How to Sell Your Company: A Multi-Time CFO's Full Playbook | Rick Smith

0:00I'm going to create something here called Smitty's Law, but everything that can go wrong or can be uncovered in a sale process will go wrong and will be uncovered. If there are areas where you as a seller say to yourself, geez, I hope the buyer doesn't poke too much at that. They're going to poke at that. It'll happen. The income statement is the siding on the side of the house looks pretty, right? It looks amazing. But then you get underneath it and you see wood framing covered with termites and a foundation that's cracked. The poor balance sheet, it's super important, but CEOs just don't pay enough attention to it.

0:31Buyers have an unending appetite for the details of your business. And really, there is no cost to them to ask for more and more stuff. But for the seller, there's both an explicit cost of your time and there's the opportunity cost. You could be doing something else to help drive the business forward. The seller has to let their staff know what is going on, usually. And if leadership doesn't properly manage the communications to the staff, it can really destabilize the company. And the last thing you want are for good people to flee en masse during a sale process, because that's going to look really bad to a buyer.

1:06Is this thing on? Yesterday's price is not today's price.

1:20welcome back to run the numbers the show where i interview really smart finance leaders including multi-time cfo rick smith not rick smith's the dunking dutchman of the pacers of the late 1990s but rick really smart guy he runs bonfire advisory right now a fractional cfo service and he's also an author. Yes, I have authors on the show. I called my mom today. I said, Mom, I'm interviewing authors. Rick wrote an amazing book. It's called Six Months to the Sale. I read through it all. And it basically teaches you everything you need to know about selling a company. Me and Rick talk about maximizing value before the sale, what multiples different businesses are purchased upon, whether it's revenue or profits.

2:01We talk about the awkward dance that the CEO and CFO have to do when communicating to the company that they're being sold. And we talk about all the different alligators you will find in a cap table, in the diligence room. This is the Deep Cuts, folks. If you want to learn how to sell a company, you'll want to listen to this podcast. Stay tuned for me and my friend Rick. Rick, welcome back to the Run the Numbers show. Thank you. Glad to be back. I feel like I'm talking to a world famous author who has created a new category of finance fiction. I might sell tens, perhaps dozens of books, but yes, I'm trying to create a new category of finance fiction, educational business stories told through fiction novels.

2:40And this is example one, the new book I'm putting out six months to the sale. Why choose to teach M &A through a fiction instead of writing another business book? The first reason, as the author of a business book, a previous book I wrote, Demystifying the Role of the CFO in venture and growth stage companies. Most business books are boring and they are. And I know plenty of people who start business books, but the percentage of people who actually finish reading a business book has got to be extremely low. And so I wanted to write something that is compelling to read from cover to cover. When I wrote my previous book, I worked really hard to make it as fun of a read as possible.

3:18And that was my first attempt at creating a readable business book. Six months to the sale is attempt number two to make it even more approachable. And honestly, you cannot make a business book more approachable than this book. Even though I'm a longtime CFO, at heart, I'm a fiction writer. And I've written three previous novels, all available on Amazon, Sal in the Suburbs, Stuck. and then I just put out a book that's a little more friendly that my kids can read called The Monster in the Room, which is not a kid's novel at all. Adults and kids can read it, but I love to write fiction. And then finally, the last reason was when I was in business school, we read The Goal, which I think a lot of your listeners probably have read.

3:56I had never read anything like it. I mean, it's a fiction novel about making operational improvements in a factory. And hearing it described like that, people probably would think, oh, it's really boring, but no, it's not. It's really well done. It was a great read cover to cover and you learn something, which is great. And so my goal was to write an engaging novel that not only makes you feel like you're along for the ride in the sale of a company, but you learn a lot about the actual process, what you need to do to prep for the process, and what might go wrong in the process. You mentioned you're a multi-time CFO.

4:28So how much of this story is inspired by some of the real transactions that you've lived through? I guess conceptually, probably like 80 % is inspired by real events. I mean, really what I tried to capture was just the feeling of being a part of a sale. So first of all, I tried to capture the challenges in the CEO and CFO relationships that tend to surface during these processes. I mean, there's a lot of stress, there's a lot of money, there's a lot of things that can go wrong. That tight relationship between a CFO and a CEO can become a bit frayed during a deal process. Two is I wanted to capture that a lot of times when you go into a sale process, the VCs and the PEs and the board members can be helpful in supporting the process.

5:07But there are times when it feels like they think they're being helpful, but maybe they're not being helpful. For the seller, and I'm going to create something here called Smitty's Law, but everything that can go wrong or can be uncovered in a sale process will go wrong and will be uncovered. So it's kind of my take on Murphy's Law. If there are areas where you as a seller say to yourself, geez, I hope the buyer doesn't poke too much at that, they're going to poke at that. It'll happen. The other thing which I think comes out pretty well in the book is that, look, investment bankers have a job to do, and hopefully they'll do it well.

5:39As a participant in the process, you get to observe aspects of the world of investment banking that are a bit comical. One thing that I just see over and over again in every deal, which is definitely very real, is that the sale funnel starts out really wide with a lot of interested buyers and everybody gets super overconfident. And then that funnel narrows fast and everybody starts to panic. And that happens in every single deal. One thing I really did want to capture, and I think I captured it very well, is how the staff perceives of these processes. Because early on in a sale process, a lot of times the staff is kept in the dark.

6:14But at some point, the seller has to let their staff know what is going on, usually. Not always, but usually. Because word of the sale at some point will get out to the staff. And if leadership doesn't properly manage the communications to the staff, it can really destabilize the company. And the last thing you want are for good people to flee en masse during a sale process, because that's going to look really bad to a buyer. The book, I think, calls out well the heavy workload that everyone involved in the process will be under. Because for about six months, they're doing their regular job day to day as best as they can.

6:48And then they're also taking on this whole second other job. And so the amount of the volume of work thrown at a lot of the executives in these processes is just massive. And then finally, the last thing I really wanted to convey is that you just can't show up in the process. You have to start well in advance, clean things up as best as possible, and you have to do what you need to do to drive the process instead of letting the process drive you. Rick, reflecting on what you just went through, I remember this part in the book where the executive team and CEO have to basically bring the employees under the tent that they're going to sell, and the CEO completely botches the announcement.

7:22It doesn't know that they botched it. That felt real. And the CEO thinks they did a great job and it just caused even more confusion within the company. No matter what you say, when you go to tell the staff, hey, we're selling the company, you can try to spin it any way you want. But there's going to be an element of fear among the staff because a lot of folks are immediately going to go to, oh, gosh, am I going to lose my job tomorrow? Or are we going to be bought by somebody and I'm going to hate working there? And I hate to say it, but there could be a lot of frustration in terms of, well, geez, that CEO, that founder is going to go make a ton of money.

7:52and there's nothing in it for me. And so just this element of uncertainty that has just been dumped on staff cannot be understated. And I think a lot of founders and selling CEOs don't think about that or just forget it. And they think they can wordsmith their way through this process and submit it to be a super positive thing. The people listening in the audience of staff are probably gonna be skeptical about what they're hearing and it could again destabilize the company really fast. I think the most honest thing that echoed throughout the book is people are thinking about the company, but they're also immediately thinking about what a transaction means for them.

8:26I remember in the first chapter, the CFO, Ezra, figures out that they're going to be selling and running a process. And he quickly does the math in his head. Oh, well, if this sells for 100 million, I have 1%. I make a million bucks pretty quickly on this. The CRO does the same thing. And that is just so honest in terms of how people think. But you wouldn't find that in an academic textbook. Everybody can try to play it cool. But I know that when I'm telling other executives, hey, we're selling the company. I can see everything's getting calculated in their heads and they're trying to figure out, what does this mean for me?

8:57Of course they do. Because especially with these early stage companies where stock options or stock appreciation rights are handed out to all the executives and often a lot of the staff, if not all the staff, everybody at some point is going to ask that basic primal question. Hey, great for the company, great for the seller, great for the founder. Hey, what's in it for me? Of course they are. Everybody will. I really like how you also weaved in personal stories of the characters and how it impacted how they thought about the deal. So there's one executive, the CRO, he's going through a divorce at the time.

9:26So he's trying to figure out what does this mean for my personal life situation? And then there's the CFO who promised his wife that he's going to go on vacation and they're not going to miss that. Can you just speak to how personal situations unexpectedly affect transactions? I've been a part of a lot of deals and I have not had somebody in the midst of a divorce. but it's a very real possibility. Of course it is. And so what I have had is I have known C-level people are going through a divorce and they're sitting on private company stock options, and that's a challenge. The spouse they're splitting up from is asking a lot of questions about, well, geez, what are those going to be worth?

10:02And you know it because you've sat in the seat. They could be worth zero. They could be worth 10 million. I have no idea. So I think those are really tricky, very real situations, but I haven't had to deal with that that much. The vacation thing, though, that I brought up in the book is very, very, very real for me. I've had many deals ruin my own family vacations, and I'll have an unhappy spouse kind of staring at me about the whole issue. And the hard part is, is you can't be a CFO going through a deal and just disappear for a week or two. And so if I know a deal might be coming, I'll do my best to try to plan a vacation around those windows.

10:37But deals can take like a long time to get done and the times can really slip. And it's not realistic for me to look at my spouse and say, well, geez, we're going to go nine months without a vacation or something like that. So I try as best as I can to plan it around it. But I've had a couple of vacations truly ruined by deals, which is unfortunate. Oh, it happened to me when I was working at a company that we sold. We thought we were going to close around Thanksgiving and it stretched until late January. And I had a safari with my family and I couldn't say no because my mom had been planning it for legitimately two years.

11:08So I'd take a Starlink with me to the middle of the jungle and I'm on these legal calls while they're like waiting for me by the pool. And so that part of the story at home. Yeah, no, I've had that. I've been dealing with shoddy Wi-Fi in the Caribbean in a hotel room while my family's at the beach or something. It's very tricky, but you've got to be present as a CFO. You just can't disappear and you can't plan these things. And a funny thing hearing you say that is it's very hard to get a deal done between Thanksgiving and year end because of the holidays, because everybody's trying to get deals done.

11:39A lot of times there might be a tax implication if it slips into the following year and you don't know what capital gains taxes are going to look like next year. So everybody's trying to get deals done by year end. And yeah, if you're not really far along by Thanksgiving, it's probably a January or February close and Christmas is probably going to be ruined for a lot of folks. Remember when pricing was simple? One product, one subscription, one invoice every month. Those days are over. The AI economy is changing how everything gets bought and sold. We're seeing usage-based pricing, hybrid contracts, and something called a credit.

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14:02And one of the most interesting ideas that you had in the book is that sometimes it's actually worse to be a little bit profitable? Why? Well, walk me through when buyers value companies on ARR versus EBITDA. This has been a really interesting learning for me. And again, I mostly work with venture backed like software companies and high growth companies. So this isn't always going to be the case. If you're selling a business that's more of like a cash flow driven cash cow kind of business, like a distributor or a maintenance company or something like that, buyers are absolutely going to gravitate towards an even a multiple.

14:36But the world I live in, which is more high growth software and services companies in those segments, the number one valuation tool people are using these days is an ARR multiple. And they look at similar companies in recent periods and what kind of ARR multiple those sold for, and then they'll apply it to your company. Gross margin percents can also help drive valuation because everybody wants to buy a high gross margin company. If it's a strategic buyer, not a PE firm that is buying you, they're probably not planning to keep a whole lot of your OPEX. And so that's where they're going to get a lot of synergies.

15:10And that's why they're going to focus a lot more on your ARR and they're going to focus on the quality of your sales pipeline because that'll drive future ARR. They're going to focus on your gross margins. Now, a PE buyer might put debt on your books, so they're going to lean a little bit more on trying to project out EBITDA, And then they're not going to get a lot of synergies on the OPEX side because they don't have anything to synergize, really. And so they're going to focus a little bit more on EBITDA and cash flow to figure out what kind of levels of debt the company can support. So stepping back, many buyers would absolutely love to triangulate an appropriate valuation based not just on ARR, but also on EBITDA.

15:47But let's say you're a growing early stage company that just flipped to being EBITDA positive. As a seller, the last thing you want to have done is to have just flipped to being EBITDA positive or just having no EBITDA because that might indicate a lower valuation multiple. So when you go to sell, either have negative EBITDA and be able to provide a grounded viewpoint on what you believe the ultimate max EBITDA percent might be or have tons of EBITDA, but don't be in the middle. That won't help you. And if anything, it'll set a price floor for the buyer. And then the seller is going to have to argue up from that floor.

16:24And this is the game inside the game. And it reminds me of this quote from Ross Hanneman in the TV show Silicon Valley that was on HBO. And he's saying to the CEO, revenue, you don't want revenue. You want to be pre-revenue because once you have revenue, there are expectations. I don't agree with that part. Like you want to have revenue, but the same point holds. I think it's the same thread that if you have profitability, it's like, great, you're profitable. but now we're going to also measure you on that profitability. So in some ways, the story of where you're going is better than any reality you could put up in the moment.

16:53I hadn't really thought of it. And then there was a deal I was a part of, I think a board member mentioned that. And I put a lot of thought to that. And I was like, oh, I totally get it. Because if your profits are nascent, you're sitting there with like whatever, a 3%, even a margin or 5 % even a margin. But yeah, but you ultimately could get to a 30 % or 40 % based on the projections you've done. That 3 % to 5 % is just going to create angst among the buyer. They're going to look at it and say, well, geez, that's really low. That's not great. I think it's just going to be a heavier lift. So that's where either have a ton or have it be negative, but have a credible story as to what you can get to.

17:28But I wouldn't go in with a low EBIT if I could avoid it. It does have to be credible though. It can't just be this work of picture. And if you're a CFO, you should be able to story tell that all day long in terms of, look, here's what's going on and average contract value is what our gross margin is by the contracts. And most importantly, here's the staff we're going to need to add or the technology expense we're going to need to spend to get the, you should be able to lay out the forecast and have them stress test it. And they will stress test it. They'll go through it line by line and be able to articulate, here's the why we think we're going to get to where we're going to get to.

17:56So if you're preparing for a sale that's 12 to 24 months out, what financial profile are you as a CFO trying to optimize for? Let's do whatever it takes to drive up our revenues and our ARR, but don't do it at the sacrifice of gross margins, meaning that if you just drop prices to drive volume, that's not a good thing. And they'll catch that because a buyer will look at your gross margins and they'll go buy contract and try to figure it out. And if they see that you're starting to price favorably just to drive volume, that's going to work against you. A buyer will not be excited to buy a rapidly growing company whose gross margins are deteriorating.

18:34Probably most buyers, they're going to peel back your revenues at a absolute micro level. And so the best scenario is for you to have a lot of long-term high gross margin clients under contract, hopefully with future contractual price escalators. And then when those contracts are under renewal, you have low churn. Buyers will go hard at your churn and they'll try to understand why customers churn and who did they switch to. And so when they're going through your customers, you'll have to have a story about any significant churn and what drove it. And it's also not a great sign if you have any churn during the deal process because you give them these files up front and then they're going to match between the pipeline that you said you're going to close, but also the current customer list you have.

19:15And you had this story in there where the CRO has to pull this Hail Mary to try to keep a customer around. They'll look at anything upcoming, any contract expiration that's upcoming, and they're going to ask you for a point of view. Do you think this is going to churn or not? And if you look at them and say, this is not going to turn. And then it does. Then your credibility is shot. And so in the book, that's what happens is the CRO is faced with a very large client who is turning, not because of their unhappiness with the company's product, but because of their own financial situation. And so the CRO's goal, he was told from day one, hey, we're going to start the sale process.

19:49Do not let anything churn. And then late in the process, right before they're going to meet with a potential buyer, a customer reaches out to them and says, hey, we're going to churn you. Then it's, oh God, it's all hands on deck. What do we do to prevent this from happening? And at that point, it might be, what deal do we need to cut with you to retain you? Because if it's a 500K customer and you're being bought for 10 times revenue, that's a$5 million hit to purchase price. In your head, you're going through this process. That's exactly how you should think about it. Geez, if I let this customer churn, that's a big purchase price adjustment potentially.

20:20What do I have to do to keep it? And if it does have to go down in terms of value, then what will my story be in this process, recognizing that I'm going to have to explain exactly what happened with this customer and why it's a downsell. And there might be a good reason. In this case, there was a good reason, right? The client's under a lot of financial pressure on their own. They're happy with the product. There's nothing wrong. Very understandable. Hey, you kept it, but you down dialed the size of the contract. That does happen. Rick, you've dealt with selling to strategics as well as selling to private equity.

20:48And you mentioned at the top of the podcast how everybody seems to start with this big, fat, juicy funnel, and then it gets narrowed down, right? And there is a sequencing game that's played where you start with the strategic buyers before bringing in private equity. Why do you do that? Let's start with stepping back. It depends on what are your goals in the process. And so in my novel, the seller wanted to retire. She was very upfront about that. A PE buyer might require the seller to stay on for a period of time, and they may also require the seller to keep some of the seller's equity into the newly combined business.

21:22And keep in mind as a seller, if you keep a significant amount of equity in a business that you just sold and you now become a minority shareholder, you're placing your future gains in the hands of someone else. You lose control and that makes a lot of sellers uncomfortable. Because the founder of my book wanted to sell and be completely done, a strategic buyer made a lot of sense. Now, one thing to note, strategic buyers often take a lot longer to close a transaction. PE firms do deals for a living and they can move quickly, but many strategic buyers do deals here and there, so they might not be able to close on a deal nearly as quickly.

21:55In the case presented in my novel, as the funnel of potential strategic buyers went from wide to narrow and the seller started to panic, that's when the CFO offered up some options here. Number one, we can always open up this process to PE buyers. And number two, we can always pull the deal and go back to market down the line. There are an infinite number of PE buyers out there. So that's always a great lever to pull. And depending on your industry, there may be a decent number of strategic buyers. There may not be. Because the strategic buyers take longer to get through a process and because the pool might be narrower, it's certainly an option to start off with just strategics, see how that goes.

22:32And if the funnel is narrowing too much, okay, let's open it up to PE buyers too. And by the way, they're quick, they can get caught up fast. When we were selling my company, we started with Strategics and I think we gave them like a six week head start. And we did it because we knew that they needed more time to get the gears turning inside of their firm. Whereas if we flip to PE or growth equity, they would work pretty quickly. And then you don't have the same tension of two bidders, right? Because you want them to end at the same logical conclusion. That way you can put them against each other, ideally.

23:08Yeah. And it's really hard to get everybody's pace at which they're going through their diligence to get them all to align. And so a lot of times you'll flat out tell the pool of buyers, all right, we want bids by this certain date and it's still going to drag, you know, because nobody's going to say, all right, it's a hard cutoff. If you haven't submitted, you're out. A lot of buyers will call up and say, hey, we just need a little bit more time. We need a little bit more time. We need a little bit more time. So you might set a target of the end of the month and you might be getting all of the bids in a month later.

23:38It's very possible. Rick, I want to go a bit deeper on this point. Can you break down the differences of selling to strategics versus PE firms and running a sales process with both of those parties involved? Yeah, and I'm going to go in so many directions here that you're going to see the chaos of trying to get this to work. The nuances are not small nuances, and I am going to generalize here, but let's just start off with the fact that PE firms have plenty of deal-focused staff who can move quickly. Now, strategics, there's going to be a wide range. If they are a serial acquirer, which there are plenty of strategic serial acquirers out there, they might have a corp dev team.

24:14They might have a lot of deal staffing that's available. That's the question too. Even if they have a corp dev team, are they pursuing other deals at the same time? At least if they have a corp dev team, they might have enough staffing to get through this as quickly, almost as a PE firm would. But a lot of strategics don't have a corp dev team. It might be the CFO, and some other people. And so they may be slow. So there's a wide range in terms of can a strategic go as fast as a PE firm. And then the other thing to keep in mind with strategics is they need board approval to move forward on stuff.

24:44And so that can drag things out as you might have to wait for the next board meeting for them. A PE buyer might look to put debt on the company's books and that can slow down a process and it creates a lot more work for the seller because now the PE firm and the bank, have to diligence the seller. Plus the legal aspect, the lender's credit agreement is yet another legal doc that has to get nailed down. And credit agreements are very complex to nail down. A PE buyer may be more comfortable with an earn out, which may provide the seller with some upside. But if the buyer is a publicly traded strategist, earn outs actually have a lot of accounting complexity to them.

25:21And so a public strategic might not want to do an earn out. They might want to go all cash, which can be great, right? You're getting all cash, but it also might limit the ultimate price that a strategic can get to. A strategic may be able to get a lot of synergies versus a PE firm probably won't get any. This requires a little more diligence by a strategic buyer to try to identify and model in those synergies upfront. But if there are a lot of synergies, that might expand the price that a strategic can offer. So there's a lot of puts and calls here. One final point. Again, I said this earlier, I want to emphasize it.

25:54Depending on the seller's industry, there might be a very limited pool of strategic buyers, and there's always a ton of PE firms out there. So if you limit your pool to strategics, you do run the risk of fishing in a very small pond. And so seller beware. There's so many more probably that I've given you a lot of puts and calls. This is why it can be hard to pursue a sale to both strategics and PE firms at the same time. And that's why companies often either choose one or the other, or they start off with strategics to give them a kind of a headstart, and then they'll open it to PE firms. Net-net, who's likely to bid higher based on everything that you said?

26:27This is a great question for investment bankers because I think it changes over time. I think it used to be strategics could bid higher than PE. And I think over time, it started to normalize where they were almost equivalent. But I do think it changes over time. And I'd be curious to get an investment banker's point of view. My guess is at this point, they can probably get to the same place because even though a strategic can factor in synergies, the PE firm can use an earn out and use more debt to try to get to a comparable price. So I wouldn't be surprised if they land in the same place. The PE firm might require the leadership team to stay on for a couple of years, may require the leadership team to roll a portion of their equity versus a strategic.

27:06It's unlikely they will. Net-net, if they had the same dollar offer, you might still be better off going with a strategic. And your valuation can also dictate which of these parties you approach or lean into more because something that's not said about a lot of the ZERP companies that received huge fundraising rounds, you can get to a point valuation wise where, hey, there are legitimately like four companies out there who could possibly buy us. And they're like Google and Meta. An investment banking firm, when they're pitching for the business, will have a slide with 30 possible buyers and 30 buyers might take a look at the company.

27:38But it might turn out that on that list of 30, there might legitimately only be five potentially good partners out there for you, especially if you're in vertical software. Yeah, 100 percent. I want to talk about building your deal team because something you layered well into the book are the interactions that they have with the investment bankers. Let's start there. What's the typical fee structure for an investment banker on, let's say, a middle market transaction? I'm not a banker, but based on what I've seen for lower middle market transactions, and let's call those deal sizes somewhere in the$50 million to$250 million range, generally what I've seen is there will be a low seven-figure minimum fee that covers the banker's fee up to a certain valuation threshold.

28:21threshold. And then above that, they'll get a percentage of any additional valuation the company gets in a deal. And that often is going to start at like two to three percent. And then that percent may go up if the banker is able to drive an extraordinary outcome. So just to make it real for listeners, it could be a minimum of two million dollars and then a sliding scale between three and five percent for every incremental 25 or 50 million. Yeah, something like that. I mean, again, there's an endless number of structures. Everything is generally negotiable. And if I'm interviewing investment banks, I'm going to get offers from a couple of them and I'll bid them against each other and try to drive to a reasonably good financial deal.

29:06But that's generally what I've seen. Other people might have had a very different experience. More importantly, which parts of the engagement are actually negotiable? I think everything is fairly negotiable. The banker's going to definitely want a minimum fee because the last thing they want to do is spin their wheels for six to 12 months and walk away with nothing. So there's going to be a minimum fee. And I think that minimum fee is probably, again, for a lower middle market transaction, is going to be at least a million or two million bucks. I think beyond that, most things are negotiable, the break points and the percentages that they're going to get above a certain threshold.

29:40I think those things generally are negotiable. But again, I would get at least three or four competing bids from bankers. The fees are kind of important. They're not small and they will affect how much the shareholders ultimately receive, the selling shareholders. And so I would kind of pit the bankers against each other and try to drive a good deal. Any caution around picking the banker who promises you the largest number? It's kind of like when you're going to sell your house and a realtor walks in and gives you a valuation that is way above what you expected. It's flattering and maybe you get greedy and you go with that realtor.

30:14But what the realtor told you to win the business doesn't pay your bills. It gets the realtor another deal. There's not a lot of downside to the realtor outside of the fact that they might have to deal with some seller disappointment down the line. The market ultimately determines what your business is worth. And if it comes in lower than what you were initially told by the banker, you're locked into an agreement with the banker. You're kind of stuck. The seller should come up with their own best guess at valuation and should choose the banker based on their ability to at least get to that valuation.

30:44And then you set the pricing accordingly. If I think my business is worth$100 million and the banker says$150 million, fine. I'll pay you 2 % up to$100 million. I'll pay you 5 % for anything earned from$100 million to$150 million. And I'll pay you 10 % for anything earned above$150 million, something like that. So offer a big parabolic incentive for the banker to chase a truly extraordinary outcome. Because people forget that the difference between them getting a deal done and not getting a deal done is massive. But for you, you're thinking about this as real money. So similar to a realtor, 50 grand on the price of your house to you is real money.

31:22But to them, they're like, oh, what am I going to make like five extra bucks off this? That's 100 % true. It's funny. When I go to sell a house, they always have flat percentages for the realtor, but I always want to offer them a deal like this. It's like, well, geez, if you can get above the value I think the house is worth, I'll pay you 20 % on anything above that valuation. I'll do that with a banker too. Why not? Max and more, get your Max and more here. Sorry, I just came from selling Cracker Jacks at the ballpark. Everyone in finance is adopting AI right now. The problem, it's a dozen disconnected tools.

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32:28Every output is audit ready and when a call needs human judgment it escalates for review because the agents optimize not just execute and your kpis keep on improving one pe-backed customer posted 98 percent of transactions straight to their erp no error rate the other two percent go to a human before posting you pay only for real outcomes not seats see it at maximor.ai that is m-a-x-i-m-o-r dot What's AI? Every decision a company makes is inherently a financial decision. Folks, I've been trying to tell you that for 300 episodes. So it's wild that most finance teams have to spend a week on what already happened.

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34:23AnRock's platform runs every tax job, and it's the only tax engine with reconciliation built in. Whether you're selling into your first state or your 40th country, Mr. Worldwide, it's all supported by the same platform. One engine, however you reach it. Agents included. Every tax dollar owed, collected, because AnRock gets the transactions right underneath. Tax stops being an expense and becomes a pastor. AnRock. Built for what's next. Learn more at AnRock.com slash RTN. So the other component to selling a company is you're going to have to have an audit most of the time. You're going to have to do due diligence and quality of earnings.

35:01Can you just speak to preparing for a sale and whether you need to choose a big four accounting firm? Or can you choose a smaller regional firm that's just as effective? Yeah, especially in lower middle market land where I live, I will most likely work with an accounting firm that is well known but is outside of the big four. There are plenty of great firms in the five to 20 spots. They'll offer much lower fees and they might be less cumbersome to work with. I know that a lot of boards instantly gravitate towards using big four firms. They believe that the name implies quality. I've seen a major price difference.

35:35I have not seen a huge quality difference. And I have never seen a deal price impacted by using a firm in the five to 20 range. Never. Not once. Never comes up. Any advice for negotiating these fees? I would always get at least three bids. With accounting firms, it's funny because they do try to make the pricing sometimes a bit opaque. So I would make sure to get all-in pricing because some firms will nickel and dime you with stuff like so-called technology fees or database access fees, printing fees, right? In this era, still charging for printing. I'm shocked when I see that. So if I'm going to engage a firm to do a review, an audit, a QV, whatever, I want to know all-in.

36:12Just like when you're buying a car, give me the out-the-door price. I want to know all-in what I'm going to pay. Something that really stuck with me is how important the balance sheet becomes in all of this because many CFOs, they live and die by the income statement, their whole tenure. But then you get to this point where you have to do all of the quality of earnings checks and all the diligence checks on the balance sheet and any sins that remain in there. And CEOs are often really guilty of this. They only want to talk to the CFO about the income statement, but buyers find the majority of the problems on the balance sheet.

36:44Why does this happen? I'm using a lot of housing analogies today. Boy, the income statement is deciding on the side of the house. Looks pretty, right? It looks amazing. But then you get underneath it and you see wood framing covered with termites and a foundation that's cracked. The poor balance sheet, it's super important, but CEOs just don't pay enough attention to it. Mistakes are hidden on the balance sheet and those mistakes can jack up your income statement. Then buyers will go hard at the balance sheet to find those mistakes or to make sure at least that they're not there as they should.

37:13If you're accruing revenue, so revenue you believe you've earned, you're putting out on your income statement, but most likely you haven't invoiced it yet or collected on it. Or if you're booking revenues based on AR that is uncollectible, and if a buyer is using a revenue multiple, they might overpay to close the deal. And then after the deal's closed, they might discover this and it's a bad thing. And they're going to have to write off a bunch of balance sheet items on their P &L. And that's not good for the buyer. So during diligence, they're going to peel back all of your balance sheet items and they're going to focus a lot on your accrued revenues and your AR, and they're going to make sure what's on the balance sheet is correct.

37:49If your company sells software subscriptions in pre-bills customers, you need to keep an accurate deferred revenues schedule. This is incredibly important. Accountants should know this and non-accountants might not understand this, but this is an incredibly important thing. Your deferred revenue schedule becomes one of the most important things that you're doing behind the scenes to make sure that all your accounting is done correctly, both P &L and balance sheet. SaaS software companies that have high deferred revenues or any company that has high deferred revenues is some buyers might try to argue that the purchase price should be adjusted down by the amount of deferred revenues.

38:23The buyer may basically say, why should the seller get to benefit for prepaid revenues that I, the buyer, will have to deliver upon post-close? So as a seller, you're going to want to be aware of this. You're going to want to have a point of view on it because depending on your model, it could be a big adjustment down to the purchase price. And buyers, they're going to go all over your balance sheet, they're going to poke at everything. And they're going to poke at your accrued bonuses and your commissions because the last thing they want is for those items to be under accrued at the time of the deal.

38:51And then they have to book an inordinate amount of expense post-close to true those up. And also similar to deferred revenues, the buyer might ask, why should we be on the hook to pay out bonuses and commissions that date back to when you, the seller, still own the company? This is an item I call out in my book that pops up kind of deep and the process is late in the game. The buyer basically says to the seller, we don't want to pay for your bonuses that were earned before we bought you guys. Why should we be on the hook for that? And that becomes a point of contention. That happened in my sale because we were supposed to close in November.

39:23It's up till January. And they're like, why are we going to pay the annual bonuses for a year that already happened? Yeah, and you probably weren't going to pay those out till Feb or March. But yeah, I mean, there's a couple of ways to deal with it. One is you just go pay them out or two is you adjust the purchase price and kind of settle it up that way too. Another way to settle the deferred revenue debate is to say, hey, look, well, what's our gross margin? We're an 80 % gross margin business. How about we just deduct 20 % because that's the price it's going to cost you to serve these customers?

39:50That's exactly the strategy that I've used because I've had buyers come back and say, we want to fully adjust the purchase price based on the deferred revenues. And it's like, no, we're a high margin software company. So as you just said, that was exactly the argument. If you're going to do anything, you can adjust it for 20 % of deferred revenues, but not 100%. That doesn't make any sense. The CFO in the book has a line that I love. You have Smitty-isms. I think this would be an Ezra-ism. And it's every cap table I inherit is wrong. Talk to me about cap table issues that pop up. Whenever I tell this to CFOs, they're like, really?

40:21And I'm like, seriously, every cap table I ever look at has something that is wrong. They do. First of all, some cap tables have a lot of complexity and some don't have a ton of complexity. But if you have a lot of complexity on your cap table, there's a good chance that something on it is wrong. And when you go into a deal, you absolutely cannot have that. You can't close on a deal and then have some old co-shareholders come back and say, wait a second, you owe me more money because you've already paid out the money. So solving that problem would become a big, big problem. So the CFO really does need to work, especially if they're outside attorneys who've been helping manage the cap table.

40:55They need to go through it and make sure that every single item on that cap table is correct. Preferred stock, there's probably not going to be any issues there. The list of preferred shareholders is usually not crazy long. There's usually tons of documentation that shows exactly what they own. There's probably not going to be a problem there. And almost probably the same issue with common stock. Some companies might have a lot of common shareholders, but it's probably unlikely there's going to be an issue here. And there's probably a lot of documentation to support the common shareholdings. Now, warrants.

41:25Historically, I would have said there's probably not a lot of risk here, but then I had a deal where there was risk here. And so let me give you the situation. The company had taken out a loan from a venture lender, and the loan had two tranches to it. And if they drew on the second tranche of the venture loan, they then had to do another warrants grant. So when they drew on it, just nobody remembered it and nobody thought about it. So it never made its way onto the cap table. And then as we're getting into the sale process and we're starting to really look hard at every item, that item popped up.

41:54You've agreed to this deal with the bank and they get more warrants or entitled to the warrants. So prior to the deal closing, you have to make sure that warrants are completely correct. The number one area, though, where probably something will go wrong is if your company widely issues stock options or stock appreciation rights. If there's a mistake anywhere, it's probably going to be here. And it's especially complicated when very generous companies, and I love that they do this, but when they give out stock options to every employee, that's a lot of complexity. A lot of people who are being granted options, and then maybe the employee leaves and the options are being canceled.

42:26Or maybe, I hate to say this, if your company has different vesting schedules, it just adds a lot of complexity. So it sounds nice when companies do this and it is nice, but that complexity will most likely result in something being wrong. The two things that I often see are wrong is number one, if someone was told in writing that they will get options, like in an offer letter, but for whatever reason, that options grant never made it to the board and was never approved. That's a problem. It's got to get fixed. And then the second challenge, which to me is less of an issue. But if somebody was given a grant and then it's clearly stipulated in their documents that if you leave the company and you don't convert the grant into share, any uninvested shares into stock within like 30 days or 60 days or 90 days, you lose the grant.

43:11But let's say you didn't cancel them out in cap table software like Carta, then the employee might start to argue, wait a second, it shows in Carta that I have shares granted to me. No, no. The paperwork is what rules, not what's in Carta. But that can create a problem. And it creates a problem with your cap table being slightly wrong, if you're still showing people as holding options and they're not, it's going to affect the share price by at least a few pennies. And so that's a problem. That's one I've ran into a lot, Rick, where you have all these former employees who are past their window to exercise, but the software still thinks that it exists.

43:41And so it increases the denominator and that's going to impact your final share price if you don't wipe those out. Yeah. And it's funny, you cannot be off by a couple of like pennies or 0.001 of a penny. It's got to be perfect. And so you have to go through option holder by option holder, make sure that everything that is going to be done in the calculations is an active vested share. Rick, somewhat related to stock, it's also in the tax world, I guess. Talk to me about QSBS because this is a complete hornet's nest and I ran into it and I had no idea what I should be telling people. QSBS is a big deal.

44:16So if people don't know what QSBS is, you should definitely pay attention. Let me also say I'm not a tax advisor, so you should consult your tax advisors on this topic. QSBS is qualified small business stock, and this allows founders, early employees, and investors to potentially exclude up to 100 % of federal capital gains taxes on the sale of their eligible startup shares. Founders, I strongly recommend you learn about QSBS and structure your shares to make sure that they will be QSBS eligible and hire a reputable firm to help you with this. CFOs, if you're heading into a sale and you think some of the shares are QSBS eligible, hire a reputable firm to confirm that this is the case because this will have big implications for selling shareholders.

45:04They will ask about it and the onus is on you to help prove out that those shares are QSBS eligible. Founders care about this a lot. And a lot of times, if it probably is a meaningful amount of money, they'll bring in their own tax advisors. And as the CFO, you get caught somewhere in this awkward middle. You do. And I always tell people I'm not a tax advisor. I'm not offering tax advice. But I do have to be an active participant in this process to make sure everything is being done correctly. Let's get into the Q of E process. First question, Rick, who foots the bill for it? So when I go to sell a company, I engage a firm to do a sell side Q of E.

45:36For many lower middle market transactions, a buyer will rely on the seller's QOV because these things are expensive. Until the deal size gets up to a certain level, they don't want to spend money to do their own QOV and it drags out the process. So they're going to rely on the seller's QOV. Sometimes they will engage a firm to kind of pick apart the QOV. The buyer will. And sometimes if the deal is big enough, they'll have their own QOV done. I was a seller and I engaged a very well-known QV firm. And then the buyer came to us and said, well, they generally use that same firm too. Both sides are hiring teams from the same firm.

46:13And we were fine with that. The funny part is, oh my God, those two teams from the same firm were at each other's throats. It was uncomfortable being on calls with those two teams arguing with each other. Same company. And all I was envisioning was I wanted to be at the Christmas party to watch those folks battle it out over the shrimp platter or something like that. It was ugly. Weird question, but the seller paying for their own QV, isn't that kind of like having a fox in the hen house? This shouldn't sound bad, but it helps you tell the story as you think the story needs to be told. Meaning you can help work with the QV firm to use the same vernacular, to use the same structure to your financials, to really help make sure all of their data and their information is correct.

46:59They're going to come in really fast and they're going to have no context and they're just going to drill through all your financials and a lot of your other operational and HR data. You just want to make sure it's done correctly. The onus though then is on the buyer to make sure that everything in that QOV kind of meets their diligence requirements. So it's up to them to pick on it. And if they have concerns, they can go hire their own QOV firm. I would not go into a sale process without having done a sell-side QOV. Maybe you weren't doing something right, but you don't want to have that blow up a deal.

47:31So hire a sell-side QOV firm. The good ones can get through your stuff really fast, especially if your company isn't that complicated. And work with them, again, to tell the story and make sure they understand everything as it truly is. And then let the buyer pick it apart if they need to. Speaking of picking it apart, how much of a QOV do you think is hunting for a purchase price reduction versus trying to get to ground truths and just validating earnings? I might be naive and I think I'm a pretty nice person, but I truly don't believe anybody is searching for gotchas to cut the price. My opinion is that goal number one is to validate everything that the seller is saying is true.

48:08Gotchas may happen, but in my eyes, that's a little bit more on the seller and the quality of their accounting and financial information that they've provided than it is the buyer trying to invent issues to push the price down. Give me some of those gotchas. We've discussed some of the balance sheet items. They're going to go through every balance sheet item line by line. On the revenues and cost of sale side, a good QV should look at the average customer contract size in terms to make sure that the seller isn't temporarily goosing up revenues or ARR by offering below market terms. A good QV will include the building out of a customer database.

48:43They call it a customer cube that That allows everyone to examine by client, by month, what happened. Did the client's revenues go up or down based on price increases or decreases, volume increases or decreases, add-on sales of new lines or reductions in lines sold, or a mix of these factors? Which customers churned and why did they churn? Because gross margins are super important, it's really important that a QOV provider digs into cost of sales to make sure that what is and isn't being included is appropriate and that the seller's methodology has been consistently applied over time in terms of what is included in cost of sales and what isn't.

49:25Then as you're going down the P &L on the EBITDA side, a seller is going to focus on if you provide them with an adjusted EBITDA number and if you give them a list of one-time adjustments that you think are fair addbacks to EBITDA, a seller is going to really go through those line item by line item and try to pick those apart. And hopefully a good QV does a great job at going through each of those items and providing an explanation and explaining why it is a fair addback to EBITDA. Some sellers get super aggressive with things they try to include in the adjusted EBITDA number, and some buyers will call them on those.

50:01And hopefully a good QV will provide a very detailed reconciliation and make it pretty clear that these are very fair add backs. A QV should call out when there's a temporary vacancy, like in a high comp position. So, for example, if a company CTO left and they didn't backfill the position for six months, a QOV should adjust the company's salaries number for that time as if the CTO had always been in the job. That's a more realistic portrayal of what the company's financials should have looked like. Very fair adjustment. A QOV should call out any expenses that have been underspent in the short run that maybe are used to drive up EBITDA.

50:39so that sales function you have for your customers that you've had every year until the last year, it should adjust for that. And then finally, not every QOV is going to call this out, but this is a very real issue. When you have an early stage company, a lot of times your staff is willing to work for below market cash compensation because they're getting stock options. And then a buyer might be flipping that where they're not going to get stock options, they're just going to get all cash. Hopefully a QOV is going to call out the fact that this could be an issue and that people have been receiving below market comp.

51:09By the way, that is a very common. And when I'm buying a company, I pay a lot of attention to that. If we're not going to offer stock in a similar way to how the seller offered it, then I might have to do salary adjustments. So I need to factor that into my deal math. For anybody who's been through a deal, there's this feeling that this thing just takes on a life of its own. You wrote in the book that when the deal train leaves the station, it's difficult to get it to turn around. I've heard it said a different way that, hey, don't worry, this thing is on the tracks. Why does deal momentum become so powerful?

51:38No doubt when each side has invested a boatload of time, money, and effort into moving a deal forward, it gets harder and harder every day to walk away from the deal. No one wants to chuck a million bucks into a fireplace and move it around with those fireplace poker thingies. And also if the seller is in a sale process and there's a bunch of potential buyers and they go and they go exclusive for a period of time with one potential buyer and they let the other potential buyers know, hey, we're going exclusive with this other potential buyer. The challenge you get is if you don't get to a deal with that buyer, then you have to crawl back to the other buyers and say, hey, we're back on the market.

52:14And they're going to ask a lot of questions as to what happened with the earlier buyer. That might cause a lot of cold feet and it could result in the purchase price getting down dialed a bit. There's a risk to appearing to be always in market, right? Absolutely. I want to talk about negotiating dynamics a bit because you mentioned that being too accommodating during this process can actually be viewed as a weakness, which I found so true, but unsaid. Why? How should CFOs balance the cooperation of giving them all this data with also protecting their own leverage to get the best price for their company?

52:47You could probably graph it where I'm super accommodating at the beginning of a deal, but it probably, again, becomes parabolic towards the end of the deal where I'm not accommodating at all. Buyers have an unending appetite for the details of your business. And really, there is no cost to them to ask for more and more stuff. But for the seller, there's both an explicit cost of your time and there's the opportunity cost that you could be doing something else to help drive the business forward. So seriously, if you don't show at least a modest amount of pushback as you get deeper and deeper into the deal, a deal will never get done, years will go by, and the buyer will still be requesting more and more items, including asking you to provide updates as to what you've previously given them because more and more time has passed and they're going to need fresh numbers.

53:32So I want to make a buyer feel that I'm glad to be accommodating up to a certain point. But after that, I'm going to grind you a little bit as the requests pile up. I have a business to run and hopefully they understand that. And I just, there's a level at which I can't be completely accommodating after a certain amount of time. There's also an element of debate over what the final purchase price is. I've heard it phrased as total consideration. And you're like, huh, well, I wonder what that means. Everyone here is, hey, a company has sold for$200 million, but shareholders rarely receive the headline number.

54:03Can you walk us through the waterfall of what makes the price go up or down? It's a tall waterfall. I mean, there's a lot of items. CFOs see this because when you're preparing a lot of the final spreadsheets on the payouts, either the investment banker or the CFO is going to have to prepare this. So first of all, you have the agreed upon purchase price. We start with that. And then you adjust that up for cash on the balance sheet at the time of close because deals are done on a cash-free, debt-free basis, meaning the seller gets all the cash on the balance sheet, but that's after debt is paid off.

54:32Agreed upon purchase price, we adjust it up for the cash on the balance sheet at the time of close, but then we have to adjust it down for the bank debt and for any interest owed on that bank debt. So again, deals are done on a cash-free, debt-free basis. Then from there, you have to adjust down for the banker's fees, which as we've discussed on this call, they're not small. And for any legal fees, the legal fees are just probably a little bit smaller than the banker's fees. You'd be shocked at what the legal fees are on these deals. I was on a call one time and I think there were eight lawyers and I calculated it out that this was like a$30 ,000 call.

55:02It was crazy. The lawyer fees really pile up. You look at them at the end, you're like, man, in my next life, I'm going to be a lawyer, but I think the world has enough lawyers. I couldn't do that job. I don't know how they do it. Then there are these things, you know, called escrow accounts. So there are certain items that the buyer might be nervous about. And to make them not nervous, you'll park money in an escrow account for a period of time. And then if there have been no claims against those items, the escrow accounts will get paid out. So hopefully, the selling shareholders will get some or all of that money down the line.

55:33But that's another item that will initially come out of the purchase price. Then there's a lot of deal-related expenses. So you have to take those out of the purchase price too. So the quality of earnings study fees or any other accounting or tax fees, those are going to come out. If you use software for the data room behind the deal, that might come out. Then there are these people called paying agents. They're the ones who, when a deal gets done, they're going to go and work with every person who's owed money to make sure that they get their money. But a paying agent costs money. And so those fees might come out of the purchase price too.

56:07A benevolent seller will want to pay out thank you bonuses or other deal-related bonuses to the staff. And as long as the shareholders are fine with that, those will come out of the purchase price too. Then, and this is a funky one, but sometimes the buyer asks the seller to put in place what's called a tail policy, which is an insurance policy against claims arising from prior to when the deal was closed, but submitted after the deal was closed. So basically, they demand these policies because no buyer wants to be on the hook for insurance claims that date back to prior to the sale, but come in after the sale.

56:45So if a seller pays for this policy, those fees are going to get deducted here too. And then finally, the trickiest one is the working capital. What buyers don't want you to do is to basically strip the company of as much cash as you can prior to a deal being closed, because again, deals are done on a cash-free, debt-free basis. Barring a working capital like Target, as a seller, you could just try to collect as much AR as possible and stop paying out vendor invoices and stuff like that to drive up your cash because you're going to get all that cash. So what you do is you work with a buyer and agree upon a number and amount of working capital to be left in the business.

57:23And then after the deal is closed, you kind of true that up with them. And if your working capital comes in higher, you know, yay seller, you'll get an adjustment up on the purchase price. But if your working capital comes in lower, then you'll adjust the purchase price down a little bit and the buyer will benefit from that. The amounts to initially be paid out to shareholders when you hear that, hey, the deal consideration is that it's so much lower than you might think. And then also keep in mind that the selling shareholders are going to get two payouts, most likely. They're going to get the upfront payout.

57:55And then once the escrows are settled up down the line, which could be anywhere from three months to, I don't know, 18 months later, the selling shareholders are going to get a second payment, probably a smaller payment, but a second payment. Rick, we could do an entire book and series of podcasts on escrow versus earn out where we're going to spare the listeners that and maybe we'll come back for a part two down the line. I want to jump to something less technical, and that's the human element side of all of this. Which employees will a strategic buyer usually want to retain and which roles are most at risk after an acquisition?

58:27The back office folks will most likely be the first people to go. So most likely myself, the CFO, and probably the CTO will be out quickly because a strategic buyer, they're not going to need two CFOs and they're not going to need two CTOs. Post-integration, a strategic buyer may not need much or any of the seller's HR team. And ditto for a lot of like the technology infrastructure folks, they're probably going to have their own folks who handle all the technology infrastructure stuff. Marketing is a tough one to say. The seller or the buyer might have a fully capable marketing team that can extend to the acquisition or maybe not.

59:04I think a lot of buyers will, at least for a period of time, keep the rest of the staff to evaluate them. But that being said, the question is, does the staff want to stay? Because a lot of people don't like working for a small, scrappy company and then transitioning to a big bureaucratic company. It's not what they signed up for. You know, you might move from better technology to worse technology. You know, it's surprising to hear that, but a lot of small startups have great cutting edge technology and a lot of larger buyers might have kind of archaic technology from 10 years ago or 15 years ago.

59:35And that can be really frustrating for employees. They get rid of Slack and they're like, hey, you're going to be on Teams now. The look of depression on a lot of people's faces is high because they're like, oh, man, I love Slack and Teams kind of sucks. Two checks that always end up happening some way, somehow at the very end. The first one is the customer reference calls, which are super nerve wracking. And the second one is they'll hire like a GLG or some research firm to go out and talk to former employees. On the first one, how nerve wracking are the customer reference calls at the very end?

1:00:06I think they're really nerve wracking because you're going to serve up your best, largest clients, but nobody from the seller is on those calls. So you don't truly know what's being said. And now your clients are going to know you're being sold, which, you know, let's say the deal doesn't go through. that can be destabilizing to your client relationships. I will say I've never had these calls not go well, and I've never had them jeopardize a deal, but it's always a little nerve wracking. I mean, it's like when you're going to interview for a job, right? And you're going to serve up references and you feel like pretty good.

1:00:34Hey, I think that person likes me, but there's a 1 % chance in the back of your mind, you're thinking, well, geez, maybe I'm wrong and they don't. And so it's always a little nerve wracking, but I've never had them not go right. What is interesting is the second thing you asked about, these third-party research firms like the GLGs of the world. In any significant deal, they will get hired and they are going to hit up your ex-employees on LinkedIn and they're going to offer them money for interviews about you, about you, the seller. And they'll make it clear to the ex-employees that those people can't reveal confidential information, but you never know what's being said on those calls.

1:01:07I once was selling a company and a potential buyer started asking questions that were at a level of detail that the only possible way they knew to ask those questions was because of these types of services because somebody had spoken to former employees who said some stuff. There's no way they would have known the level of details. That's reality. And that's also another reason why, by the way, it's very hard to prevent your existing employees from knowing a deal is getting on. Something that caught me like a knife in the book is you describe this dynamic between the buying CFO and the selling CFO of a smaller company.

1:01:39Why can even an experienced finance leaders suddenly feel professionally small. In the book, Six Months to the Sale, the CFO is doing a good job in the deal and he has previous deal experience. There's no reason for him to feel intimidated, but he was. When you're a selling CFO, selling your company into a much larger organization, the finance leadership of those billion dollar companies is impressive. And they're very experienced and they're very savvy people and they do deals all the time. And all this can be very intimidating to somebody like me. I always say that they're doing deals for a living.

1:02:11I do it as a hobby. I'm doing it here and there. Acquisition heavy companies and PE firms, they do. They do this for a living and they know the ins and outs of these processes so well. And there are so many nuances and they know those nuances. Lots of CFOs haven't done that much M &A or they do a deal here and there. And so deep down, they feel like maybe here and there, they don't know what they're doing and they end up letting the process drive them instead of driving the process. I've been a part of enough transactions that I feel comfortable 98 % of the time, but still 2 % of the time, I feel like I'm the dumb money at the poker table because across from me at the table are people who play poker every day of their lives and I'm just showing up here and there.

1:02:52I feel intimidated and I've done enough of these deals. So I don't know, maybe everybody else doesn't feel like that, but I do. For our next segment, I want to ask some better questions brought to you by our friends at EY. And let me tell you, they think a lot about great questions across enterprise risk, audit, diligence. They're a smart bunch. So I'm going to ask some smarter questions right now. Last one I got for you. This has been amazing. Prospect theory really seems to show up near the end of a transaction. Once people know they're about to make life changing money, how does their decision making change?

1:03:23Because I've seen people get super squirrely at the end of a deal. Everybody's different. I mean, I'll just give you a couple of candid observations. I've been surprised how much in deals people will argue over small amounts of money. And that goes for buyers and sellers. I mean, it could be a$100 million deal or whatever, and people are arguing over a$10 ,000 bill. It's like, oh God, just let it go. People who are about to make a truckload of money always seem to play it cool. I have never heard a seller who's about to make a fabulous amount of money talk about the money at all. I've never heard a seller talk about, hey, I'm going to do this, I'm going to do this, I'm going to do this.

1:03:56Founders are selling their baby. And this is where I think they get squirrely and I'll put their baby in air quotes. Sometimes founders think their baby is much better and worth a lot more than it is. And sometimes founders have a problem intellectually separating themselves from the business they're about to sell. We're hearing any criticism about the business they're selling. But the truth is, is sometimes their baby is kind of meh and commands a meh multiple. Sometimes sellers have a hard time accepting that, and they're absolutely convinced their baby is better and worth more than it is. And this is very tricky to deal with in a process.

1:04:31I truly always fight for the staff. I'm always looking out for what the payouts are going to be for the staff from their stock options or bonuses or whatever, because I want them to walk away from this feeling good too. And I don't want them to look at the deal and be bitter about it in terms of, hey, you founder just made a ton of money, and now I'm working for this big company. My future is uncertain. and the situation kind of sucks and I didn't make anything from it. So I always want the staff to feel good about the deal in terms of financially, let's see what we can do. If their stock options didn't get them good payouts, can we do staff bonuses?

1:05:04What can we do to make them feel good about the transaction too? I don't know any founder who looks back and is angry or regrets taking care of their employees. Maybe they had a quibble with a co-founder who ended up making a bunch of money that's not there anymore, but taking care of the long tail of employees, people find the most gratification that they took care of their own. I 100 % agree. And I've been really surprised or impressed with founders and a lot of times how much they're willing to take out of the shareholder proceeds and give to the staff. You feel like maybe you hear a lot of times these people are greedy or this and that.

1:05:36I actually have seen the opposite. I've seen a lot of generosity from founders selling companies towards the staff. Absolutely. Rick, thank you so much for coming on. Where can people find the book so they can enjoy it like me? Go on Amazon. The book is called Six Months to the Sale. Go on Amazon and search Six Months to the Sale, Rick Smith, and it should pop up. And from there, you can actually, if you want to read any of my fiction books, they're all completely different. You can find those too. You can also find the previous business book I wrote, Demystifying the Role of the CFO in Venture and Grow Stage Companies.

1:06:04Look, I'm biased. I wrote them, but they're all good books. They're all very different. On the fiction side, everything I write is a different genre. They're completely different. But as a business book goes, I think this is well worth reading for anybody who works lower middle market, financial stuff for companies or in private equity or in VC. And it's a fun read. That's the goal. I think you'll find yourself, as opposed to most business books, is you want to read from first page to last page so you can see how the story ends. Appreciate it. So great to see you, Rick. Hey, thanks. Run the Numbers is a mostly media production.

1:06:34Yelling an intro by Fat Joe. Artwork by Meg D 'Alessandro. Nothing said on this podcast is intended to be business or investment advice. It's the sole opinion of me, a guy who feeds his dog way too much ice cream and has a history of net operating losses, LOL. If you like this podcast, hit subscribe and give us five stars. It will take like two seconds and our algorithm overlords love it. Drink water, call your mom and have a great day. Peace.