Driving Value in Today's M&A Market

Today focuses on driving business value in today's merger and acquisition market.

Our panelists will discuss the current state of M&A in the middle market and share strategies to maximize the value of your business during this dynamic time.

Each of our panelists brings a unique a unique perspective to our webinar.

Today, we have Nerre Shuriah, who is a Senior Wealth Planning Director at First Citizens Bank, where she leads the wealth planning team and oversees its client-centered and goals-based culture.

Also with us is Greg Rush.

Greg is a Senior Managing Director at Dunn Rush and Company, a boutique middle market investment banking firm he co-founded that specializes in M&A advisory.

And finally, Jonathan Wang, a principal at HCVT and works in the firm's M&A practice providing quality-of-earnings and working capital analysis, as well as post-closing adjustments.

Today, we have a series of prepared questions for our panelists, and we expect to have time at the end of the webinar for questions from the audience.

If you have a question for our panelists, you can submit it at any time by clicking Q&A at the bottom righthand corner of your screen, type your question in a box that pops up and hitting send.

And with that, we'll get started.

Okay. To kick things off, a couple of our panelists are going to share their perspective on the state of M&A in the middle market as we recover from the pandemic slowdown.

Greg, if you don't mind, I'll turn it to you first.

Great. Thank you, Brendan, and thanks for having me today. It's a pleasure to be here.

You know, we look at the health of the M&A market in the, certainly in the middle market, in terms of the number of transactions that are getting completed.

And we look at the number of deals under two hundred and fifty million dollars, and we kinda track that quarter to quarter.

And, you know, by any sort of measurement, as we were coming out of the pandemic from Q4 of 2020 right through the middle of 2022, we saw a string of seven consecutive record quarters in terms of the number of transactions that we're getting done. Just an explosive M&A market, and things had been pretty solid for M&A, you know, over the prior 10 years running up to, the pandemic.

But since then, you know, I think as we've, as we've seen sort of some concerns about inflation in the economy and higher interest rates, things have cooled off a bit. And now we've seen seven consecutive quarters that have been down year over year by anywhere from 10 to 20 percent in each of those quarters. And, you know, we see interest rates as being something that has been a little harder for operators of companies to deal with. It's harder for them to predict, you know, their operating performance. And, you know, I think financing and diligence have also been challenging. But, you know, as we look at these types of things, those all contribute to one of the reasons or the reasons why M&A volume has been down in recent quarters.

And all of that said, you know, private equity firms drive a lot of the volume here. They haven't really been selling in recent quarters. I think they're waiting for more momentum to be able to drive more effective auctions. And, you know, there is a lot of pent-up demand in terms of both sellers for the market and buyers. We've got record levels of dry powder out there in private equity. So as we sit here and move into '24 with some stabilization of interest rates and people being better able to predict where things are going, we're seeing optimism that the back half of 2024 and certainly as we move into 2025 as there's going to be a number of of things that relate to taxes and so forth that might encourage people to take a look at increasing transaction volume for the next, you know, four, five, six quarters.

Yeah. Yeah. And, I agree.

You know, Greg was saying, you know, all the trends that in our firm, we take a look at our stats. It's all kind of the same story.

We talk to other, you know, investment banking firms, legal firms, that it all seemed the same. So, from our firm standpoint, we did about, about between a hundred and a hundred twenty transactions pretty consistently for the past 10, 12 years.

And then lo and behold, you know, even sort of COVID 2020 into '21 into '22 to a certain extent, probably the early part, you know, it just went crazy. I mean, it probably went up to closer to almost two hundred transactions.

Umm and yeah. And now it's kind of slowed, and it feels like it slowed all around. '23 was probably a record slow, and it was probably the first year that we actually did sub-100 transactions just from a volume standpoint.

Umm, and you know, everything I think everybody's kind of got a positive outlook going into '24. Started off a little slow still, but everybody at least, you know, there's that forward looking where they're like, okay, let's get things done. Everybody's looking.

So it's definitely been very positive as far as the outlook goes. And, you know, same as what we had mentioned before is, you know, everybody's always waiting for a recession, right? You get it when you hit when the iron's hot and then you kinda take it slow.

So, you know, even since the recession of, like, the 2008, '09, '10, when that was building up slowly, everybody's like, okay, there's going to be a recession. Okay, there's going to be a recession. And I think when COVID hit, everybody kinda took it as that because it's just a long time.

And now finally, we're kinda seeing it, you know, kinda soft in '23 and in '24 it's kinda coming back up where it's back into that cyclicality of things.

That—thank you both. That's really a solid overview of what we've been seeing in the market.

And I know we're all looking forward to a bounce back in the next next couple of years. Greg, you mentioned looming tax changes. So I'd like to talk a little bit more about that. Nerre, can you share your insight on any new legislation that could potentially impact an M&A rebound?

Sure, Brendan. Thanks for asking me that question. And, unfortunately, I actually don't think there's going to be a lot of change this year. And there's a number of reasons why. And I think the main reason is it's an election year. So the Fed, the Federal Reserve bank, prides itself on being neutral, right? They don't—they're politically neutral. They shouldn't really be wavered by an election year.

But in this year, there's a couple of circumstances that would make them not likely to take action, even though they have made rate cuts or taken action in prior election years. And this year, one of those circumstances is that inflation has recently ticked up, so that has prevented them from making the rate cuts that they maybe want to make or that maybe the PE community is looking forward to. Private equity often leverages asset-backed lending when they're putting together their recapitalization structures. So having such high interest rates is also one of the things that's tamping down the M&A market.

The other reason why the Fed is not likely to take action this year is because the challenging candidate from President Trump has accused them of making, if they make a cut before the election year, saying that would favor President Biden. And so in the event of not wanting to look like they're favoring any one candidate, I think it's likely the Fed is not going to take any action before the election. The other reason why we're not likely to see any legislation—tax legislation laws or otherwise—is neither party really has to.

The Democrats don't really need to do anything. And in fact, one of the main things they're looking forward to is the expiration of the Tax Cuts and Jobs Act that was passed in 2017.

A lot of those tax cuts for individuals are set to sunset at the end of 2025. So with no action at all, there's a major event that could happen for most individuals.

The only real comment that they've made about that is they're looking to pass legislation that would not increase taxes for any families or individuals earning less than four hundred thousand a year. But other than that, they're not really looking to do anything. So when it comes to that Tax Cuts and Jobs Act, I would say individuals that are paying attention should look at that and start making some moves with regard to business succession planning or estate planning. One of the major things that that legislation did was double the estate tax exemption.

So remember the estate tax exemption was based at $5 million and, they doubled it to $10 million, but it tracks with inflation. So right now it's about $13 million or so per person. It's indexed for inflation. So it would drop down to $5 million, but with inflation, at the end of 2025 would be around $7 million or so per person.

That's a huge cut in the amount that you can transfer to the next generation. And for business owners, that's a huge amount that you could lose if you're trying to with tax liability. So for most people with a business, they should really be talking to their advisors at this stage of the game to look at locking that double of the exemption in place through some sort of transition strategy. I'm looking at it now because if you wait until the end of next this year—next year, most advisors, especially business attorneys, estate planning attorneys—they're going to be locked up busy, and most of these strategies take a long time to implement.

So it's a good idea to get those things in place. It takes a while to figure out which one works for you and what you want to do. So I think those are the two things that we need to be aware of.

Good points.

And and, you know, I would agree 100 percent with Nerre's points that she just made. I think the sunsetting of the Tax Cuts and Job Act really applies to a small percentage of people, but business owners that own a valuable company are certainly potentially in that group. And you don't have to sell your business, to be clear, by 1/1/26 to take advantage of these additional exclusions. You just need to do the planning ahead of time.

But I think in my experience, a lot of business owners that might be considering significant gifts really are hesitant to do so until they're at that point where they're ready to sell their business because they don't know if they're going to need that money or want to use it for different things. And when you go through this process, that's usually when they're doing most of that advanced planning. So, as Nerre mentioned, it it can take years to plan these things effectively, and so 6, 9, 12 months to get your transaction done is pretty typical once you get going down that path.

And so we think 2025 will be a little bit busier if for no other reason than some people will evaluate this sunsetting tax change and decide they'd like to use some or all of that additional exclusion. And the other point that Nerre made is, you know, that's per person. So if you and your spouse both own a business, it could be a significant seven-figure savings for you to do some efficient gifting before this sunsets.

And you know, the other important point and, you know, Nerre made this point as well, you know, in the past when people worried about tax changes, there's been a little bit of a cry-wolf element and people say, oh, well, you know, this is going to go up or this is going to happen. And people don't really take it seriously because it's going to have to go through Congress and get passed.

That is not the case here with inaction.

This is already set to sunset. So inaction seems to be something people are pretty good at here. And as Nerre pointed out, I don't think either party, no matter what happens with the election, is going to use political capital with all the issues we face to sort of preserve this, you know, very narrow, higher level of exemption for business owners. So at a minimum, you don't have to do anything about it, but we always encourage people to speak to your advisors and get smart about these things so that you don't miss the opportunity if it's something you would or could have taken advantage of had you known more about it.

Yeah. And, you know, final thing to add is, you know, I'm by no means a tax expert. I leave that to my tax partners. But, you know, in the transaction space, every time we always see it, which is—it's just about uncertainty.

Right? It's, hey, what is the new person going to do? What new legislation is there? What can you take advantage of now versus what may or may not potentially be there in the future?

So it's the—I agree with Nerre and Greg, you know, completely—it's all just more about uncertainty about what's going to happen. Nobody has a crystal ball, so you kinda use what you got and make your best decision.

I think those are all great points, and I appreciate it. I guess, maybe a little bit of a follow on there. If if we do see the Tax Cuts and Jobs Act sunset in 2025, what should business owners be doing now to prepare for that?

You know what? My view is business owners should be doing this type of preparation always, regardless of what's going on with the tax situation. There is literally no downside to being prepared. And, you know, I think they first off need to be speaking to their attorneys and their tax advisors and their estate planning professionals that are going to help them understand, you know, how can they most effectively accomplish the goals they have for themselves, for their lifestyles, for their children, their heirs, for their philanthropic causes that they want to support?

You know, business owners are fortunate to have a vehicle through which they can support many of these things, and the only way they're going to be able to do that effectively is if they plan well ahead. And, you know, if you are planning to do a transaction, it's even more important that you get busy with your advisors to do this planning ahead of time because, you know, you need to set these things up before you start down the path of doing a transaction. Because once you've reached a point where you've got a a deal in the offing, some of those things may be unwound.

And in our experience, I just think owners don't often do anywhere near as much planning as they should. And, in our business there's a saying, everybody leaves their business someday. It's inevitable. And it can only happen one of two ways, on your own terms or someone else's. And if you haven't done this preparation, you know, God forbid something happens to you or your company. I mean, you don't want to have to exit where you're not prepared for the things that can happen to you. So the planning with wealth advisory, estate planning, legal and accounting tax professionals is super critical to be ready when you want that to happen on your own terms.

I'll jump in on that, Greg. And I think Greg is being nice. He says on your own terms or on someone else's. We have a saying, you leave your business vertically or horizontally. So maybe that's not nice, but it's true. And there's no end of planning that you need to do to prepare. And a lot of that can be asset protection.

So what can you do to prepare for eventualities that are things that you have no control over? So things like key man insurance. It may not be you that runs into trouble, but your best salesperson. What if something happens to that person? Do you have insurance to cover the lost revenue, the contacts that you don't have good rapport with because maybe they all went through that person, to tide you over until you hire, to train that new person to take over. I mean, that kind of thing you need to think through.

Making sure you have a succession plan in place. If you do want to transition the business, what about your bench strength? I mean, making sure all those managers can run the business while you're out and will stay on.

What do your stakeholders think? Your spouses, the employees, your partners. I mean, there are a lot of things that we like to work with business owners to think about both with running the company, protecting and then your own personal life. What do you want to do after the company? I mean, there's so many ways in which business owners focus on the number that they're going to get, and then when they leave, they can really fall into a bit of a depression because they identify with their company but they haven't gotten a a clear plan as to what they're going to do afterwards and then they feel a little aimless or dissatisfied with that separation or that transition. So there's no end to things that you can plan for. You can't overplan, to be honest. And so, the earlier you get started, I think the happier you would be with that transition when it occurs.

Yeah. And final thought was, you know, just from the the tax side, you know, it takes time for structuring. It also takes time for, you know, sometimes where it's like residency, you know, what state you're going to be in, what taxes you're going to pay. So that's why definitely sooner the better. Some things take, you know, 6 months, some things take a year, right? So it's definitely at least knowing, hey, what your plan is when you're however far out. I think that's always beneficial.

That's helpful. Very insightful from each of you. Thank you.

So like, let's talk up for a second about other upcoming legislation. Are there legislation changes that are going to impact middle market businesses, in the future on the horizon?

Yeah, Brendan. There is actually. And it actually is legislation that was passed a while ago. It was passed in 2021, but only became effective at the beginning of this year, and it's called the Corporate Transparency Act. And it's a big deal for middle market companies—really small businesses.

It doesn't involve paying anything. It's a reporting structure, and it's part of an effort by the government to combat financial crimes. And what it requires is for reporting companies to file a report on beneficial ownership. Beneficial ownership can be people who own more than 25 percent of the company or people who have, like, a say in how the company is run. So that's fairly broad, actually. Could be, you know, your directors, your managers.

And who does it apply to? It really applies to small businesses. If you're a highly regulated company like financial institutions, if you make more than $5 million in gross receipts, you have more than 20 employees, you're exempted.

So the burden of this act falls on most of our small business owners. And what do they have to do? File a report. If you're a new company that you just formed, you've got to file a report within 90 days. If you're already existing, you've got to file a report by January first. A lot of our clients seem to be unaware of this new act.

What's so important because fines are hefty, if you don't file this report, you're going to start getting fined $500 a day, or you could be subject to 2 years in prison or a fine of $10,000. That's huge.

And so we want people to be aware of it. It's already getting some pushback. I think there's a a court in the district of, a district court in Alabama that has found it unconstitutional, but that's got a narrow application.

Right now, it's only applicable to the plaintiffs of that particular case. As far as everyone else is concerned, they still need to apply and file that report by the end of this year. So those are little things that we want our small business owners to be aware of. That's important. Another thing that we try to get across with small business owners is making sure your financials are cleaned up. When we work with small business owners, especially ones that are looking towards transition, sometimes they have a really hard time in cleaning up their financials with an eye to—how do I increase the value of my business? Meaning most small business owners, when you look at their net worth statement or their personal financial statement, the business is the biggest asset that they own.

Right.

And it's illiquid. So they've got to they've got to go through a strategy to take that illiquid asset and make it liquid to fund their retirement, fund their goals or whatever it is that their dreams entail after the transition of that business. And that's a huge step. A lot of business owners can't make that step from illiquidity to liquidity. And one of the ways that we do it is normalizing their financials.

While you're running the company, one of the ways that business owners do it is to try to reduce the cash flow, right? You take a lot of deductions, you reduce the cash flow to reduce your taxes. But on the other side, when you're trying to make your business attractive to an outside purchaser or buyer, you've got to increase the value by increasing cash flow. Revenue has to look good. You're selling your business on a growth-high cycle, and making that transition to reducing cash flow to increasing the cash flow of my business is a difficult transition for our business owners to make.

Yeah. And, you know, on that kind of the the business value and the value of your business, you know, that's where a sell-side QV usually helps, right? Because a lot of the times, business owners aren't really focused on kind of the books. So your books and records, usually it's, hey, your bank account's going up, bills are getting paid, you know, you get to take some nice vacation, so everything's going well.

Whereas, you know, when you do start at least the sale process or even when you get larger, you kinda have to get it onto what we call generally accepted accounting principles.

And that just makes it so that you can kinda compare between, you know, different kind of companies, same industry, things like that, where it's like, hey, look at using these set of rules, this is how this company is doing, this is how that company is doing. And I think, you know, that is kind of a probably what I always do on the sell side. It makes it so that you can see exactly how much, like, Nerre was saying, cash flow you're getting from the business. So what part is liquid versus what part isn't?

You know, that's what I do all day basically is just doing a normalized EBITDA. So EBITDA always generally what everybody talks about when you hear about transactions. Hey. What was this multiple? What was that multiple?

And a lot of the times, when you don't have this generally accepted accounting principles kind of bookkeeping, you know, you're more tax driven. So you're pulling up expenses so that you would pay less taxes. Well, the sell-side QV makes it so that you can kind of, you know, you get that. But then on the it's kind of a prospective basis. Again, what Nerre was saying was, hey, what is your company going to look like? So you get this good EBITDA based on historicals, and then now you can have, you know, Greg kind of project it out and say, look how large the company can get with certain assumptions and such.

So in a certain way, you actually get to kinda have your cake and eat it too. You know, you you've gotten all your tax deductions, and then now you bring me in, you do the EBITDA, you know, you get your add-backs. So now your EBITDA is nice and hefty, and you will be able to benefit from that when the eventual exit happens. So all this is kind of all about, you know, the the value of the business, the preparation. This also helps with kind of, showing how sophisticated the business is, and that's all part of the whole deal readiness, right?

Like Greg was saying, you know, it's not like you decide to sell your business and you put it on some, you know, marketplace and then boom, somebody buys it, right? And it's like, buy now. It's—it takes a while. So the sooner you get kind of everything in order, the faster you can go so it does shorten the time period, and and the less hiccups you end up getting.

Right.

That, discussion that—I'm sorry to interrupt—that discussion that Jonathan just gave about using EBITDA to sort of clean up your financials and give you an idea of value is is so, you know, to utilize the same word is so invaluable, especially at the beginning of the process because you can get evaluation for your company, but that's just a point-in-time value. And it's costly. So you don't want to get that too soon. You want to get an idea for the value of your business.

And utilizing Jonathan in that process to clean up your financials, use EBITDA to normalize your financials, can give you an idea of what is the range of value for your business. And if it's below what you need, if you've done some financial planning and figured out, hey, I need, you know, $15 million to fund my retirement, and Jonathan's determined your business is worth 12—then you've figured out what your gap is, and you can spend a couple of years working to build the value of your business during that interim. So it's really important to dig in there and sort of clean things out—clean out some of your personal expenses that maybe you're running through your business for this purpose so that you can get to what the actual number is.

Owners need to clean up their financials and can't understate how important that is. I mean, it's, or overstate how important that is rather. We see so many companies that think, oh, my numbers are fine, but it's such an underappreciated and neglected area of most business owners. They look at it as a as sort of cost or sort of an overhead department. And until you start thinking about how you're going to use your finance department and your reporting and those types of things as a growth tool, you know, you really haven't unlocked the value of your business. And if you haven't cleaned up these numbers, I mean, I think, you know, Nerre and Jonathan are kind of being nice.

I mean, there's there are valuation exercises out there as to what academically someone could say your business is worth. But the reality is you don't know what it's worth until you find a buyer willing to pay you something for it. And if you haven't done the right work to get your company ready to go and have your financials ready to be evaluated by somebody else, it might not be a a function of low value or a low multiple. You might not be able to sell your business at all.

And, you know, we hear, you know, the importance of a quality of earnings really has become critical. Buyers started doing them because they would find they'd flip over stones and find all these reasons to sort of retrade their deals or use it against sellers, and sellers started getting smart a few years ago. I wish, you know, we we try to make all of our, clients understand the value of doing a sell-side QOE because you want to frame out the sandbox in which all those arguments and discussions happen. And if they're going to use it against you, you better know right on down to the line items in your general ledger how your numbers are working.

And, you know, the wrong question that a lot of owners ask is, like, what's my multiple? And they try to get, you know, oh, might know somebody that did this or did that. The reality is, valuation is about only two things. It's about cash flow and risk to those cash flows.

And, you know, Jonathan's QOE analysis is all about the risks to those cash flows going forward. It's not necessarily your cash flows. It's what the buyers expect to reliably be able to generate over time. And that's why the wrong question is, "What's my multiple?"

The right question is, "Which buyers can apply a higher level of pro-forma cash flow to a normal multiple, which is going to be, you know, around, you know, the leverage multiples and how much they can get for for other capital sources and so forth.

So, you know, you really do need to dig in and professionalize your financial area in particular, but preparation up and down your organization really is critical because unless you've sold a business before, you really don't have a frame of reference for how detailed the diligence process is going to be. And the more prepared you can be, the more likely it is that an offer you receive can actually get closed.

I think that's a really good perspective and actually an excellent segue into where I want to head to next in this discussion, which is how to really drive business value, especially in this dynamic market.

Jonathan, since you do this for a living, I'd love to get your thoughts on this.

Yeah. Sure. I mean, basically, just from a deal perspective, like I said, it's mainly, right, EBITDA. It's about growth. It's about how, you know, trending looks.

And I always tell business owners, it's better for you to hire me, and then you're paying me and I'm telling you—hey, this is what EBITDA is going to look like when somebody else is coming in versus, you know, if you don't end up taking that cost, you end up having somebody else coming in who's getting paid by somebody who's trying to buy your business, who is telling you, okay, hey, this is what your EBITDA looks like.

And, you know, there are things that are very judgmental, right? There are things where somebody can say, oh, how much is this person getting paid? What's the market value?

So a lot of the times, it's good to have this preparation where you can see what questions may come up, what issues may arise and then we have kind of a sophisticated response for them.

And it's something that makes sense financially and from the business sense, right? Strategically. And that's generally, you know, kind of the the main point of of driving the value. Yes, there is that cost of getting this sell-side QOV. But for those dynamics, right, you want me telling you what your EBITDA is versus somebody else.

Definitely better to know on the front end going into that conversation. I agree.

Thank you.

Yeah, you know, the other thing that I I just add to that, it's so important because, you know, a number of the people that we talk to and a lot of the processes that we start working with clients on are kicked off by, you know, oh, someone's got an offer or they or someone's confronted them and said, hey, you know, I'll pay you this for your business.

But the reality, not all offers are are the same. And and, you know, that's like tactic 101 from buyers. Right? It's to throw an offer out there to try and get somebody off the market.

But the reality is they don't have enough information to know whether that offer can actually be something you can get closed. And if you have done the work and you have gone through with Jonathan and done a quality of earnings, you know, you'll know whether there's anything there that somebody's going to find. And, you know, I think it's important that, you know, when you encourage people to give you offers, you have competition and you've got, you know, the same information in everybody's hands and you move them along a timetable so that you can actually control the environment in which you know what information they have in their hands and you can have a high level of confidence that that deal can get closed.

Because as Jonathan pointed out, I mean, every one of the advisors that works for a buyer—and they're going to have 20 or 30 people in a data room crawling all over all of your information—every one of them is getting paid six figures by that buyer to try and figure out why the buyer should pay you less or retrade and and change the terms on your deal. And so you don't want to be, you know, in a knife fight with a spoon, so to speak, without knowing this information and really being being able to sort of set the rules of engagement around the financial discussion.

Greg, you made a really good point there. And that is at the beginning of the process, you know, right up until due diligence, the seller has the advantage in that transaction. They have the financials. They have the information.

And so if you want to take advantage in those negotiations, you really need all the information that you can get. And so not only is having clean financials important, comparing yourself to the industry is also important. So—and a lot of our clients, they think they're doing really well because they know what they're doing in their company, but they don't know what's going on with other similar companies in their industry. And that's so important to realize. How do I stack up against everyone else?

I mean, if it's just you and a few other people in your industry, that's one thing—and it may be a tight situation. But for the most part, it's usually a fairly wide field, and you don't know what other people are doing. So having that information really gives you an edge in the negotiations. So take advantage of it.

As I said, you get one shot at this apple. It's rare that we meet the business owner that buys and sells a business and buys and sells a business. Usually, it's somebody that's dedicated their life, blood, sweat and tears to one business and gets one shot at liquidating that for what they need. And so it's really super important.

The other is that getting that informal evaluation really helps you to know where on the trajectory of transition you want to turn. So where you actually transition your business to is the business owner's decision. And I know in this panel, we focused a lot on sales and M&A, but sometimes you're transitioning to the next generation. You may be transitioning internally to employees, managers, through an ESOP, manage buyout, or something like that. That's something that's decided by the owner. That's decided by you. And once you make that choice, then we help you understand the various strategies available to you.

And you make that choice often based on your internal motivations that are qualitative, but also value. Knowing how much value you can get often can decide for you which one of those transitions you're going to make because one or more of them is going to create more value than another. You know, transitioning to a family member or to an employee may create less value for you than a sale to a third party.

Just like how think about selling your car, right? Selling your car is going to create more value if you sell it to a third party than if you sell it to the dealer. So those types of things are important, and having that value pretty accurately in your mind of how much you can get is going to drive those decisions for you. So it's always good to have as much information on your plate so you can make the most accurate decision, and it just cuts down on the regret later.

Yeah. The preparation that we've all been talking about on this call, just on that point Nerre just made, is just as important if you want your grandchildren to run the business for you someday. It just maximizes your flexibility. You know, you should always be working to do the things that make your company more valuable. And I think surrounding yourself with the information that, you know, outside parties would look at and, you know, the stones that they would flip over to understand whether there's things you should be doing differently or better. You know, you should be challenging yourself and your management team to do that even if you want to keep the business in your family forever.

Yeah. Really great discussion, and I think all good points for business owners regardless of where they are in their journey, right? Because like you said, everybody leaves their business someday. So with that in mind, I'd like to hear recommendations from each of you on actionable strategies that business owners can take now to prepare for the inevitable exit of their business. Jonathan, do you mind if we start with you?

Sure. I mean, it we kinda hit on that point where, you know, at some point in time, it's good to know how much you make from this generally accepted accounting principle standpoint. So whether that is, you know, getting a more sophisticated, either accounting team or management team, you know, if you have bank debt, you likely—you know, doing an audit or review—that always helps because that helps with you knowing your process, knowing your books, closing them, things, you know, kinda stay closed and they are where they are.

And then segueing into once that happens, you get EBITDA, right? So from there, when you get your net income in your audit or or in your review, eventually, you get up to EBITDA and then you are a little bit more flexible, right?

So it's whether you're transitioning and you're continuing to run the business, you may need bank debt, that audit is still there. Whether you find a buyer or whether the economy just, you know, goes gangbusters on you for your specific company and you want to look to sell, you have your EBITDA right in your hand and you know exactly, you know, what people are expecting in kind of the industry. So that's how I would say just deal readiness, just get everything as clean as you can, right? And and get some sophisticated people in there that that can kinda understand how certain things work as far as the financials go.

Great. Nerre, you want oh, I can jump in. You know, I guess what I would say, just talk to your trusted advisors, right?

I mean, I think it has to start somewhere. And, you know, if you're working with, you know, accounting firms and attorneys and wealth advisors that have all seen many, many people do these things the right way and have to do with things when they haven't done the right way. You know, use their expertise. It shouldn't cost you anything other than just having some conversations to frame this out for yourself so that you can get smart.

I mean, you worked too hard and too long on your business to ultimately have something happen to you that comes across unexpected. Just talk to people and get smart about what advisors you need to bring to the table. You know, it's funny. People are always saying, you know, when should I start, you know, planning? And the answer is always yesterday. It doesn't matter how long you've been planning. You should have done it sooner. It's never been somebody that successfully transitioned away in a deal from their business and then say, boy, I wish I'd done less planning. It's never been said.

So, like, you know, it's so complicated and there's so many things. And the more confidence you have in, you know, understanding all the things that are going to impact how you can effectively transition your business—whatever way that is you want it to happen—the more likely it is you're going to be able to successfully pull off your transaction.

That's a good point, Greg. You really should have a good advisory team together, people that you trust, people that you can go to to bounce ideas off of, run your decisions by at any stage where you are in a life cycle of your business. You need a good business tax attorney, a CPA. You should have a wealth management consultant on your team, a wealth planner.

And one of the things that you need to be aware of is as you grow, as your business grows, as you grow in sophistication and complexity, your advisor needs to grow. A lot of times we see with clients that they've grown, their business has gotten big and they're still using a really small CPA that just doesn't understand the sophistication and tax complexity that they're now facing. And we want to get them to move on to somebody that really needs to recognize where they're at and be proactive about some of the issues that they're now facing. So that's something that you need to put together and put it together as soon as possible because remember that comment that I made before that maybe didn't feel so good. You don't know when things are going to happen to you, and they're not always transition oriented. You want to know these things if you're growing the business. Learning to run your company well will enable you to grow and expand.

Let me tell you something. When you go to Brendan Chambers' team and you're seeking financing, what they're doing is they run a report on you. They run a report and they run all these performance ratios on your company, like 40 of them, all different things, even if it's just one, but, you know, accounts payable, working capital, all kinds of things, to see how well do you run your company? And that tells us the risk that we're taking on lending money to your business. Do you run your business well that we can lend you money and both of us will succeed?

I don't know that they necessarily share that report with you, but it's important for a business owner to be aware of those ratios and how they perform so that they can improve on running their company. And that if they do seek financing to grow, expand, open another office, build more IT or AI—AI is the buzz word of the day, but AI is expensive—they can get the funding to do it and pay it back that it won't be a debt burden that will crush the business.

All those things are important, but you have to run your company well to do it. Having advisors help you run your company well is so key. And so building that team of advisors now is really important. You can't start too soon. You can't wait until you get that LOI from somebody or that bid off or that you weren't really expecting that you don't even know how to evaluate.

No, I think that's—thank you all—I mean, I think that's really solid advice, and it goes back to the concept of being prepared for the future and all the various possibilities of exiting a business.

I really appreciate the discussion we've had so far today, and I want to make sure we leave some time for questions from the audience.

So as a reminder, if you'd like to ask a question, please click the Q&A in the bottom righthand corner of your screen, type your question in the box that pops up and hit Send. We'll monitor, the box, of course, and bring any questions to this to this group. We did have one come in earlier, so maybe we start with that as we compile some others.

So since the last 3 years have been so—this is the question—since the last 3 years have been so volatile with COVID, supply chain disruptions, labor challenges, and a myriad of other issues, how do sellers or acquirers actively value these companies and predict what future cash flows will look like, given that some of the businesses will continue on this trajectory while others may fall back to earth in a more normalized environment?

To bring in Jonathan, right, to do a quality burning. Say, I mean, that's literally what they do. And, you know, Jonathan, you can talk about that because I'm sure it doesn't matter whether you performed well from the the the pandemic or you were impacted negatively. It bites against an owner both ways. If you performed well, then, you know, buyers are going to be concerned that the performance is going to drop back down. If you were impacted negatively by it, they're waiting to see whether it's going to recover and-or whether it could happen again. But normalizing those things is, that's what you do, Jonathan.

Yeah. I mean, you know, I I think one important concept is that it's not when everybody says multiples and you get an EBITDA figure, you kinda back into that once somebody's willing to pay you something, right? So really, what you're doing is you're starting with EBITDA, which is probably the best gauge of what your company would do in the future. So it starts with that.

And yeah, you know, COVID did all sorts of weird things, right? We have a few online e-tailers, we call them. I mean, once everything was locked down, everybody was buying everything online, right? Getting it delivered, groceries, everything.

So a lot of the companies, they just, you know, hockey-sticked up for, let's say, one-and-a-half, 2 years. And then what happened in every single deal, everybody was asking, so is this normal or is this going to go back? And, obviously, everybody's like, oh, this is the new normal, right? This is never going to go back. Once everybody's working from home, once everybody's, you know, buying groceries and have you'd never have to go to the grocery store again.

And lo and behold, what happened, everybody just kinda got sick of it. Things finally opened up, and then all the e-tailers just had this back to real reality, right, where everybody was like, alright, let's go on vacation. Let's spend money on other things instead of being, you know, cooped up at home.

So definitely, you know, COVID's a great example. During that time, we did have to estimate. We were saying, hey. We call these pro-forma adjustments where people are thinking, alright, what is the business going to look like without some, you know, strange event, right? Like, you know, for for firearms companies, it's every 4 years election, you know, for the e-tailers it was COVID. There's there's always some sort of cyclicality. So you kinda get to that point, and that's where you we call it, you know, normalized EBITDA, where it's what is the best gauge of how your company is going to look going forward in the next, you know, 2, 3, 4 or 5 years.

As planners, I'd say, usually, we ask for 3 years of financials. We end up just asking for more. Four years, and then maybe throwing out that year where the financials are just so off, we just can't, we can't use it for any predictable purposes.

But, you know, I'd say when it comes to middle market and private companies, even though we have been through a pandemic and it has thrown off financials, it's something that we struggle with with private companies anyway, which is predicting future growth. You know, we don't have the certainty of, you know, public financials that we have with public companies and able to show what's going to happen for the future for them. So we maybe use more financials, work harder to clean up those financials or normalize them as we've been seeing.

And the other is bringing other KPIs to prove value. So other things that we work on to show where is the value in your company, you know, customer satisfaction. What is your growth potential? What's your market control? What are your customer demographics? You know, what does your your management bench strength look like?

We look at all those other qualitative things to prove the value in a company to supplement what may not be evident in financials or may be a little cloudy in financials due to the pandemic.

And to tie together, you know, Nerre and Jonathan's comments, what we're seeing in buyer due diligence right now is they're taking a look at those KPIs and taking a look at that sort of, analytical EBITDA pro-forma analysis, and they're looking at what it was like in 2019, right before all this happened. And they're trying to compare what's happening in 2024 and what they expect in '25 to what had happened prior to the pandemic. So they're literally just taking all these years and pulling them off to the side and saying, what could we expect from a normal operating environment?

Okay. Great. Yeah. That's, very helpful. We do have a couple other questions.

Jonathan, I think this one's for you. What is the average cost of a quality of earnings due diligence review? And if you have clean financials, how long does one generally take?

Oh, boy. They got this on recording too. I don't know if they're going to hold me to it, but it's definitely a range. So things that kind of, affect it, right, is how many entities you have under something that we're evaluating, right? If you have one entity, it's definitely a lot less expensive, but then, you know, I've had one where it was probably 22 entities, right? That takes a while. If you think about each entity has its own, you know, bookkeeping system, trial balance and things like that.

It also depends on kind of the complexity of your add-backs, right? There are some that are very simple where it's like, hey, you know, somebody has somebody on the payroll. They're not going to be continuing going forward, so that's added back. Very simple to easily quantifiable.

Things like, you know, this COVID adjustment that we're talking about that happened in every QV during that period. I mean, those depend on what type of business was it. Was it like a brick and mortar? You know, was it, online? You know, was it service based, hours based, right?

So it's definitely a large, large range. I think at least at our firm, we kinda have this this, we we have like this three-tiered system because we work with business owners a lot so we understand the sensitivity of it, right? So you you get all the same services, but it's more about presentation. So that's where I'd work with, you know, Greg and say, alright, what exactly do you need to market this successfully? Do you need this nice, wonderful, pretty-looking report, or do you just need an Excel data book that has all the diligence in it and then, you know, he uses his marketing material?

But, yeah, I would say, I mean, if you had to put a number to it, it could go anywhere from probably $40,000 up to, you know, depending on how large, how many entities, I mean, you know, that could be, six figures as well, like hundred, hundred twenty, hundred thirty. You know? It's—and it's all different sizes. It could be a la carte depending on what you want, what the big risks are.

I think that's I think that's very helpful. Another one that's a little another question that's a little bit along the same lines is how does a company keep the information confidential in the market, where all do not know you might possibly want to sell?

Brendan, I can jump on that one. As you might imagine, a hundred percent of sellers worry about that a hundred percent of the time. So, you know, I think it's a careful thing, right? I mean, everything we do is confidential. It's bound by confidentiality agreements, nondisclosure agreements.

We'll do things, you know, where we only go to parties that have been approved in writing by our client. We go to those parties on a no-name basis and get them to sign a nondisclosure agreement before we even disclose the name of the company.

I think, you know, what what a lot of owners haven't been through it before, you know, fear is that, oh, my competitor's going to do this. They're going to steal my employees. They're going to go after my clients. The reality is that almost never happens.

It sure can, but I think if you've got a business that's worth twenty, thirty, forty, fifty million dollars and you're going to people that want to buy companies of that size, the reality is they take it pretty seriously. It stays within the C-suite. Most companies that are making those size acquisitions actually have, professionals who this is all they do. They've got a business development or an M&A head, and it will stay in in that small circle of people until it gets to a much more detailed level of discussion and their bid has been qualified and they've made it to a second round or maybe even been a finalist and gotten to the letter of intent stage before it opens up to a a larger number of people internally there that that need to be involved in the process.

But, we do things like, you know, and for critical information they need to know, the bid you get is worthless unless you've given the buyers all the information: the good, the bad, the other, the names. You know, they're going to have to talk to your customers. They're going to have to know who your key management members are, or they're just not going to bid on your business.

And so we have to package this up in a way that can address those valid concerns, make it as, as confidential as it can be, and, you know, do things like, put your customer names as customer A, B, C, so blind until very close to the end of the process, when you're fairly certain that you've certainly picked the party. We we share that with one party—not with all the parties. So, you know, there's there's a very well-curated process. And, you know, people sell their businesses all the time.

It happens every day, and they've all been worried about this. So you just want to, you know, talk to people and understand the tools people have used to do this effectively and avoid the problems that might happen with, you know, disclosing what is very sensitive information.

Very helpful.

Getting—got a couple more. I'll be cognizant of time here.

What determines when you decide to value a business using EBITDA versus seller's discretionary earnings?

I would say it's it's never—no buyer tells you, right, what's going on behind their curtain. And I think it's all more important to run an auction process because no buyers have the same assumptions, right?

So a good adviser is going to be going to each of these buyers and pressing the buttons for them saying, hey, you know, you don't need this duplicative facility, or, hey, you really need to be in the northeast or, hey, look at these customers that we're selling these products to. You've got these products and services that fit perfectly. We could cross sell.

It's all about the most aggressive assumptions that each of these buyers are going to be willing to make so that they can understand how impactful the addition of your business to what they have is going to be for them, and then the risk that they see to those cash flows. So if you can knock down the risks—audits are better than reviews, reviews are better than compilations, reviews paired with the quality of earnings may be the gold standard for all of that so that they understand, yeah, I can take this to the bank. I can get it financed by a bank, right? I mean, if they can get things financed with cheap sources of capital, that allows them to pay more for the business. So you have to knock down all these risks. The KPI reports that Nerre talked about. I mean, if you've got, you know, you know your business like the back of your hand. They don't. They're going to assume everything's wrong until you can prove otherwise. So I think it's about getting them confident about the biggest number they can possibly justify when they make a bid.

Look, nobody sits there and says I'm going to pay 20 times EBITDA. But it might look like 20 times your EBITDA when they talk about what they're going to make and they put a six, seven, eight times multiple on that number that they think they can make. And they'll be, you know, top bidders oftentimes. This stuns a lot of sellers. If you get 10 bids, the top bidders will be double the bottom bids a hundred percent of the time. I mean, it's amazing how different companies bid on the same assets.

Very, very helpful, and great, great discussion. There was one last question, which I think I can take. Highlights will be available very soon.

So, yes, we will share a replay with highlights, on our website and through social channels. So really appreciate the questions. It was great way to conclude the webinar today. And before we close, I want to thank our panelists for today's thought-provoking discussion and for sharing their time and expertise with us. I thought it was fantastic.

I also want to thank the audience for joining our Middle Market webinar. These are things these webinars we try to put on a few times a year to really help provide content to our clients and and and potential clients, and so appreciate you taking the time—just one additional way, again, we try to add value as part of our the relationship we share.

And we will share information on our next webinar and other ways to engage with our team via email, on our website and on First Citizen social media channels.

Thanks again. Really appreciate it, and hope everybody has a great rest of the day.

Thank you, Brendan.

Thanks, everyone. Thanks, everybody.

Thanks, everybody.