E122: Selling Your Business

26:12But people are doing them because they are taking money out. So some people are just like, hey, I'm just going to take this money out because I'm taking enough out. And you know what? If the rest of my investment just doesn't work out the way I want it to. So let's just make it out. Let's not make it out to be like, it's all that awful. It's just know what, you know, just kind of know what it is. And those structured deals are very often, you're taking money out. So if you're taking 50 million, 20 million, 100 million off the table, and you just, that's how you, you're not going to get the money out without a structured deal.

26:45The deal, there is no other deal. That's why structured deals are popular right now, because there ain't no other deal. And you want to get money out. This is the way to do it. No, you just know the risks. Oh, the other thing is like the reason why this is so aggressive in minority deals is because the private equity group doesn't have control of the business. Right. Like, you know, somebody could buy 25 % of Ridge and then tomorrow I could say, like, no, we're pivoting into being an ice cream company. And like, they would put up a big fight. There might be a lawsuit. But like, if we control the board, if we control everything, like they just, they need some sort of protection.

27:21Right. If you were buying something as a minority passive partner, you'd want protection too. And if you do a majority sale, you're giving up control of your business. You could probably get better terms on all of that. A dream private equity deal is they buy 51 % of the business. So they're putting out the least amount of capital, but they still have control of the thing. And that's what gets you the best terms. But then you are kind of f***ing, right? Right. Yeah. It's, it's, what do you, I think what Jason's saying is, and what you're saying, Sean, is you're trading something, right? Like that's kind of how these deals get done is like, you just have to decide what's most important to you.

27:59Like in a minority deal, you're de-risking. It's like Jason's comment. It's, it's probably good for you. You know, like most of your net worth is likely tied up in this business. You're taking some chips off the table. It comes with structure. Like you're, you're still going to have to operate, you know, they're going to get their money out first, whether that's another sale or just dividends, like just cash coming out of the business, they always get it first. Jason, are there other, like when you look at deal terms or structure, is there other things that you pay attention to? Like if you were advising a company who's like 30,$40 million in revenue, they've got a private equity group that wants to come in and buy a chunk.

28:38What are some of the other things beyond preferred shares, right uh what else are they going to look for what should they keep an eye out for i guess like fundamentally you got to work with these people right so okay you just there's countless stories of people doing deals and then just being unhappy with the investors so now these guys are in business to to make money and even if um even if you're not selling control, you're giving up a tremendous amount of control. So I think that's important. And that will be reflected in the deal terms. And I mean, I don't know if we need to go into all the different terms, but they have approval rights over all sorts of things that you want to do to run your company.

29:29So you may be like, oh, I still own the company and I control the board, but you don't control that much. And that probably goes with a lot of both PE and VC deals, but certainly with these PE deals where you've taken a lot out. Now, these guys aren't just sort of sitting on the sidelines and running and letting you run the business. They want to talk a lot. And so there's like tons and tons of terms that go into this kind of different minority protections and control rights, which like Sean said, you need to get really good advice on it. Bankers, lawyers are both really useful. Obviously, a really good deal lawyer is absolutely paramount in doing this.

30:16But I just think you are probably giving up a lot more control than you think you are. And what happens is you go down the path of the negotiation of these transactions and you get all excited about the money and the valuation and all that. And then stuff gets sprung on you or you just don't understand these things. So just realize that you're going to give up a lot of control, even if you still own a majority of the company. Yeah, that's such a good point. There's like veto rights are really common when you do these deals. So even if they have a minority stake, like let's say they own 30 % of your company, it's common that they'll stick in a veto on any other debt or equity deal that you do.

31:00So you can't choose to go out and take on more debt. You can't choose to go out and sell more equity. They have complete control over that. They can put in even veto rights over expenditures. So like Sean, in your example, they might actually have structure in that deal which says like any expense over$100 ,000 or $250 ,000, whatever that number is, has to be board approved. Yeah. So we're talking about situation where you could sell 30 % of your business and then you hate these people and you want to sell the remaining 70 % of your business and they have the right to say no. Like, no, we get to sell first, right?

31:34And we're not ready to sell yet. So this is why the highest valuation might not be the best deal. And also why it makes sense to sell to firms that have good reputations, right? There's something like 5 ,000 private equity groups. They've really, really, really exploded. And there's a million people who would love to buy your business. But sticking to a company that has a really good, like a private equity group that has a really good reputation for winners and losers, right? Because a lot of deals do blow up and a lot of private equity groups go bankrupt. And that's typically actually a good investment form.

32:07I wrote a whole thing about how bankrupting companies can make you a ton of money. But you want people who act in your best interest or at least aligned with your best interest through the good times and the bad times. So there's a bunch of great, great firms. They talk to a banker and they'll tell you who the best firms are. Yeah. And you should, I think, Sean, you should also, I don't know if you guys agree with this, but if you're going to sell any part of your business to a private equity group, you should probably be looking at PE groups that have done deals in your sector, in your industry.

32:39If you're a consumer goods brand, you should be dealing with a PE group who's done that before. because like to Jason's point, you're going to hate your life if this is their first consumer deal because they're going to ask you a lot of stupid questions and they want to talk to you a lot. Yeah, I mean, do not sell to a firm that does like oil and gas industries because they'll come in and be like, turn off the bad ads. They're like, stop spending money on the bad ads. Just do the good ads. It's like, I didn't think of that one. It's like, yeah, I'll just only run the good ads, bud. Well, look, guys, I got to say, most of them are not very fun to work with.

33:18You know, it's like, yeah, definitely you want to, it's like the lesser of, of many evils. Like, who are you going to find to work with? Because your interests are just not, not aligned at all times, right? Like when everything is going well, your interests are pretty, interests are pretty aligned, except they're like, Like they're going to find ways to tell you what to do or, you know, because like they've got a bunch of really good number crunchers. I remember when I was a first year lawyer at Scadden and I worked on my first P.E. deal and I was, you know, we were doing due diligence and and the the P.E.

33:58Junior P.E. guys, they're building the model, right? They're building the model. This is 1997, guys, and I'm in Texas. OK, I'm staying. It was it was it was crazy. And I'm like, I was so enamored with and impressed with these guys going through all these numbers. And this is way before I became a banker. And I was just so impressed with what they were doing. Because I was a words guy as a lawyer and they were numbers guys. And the way they talked about the numbers and were able to analyze the business. And it all seemed really, really impressive. And these guys are all really smart. But they also all are very, very similar.

34:33And they run by a certain playbook. and if what your business is doing is within the playbook, everything is good. But the minute something goes wrong, it gets really, really tough really, really soon. So that's why if you have a business that's making a lot of money, you do the math, right? And be like, okay, do I want to sell, take out X million now if I know I'm going to make that back over five years and not have to deal with these guys in my shorts all the time? I know I'm going off on a tangent, but that, what I'm trying to say is these guys are all tough. And they're sharp elbows and they're all really smart, but actually they're not as smart as you think they are.

35:17And so, um, like be, be mindful of that. Yeah. It's the, the, you know, they're really smart in their own lane and now they're going to be in yours, you know, like they might be world, world-class sprinters and now they're going to jump into a swim lane. Like they're used to running. So like, yes, I think it's great advice, Jason. Jason, what do you like about Saris? You were gone for the past week in Italy. Were you checking Saris dashboards? I wasn't checking anything in Italy, but I will say this, like whenever anyone on my team, like growth team or anywhere else, like sends me data anymore, it's likely coming out of Saris.

35:57And every once in a while, I'll get something from them and it looks really slick. And I'm like, where'd you get? Is that Saris? Like, yeah. And I always feel really good about our investment. I do get a daily email of some metrics out of Saris that comes through. But one of the things that I've been thinking about a lot lately is AI. I mean, duh, right? Everyone is. Duh. But I finally woke up a few weeks ago. I finally woke up a few weeks ago. I was like, I got to get serious about this. And I was actually talking to the Saris guys. And they launched a next generation AI-powered stuff in their platform, which I'm excited about.

36:32It's Saris IQ. It's invite only right now. If you mentioned Operators Podcast, you can probably get access, hopefully. But the next level of all of this is, first, with AI, you need to have all of your data somewhere. I mean, it's going to be really messy to just drop stuff into different AI platforms. If you have your data in one place, then you can leverage. You can really leverage AI. So the way I've thought about our investment in SaaS analytics was getting all of our data in one place, understanding our customers better, understanding our marketing metrics better. But then being able to lay your AI on top of that is, I think, the really exciting next level here.

37:13You brought up bringing in Costco, Amazon, and Shopify. The ability to have all sales channels with the same data is so important. If you're listening to this and you sell on Amazon, you know how painful that platform is. You have to wait a couple extra days to pull your reports. like the skews aren't the same as the rest of your skews like the titles are different so like to get actually like clean data to compare it's very manual using xeris analytics they matched all that up for us so like they cleaned all that data so i could actually look at what is the true margin profile of an amazon sale what's amazon return rate what's amazon customer frequency like all the type of data compare it to our.com and have like a comprehensive overview and now with their new ai tool i don't have to look at it i could just ask it it could just tell me cool questions.

37:57So doing that across our five Shopify stores as well. We have an EU Shopify store. So now I can compare EU ring customer cohorts versus Canadian ring customer cohorts versus Amazon ring customer cohorts. So now we're getting to different functions of my business across different channels, different categories, and actually looking at the margin, the repeat rate, and like, is it worth investing in these different things? So if your business starts to feel like a spider web and just like keeps going and going and going, it's just like this nonstop proliferation of different channels, maybe it's time to check something out like Sarah's Analytics.

38:30I remember, Sean, at the very beginning, this is a very typical Sean thing. Sean was like, what is this? Why do I need this, right? And I'm actually really happy that you've come to understand how important having a data warehouse is and what it does for managing your business because you were not like a true believer from the beginning. No, I was angry. when you told me I needed to pay for something new. But Jason was right. He convinced me. He got me on board. I'm using it. So a rare Jason W. So thank you, Jason. Very rare. I'm on Ceras Analytics. He's on Ceras Analytics. Proud sponsor of the Operators Podcast.

39:13So if you want a data warehouse and you want an AI-powered data warehouse, tell Ceras about the Ceras IQ feature and then you crave it. You're demanding you get access to it. So, all right, guys, talk to you later. Can you talk about the whole clock thing? Like, why did you say that a PE fund is coming in and they're out in five years? Like, where does that come from? Like, why do they have these timelines? Well, they have funds and they need to return, right? They're always doing, you know, their funds have a certain life. They have, and they want to always go raise their next fund because PE firms, they make money two ways.

39:52they make money on the management fees of their fund. And then they make money on the carry, which is the return on each of the investments. So they'll get, say, 2 and 20. 2 % of the portfolio each year, they'll get a management fee. And then they'll get 20 % of the return on the fund or on the investment. So they just, they have to report. Or, you know, they have to, that's how they realize their profit as a business. So they, in their, in the deal, in their fund documents, they have, they have life to their fund. And then in the deal terms, they're going to, they're going to negotiate, you know, basically an exit, like that they're basically can force an exit after a certain period of time.

40:42And I think it's usually five, around five years. Jason, just for people who don't know this, you're talking about the actual fund itself. So when a private equity firm raises a fund, let's say it's a billion dollar fund, they get that money from LPs, limited partners. That fund, whenever they sign the paperwork to form the fund, that that fund has a timeline on it. So it's not specifically your deal that you do with the PE firm. it's the fund itself, correct? Well, it's both. The fund has its own timeline. I forget whether it's 10 years or seven years. It may vary based on the fund. But when you go out and raise money from LPs, there's a timeframe for the fund.

41:31And so therefore, when they look at their investments, they basically need to provide for exit timing. unless it's like some family office that's not really a fund and they just invest in their own money because they can't. But most like traditional funds, both VC and PE, they have a life of the fund. And so in their deals that they do, in their investments that they do, they will negotiate a guaranteed exit process, an exit procedure at a period of time where they can basically force a sale. You know, we've seen that with one of our friends recently that went through a transaction. And, you know, it was like, I think it was a timing issue.

42:18Maybe it wasn't a timing issue, but either way, like at some point, they have the right to force a process to exit their investment. I got bit by this once. Sorry, Sean. I didn't realize that, Jason. Like years and years ago, I was in a deal where I was an investor. and the fund that was the sort of like the main check, this private equity fund, I didn't realize that like they were very late in their fund age that they were investing out of. So they actually like they're, and it's important for founders to listen to this, right? So where they are in their fund life cycle matters to you because this changes their incentives and how they do deals.

42:59Like if they're investing in your company and it's like year eight of their fund, okay? and they're still trying to get returns for their investors, how they behave with you is going to be different than if they were investing in year one. Yeah, there's a lot there. Actually, that's a really good point because their whole philosophy will change over time. And I'm not sure what the particulars may be, what happened to others, but they will view a certain investment and how they want it to go based on how well their fund is already done, for example. Yes. Or how much money is left in their fund.

43:34So all the things matter. to the psychology of the investor and how they're going to behave with you. Yeah. Sorry, Sean, you were going to say something. Well, you guys brought up family offices and I just kind of wanted to explain like why funds act this way. And you have to put yourself in the private equity shoes. You're selling a product to investors, right? You're selling a product to LPs and it's some sort of like, you know, it's basically like a treasury, right? You're like, hey, we're going to take your money and we're going to deploy it in this strategy and then we're going to give you, you know, our target return is X in 10 years or whatever.

44:09Right. So to the investor, it's kind of fungible. Like they don't really care what they're investing in. They just like, they, they, they are setting themselves up to have the money locked up for roughly 10 to 15 years or whatever, because there's a seven year deploy period. And then there's like a seven year harvest period. Right. And so you could get deployed in year two and harvested in year four, but like, it's, something like that where like it's it it is off the person who bought the coupon if they're waiting 15 years to get their money back right so they need to they need to actually return capital back right and that's why like you know it i i if you're in year six of a fund you still have money to deploy everyone gets very antsy because it's like i need to deploy this things that can i get my money back within three years right you have way shorter time horizon so yeah it's also why right now in the market, things are so dicey is because there's a lot of funds who've had no distributions.

45:05Like they've not returned any capital to investors and yet they're calling on for more capital later in the funds. Like capital calls is a whole other thing. We don't need to, we don't have to explain it, but you know, they're doing capital calls and these investors are like, I haven't seen any returns. It's, you know, six years in, seven years in, doesn't look like anything's going to happen. Like, why would I continue to put more money into this fund, even though I've committed to putting more money into the fund? So yeah, Yeah, these, knowing your fund, like if you're going to deal with a PE fund, knowing the fund mechanics, right?

45:35How they underwrite deals, who their LPs are, their timelines, all that stuff. The more information you can get on who you're dealing with and how their incentives work, it's going to be better for you. Yeah. And then it's the reason why family offices, you know, it's also called permanent capital. People who don't have to raise funds, right? Sovereign wealth funds or anything like that. If you're investing on your own checkbook, you could have a way different time horizon. Like L. Catterton, which is owned by the LVMH family, permanent capital, way different time horizon, way different goals of that fund.

46:10That fund is there to find, it's like the field teams that they can actually pull people into the LVMH portfolio when they're ready. It's like a scout program almost. So every fund's just like super different. You should understand that. Like why they have different time horizons. But everyone's totally right here that, you know, if you catch a late fund, they have to return something like two to four years and they're going to be more aggressive than somebody in fund one, year one. The North Beam just launched clicks and deterministic views, breakthrough attribution model that deterministically captures view-based performance of ad spend.

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48:14Yeah. So I think family office too is interesting, Sean, because I mean, I know that they play in consumer a bit. Um, I we've got a mutual friend who a lot of his cash comes from family office and I'm starting to actually, I want to say like in the last two months, I have heard of more. Um, cause family office has a whole other set of incentives, right? Like they might buy a company cause they want to own it and they want the cashflow for 20 or 30 years. Like they just might believe in, and they're there, they might be a sector investor, right? Like they just might own a ton of consumer goods companies or a ton of real estate or something else.

48:52Um, yeah, I was just going to say that, um, family offices are the most unique because it's, it's, it's individual people like whatever they want to do like maybe maybe they put together like a thesis maybe they it's really it's just whatever they think is cool it's think of people who are billionaires like they want to buy stuff like like it's very common like you know if you have a big exit like you actually end up getting pretty depressed because you miss being in the game it's family officer just a way that like they could they could jump on calls and tell you ideas and you kind of have to listen to them.

49:27But look, there's really great family offices out there that have a lot of structure to them. It's always like weird people that you've never heard of. Like I know with one, he was like, he's like the richest guy in Belgium. He's like, yeah, they have like$4 billion. He's like, yeah, we're invested in a bunch of stuff. And then there's like a bunch of weird countries have Southern wealth funds. Like Singapore has one and they're trying to buy a bunch of deals right now. The thing they bought that hack company, 57, Oh, really? All the hats, yeah. So they're owned by the Singapore Wealth Fund. Yeah, I think that's the thing to note about family offices is there's not a lot of patterns, right?

50:06Like private equity, there's a playbook that they all follow within a range. Jason, I'm sure you'd agree with that. Like they kind of all follow the same playbook. Family office, man, you have no idea what you're getting into. Like each one is different. I've met so many family offices and every single one is different. it. And those are just like way harder to, I mean, there's not as many of them. There are, there are stopping them. There's not as many of them. And they're just like, they're like the unicorn. They're great. You know, if you could find the right family, family office that believes in your business, they'll be with you through thick and thin.

50:39And Mike, they're just that quote permanent capital. That's awesome. But I, it's, I find that like a little bit of a pipe dream. I mean, a lot of these things are pipe dreams, right? But what I would like to go back to one of the things that we really didn't hit on, because we've been talking a lot about like the nuts and bolts of stuff. But I think a lot of people care about, you know, hey, who's going to buy my business? What business do people do funds? Like, are they interested in? Like, we talked about it at the very beginning where Sean was commenting a little bit about like the state of the market.

51:12But no, like PE, they have a herd mentality, right? Like Sean's talking about them investing in service businesses now. So, you know, they sort of find the sector that they like for whatever reason and they all kind of decide, oh, this is where we want to be. And then they gravitate toward that sector and it gets kind of weird, right? And like durables ever since the mid-pandemic, consumer durables have been really not, have been ice cold, ice cold with PE. I would say starting in like early 2022 and it has remained there. But we've seen a lot of really cool deals happen recently. Like Sean said, it's like a lot of consumables and packaged goods, etc.

52:00Because I think it's just really like easier for investors to underwrite that kind of deal where there's more like just more sales velocity and repeat purchase. And there's ways that they can do that versus, you know, versus durables or something that's, it doesn't have, it's not really a big LTV play that, you know, it's really an AOV play. So, you know, like I think it's just, it's been, it's very binary right now. If you're like consumable or CPG, like congratulations, because like beauty and drinks and like there's a lot of, you know, a lot of like our friends, Dr. Squatch, you know, did a deal and all these things.

52:49So those areas remain hot. But peak, and we talk about all the dry powder. I've been hearing about dry powder for like 10 years. I've been hearing about the dry powder for 10 years. It doesn't matter. They're not going to do investments that they just can't get behind. And I don't know what happens to all the dry powder, to be honest with you. It just seems like people like the LPs, which are like big pension funds, like CalPERS and TIA CREF and people like that. They just need to put their money somewhere, you know. And so they kind of put up with this stuff. But if you look at, you know, there's a lot.

53:31There's this little area called AI right now. Yeah. Where like, you know, funds can deploy a lot of capital into that sector. So it's just like rotating sector-wise. But fundamentally, there typically will be a deal for a good business out there. It may not be at the valuation that you want. And so there's usually a misalignment in that and in valuation expectations and what people want to pay. I'm sure there's a deal for Ridge out there at a valuation. but maybe not at the valuation that Ridge wants. And so those are just a few things to think about. Everyone wants to know, like, everyone thinks, also like a lot of business owners will look at the most recent deal and look at that comp and then figure out a way to convince themselves that like they're the same.

54:27You know what? You're not. Yeah. Okay, so what I wanted to bring up is that the ultimate buyer of all assets is the public market. And I know what that means is that everything has to IPO or be bought by a company that's traded publicly, right? And I know that we're in a weird period where Stripe and SpaceX and these companies can be worth$100 billion and not go public. That is actually an exception and not the rule, right? So private equity is not the ultimate buyer of your business, right? Private equity is going to buy your business. What they hope to do is sell you or IPO you, right? Yeti was bought by private equity and IPO'd.

55:06Dr. Squatch was owned by private equity, sold to Unilever. What they're looking for as a private equity group is that there's a path for somebody else to give them more money for this asset, right? They're wholesalers. Yeah. They are not in the business of long-term holding and cash flowing this business. They will, in weird circumstances, they'll be like, oh, we just want to hold that thing forever. It's a cash cow, right? I heard about a company that sells school supplies, like science equipment to schools, and that it does like$50 million in revenue, $25 million in EBITDA, and they just cash that f***ing piss this in.

55:38They're like, we're going to have that thing for 50 years because that is like the secret sauce to that fund is that like they don't have to do anything else. They could just keep owning it. They'll probably sell it to themselves. So the actual general partners will buy it from the LPs just to have this like constant ever-owned capital. Super rare. They want to sell your thing to somebody else. And if there isn't a good strategic or the strategics in that space are dying, Like Jason's too big to be sold to a strategic. Costco would have to buy him, right? So if he gets bought for private equity, they need to IPO that business.

56:10It's the only, it's the only path to get a return. Yeah, it's a certain scale. And they, you know, they're, that's a big point. That's a great point that Sean raises that there's, they're looking at their exit coming in, right? Like that's really important to them. That's a big criteria that they're evaluating in doing a transaction. And so they're like, okay, who's going to buy? Who are the natural strategics to buy this? And the thing that they don't tell you is that 50 % of exits are PE to PE, or 50 % of deals are PE. So they'll try to ding you or find a way. They'll use it as an excuse to not invest.

56:48Say, well, there's no real natural strategic buyer. But there's a ton of PE to PE trading out there. But ultimately, you get to a certain size where, yeah, there's no strategic buyer out there for you. So the PE, but that's kind of rare air too. We're sitting up in the point whatever percent of deals right now. Matt, you had cool things to say. I was going to say my last deal, my last company, when I sold it, we sold to private equity as part of a roll up. And then three years later, they just sold to an even bigger private equity group doing an even bigger roll up. That's very common. yeah and is that company still owned by private equity hasn't ipo'd yet still today yeah yeah that deal happened in mid 2021 the second exit was in mid 2021 and they still own it yeah there's i don't know i'm out now so i have no idea what the the plan is like that was my actual like final out um yeah 2021 has made it very very weird for deal math is that like you know we're getting on four we're gonna be five it's gonna be six years like those assets either need to be written down or they need to sell something needs to happen yeah yeah i think there's a i mean i think that's a separate thing i think there's a ton of venture dollars still sort of out there and marked at a value in consumer that i just think everybody's looking at each other across tables saying like i don't want to do it do you want to do it and it's just a game of a weird game of chicken we're like nobody actually wants to do that sean um just just because of the incentives of the actual GPs and the people that work at these funds, like it's not good for them if they have to go and like mark down their, their portfolio of consumer deals by half, right.

58:34Or, or SAS or whatever else, like it was all just a really stupid time for value. But when the minute they do that, it makes their life so much more difficult, right? Like if, and this is why it comes, like, I think understanding the people, the funds or the, the, like the firms that you're dealing with is so important. because that's going to govern their behavior with you. And I think like Jason brought up so far as my favorite point, which is like, you still have, when you do a deal, minority or majority with private equity, you are working with them now, right? And they're going to add structure to that deal where you absolutely are going to have to work with them.

59:10Like this isn't some like right off into the sunset moment. It's unlikely that you're doing that kind of deal. Like, let's be clear, like you're, you know, consumer operator. they're not running your Facebook ads for you right so I've never watched Entourage so I'm watching it for the first time now such a good show yeah yeah so good so I've never seen it but you know I'm season one right now and you know there's a line that it's like you should sign your next movie before your movie comes out in case it bombs right and that's kind of like how private equity funds work it's like you want to raise your next fund as soon as possible And so if you had a fund in 2021, it's really like, oh, this is all overvalued.

59:55I need to find a fund. I have to raise a new fund before I mark this stuff down. So they were trying to close funds in 2022, 2023. Hopefully, they closed in 2024 so that now they can actually write all that previous fund down because they're set up for success now. They already have the money. Most brands are leaving money on the table with SMS, not us at Ridge. SMS is our number one revenue driver and PostScript is the reason why. Here's the deal. SMS is an email. If you're true to like email, you're doing it wrong. PostScript gets it. They help brands like ours turn SMS into a high margin, high ROI channel.

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1:02:56They're not going to leave your customers out to dry. You're going to get more subscribers. They're going to instantly convert them. with AI. They have auto optimization for profit. They're going to keep you compliant. I think SMS is still the frontier of messaging to customers and PostScript's the best name in it. Ridge did$40 million in SMS last year. This year will probably double again, $100 million in SMS probably because of PostScript. Thank you for sponsoring this podcast. Thank you guys. Talk to you later. But anyway, this has been a lot of nerding out. Let's get to the tips section. Matt, You got any tips?

1:03:32It's going to take, yeah, here's a good one. It's going to take longer than you think it will. So when you start the process, right, however long you think it's going to take you to find a buyer and however long you think it's going to go, it's going to take from the point where you sign a term sheet to when a deal closes, it is going to take longer. It is going to be more painful than you imagine. And the deal is likely to retrade at the last minute. All true. All true? Did I get that right, Jason? All three of those things are probably true. The issue here is, unfortunately, we're not the bearers of good news here.

1:04:11These things are really, really hard. I always said that when you have an agreement on price or a term sheet or whatever, there's still at least 50 % chance that the deal dies. So don't spend the money. And I would say the best thing to do is sort of keep it, keep, try to create some kind of competition or, like I have a whole bunch of like these things in the, in the panzerisms, right? Time kills all deals, like build a business you want to own forever. Like there's a reason why I've been saying these things like for my entire career, haven't seen all this. So like the, the advice is like build a, we've given all kinds of these, like build a really strong business, you know, And then use professionals.

1:04:52Don't be penny wise and pound foolish. And take the money. Like don't just over negotiate for the last penny. Because I've seen the M &A landscape is riddled with people that turned down a deal. And that was actually a good deal. And at the time, and they thought they could get more. And not only did they never get more, but they actually never did a deal. So that kind of stuff happens way more than you think. So you got to be incredibly realistic about this process. It's really, really hard. It's really, really time consuming. It's a major time suck. And the other thing I'll say is private equity firms and VC firms, institutional investors, they all love you until they don't.

1:05:47So I used to get the emails all the time. Oh, I still get these ridiculous people saying they want to buy Hexclad. I'm like, dude, did you even Google us? Do you have 2 billion? You don't have 2 billion. What are you talking about? There's a bunch of junior people that are paid to reach out to you. That's their job. They're just sending out emails. and so they all love you. They all love you until they tell. Just really try not to waste your time. Okay, hang on. That's a really good tip. This industry has a lot of people that are employed to waste your time because that's their job. Their job is simply to get you on the phone and get to know you and talk to you even though it's like, I mean, this is, I think Jason said another thing that's really important here.

1:06:41The chances of you getting to a successful exit is so low. It is such rare error. And this is for any deal size. Okay, if you're listening to this right now and you have dreams of selling your company, like you are playing a game of lightning strikes. This does not happen often. Like in the math of like how many businesses get started every year to how many ultimately get bought, that is a crazy low number. You're probably better off just building something you want to own. I think that's really good advice. This is the thing that drives me crazy, Matt, is like people literally, they start a company and the first thing they're thinking about is like, how are we going to sell it?

1:07:17It's like, no, start a company that you can make money. Like if you're not thinking about how do I make money right away, especially in consumer. I mean, I used to see this in tech all the time because I'm a tech banker and it is, again, there's like a million companies that just like never got a deal done, millions. But this whole like, oh, I'm going to start a brand and we're going to, you know, we all meet people like this. Yeah. Right. And I'm sorry because I might be, you know, there are probably a lot of people that listen to the pod and who are great people, but they're thinking the wrong way.

1:07:53Like they're thinking about it this way. And it's just like super rare that this is going to work. There's a, I also, I got another one. If you guys are cool with it. I think in consumer, this is actually an important one. The age of your brand matters a lot in the value of your brand. Right. So if you think you're going to build a company and sell it in two or three years and get maximum value, you just took really bad odds and made them two orders of magnitude worse. I think there's a magic age in consumer. You need to be over five years old. If you're not over five, and actually ideally closer to 10, because that means that you're sort of enduring and durable and you're actually more attractive.

1:08:35So I think this idea of rush to exit, Jason, is really important to call out. So even if you have dreams of selling, you shouldn't be coming into this game trying to get in and get out in sub five years. That's it's just such bad math. Like, go get a better job. It's better math. Yeah. Yeah. And I want to give it an advanced tip, though. I think we skipped over that we should have talked about. We should talk about like the economics of leverage buyout and how you can recreate that with a debt recap. That's a great one. We talked about private equity buying your business, right? Private equity raises a fund.

1:09:18A lot of times what they do is they deploy a small percentage of that fund into your business and then they put debt on your business to buy the rest of it. So how does this work in practice? I have a$100 bill. You're going to buy the$100 bill for$110. You only have$20. You're going to give me$20. and then against the$100 bill, you're going to borrow$90, okay? You've now created$110 of purchasing power to buy my$100 asset with only$20 down payment, right? And the idea is that the$100 can be put to work to pay back the$90 over time. I'm sick, so hopefully what I just said makes sense. But - Well, yeah, it does make sense.

1:10:03It's like when private equity, the reason where private equity came from was the LBO world. Like this is really where it started in like the 80s. Read Barbarians at the Gate. Great book. If you want to learn about the history of this, it's the RGR Nabisco deal and KKR. But it gives you like a lot of the history of LBOs and private equity. But essentially, they're able to borrow money based on your cash flow and pay you with it. So you can, if you have a good enough business with enough cash flow, you could essentially do that yourself in what is often referred to as a dividend recap or something like that.

1:10:46And we've done that. So basically, you can find a bank if you have a stable enough cash flow stream and if you're big enough to lend you a multiple of your EBITDA. and you can take some or all of that out at a low multiple. A private equity firm, in a really hot market, private equity firms will be able to get like six or seven times leverage on a business. And so they're putting up very little cash. Okay, hold on. So let's explain that. You want to buy a$60 million business. You can put up$10 million and then you can get the remaining amount of money from the bank, right? And that's how many turns you can get, how many turns of anybody you can get on this business.

1:11:34So when Jason says six to seven times levered, that's incredibly aggressive, right? Like the modern multiple is two or three. Yeah. Well, I would say for PE, in a PE deal, I would say the multiple is more like three to four. I would say like super, super conservative leverage is like 2x.

1:12:02banks don't like doing that for founder-owned companies, by the way. You have to have a really strong business to do it. But if you do have a really strong business, you can essentially be your own PE firm and you can keep doing it. Every couple of years you do it and you take money out as long as you have a really good track record of stable cash flow and making your payments. So you could do like we did 2X. We did a 2X one last year, two times EBITDA. I think it's pretty... People know about this. We've talked about it before. And it's no problem. I wouldn't do more than that because it's just like we don't need it and it's a headache.

1:12:51But I think a modest level of leverage is actually really cheap money too, right? At rates today in the, call it like 7 % range or even 8 % range. Interest is tax deductible. So if you're profitable, your effective interest rate is like half that. So you could borrow that and go invest that if you're a smart investor and probably make an even better return. So it's actually good. It's good financing. Right. And going back to the fundamentals of this, if you're selling your business, it's because you value cash today versus cash in the future, because you're not selling your business unless there's cash flow tied to it.

1:13:32That's the reality. If like, if you don't have actual two to three years of profitability in EBITDA, right, unless you're the extreme outlier growing 300%, like unless you're profitable right now, you're not going to sell your business anyway. So if you're selling your business in this market, it's because you value cash today versus cash in the future. That's the math private equity is counting on. Is that like you want the money today, they have the money today. Now, if you believe in the long-term cash flow of your business, what you can do is you can get good relationships with a bank and you can do a dividend recap where you're doing a lever's buyout of yourself, basically.

1:14:10Right? So they're going to give you, your business,$50 million in loans. You're going to pay out$40 million in loans. You're going to keep$10 million on the business. You're going to pay that back over five to seven years. Typically, you just pay the interest and then there's a balloon payment due at the end. And then they just have you refinance and you do it again. So instead of taking out 50, in five years, you take out 85, right? And that's how the bank's really happy doing that because they love the free money, right? They're in the business of lending out money. And now you're hooked with them until you go out and sell this thing.

1:14:42So leverage buyouts are a tried and true tactic that they're going to do to your business anyway. You can learn about the power of leverage and you can do it to yourself. That's just like the advanced tip I want to tell you guys about. That's a great one. That's a really good one. Can we talk about bankers real quick? Because I think this is another thing that I didn't realize until I started working with bankers. And I've worked with a few now. Bankers, Jason, let me start with this. Jason, what is the job of a banker? So let's say a company is fortunate enough to be big enough that they can get an actual good bank to represent them for a minority, whatever the deal is.

1:15:22How should a founder look at that bank, broker, whatever, as what are they going to do for that founder, that operator? So the banker is going to prep the company, is going to create marketing materials about the company, and is going to reach out to all of the potential buyers slash investors and manage the whole process. They'll do like the marketing materials will give a bunch of information, you know, sign NDAs to send marketing materials and start with a teaser and then you'll sign an NDA and then they'll provide a full, like a book, an information memorandum. And that will tell them a lot about the company and they'll solicit indications of interest.

1:16:06And so they'll, they handle, they do a ton of the heavy lifting and they create competition in the process. And then they also like, there is a ton of work in getting a deal done. And because the bankers only get paid really, if they close the deal, they're incredibly motivated to help to get everything done. there's just so much work, right? So you'll have a banker and a lawyer, but the banker is the marketing arm and the lawyer is the execution arm. But actually the banker is marketing execution and execution and the lawyer is really execution and risk analysis, right? So it's really like all that upfront work of prepping you, of doing a model, doing a book, and then reaching out to all the parties who you guys all agree are worth talking to about a transaction and then do a bidding process, negotiating with the bank, with the bidders.

1:17:02Hopefully you get multiple bidders. Doesn't always happen, but it's great when you can get multiple bidders and play them off each other. Bankers know how to do that. Bankers are pretty shameless. And you need that like those shameless people to sit there and talk a good game about everything to create interest and maintain leverage in the process. Yeah. And I think the thing with bankers, at least in my experience is they do an immense amount of work when it comes to like the process and the outreach and the competition piece. You're still as an operator, you still have to sort of be deal ready.

1:17:42Right. So like, they're not going to come in and build out your data room for you. Like you are still going to, they're going to tell you what you need. Right. But like your team and you are still going to have to do all this work to make your company like truly saleable because they don't, they don't know your business that well. What they will, what Jason's talking about with model is they're going to take what you have and they're going to go and build this like future looking really beautiful model of like here, what here, Mr. Buyer, once you own this company, this is what it's going to do for the next, whatever, five years or however long.

1:18:14Am I correct in saying that, Jason? Yeah, I think that's fair. You have to definitely be a very active participant in the upfront part of the process. Once the bankers take the business to market, there's a quiet period where they're doing all their work and they're reporting to you how that process is going. Then eventually you'll have to meet with interested parties. And that It also takes up a lot of time. So, but yeah, you have to be ready. I mean, the, but the bankers, when they, when they do the go to market prep, like building the model and writing the marketing materials, um, they definitely like, they do a lot of heavy lifting there.

1:18:52Um, and they leverage what you have, but actually they will, they will give you work, right? Cause you'll, you'll uncover during that process, like all this that you haven't done. Um, and it might even be like, Hey, we got to put this on hold cause you're just not prepared. Right. So there is a ton of work all throughout the process. The bankers will handle a lot of... Once you decide, hey, we have a deal, there is a ton of due diligence. And that's one area in which the bankers are really helpful in managing that due diligence process. It is a lot of work. And you can be getting diligence by 5, 10 different potential partners.

1:19:31So that diligence process is a... I mean, I remember when I was a banker, like, like we just got deals closed because we refused to quit and we just kept pushing through due diligence. But like, if we were lazy, there would have been a reason why like many of our deals just never got done. But we were super motivated because if we didn't close the deal, we didn't get a fee. Bankers are like the elite level salespeople. They're like the highest level of being a salesperson. you know like you they start off with like selling phone kiosks salesman and then it's like you know you're doing sass and then like you know bankers are like top of the game right um don't don't skip cut code dude like you got to sell knives door-to-door vacuums first and then then you get to go be a banker man like they're yeah like kudos to i appreciate you saying that sean having spent 12 years in doing that but like kudos to bankers in the sense that um they are the elite salespeople, but they also have to be really skilled at other things.

1:20:29And when I became a banker, I was really good at the transactional side of things, but I wasn't, I didn't really, I underestimated how much sales and marketing skill you needed to have to be a really good banker, both in creating the materials and just bringing in business. These bankers, not only are trying to sell your company for you, but they're trying to get you as a customer, trying to get you as a client. It's hard. And do you know why that job is so difficult? It's because if you sell a business, you could make$4 million in one year, right? Like it is one of the very few jobs. It is like brain surgeon.

1:21:04It is partner at a law firm and it is banker, right? Like it's normal doctors make like 300 grand. So like, if you're a good banker, you know, I was reading the top M &A lawyers in New York were making like$40 million a year, right? If you're like the best of the best, you can make$10 million on one deal. Because if you're doing the Figma Adobe merger, I mean, that got broken up, right? But if that would have went through, the commission checks on that are a billion dollars going around, right? So it's like a billion dollars. Now, four firms have to split it, and there's a bunch of people in those firms.

1:21:40But it gets insane very, very fast. So yeah, it's great work if you can hack it, but it's not easy. I mean, it is, there's a reason why bankers get divorced, right? It's like, it is 80 hour weeks. It is planes. It is meeting people in person, shaking hands, trying to get deals done. It was an absolutely punishing job. I must say, I was really interested in doing it when I got, when I, when I transitioned into banking from the operating side. And I, the, the amount that I learned was incredible. And the skillset that I developed was incredible. But I, I don't advise, I don't advise doing that job, man.

1:22:15And it's a really, because you also have to have that characteristic of being sort of shameless too. You know, I think Jason too, like you being a banker, uh, as hard as that job is, like, it's the reason you're, you're in the role you're in now and doing some of the deals and some of the things you have. Like I have done so few deals in my life and I've even like, even raising money, like we've only done it a few times. The amount of minutia that I'm aware of now in how a deal gets done. I just like, I can't imagine how, if you've done a hundred deals, how many little weird terms things you've seen, like from share sales to asset sales, to like employment agreements and non-competes and all these stupid little things that come with getting a deal done.

1:23:01And there's, I mean, I don't know if anybody, it'd be fun if you can, if you listen to this show, try and get yourself, get your hands on a purchase agreement, a share purchase agreement from a private equity deal and just look at all the that's in there or ask maybe ai can spit one out of like the typical it's these things are not like two-page documents it's a hundred page document yeah there's a lot like we're giving you the high level structure things right now but there are literally dozens and dozens of little minutiae things that are going to be important to you they will impact your life and your happiness post deal.

1:23:40Yeah. So I was talking to a fund yesterday, really great fund, top tier, crushing it. And they're interested in a minority deal in Ridge. And I've said publicly, we're years away from doing something. I mean, I think we're years and years, but talk to the banker, young guy, probably my age, maybe even younger, great shape, balding. And it's like, that is what happens if you're a banker. Just it sucks the life out of you, right? Like it just, it'll take your hair. It'll take your sleep. It'll take your life. But there's big upside. I mean, if you're good, like you said, really big upset if you're good.

1:24:21I'm actually so much better at being a banker than I am doing this job. It's crazy. Like I've forgotten more about the deal game. I love, I love doing deals. It's a, but it's a hard job. Can I ask you like a tactical question? Because I think I saw this come up recently. Audited versus review financials, Jason. When do you advise a brand, a company to start doing audits? I think if you're over 20 million in revenue, if you're 20 plus million in revenue, you should just do audited financials. It's not like, it's really not that much more money. If you're making that kind of money, it's like a drop in the bucket to pay the extra.

1:24:57I mean, I think our first audit cost us like 60K. when we were 50. Yeah, dude. My reviews are 80 grand now. My quote for an audit was like 250 ,000. So I don't know where. That seems high. That's what I'm getting quoted. So I've just done review financials, but Jason gives me shit about it all the time. He should. You can't sell a company with review financials. Are you talking to like a big four firm? Are you talking to big? Look, we did our first. All right, I'm talking about five years ago. we did five years of audited financials in 2020 we did our first audit with they're a good firm they do a lot of retail they've got offices in LA and other places I cannot you gotta be able to do an audit for a hundred grand you gotta be able to do an audit for a hundred grand make the intro dude but we did this is all over reviewed financials and they just got bought by a multi-billion dollar deal they just got bought they're rolled up with somebody.

1:26:00But if you listen to this, dude, a hundred grand, that's the going price for Audit Financials. No, block them out too. Or actually just not, that's not really a referral. All right, boys. Fun chatting as always. All right. Thanks for making it all the way to the end of this episode. Wherever you are in the world, it is awesome to have you here. If you do not already subscribe to this show, that is my one ask is please go to whatever platform you are watching or listening to this on. It could be YouTube, it could be Spotify, Apple, I don't care. Just go hit the subscribe button. Please pump our egos up.

1:26:33It helps. And before we go, one more thank you to the sponsors, Fulfill, Postscript, Northbeam, Ceres, and Rich Panel. Awesome guys running these companies. We all use them. These are our vendors. That's the only reason they're sponsors of the show. So thanks again to those people.