Horizon LIVE: what makes a profitable business sellable

Jackie

I think my perspective is a profitable business feeds the current owner. A sellable business feeds the next owner. So if you do not have your minute books organized, if you don't have your legal documents organized, if you don't have your financial statements at the ready and clear, precise, and transparent, you're in big trouble.

Brent

The beware of people that look like me that want to sell your business that say I can sell your business in 90 days. That is utter crap. And the process is going to take six to eight months to do.

Jackie

You should be selling your business because you're working towards something, not running away from something.

Brent

If you're not over 5 million in revenue, they won't buy you. So, you just taken like almost 65% of the market of your buyers away by not yet being at 5 million.

Krystyn

Let's just do quick in a headline who you are, how you're showing up, and how you're thinking about today in terms of the focus on inside M&A opening the playbook. Jackie, let's start with you.

Jackie

Sure. My name is Jackie Dinsmore. I am a recovering lawyer, I like to say. Started on Bay Street, worked in-house at the Toronto Star, and then became more of an entrepreneur to be honest with you. So, successfully sold a consumer products company and two professional services firms. I'm now the managing partner of one of those firms. We have about 130 or 120 lawyers across Canada. I wanted to disrupt the legal world to make it more accessible to entrepreneurs. Having gone through that experience myself and really had a lot of fun I'd like to say with the bowl of spaghetti. People think success is kind of, you know, a straight arrow, but really it ended up being a bowl of spaghetti that I wouldn't have changed for the world and really excited to still be working in the business that I sold and with a great team. So, thank you for having me.

Krystyn

Awesome. Welcome, Brent. What about you? You have the other side of the table on the

Brent

Yeah. Well, I've been on a few sides of the table. Brent Holliday, founder and CEO of Garibaldi Capital Advisors. We are a tech focused M&A adviser and have been since we started in 2013 as Canada's first tech-focused investment bank if you will. I have been around a long time in the tech and finance world since 1994. I was an operator in the internet 1.0 days. I became a venture capitalist. That was about 15 years of my career.

Krystyn

Awesome. And it's such a simple too to every founder here like we are always looking for our next mountain. I'm a little cheesy also as a person, but thank you both for joining us. And I think one of the questions that I'm going to throw out there as a poll and this is a little interactive as we kind of go through this, but I'd love to know a question that we ask our folks that we work with, which is really, do you know your endgame? What are you playing? Right? Like what does this asset, this business actually mean to you? So, I'm throwing that up there because it helps us kind of frame where you're coming at this from. And so, we're looking at, you know, optionality is something we talk a lot about.

Brent

Well, again, my lens is technology, and technology is a little bit different than most industries. A lot of techn the number one driver of value in technology is growth. Sometimes we're in cycles where it's growth at all costs, which means it's okay to be losing money as you're growing. We have been out of that cycle for a couple of years now where buyers prefer in the technology industry to buy companies that are at least break even, if not profitable. And it's kind of this demand that's put on the technology entrepreneur. I want you to grow faster and I want you to be profitable. So that those two things don't square up because you've got to spend money presumably to grow.

Krystyn

Yeah, it's so critical also to know where you're coming from where revenue is typically how tech companies are going to be valued. A lot of folks in the audience are from services businesses for example uh or even in kind of trades and home services for example and we do have some tech as well. But Jackie from your perspective what makes a business sellable not just profitable? You had sold an e-commerce business. We actually have a few founders here who are in the DTC retail space but you've also served and sold on the professional services side. What do you see? What does that look like different?

Jackie

Yeah, I love this question. I think my perspective is a profitable business feeds the current owner. A sellable business feeds the next owner. And let's break that down a little bit. So I think you have to kind of look at that's great. Your business is profitable. You love it. Customers love it. You know, everybody's like, "Yeah." But you know, can this business run without you as an owner? Okay. Are there clear opportunities for growth for the new owner? Right? Like no new owner wants to come in to something that they can't run that they can't be profitable in, right? Are the customers loyal to only the owner or are they going to be loyal to the new owner? Right? Are they going to see see that new owner as somebody that can run it? I see a lot of breakdown in systems, procedures, processes.

Krystyn

Totally. And thinking of your business as an asset. And when I was I built a tech company, I was all about the mission, rallying the team, the product, you know, that part of the ride. And I hadn't looked at it like an asset. I just sort of felt like this thing has to exist. I'm going to will it into existence. But then you kind of and I jumped into private equity as, you know, a PE backed CEO and I learned the private equity way of looking at a business, which is truly like what is the current value?

Jackie

Very topical because I'm selling my house right now. So, if anyone wants to buy a house in Oakville, I have a great deal. It's not on swamp land, I promise you. But no, it is it is a good analogy, right? Because you're never going to sell your house with clothes all over the floor and dirty dishes in the sink, right? People will automatically think, okay, okay, so this homeowner is a little sloppy and doesn't do the dishes and cleans up the, you know, the laundry. But then what's what's behind how they maintain this house? You know, is there going to be a problem with the electrical? Have they like done stuff with the roof? What if they're that if that if they're that dirty and messy on its face, what's behind closed doors? And we all know that buyers walk into closets, too, right?

Krystyn

And that drives speed and as as I have learned time really does kill deals. This is a science but it's more of an art and I'm curious Brent from your what are the what are the blind spots that you see when founders start a process?

Brent

Um, so I like the analogy of the house by the way, Jackie. And what we primarily sell, we do, we raise growth equity for companies, technology companies as well, but what we primar primarily sell are entrepreneur-owned or bootstrapped or maybe lightly capitalized like angel, friends and family technology businesses. So these are not VC-backed businesses typically. And so equating VC backed with private equity and in what you went through Krystyn, it's all about governance and structure and reporting and all of the stuff that goes into that proper governance of a company leads to proper document keeping leads to there being the minute books and etc.

Krystyn

Right? Well, and let's talk about that. So just in terms of trust can be harmed, let's say, and trust is everything. Hold this is a relational game at the end of the day. People still buy from people and that's true in businesses as well and acquisitions. And so financials, getting those in order, making sure those are trustworthy really comes down to what we tell our clients, the three things buyers look for. What were your results historically? Looking backwards, do I feel confident that I can actually achieve those results if you were no longer here? Which goes back to the SOPs? Like how do you run the thing? Are you the number one salesperson? If you are, that sounds not very scalable beyond yourself. And thirdly, do I believe I can I can achieve those myself and actually put that into motion. Do I have what I need?

Brent

So again most the majority of the businesses the people that are watching this are going to be bought by on multiples of EBITDA. In tech we do multiples of revenue but that's another discussion. And the reason that normalization is important is because the buyer is going to buy you based on what kind of cash your business is generating. And it's going to be cash that the business is generating. So there that that's the grade three English. The normalization is the expenses that aren't normal and they're not normally there and are artificially driving down your EBITDA. So that can be you hired a consultant this year that you hired in no other years to do a specific project. It can be, you know, something that happens just once.

Krystyn

And so this is a great example and can you give a practical example? So for example, we had a client who was paying for a nanny through the business. Well, that's of course not an expense that a buyer is going to incur. What have you what have you seen that are some common buckets that founders can start to take note of? Because this does literally if you think about how businesses are valued, it's a multiple like a multiplier on that number could mean the difference in a positive swing to your valuation. And it could add millions depending on how large that expense bucket is and with whether they're defensible.

Brent

Yeah. So in a lot of entrepreneur owned organizations, you mentioned the nanny, there's things like your the car or you know whatever that the accountants allow travel that might not be exactly related to your business. You've got to start think once again go back to that governance idea. What if you had a board? Would a board have said this is probably not a great expense for you to have in the company? That's what's going to happen when the buyer comes along. The new buyer is going to operate it and it's going to be very very you know strict and narrowly defined to be what is this a business expense that is helping drive the business. So that's how we commonly see it as items that you have conveniently put into the company for whatever reason, tax reasons, etc.

Krystyn

And that's a great example, too, when you're making decisions in your business. Something we talked about is if it wasn't you running the sales team, what would that market salary be? And then make a decision based on that as well. Thinking kind of sustainably, thinking like a buyer actually is a mindset shift for a lot of folks. Jackie, from your perspective, one of the things the audience asked and I asked folks to submit stuff in advance and if you didn't that's okay. There'll be space for that towards the end anonymously.

Jackie

Well, I think it come in professional services, it comes down to sales, right? And so, as much as I like to think that I'm a good salesperson and, you know, people like to buy from me, it's really about the brand has to be stronger than the owner, right? People are buying the brand. They're not buying the person because the person, even if you have a contract that says that the person's going to stay 6 months, a year, two years, you never know what's going to happen. So, you can't you can't kind of peg your horse to that. You have to kind of think about what am I what the buyer has to think about what am I buying? Am I buying the brand and not the owner?

Krystyn

Let's given this is a room where we're we're sharing stories here and stories really do help drive our understanding. Are there any stories of surprises that either of you have seen whether on the investment side or the M&A sell side?

Brent

Yeah, so definitely surprises when when you when when you're hired in our role, we're supposed to have scrubbed the company beforehand and we like to think that we are very good at taking the lens of the investor or the lens of the buyer and applying it so that we're looking at that business. But we can't possibly do the level of confirmatory due diligence that a buyer does at the end of the process. Right? So once the LOI is signed, the confirmatory due diligence part is exhaustive. It's where you need that data room.

Krystyn

Okay. No kidding. And transitions are very typical. What we'll talk about after this is also just like what should we expect? Let's do the exit timeline math. How long do these things take? What should we be prepared for? And also how much to disclose? And we'll talk about a few instances like when the private equity firm calls you inbound uh and those those moments. But Jackie, what's what's your take on this? What surprises have you seen?

Jackie

Well, I did talk about the data data room example. I'm gonna kind of like flip the narrative a little bit and talk about there's one thing to see surprises when you've you're looking at a company to invest, but I think some of the problems I've had is after I've invested and then I don't hear from them and it's like silence and that is the worst. And maybe everything's fine, but it's a huge red flag to me if I'm not getting kind of investor updates quarterly. I'm not asking for weekly updates or monthly updates. I want you to focus on the business I just invested in.

Krystyn

Totally. Well, and if you have a board, you've already got some governance there to support that, but but also if you're early stage and you've got friends and family and actually this is actually a really good point, Brent, what's your take and from both of you on disclosure um because I you know there are some founders who disclosed the entire team very very early which presents risk uh versus closing closing it down in terms of the their adviser and maybe their COO like what's what's best?

Brent

It depends on the situation really. I've seen situations where the buyer really wanted the engineering team as well as the assets of the company and so therefore had to interview those engineers almost immediately. So there was no way there's no way around it. You know, you're you're you're being teed up to be interviewed by a new company. You can't pretend that they're not buying you. So there are certain situations where full disclosure is a must. If there's a decision to be made, I and there's an option.

Krystyn

And a stat that I do have here is that around 75% of businesses who go to market, who go to sell, fail to sell for various reasons, but it is just worth keeping in mind. Preparation is often a key gap. How prepared you are, the financials, the house, all that stuff we've been talking about. But but Jackie, any any advice or perspective from the founder seat on on disclosure and how to think about who who is at your table? Who was at your table when you're going through this? Because there's an emotional side of this as well, right? There's a IQ part, but there's also an EQ part here.

Jackie

100%. I agree 100% with you, Brent. You know, I keep it close, keep it tight, because the number of times things fall through and then then you got to back and explain. I would say the other side of the coin, though, is that employees aren't stupid. You know, all of a sudden there's closed doors and hush hush and whispering and so you got to be really careful about not having those meetings in the office. That would be some advice that I would have is take it out of the conference room. Employees are not dumb and just just try and keep it a separate and apart as much as you can and involve those that are really just the key key employees that need to know.

Krystyn

That's great. Let's get into the money conversation. And every founder I've ever met with, I would say on average, including myself, it's it's not all it's not about the money. The money is a nice kind of carrot towards the end, but value means so much more than just the enterprise value of the business. There's your employees, there's your relationships, there's your social. There's so much tied up in the business. But let's specifically talk about the money. I'm going to pull up a poll here because I'm very curious how folks are thinking about knowing your number. And the question really is around do you have a sense of what your business is actually worth? Most people don't. Some who've gone through a raise perhaps had a valuation set pre- money, post money, however you want to kind of look at it.

Brent

Bringing that back to sort of the money side of things, there's two different parts of the money. One is the negotiation for what you're going to end up getting, right? And the other is what is your company actually worth? And the house analogy that Jackie used earlier is really really excellent because how does a real estate agent value your house? It's on all the comparables. It's on what happened in the neighborhood, same size houses, the renovations, blah blah blah. And that there are many, many items and layers that go into comparing your house to another house to get the values. For all those people that have no idea what their business is worth, buyers look at it first as a comparable. So they understand businesses like yours and they understand what drives the value in those businesses. And you talked about professional services earlier.

Krystyn

Is there another question or other kind of yeah a few other questions that you should have in your back pocket? For example, perhaps it's a more junior private equity associate calling you for example. You know, oftent times what you don't know when you're on in the founder seat versus my co-founder Matt as you know was an M&A adviser. He knows there's a list there's a list of companies. It's like sales but it's for the private equity side of the business. And they're they're looking they're building their deal flow. And so one of the things we'll say is like what do you know about my business versus feeling like you have to be super transparent. And I think I don't know it feels very flattering when you get those calls. So I'm curious is there anything else you'd recommend?

Brent

Yeah, I'd be careful. I think what you're saying is you can get information out of them the most. So tell me why are you looking at my space and what do you know what do you see or what do you know about my business is a great opening question but also well what are you seeing out there? What are what are the multiples? Like throw it back at them. These are other people studying your market. You're saying, you know, what are you seeing? You know, what's the latest sale multiple that you've seen? Uh what do I have to do to get on the higher end of that spectrum in your mind?

Krystyn

That's really wise. And some folks have asked questions about private equity. We'll get into more of the AMA, but there's many types of buyers. There's a universe of buyers. And before we get into that, I'm thinking about the actual process. That was a moment where you're starting to think about it because it came inbound. There's also the other moment which is more of the pull. There's also a push where you're actually preparing and starting to think through your endgame and what that looks like for you. And I promise we go through kind of the exit timeline math.

Brent

So first of all Jackie made the point earlier be ready and have that data room ready to the extent that you can be ready even if you don't have a board to report to and it forces you to be ready by having you know the metrics and all that you should have be ready for that inbound for the you know holy cow they want to buy my company what do I do now if you are not ready at all you're going to be in trouble you so you have to be prepared regardless of whether you want to go sell the business or not but then when you say okay I'm going to go sell the business I'm going to run a process you should have kept a list of all the people that ever called you that said that they're interested potentially in buying your company you should keep a make a list of all of the companies in your ecosystem that make sense to own you and in that list say why would they want me?

Krystyn

And so what I'm hearing is 12 months kind of minimum in terms of what you should ac

Brent

Call it 12 to 18 months on average,

Krystyn

Right? So really we're talking two three years away. And then the preparation to get your house in order, especially if you've been scaling so fast, the wheels are coming off takes time. And to your point, you want to be ready for that inbound coming in at any point. And that's frankly, it's a more valuable business if you're ready for those conversations.

Brent

By the way, sorry Jackie, by the way, the service business that I run, I am very well aware that I am going to be working for at least 3 years after my business gets bought because they want all of the relationships that I have. If you're in a business like that, you talked about it earlier, it's not 12 months or 18 months, right? They're going to 3 to 5 years if if you have all of the relationships. So, I'm well aware when I go to sell my business how much more I've got to give. Sorry, Jackie.

Krystyn

Jackie, over to you.

Jackie

Yeah. No, I would like to take it back a little bit to the your first question about when that firm calls and do you take the call and what do you do and not do what do you say and what do you not say? Always take the call. Always take the call because you can kind of figure out what your options are, what's what the markets out there. It's it think of it as an information call and get them to talk more than you talk is ideal. Um, but a few things that I've heard people say that absolutely like cause me to cringe. Things like, um, you know, we don't really need the money. I've heard people say that and that's so dismissive and then it puts you in a really bad negotiation position because everybody needs the money. Let's face it, everybody wants the money or you wouldn't be having the call, right?

Brent

Competitive competitive process.

Jackie

And sometimes it's appropriate, but sometimes it really isn't. So, you have to really kind of think these through. And in terms of t like overall timeline, I mean, I've had three exits. One took two years and two took just over a year. Um, so six months is fast. And I just even if you have your house in order, there's so many things and especially with private equity, you're not the only deal that they're doing. They got other stuff going on, right? And they have a whole team. And especially if you're a smaller deal, they're going to put their energy in the hundred million dollar deal versus the $5 million deal or $10 million deal or $20 million deal, right? Yeah. So, you have to remember sometimes you're guided by their timeline and not yours.

Krystyn

Yeah. And Jackie, you mentioned something about kind of knowing when to sell. Uh I'm kind of curious just in terms of you've made three of these decisions where it made sense to sell, but inverting that, when do you think it makes sense not to sell?

Jackie

Well, I mean, I think we can look at this in a bunch of categories. Let's talk about emotions. We talked about that, right, before where if you're really selling to get away from something and not selling towards something, that's a problem. If you don't know what you're going to do after this sale, you might have to give some thoughts to whether you're you should sell or not, right? Um, I always plug my friend's book, um, Kelsey Ramsden. She wrote a book called The Success Hangover. And it's real. A lot of folks sell their business and the rates of depression after people sell their business are very high because they haven't planned for their future, right? So, you have to kind of think about that. Um, and that you're not selling because of burnout and panic, which I talked about.

Krystyn

Yeah. And value is eroded, which is why it's a very painstaking process, but one of the tools we provide our clients is like let's let's build a contingency plan. Let's build a if Krystyn was no longer here, poof, what would break? And a great way to think about it is like I think of Tom Hanks and Wilson and go to an island. If you were totally without reception or anything, what would happen? And it's a great test to go for you as a founder, how dependent is the business, but also other key roles. Are there single points of failure across your system that is your company and where are they? And then let's figure out another way to derisk it. Brent, what's your take on this? When should you not sell?

Brent

Well, uh we advise all the time. Um uh tech companies come to us and uh this is specific to tech. Uh but um I call a business under $5 million in revenue subscale and um 5 to 10 5 to 12 scaling and then you know once you're in the teens and higher than that in the tech world you're at scale um meaning you're you're meaningful to people and businesses and you know can drive um uh you're globally meaningful let's put it that way. So, um, uh, we have all sorts of people that come to us and say, um, I've grown my business to $3 million and I want to sell. And we say, here's the reason you don't want to sell.

Krystyn

Completely. So and the effort is often very similar. Obviously more complexity the larger you are but there's still quite a bit of work and I saw that on the PE side

Brent

Right so my angle from from the when not to sell is just because of where you are in the market so and you got to be aware of that

Krystyn

And understanding the buyer universe I've also heard kind of a magic number and we've heard this from um from buyers as well as other investment bankers just around you know a million two million EBITDA starts to really open up the market to a financial buyer who that's right also makes up quite a bit of you know these are family offices these are individual ual with capital to deploy um and they're looking for a cash flowing asset. So regardless, I think what I'm hearing is increase your surface area for luck by building a great business built on great fundamentals, get your house in order. Um and then increase your optionality by getting to that kind of growth threshold and be ready.

Brent

Yep. So putting your head down and growing the business uh is the best advice because you will become more attractive the more you grow.

Krystyn

Yeah. And love the house that you've built. Maybe if you're feeling burnt out, it's sort of a question to go if I step back, bring in some support. Is there a way to structure this so it's a house I want to live in? And that's likely a more sellable business. Yeah. When you do that work, coaches.

Jackie

Oh, I was going to say in one of my exits, you know, it was it was the consumer products one, my partners were my parents and they were aging. They were in their 70s, right? And so it's not that we were burnt out, but we were also looking at what our life looked like for the next 10-15 years. I either had to replace them or and they were key to making me happy in my business.

Krystyn

You are not the business. This is a platform. This is an asset that can live beyond you. So, I love that. Now, we also promised AMA a lot of the questions we wo into the narrative here, but I do have Q&A open. You can submit anonymously, so feel free to throw any burning questions you have in there. And uh and while we wait, I'm going to do a couple of rapidfire ones just because uh these were related to some of the questions that came in. Uh so super fast quick answers. You ready? Here we go. Uh biggest green flag in a founder you'd invest in, Jackie?

Jackie

Uh coachability, execution ability, integrity, a deep understanding of the business, and great leadership.

Krystyn

Killer. Brent, biggest red flag that kills a deal. Oh, you want

Brent

Yeah, I was just gonna say that those were excellent and that's exactly what I look for. Go. Sorry. My question is

Krystyn

Right on. Biggest red flag, biggest gotcha in a deal for a founder.

Brent

Uh you that that you have you find something that they didn't disclose earlier. Um they didn't share bad news. Um if they've masked something in some way, uh that's going to come back and bite you every time.

Krystyn

Amazing. Awesome. Andreas, love this question. Do you see any major differences between North American versus European companies, buyers, mindsets etc.?

Brent

Uh, it was not really. Uh, European uh buyers weren't really uh and again I'm a tech focused. They were not as many European tech buyers. There are now. They've really matured. Um uh I think that there's hard-nosed uh buyers. Um, but they come from all different areas like you know tough buyers, tough negotiators. Um, I don't think you can put it geographically. It's just like it's the people. Uh, so yeah. No, I don't see a big difference these days.

Krystyn

Awesome. All right. In one sentence, finish the sentence. The founders who get the best exits are the ones who

Jackie

Prepare.

Brent

Who prepare and you can trust. Yeah. Yeah. And don't forget to, you know, I'm not just waving our flag, Jackie and Brent's flag. You got to pay advisors to help you. Uh you can't do it all on your own. And you've got to go and get that expertise. We haven't even talked about tax planning. Like you could do a whole series on what your audience doesn't know about the tax implications of selling a business.

Krystyn

I love that you just asked that. This is we are going to be doing a series every single month and coming up next is one on finance and how to get that in order because we referenced that but the next one will be on tax and there was a question that just came in anon anonymously. We don't have time to answer but I will read it and quick reactions would be great. How do you avoid the tax burden of an asset sale when a share sale isn't an option in the deal Canadian entity focused? This might be one to adpac later but any

Jackie

I took I took tax in law school and it ended there and I'm glad it did. So what you I mean I relied on our tax advisors considerably to Brent's point right let the experts do their job stay in your lane right but a lot of that you have to do ahead of time of the sale whether it's setting up a trust or things that that people forget to do or don't think about doing

Brent

Two years two years is the crystallization period

Krystyn

Yes and we are not tax advisors either but we will be doing a Canadian focus session on tax so stay tuned on that one

Brent

I just quickly say that a share purchase usually gets you capital gains and the asset purchased just does not. Um, and that might be where they were headed with that question, but again, uh, uh, tax advice is very, very key.

Krystyn

Awesome. This is great. Uh, one last question, which is from both your perspectives. What's a question that a founder should ask a potential buyer, but almost never do?

Jackie

I mean, I think we kind of covered it. What like what interests you and me? You know what why did you pick up the phone to call me and let them just talk and talk and talk about what they obviously took the time to call you so why did they

Brent

I think that pre before the deal is done um what they forget to ask is how how do you treat your uh founders post transaction and can I speak to three or four of them uh they almost never do that and you should you've got to do diligence on your buyer Uh and that almost never happens.

Krystyn

No, that's fantastic. Well, both, thank you so much for jumping into this. This was the very first one. I so look forward to feedback. Afterwards, you're going to receive a uh a quick little how was it? What could we do better? What went well? Uh we want to keep these going and we want to bring this knowledge to more founders. Thank you both for investing your time. Uh where can folks find you uh as a next step if they're curious to kind of dig in more from your perspective, expertise?

Jackie

Yeah, I mean, uh, please reach out to caravellaw.com. So, just so people know, a caravel is one of those ships that has all the sails on it and it navigates smaller waters that big water big ships don't navigate. So, it's not a knock at the big firms, but I really wanted to make legal accessible to people. So, for all the reasons we talked about, don't be scared to spend a little bit of money to save you a lot at the end. And we kind of have a low overhead model which really intended to kind of make it easy to bring lawyers into the group. So um yeah I mean uh you can find me at [email given in the audio]. Thanks so much.

Brent

Garibaldi is on LinkedIn itself uh as am I. Um and we have webinars that are focused on tech uh related things that we posted there valuations etc. So you can learn a little bit uh that way. And then I'm just [email given in the audio].

Krystyn

Amazing. Thank you all. And I will send this out afterwards. But if you are curious about what your business is worth and where there might be room to make some moves, we have a completely free assessment you can take. It takes 15 minutes. Uh and I'll share that as a gift for you. You get the results right away and it gives you at least a starting point to start building value. So, thank you everyone for joining us and uh we'll see you next time. Thank you both.

Brent

Thanks for having all.

Jackie

Thank you. Bye.