a lot of years. In my law days, I represented buyers as well as sellers. This was a buyer of a private equity fund president. It wasn’t necessarily advice, it was an observation of what he did. He never sweated the small stuff. If a big issue arose, he would put the hammer down, but he wouldn’t sweat the small things. If there was a bunch of minutiae in a deal and people would argue about every little deal point, like post-closing liabilities, indemnities, and maybe some little side hustle that a seller wanted to do after closing, that may or may not be a violation of the non-compete or whatever. Any deal points that might arise, he’d frequently say, “They can have it. Whatever they want. That’s fine.” He’d say to me on all the indemnities because I’m the lawyer sitting there to tell him, “You can’t give them that.” He said, “It’s not like I’m going to assume anyway. If everything goes to heck after the transaction, I’m not going to sue him anyway. Why do I care what the document says?”
I could remember several occasions very clearly when a seller tried to take advantage of that generosity and change a material deal term or even the price while we approach the finish line. This particular client was larger than life. He’s one of those guys that I had a real presence to him. One time, whenever that happens, we’re sitting at a table a couple of days before closing. The sellers have their wishlist of all the things that they want to change before closing. He’s saying, “Yes, fine.” They say the next thing, he says, “Yes, fine.” They get to the very last item on the wishlist. They had saved a price increase in the transaction, the last item on the list. As though it’s an insignificant item on the tail-end of the wishlist that they had that they wanted to also get more money.
I remember him so clearly, this larger than life guy standing up and saying, “See here? I give a lot. I make sure that people are pleased, but the people I do deal with deals with having integrity. They don’t change the terms at the eleventh hour. You can rethink that request or you can walk out the door right now.” That private equity group closed every deal I ever worked for them on. He realized that everybody needs a win in negotiations. You can’t always feel like you get to win every little battle. Why not let them have all the small stuff because whenever it comes to the important things, we need to make sure that we’re bringing those changes home. Let people have some wins. Don’t sweat the small stuff.
We could go on for a long time here, but this has been a very useful and informative episode. If you don’t take anything away from this, make sure if you have a question, if you are a business owner and you are thinking about doing this or your business owner that has a rapid change in your circumstance, health issue, then you have to get busy into something, make sure to reach out to Jude. I think that you will find that you are well-served. Jude, I cannot tell you how much I appreciate you taking the time to visit us.
Thanks, Bob. It’s been a pleasure being here with you.
About Jude David
Jude David is a Senior Broker with Raincatcher. As a Louisiana native turned corporate attorney and investment banker, he is a passionate devotee professionally to corporate development through organic growth, business consulting, strategic planning, merger & acquisition negotiation, acquisition integration, and other partnership or venture structures. Although Raincatcher is designed to operate in a team environment, Jude’s primary role is negotiating deals to closing in the back half of the transaction.
Jude practiced as a corporate merger and acquisition attorney for seven years and made the transition into acquisition advisory brokerage. Throughout his career, Jude has placed emphasis on bridging the gap between ambition and moral integrity—a sometimes difficult task in the practice of law. With experience in M&A, business development, corporate development, consulting, management, and corporate law professionally, Jude’s career has centered around advising advisers, consulting for consultants, and providing strategic management advice to owners and managers. Because of the trust and confidence his clients have placed in him, Jude has acted as advisor in acquisitions amounting to more than $3 billion in the aggregate.
In his free time, Jude serves on numerous nonprofit boards, including the national Life Legal Defense Foundation, the Desormeaux Foundation / Women’s Center of Acadiana (Director and Treasurer), and the Jacob Crouch Foundation for Suicide-Awareness, Education, & Prevention. He additionally manages a private real estate network comprised of nine companies and more than 300 leased properties. When he has time, he enjoys hunting, fishing, college football, traveling, and spending time with family and friends.
Jude has been married to Ashley David, his high school sweetheart, for more than 10 years, and they have three children: Colby, Grace, and Caleb. They continue to live in their family home in Lafayette, Louisiana.
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