Welcome to Beyond Succession, the podcast where your most pressing questions about future-proofing your business are answered. Whether you are a family business owner, stakeholder or keen entrepreneur, this podcast is a valuable tool that addresses topics around navigating the complexities of the family enterprise. Join Leah Tolton, a seasoned family enterprise and corporate lawyer who is passionate about helping family enterprise businesses, as she explores topics of governance, succession and growth.
We hosted Jeff Cullen on our Beyond Succession podcast to dig deep into a subject many entrepreneurs find challenging, yet vitally important: preparing your business for an exit. Jeff is a seasoned consultant and Certified Exit Planning Advisor at Sunbelt Business Brokers with over 20 years of business experience.
From understanding business valuation methodologies and tax considerations, to planning for succession and managing liabilities, Jeff shares invaluable insights that could help you avoid common pitfalls and make your exit strategy as smooth and profitable as possible. Whether that exit is a sale to a new owner, to the existing management team, or a non-arms length transaction, each pathway presents its own unique challenges and opportunities.
Transcript
Jeff Cullen: [00:00:00] Internally, which obviously an owner has a lot more control over, some of the big things would be like, uh, concentration of, of their customers. So generally, if we see a business that has more than 20 percent of their sales from one customer consistently, like, I mean, you might have a year where, hey, somebody has, you know, 25%, they had a big order, fine.
But over time, a business that has 40, 50, even sometimes more, one customer, that's going to lower the score because obviously if I'm coming in as a buyer. I immediately see what happens if this customer disappears, yeah, or, or the relationship isn't solid.
Leah Tolton: [00:00:41] Welcome to Beyond Succession, a podcast series within the Bennett Jones Business Law Talks podcast that discusses topics around navigating the complexities of the family enterprise. I'm Leah Tolton, partner at Bennett Jones LLP, and I'm a family enterprise and corporate lawyer, passionate about helping family enterprise businesses.
Navigate the complexities of governance, succession, and growth.
Before we begin this podcast. Please note that anything said or discussed on this podcast does not constitute legal advice. Always seek proper advice from your legal advisor, as every situation is different and outcomes can vary. Today, we're diving into a topic that all business owners will inevitably face, yet many often overlook until it's too late.
Preparing your business for an exit. Whether that exit is a sale to a new owner, to the existing management team or a non-arms length transaction, each pathway presents its own unique challenges and opportunities. Joining me is Jeff Cullen, broker at Sunbelt Business Brokers. Prior to his current role, he was the founder and president of Basecamp 4, a consulting firm that helps clients on succession and exit plans.
Jeff is a certified exit planning advisor and has over 20 years of experience as a project manager. Executive, entrepreneur, business school instructor, and consultant to private companies.
Jeff, you've got a wealth of experience in advising, uh, business owners, both during the time that they're actually operating their business and when they're exiting their business. And I'm hoping to hear from you as to your special wisdom in this respect today.
Jeff Cullen: [00:02:42] Yeah, well, absolutely. I think that's why we're here.
Leah Tolton: [00:02:45] So. One of the things I often hear in discussions with owners who are looking to exit their business is what they think their business is worth. Or maybe they have no idea what their business is worth and they're wondering how to figure that out. Um, I wonder if you could elaborate on some of the methodologies that might be available to assist business owners come to some kind of idea about what they should be looking for when they sell their business.
Jeff Cullen: [00:03:14] Yeah, absolutely. So I think the first thing to differentiate evaluation, that evaluator, a CBV would do, a Certified Business Evaluator. It's different than what a business broker would do. And it's probably different than what a, uh, let's say a value advisor exit planner, right? So CBV, depending on what they're valuing for, let's say it's for a bank loan or regrettably, you know, in a, in a litigation of a divorce, that's more akin to when you get your house valued, you know, by valuation.
And then you go, well, I hope it would sell for more than that. So that's a fair market value. It does not necessarily take into account more dynamic market conditions. What we do as brokers is that we have to call it a most probable selling price because you can value it for whatever you want. But at the end of the day, what will it sell for?
And then sort of an advisor might do something in the middle that gives an owner a ballpark idea that they could relate to the magic question. Will I be able to sell the business, you know, for what I need to retire, how much I want, right? So they're slightly different. The methodologies are similar. Uh, and generally we use like, I think we use like 10 different calculations and it could be just looking at the value of the assets we could look at.
Value of future earnings, right? Sometimes we just use a multiplier, right? Which is quite a common thing in the market where you say, You hear that all the time.
Leah Tolton: [00:04:39] Oh, so and so sold their business for so many times EBITDA.
Jeff Cullen: [00:04:44] What's exactly, or what we actually use something called SDE, seller's discretionary earnings.
So, and that's probably the most important thing that we do when we value and it applies to all of the different methods is we will call it normalizing, recasting, it's, it's looking at the way the business has been operating and, and cutting out a lot of the fat and say, okay, well a new buyer might not necessarily, you know, pay for their daughter's orthodontics.
So we'll take that out or, oh, you've got like all these memberships to clubs and I mean a lot of business. We all do it right. If you own a business. And, and it's okay. I mean, that's, that's perfectly acceptable. And then when you do your, you know, your financials, of course, accountants want to minimize the tax people pay.
Uh, we need to present a picture that is... Not a tax picture, but a value picture and say, well, you know, if you took out all of these Expenditures, there'd be a lot more money actually to the bottom line. And so that's what you show a buyer So the methodology is it's pretty robust and it's then Triangulated to the market.
Is the business growing? How does it fit, you know comparable to other businesses of the same industry? Where are we at in time? And so all of that has to, to come into effect when you're actually going to put on the market, but you could do more of a preliminary, let's say a ballpark analysis earlier on, which is actually really smart, right?
You should probably be doing that on a regular basis just to know, you know, within, let's say a 25 percent plus or minus what's my business worth. Cause a lot of owners, their friends have told them, Oh yeah, yeah. Somebody I know sold their business for like 20 million and. And then they think, well, I'm sure mine will sell for more.
And then they find the, the hard reality of, yeah, no, this is not worth near that, you know, in the real world. So it's, it's an important, uh, it's a really important piece of the puzzle.
Leah Tolton: [00:06:34] Well, it sounds really complicated too. It sounds like, you know, depending on the purpose or the, way that the need to value originated, there might be a different process that would apply.
Did I understand you correctly there?
Jeff Cullen: [00:06:46] Yeah, there's a whole bunch of different methods. And, uh, you know, so when we look at a business for the most probable selling price, we might pick three or four of the 12 and then weight them. If you're having it valued by a CBV for a very specific purpose, they might.
You know, use one or two methods. So it, yeah, it's, it's kind of a science and an art. I think valuations for like litigation tend to be more scientific. And then we would go more on the art side and say, okay, well, you know, because of. Just the vast experience we have in the reality of the market just because on paper it's worth this You know, you have to look at more practical elements of the business.
Leah Tolton: [00:07:26] So let's talk a little bit about that. Okay, sure What kind of elements of the business could affect that objective value? I'm using the word objective because you're talking about components of a formula What are inputs to determine a number at the end? What kinds of things in the market could affect that value up or down?
Jeff Cullen: [00:07:47] Well, we can look at the market externally, and we can also then look probably even more importantly at the internal aspects that are going to have an impact. So obviously on the external side, the general economy, the industry that they're in, you know, if it's an industry that's being consolidated, maybe there's a lot of demand, you know, for roll up.
That might be a bit more of an attractive time, obviously economic factors come into play with bigger businesses where people are going to have to borrow money, you know, obviously we're all concerned about inflation and the interest rate, right? Uh, the one thing I'll say on that is that like anything, if you try to time the market perfectly, you're probably not going to be successful, right?
Um, so that has to sort of be looked at, but I think to try and hit it perfectly. It's probably a fool's errand internally, which obviously an owner has a lot more control over. Some of the big things would be like a concentration of, of their customers. So generally if we see a business that has more than 20 percent of their sales from one customer, Consistently.
Like, I mean, you might have a year where, hey, somebody has, you know, 25%, they had a big order. Fine. But over time, a business that has 40, 50, even sometimes more, one customer, that's going to lower the score. Because obviously if I'm coming in as a buyer, I immediately see what happens if this customer disappears.
Yeah. Or, or the relationship isn't solid. Reliance on the owner is big, right? So as a consultant, you know, over the years, we're always trying to hammer on these, on these people. Get processed, develop your people, like make yourself redundant. Because again, as a buyer, the first thing I'm going to be asking is, well, what happens the minute you're out of the picture, right?
If all of the knowledge is in the owner's head, all of the relationships, you know, all those subtle little secret things that they don't even think of, but they go like, oh yeah, you know, the file is in this magic cabinet. A buyer is going to go, okay, well. I'm going to reduce, you know, what I'm willing to pay because I see a lot of risk.
Um, same thing with key staff, right? We used to joke in a lot of businesses, you could draw the org chart, you'd have the owner at the top, then there'd be this massive gap and everybody down at the bottom. And you don't want to see that. You want to see. A pyramid where, you know, the, the, the right hand people are very close to the owner and, and almost like they could leave for six months and nothing would happen, right?
That, that makes it much more attractive. Cause as a buyer, I go in, I go, okay, it's plug and play, right? I come in and everybody talks about, I'm going to stick around and. Yeah, but I mean, if you get a big check, that motivation to be like, you know, answering the phone, I think it goes down pretty quickly, and the minute you're not contractually obligated to be there anymore, most people go.
Leah Tolton: [00:10:34] I think it's difficult for most people who've built a business up to continue to work for someone who buys it.
Jeff Cullen: [00:10:42] Oh, I think it would be really hard.
Leah Tolton: [00:10:43] I think, you know, I think a lot of people find it difficult to, you know, work in a different environment with a different direction, with different people making different decisions on a different basis.
I think it can be really hard for people to watch their baby change before their eyes and continue to be working in that environment.
Jeff Cullen: [00:11:01] I have a friend whose brother just sold his business and, and, you know, there was a substantial portion on an earn out. And he was just miserable and I think he actually walked away from a sizable, you know, amount of money to take an early departure where he was like, you know, I know I'm supposed to stay there six months, but like, I just can't be here.
Right. Yeah.
Leah Tolton: [00:11:20] So you've, you've kind of led me into the next question that I'd like to ask you and you've touched on a couple of things that I think are relevant, but I wonder, you know, with the eye looking at this from the lens of. internal factors in the business that could affect the value. What kind of steps should business owners take to ensure their business is ready for a potential exit?
Jeff Cullen: [00:11:45] Great question. So I'm going to rely a little bit, or I'm going to reference the exit planning Institute methodology. And so it's kind of a step function approach where You know, low hanging fruit is always the best place to start. So often we'll talk about de risking, right? So you say, okay, well, like, so what are the things that we've already touched on where the business is kind of in a position of risk and unnecessarily.
So that could be not having, you know, supplier contracts nailed down. It could be a lack of, of key man insurance for, you know, the critical. Uh, staff or not having them locked down with some kind of employment contract, right? You have often companies, it's almost like the owner kind of tries to do the, I'll make myself less important, but then they put all of that into one key person.
So it's like, well, you've made the problem a little bit better, but now that key person becomes the person, if they get hit by a bus, the whole thing falls apart. So making sure that the team is in place. Team is protected dealing with, you know, any sort of, uh, a residual OH and S legal liabilities, uh, safety things.
Cause again, remember due diligence, someone's going to come in particularly if they're a sophisticated buyer and they're going to tear that place apart. They're going to look at all of these, you know, skeletons, right? So that's part of it. Uh, we've already talked about diversifying the customer base growth, you know, companies usually sell better when they are.
In a growth stage, as opposed to stagnant or declining, right? Which again, that touches on timing. A lot of businesses seem to wait, or maybe they're pushed into a situation where something has happened and now they're kind of on this downward curve. And, uh, I mean, it's still sellable, but obviously a buyer looks at that and goes.
You know, if I project out, it doesn't look good. So what am I going to have to do on top of just showing up to get that curve back into growth? Right.
Leah Tolton: [00:13:41] Which gets us back to our first question about value.
Jeff Cullen: [00:13:42] So de risking, uh, developing maybe a better, uh, strategy around the people side, you know, technology, intellectual property, anything, again, that is sort of, well, we meant to sort of do the steps of getting that protected, but we haven't got around to it, you know?
So basically a lot of house cleaning at that first level. People development and growth development. So again, you get to that stage where, and often we'll talk about, you know, can you take six weeks off at the drop of a dime? Right. If the owner goes, I once had an owner said six weeks, man, six hours, I better not come back.
Right. So this is a big red flag. Yeah. Right. Yeah. So you're not in a position. But when you get to that point, and then the other thing is, uh, not to take the foot off the gas because some owners seem to think, I'm ready to put on the market. I'm tired, you know, and I'm just going to start to ease off. And we always say, no, no, no, no.
Like you go hard till that checks in your hand, like you're going hard to hit that upswing as much as possible. So those are all things that can be done kind of at a, at a high level.
Leah Tolton: [00:14:42] A lot of our listeners will be owners of family owned businesses and you're touching on things like education and development and some of the people who are members of the team could be family members.
So can you comment on how this preparation for sale is impacted by a family situation?
Jeff Cullen: [00:15:04] Well you're the FBA, I think you should probably answer that. Having said that, I, in a, in a previous phase of my career, when I was working for the business development bank, I did a lot of succession work. I think we may even met around that time or not met because we knew each other, but I think we professionally, let's say, right.
And so I did a lot of work through BDC with family succession, which is different than sale, but a lot of the same rules apply. In that you have to, and I know you're familiar with like the three circle model, which is just this idea of, okay, even more than a regular business where people don't have that layered relationship.
I think you have to really have discipline and look at those relationships with the three, the three hats or the three circles, right? One being. The family and this whole idea of family councils. And so sometimes I used to tell people that and be like, that sounds very like pedantic. And I'd be like, yeah, you know, if you're a regular family, you're not in business together.
You only have to tolerate each other twice a year. Yeah. Probably not. Probably not needed. Right. But if you are day to day interacting with each other around a joint enterprise, you almost have to do that where you can now have a venue to deal with those frictions. Right. Uh, so there's that, that approach.
Then there's the management and then the ownership, right? Say, okay, so now we're gonna be the, the stockholder hat, if you will, where we're looking at the long term viability of this business, you know, what do we want to do with it, what kind of returns, all of that estate stuff. And then the third hat or circle is the day to day management, right?
Where you, again, And it seems pedantic, I think to some people, but those that I've seen apply it after they get comfortable with it, it really works, right?
Leah Tolton: [00:16:49] Yeah, and the reason I was asking you that is that you were talking about development of successors in terms of leadership and making sure that there was a pyramid to follow the owner and Some of our prior guests have talked about things like using that family platform, whatever it is, a family council, whatever it is that works in that particular environment, to put into place things like development plans for leaders, education plans for leaders, plans that talk about what kind of experience the leader has to have, whether they're family members or not, you know, so do you see that that could assist in terms of preparing a business for sale that happens to be owned by a family enterprise?
Jeff Cullen: [00:17:29] Absolutely. And I think the probably the most important first step that the model gives us is a framework for dialogue, right? Because there's my experience and I'm sure you've seen the same. There's so many of these family businesses where let's say the founder or whoever's heading it at the time. They just make a whole bunch of assumptions.
They don't have those conversations, right? Because they're, they're difficult. Well, the dynamic becomes tricky, right? So I've often had owners who are convinced that it won't be a problem. You know, kids want to take over. And, um, when you then facilitate the process where you're talking to the different players separately.
Sometimes you uncover that, yeah, no, they're, they're basically doing it because they feel I have to, or they haven't had the, worked up the courage to tell, you know, mom and dad that now, you know, that's, this is not what they want to do. And so, um, so I think the framework allows to have those conversations early on.
And it's not often a yes or no thing, as you know, it's complex, right? So there's like, sometimes there's a lot of questions. And then the other aspect too is, like, who is going to be the right player in the right position, right? So oftentimes you might have de facto that the assumption is the oldest child will just be the player.
They may not necessarily be wanting to do that. Or, you look at them objectively, they may not be the right player, right? For whatever reason, you're just like, eh. And I've had some of those discussions back in the day where I would come in, assess different family members. And then find out, yeah, okay, this is like, something's wrong here, right?
The best one I ever had was over a curse of a day. At the end of the day, the son in law was just no doubt the guy, right? Cause he'd been there since he was a teenager and like he knew all the positions and, and I went and reported back to the owner and he basically just shut the whole thing down and he's like, okay, well thanks.
Leah Tolton: [00:19:26] But you know, you don't need to come back tomorrow.
Jeff Cullen: [00:19:27] Yeah, pretty much. Yeah. And, uh, which I thought, well, okay. This has got a lot of that family, you know, we've lit the fuse there, or potentially. So he's basically saying, I'm not going to deal with it right now, which is pretty common.
Leah Tolton: [00:19:43] But I think what I'm hearing you say is there could be value and probably is value in Engaging in those kinds of processes and thinking about those kinds of things in the context of an eventual exit from this business Whether it be to your own kids Whether it be to a third party or to the next group of people that I'm about to ask you about which is your employees
Jeff Cullen: [00:20:03] Sure, but just before we move on.
Yeah, just to circle back So, I think once you've had that initial, it wouldn't be one conversation, but once you've gone through that initial hard work of who in the family wants to do it, is well suited, then I think you can develop the training and development plan you were talking about. Again, I think that would then fit into that management circle where it's like, well, the process is not, it's, it's disassociated from the fact that we have a family relationship.
If you're going to become the CFO, And you don't have the first clue about financial management. It's a pretty obvious training path, right? So, but I think it's step one first and then it leads on to, okay, a logical progression to what skills do you need?
Leah Tolton: [00:20:50] Okay, so it's not uncommon, uh, whether in a family owned enterprise or, uh, Enterprises not owned by family members, that there might be a key group of management people who've been instrumental to the success of the business and they might be possible candidates to take over from the owner.
How important is succession planning in that context and what steps could be taken to ensure a smooth transition?
Jeff Cullen: [00:21:19] Yeah. That's a great, great question. So I, again, I think it's not dissimilar from what we were just talking about on the family side, because the other scenario I've seen is owners who, once again, have made a bunch of assumptions and who just will tell me or an early discovery that Oh yeah.
You know, the employees are going to take it over and either they have had no conversations or they may have had what I like to call like the water cooler conversation where you're like, Hey, you guys want to buy the business someday? And of course people at a first blush go. A lot of them will say yes, right?
Right. The most stark example I ever had of that was we're doing a, a succession with a company and it came down to the owner was willing to basically grant stock to his key employees. So it's about a 200, 000 value, right? With an earn out, right? And the accountant was in the room and he's explaining, you know, the mechanics, how it's going to work.
And then he said, it's going to be a little tax bill, you know, for this. And one guy got up and went, well, how much tax? And again, off the top of his head, he said, I don't know, like 9, 600 bucks or whatever. And the guy was like floored. He's like, I can't afford that. Like, how am I going to come up with 9, 600?
And the accountant's like. Do you understand you're getting 200, 000 in equity for a 96, you know, 100 tax bill? Right. Would not compute. I think what's important is the same as a family member. If you, if you're an owner and you have some key staff, you have to start preparing those people to become basically business owners, right?
Because a lot of owners keep everything kind of close to the chest. And again, they make assumptions and staff make assumptions. And when you bring the realities together, and if you've got a lot of, of runway, you know, that's fine. But if someone is needing to exit in a year or six months and they're like, okay, you know, time to start talking to the staff, boy, those disconnects could be crazy.
Right. Right. Um, all sorts of stuff. Just the fact of like. A personal guarantee. People are like, whoa, hang on a second. Are you telling me I'm going to have to risk my, my house? And, and then the other thing I often talk about owners with is. If you have someone who's been an employee for 25 years, right, and they have never done one of two things, been at your heels to buy in or threatened to go across the street and start their own thing, they're probably not magically going to come a business, become a business owner.
So again, it's a question of starting with the end in mind and finding people who, yeah, you know, it's a bit of a double edged sword. They're going to be after you, but they're going to be the kind of people that actually will be. Wired to take it over. A 25 year employee probably going to be in their 40s or 50s.
Very rarely are they going to successfully Overnight go, Oh yeah, I'm willing to take on all this risk and all, you know, it's not going to happen.
Leah Tolton: [00:24:18] And what I, what I sometimes see in that scenario is that someone who's been very successful in the branch of the operation that they've run has only seen how that branch of the operation runs.
It doesn't have the big picture and therefore isn't necessarily a big picture thinker. Right. And so then you've got someone who, who may be. Less risk averse Yep. Than the person you're describing, but doesn't understand how the pieces fit together. And so then really has a, a long, uh, learning curve to figure out how it all hangs together and exactly what he has to do to make that goal.
Jeff Cullen: [00:24:51] Again, it's not impossible, but I think once. You know, somebody identifies a player that has the right temperament and the desire. It's like, we're just saying what the family think, then you can develop that training and development program. And I always think about some of these massive corporations kind of have that baked in, right?
The CEO, even if they're an internal hire, if you look at their trajectory. They've been, they spin them off and, you know, go to a stint in marketing and work in finance. Go work out in the field somewhere. Yeah, exactly. So when they get to that tier where they're being considered for senior position, they know all the business.
So yeah, that's a really good point. And of course, there's always that tendency to, to hire or to promote the best technician into the managerial role. And then everybody's just miserable because that's not who you should have promoted. Right? Now you don't have them serving the company and what they're really good at.
This is big in sales, right? And you're not developing the rest of the team. It's just a disaster half the time. So again, it's just that. Got to be, and this is where consultants can come in and, and, and be very valuable because they can take a look at it objectively and say, I've talked to this individual.
They're much better as your, as your headhunter going out there as opposed to making them train people. You know, are you kidding? Have you talked to this person, you know, have you spent time with them? You don't want them. This is not where you want this person. This is not where you want them to be, right?
Leah Tolton: [00:26:22] You've, you've talked a bit in our conversation here about, obviously about getting the business ready for sale, the things you need to think about far in advance. Yes. You know, the plans that will serve you well while you're running the business and when you're looking to exit the business. Yep. Right.
Let's talk a bit about that exit process and the nuts and bolts of it. You know, you talked about someone coming into your business and tearing it apart, which sounds pretty intimidating. It is pretty intimidating. What does that process really look like? How do people prepare themselves for that? Due diligence, yeah.
Jeff Cullen: [00:26:51] So I like to call it a colonoscopy, but not as much fun.
Leah Tolton: [00:26:58] I tell vendors, it's the most painful part of the process. Absolutely. They usually think that the deal is done when the letter of intent is signed, but the work is just starting.
Jeff Cullen: [00:27:08] Absolutely. You know, in terms of preparing for it, I think the term preparing for it just speaks a lot for itself. Right? So again, if a company is doing, if an owner is doing some of the things that we've already talked about, and again, maybe reach out to an MNA advisor early stage or an exit plan or even a broker and just have that conversation.
What are the things that a buyer is going to be looking for, right? It's all comes down to preparation, right? Because yeah, occasionally there might be a buyer that that is very difficult and looking for, you know, above and beyond. I think that's pretty rare. Most buyers just want to validate. That there's no surprises.
And, and so, and at the things that they've been told at the surface are actually true. Right. So it's a lot of the same stuff. What is the strength of the management team? What are the relationships with key customers, key vendors, right? Are they all directly related because the owner and this. person to have been friends for 20 years and as soon as they leave, there's really no loyalty there, right?
The strategy, you know, what's the competitive advantage of the business. Are they in a position where, yeah, people are still going to do business with them because They have the best service, the best product, you know, whatever that relationship, you know, where's the value? And so I think a lot of people fear due diligence.
It's like anything else if you prepare for it and unlike, you know, jokingly we talked about a colonoscopy. That's hard to prepare for, right? Right. But you can be prepared for due diligence, right? And so, you know, my wife's, you know, litigator. Yeah, I do. Same thing, right? If you go in and you've got, you've anticipated what the other side is going to be looking for and, and you're prepared and every time they go, well, what about you pull it out and you go, oh yeah, here, boom, right?
Here's our asset list. It's already prepared. Here's, here's our financials, right?
Leah Tolton: [00:28:58] So what about those things that are probably in there that maybe. Should be somewhere else. Let's put it that way. You talked about the kinds of expenses people put into corporations I think about things that cause the hiccups all the time things like real estate that's in there That's not relevant to the business or maybe the buyer doesn't want it or whatever.
Sure. You've got stuff in there that Works for you. You don't want to move it until the time is right. What do you recommend about that in terms of preparation?
Jeff Cullen: [00:29:28] Well, we touched on this before we started in that, you know, neither of us are tax experts, but again, I think it's, it's part of the overall preparation to have someone come in and take a look at structure.
Right. So if the business has real estate, that is not, uh, they own the building, but the business could just. As easily operate out of another location, maybe it makes sense to, you know, put it into a hold, or sell it, or sell it before you sell the business. So again, I think it's just a, it's having a bit of a strategy and a plan.
So if I am an owner and I, and my, my intention is to transfer it to employees. That's probably going to be different, or to family, different again. If my intention is to put on the market and sell it to an arm's length buyer, again, that's going to have a different strategic orientation that I can start to prepare for.
Even if it's a question of hedging bets and saying, well, I'm not really sure which way I want to go. But I know now closer to go time, you know, if we're going to go this way, here's the things that we need to do. And again, I know we're not tax people. There's timelines that need to be taken into account.
And again, the last thing you want is to be caught by surprise where your accountant goes, Oh, you know, it would have been really good if you had done this. Right. 18 months ago, right.
And that's great if someone is selling and they're healthy and they're in control of the process. But obviously it's not good if it's an adverse event and now they're selling under duress and it's like, oh, okay, those opportunities have sort of sailed.
Right. So it comes down to preparation, planning and thinking about what is it that I want to achieve and go find those advisors. It's keeping it obviously on the down low, which good advisors will do and give me the options. I go this way. What do I need to think about? Let it go that way. What do I need to think about?
And I think a lot of owners don't, they don't do that necessarily. I think a lot of nature, I think,
Leah Tolton: [00:31:19] Well, I think a lot of people would, would take those steps when they see an event coming or an event has happened, you know, something big has occurred. Sure. Either. A prospective buyer has appeared out of nowhere and now is coming and wants to talk seriously about a price that they don't think they can refuse, or something has happened in particular to the owner's health.
You know, there's been a health episode, there's been a death or something like that. People think about the planning in that context, but really, you know, what I'm hearing you say here is that we can do a lot. In terms of process between events. Yes. The thing is not always based on an event. It often is, but not always.
Correct. And there's a lot you can do to get yourself ready and be in a good position. Absolutely. If you employ good process between events.
Jeff Cullen: [00:32:07] Yep. Yeah. Well, let's talk maybe timeline a little bit. Yeah. Let's do that. Because again, a lot of owners think, Oh, this business is so great. You know, I'm going to put on the market and I'll be out in three months or, or whatever.
Right. And, and so I would say. Even from my, our experience as brokers, and I know it's a bit different in the M and A space, but generally we say nine to 18 months to sell, you know, from the date of listing is kind of the expectation.
Leah Tolton: [00:32:35] And so what goes on in that nine to 18 months, is that a full blown marketing plan or is that marketing letter of intent, negotiation of agreement, closing?
What does that mean?
Jeff Cullen: [00:32:46] Well, I think it would depend. Okay. So when we work, we'll, we'll have it listed in about eight weeks, six to eight weeks from when someone signs a listing. We do the valuation, most probable selling price report, you know, sit down with the owner and say, here's what, you know, here's where it's at.
And sometimes they say, well, that's not enough. You say, okay, well, if you've got some runway, go back now and do some of the things we've been talking about, you know, clean it up and then we can revalue it. In eight months or whatever, once it goes into listing, that's when the clock would start on the average, I think, 19, 18 months.
And, um, yeah, it, it, it's all those steps, right? So we do a lot to eliminate the, uh, the phrase that Sunbelt is buyers or liars. And at the end of the day. And we say that because people have done the stats and, and different offices. And if you go from the entire number of people who, who pop up and say, Hey, I'm interested to the number of people that actually buy, it's about 2%.
dreamers and tire kickers and. You know, lookie lose and that's fine, you know, life is great, but our job is to narrow that funnel. So even once we've done that, you'll still have a number of people who will look at it and, uh, not like what they see. Right. It's not a fit. Yeah. So I'd say most of that nine to 18 months is the process of marketing it.
And finding the right buyer. And then once we get into that, it's, it's a sort of a step function, right? It gets a little bit more, they show us proof of funds. Now that gets them to that next category of, okay, serious looker. Cause they signed the NDA and now they've got actually some juice to do a down payment.
Okay, great. Right. Then we take them to the next level and that might take three to six months again, depending on. The size and complexity of the business, I mean, some businesses are, are pretty straightforward. It's it's, you're selling a nail salon or, or, um, like a, like a front street business. Basically you've got an owner operator coming in to buy themselves a job, right?
It's like, okay, I know how to do the thing, been doing it independently, and I'm going to buy a business, do the same thing. That that goes pretty quick. Obviously if it's something more complex where you've got vendors and the staff and a team. It's months, but you know that because you do that all the time.
I do. Yeah. The other thing about time though is they say that's from when they would decide to take action. Right. The pre planning piece, exit planning institute, and I, and I know this from my own experience, it makes sense. We say about three to five years, eight years if it's a family business. Right.
Right. Just generally speaking. Right. Right. And I think owners are shocked by that because they think, well, it's working great now, you know, why, why,
Leah Tolton: [00:35:23] why can't I sell it now?
Jeff Cullen: [00:35:24] Yeah. And it's because of all. Why I guess You can shorten that time if you start, you know, if you started putting those things in place the day you start the business, then yeah, you don't need three to five years, but the majority of businesses don't operate that way, right?
They operate in that entrepreneurial way at first. And then they usually have this massive growth where everything is just, you know, if they hit right then it's like, Oh man, we can't even write stuff down and that's fine. But then they hit that plateau of, okay, now you need to systematize, need to make the business a little bit more.
Mature without killing the entrepreneurial energy, right? Because a lot of businesses will bring in an accountant. Everything becomes way too. It's all systematized now. Then you've killed whatever the magic is. So it's that tension between that, right? But predominantly, yeah, it's a, it's a maturity level.
So if a business does that, as soon as they've hit that point, you don't need three to five years, but most of them have chugged along for 10, 15 years without getting a little bit more formal, if you will. And then, yeah, it takes about that amount of time. To do the things we've been talking about, right?
Put a strategy in place, get those vendor relationships, diversify the market, all of that.
Leah Tolton: [00:36:38] None of it happens, right? Make sure you've got an order. Exactly. It's got some depth.
Jeff Cullen: [00:36:41] So, a good exit planner will come in and sort of be the quarterback to help a business do that. Cause it can be kind of overwhelming, but if you break it down into like 90 day sprints and, and, you know, okay, we're going to start.
And it's like I said earlier, often the best place to start is just the low hanging fruit, the simple stuff and say, Hey, we got a lot of. You know, all those things that you've been saying for years, we should write down or have a process or let's get those done first, right? It doesn't have to be these big, broad, strategic changes in direction.
In fact, most of the time, if they don't have those processes in place, they don't really have the capacity to make those big changes, right? Right. We're going to, you know, diversify into several geographic markets. Well, you guys are using pen and paper systems and whatnot. I think we need a little bit more, you know, robustness before you can actually make that a successful move, right?
So it's a step, but I think a lot of owners, part of it's reality. It's hard work. It's like, well, I'm already working like way too hard just doing the day to day stuff.
Leah Tolton: [00:37:45] And I'm working on things that make me money. Right.
Jeff Cullen: [00:37:48] Yeah. It's like personal life. If you don't plan ahead for some things, then you pay, you know, you reap what you sow, unfortunately.
Leah Tolton: [00:37:55] You pay, you pay the price at some point. There's a price to be paid for everything. Yeah, absolutely. Exactly. So, I think really the takeaway from this segment is that this is not an event, this is a process. It is. And you get the best result at the time of the event. If there's been a systematic process, ideally a robust process that started well in advance, even of the nine to 18 months that you're talking about, which involves the actual attention to the sale.
Yeah. If these matters have been considered, if the processes are in place, if the people are being developed, if the customer relationships have been solidified and you've been working on that for a number of years. That probably translates into a good result in terms of the value that we started talking about and also translates into a better exit process when the time comes.
Jeff Cullen: [00:38:47] Yeah. Can we touch on one more thing? Of course. It's, and I'm going to, I'm going to call it mindset. Sure. And I think mindset has two pieces to it. The number one is. People have to, they don't have to, they're well served. You think about exit as kind of a, it's a unique event. And just because you've been extremely successful at running the business does not mean if you've not done this before, it's, it's a whole new ball game.
And so to have that, that kind of openness to say, It's not about, you know, I've been really good at managing this part of the, the life cycle, but now I've never gone through this and it is a complex enough thing that has all these moving parts and I need to take into account all of these different facets.
I mean, I suppose I could do it, but it's very difficult to keep the ship running and then do all of this on top of it and not have the thing fall apart. The other part of the, of the, the mental or the attitude is we know from stats that even businesses that sell or exit successfully. Which is not a big number, right?
The stats are pretty shocking. It's about 1 in 10. Like a lot of businesses just won't sell at all, right? But of the 1 in 10 that exit, let's say successfully, three quarters of owners still express remorse. a year after they go through the process, even if they have a big check in their hand. And that's because of the mindset where they don't prepare themselves for the reality of, Hey, for 25 years, you've been the grand poobah.
You tell people to do stuff, they do it. Now you've got your check. You've done your two months of golf. Or whatever, which you thought you were going to play golf every day and you did, but now
Leah Tolton: [00:40:27] maybe you'd like to do something besides golf today.
Jeff Cullen: [00:40:29] The spouse is going, if you tell me one more time, you know how I could optimize how to do the laundry, I'm going to kill you.
Right? Yeah. So that's a big part of it too. It's, it's that because a lot of deals get scuttled, cold feet thing, right? Right. It's going along and then they realize. Oh my God, I haven't thought of this. Probably wake up in the middle of the night, cold sweat. Like, who am I going to be the day after I sell?
Right. And then they find some. Well, I don't like the way he looked at my vendor, so, you know, I'm canceling the deal, which is not good for you and I, because you're like, what, what, what's happening, right? So to prepare themselves and say, Hey, realistically, if you're, if you're 55 or 60 or these days, even older, right?
You still have a lot of runway, you know, what is it that is going to give you purpose so that you can step away from the business and not feel that regret? I mean, a little pang of, Hey, I miss it is different than, man, I never should have sold that business because now I've got, you know, what am I going to do?
Go to McDonald's every day and, and hang out with all the old people. It's like, yeah, right. So is it, do you want to become a mentor? Do you want to invest in something new? Do you want to, whatever the it is, it's individual and there's no right or wrong, but you got to have that it say, okay. And it helps because even as they're going through, like we talked about the painful due diligence part.
They've already got something that they can, at the end of the day, They're looking forward to. Man, that was a tough day, but it's okay, I've got that thing I'm going to. So that's a really important part.
Leah Tolton: [00:41:56] So, and, and I think I'm, what I'm hearing you say is the mindset piece is something that should be factored into the preparation in advance of the exit.
Absolutely. Last word to you. Three most important things that you have seen come up that, that you would like to advise people to watch for that are key to success for X out of their business.
Jeff Cullen: [00:42:18] Self introspection, right? We were just talking about that. So really doing that work in terms of what is it that I want?
Where am I going to, what do I want to see happen with this business? Am I happy to just walk away from it or do I want to make sure that. There's a legacy tied to the business or maybe my legacy is independent, right? So that's number one planning ahead. I mean, it's cliche, but you know, it was it was that we don't plan to fail We failed to plan right, right because there are so many potential things that can derail the process You know, some of them are external some of them might be internal But the more prepared you are, the better you can pivot when things go wrong.
Like we talked about, maybe you, the plan is to sell it to employees, but that's just not going to happen. Okay. Well, you know, am I starting from zero to put on the market or is it pretty much my plan B, right? So preparation. Right. And then I think a willingness to go find the help.
I mean, it's the funny thing with a lot of owners that I've worked with, they don't recognize, I think sometimes that they are kind of a unique cat. So I had one guy who constantly would complain about none of his employees would step up, you know, and, and I said, uh, he was, uh, on a particular industry and he'd started off back in Montreal when he was in his twenties and this guy's name was Chris.
I said, one day I said, Chris, when you started as an apprentice, you know, how many people We're working in the shop where you apprenticed and he's like, I don't know, like 30, right? So how many of the 30 started their own businesses, you know, and he thought about it and he goes like two. I was going to say one.
Chris. And another guy, right? Yeah. And I'm like, do you see that you're a unique guy, right? Like you are wired to be like a bushwhacker, but like, you know, you just go, right? And so two things are happening. A, you're expecting people who are like the 28 guys that you worked with who never went anywhere to suddenly be like you, you know, why don't they take more initiative?
Cause they're not, right?
Leah Tolton: [00:44:21] That's not how they're wired. They're not fit for that role. That's not what they want.
Jeff Cullen: [00:44:25] But it's then recognizing that. Okay. So those, those skills, those talents that have brought you this far doesn't necessarily translate. Then once you hit that plateau, right, that, that three to five year and beyond, we're now.
It's okay to go out and seek out that expertise because not, you know, we know business is complicated and as the businesses get bigger, they become more complicated. There might be a time where somebody knows enough about I can do the marketing and I can do the finance and I've got. You know, I'm doing my own cashflow, but pretty soon it becomes unmanageable.
So it's just trusting to go find the right people that you can have counsel with. And in the terms of exit planning, find that one advisor who's maybe your, your consigliere, but then that they can be the quarterback for the team. Cause you're going to need more than just that one accountant or your lawyer who's telling you.
Unless they're super lawyer, you know, but they don't know insurance. They don't know family enterprise stuff. They don't, you know, so whatever circumstance it's just trusting. Okay. I may not like to admit it, because I've always been this kind of lone wolf. I get it done, but now I'm moving into that phase where I don't, I don't know all the answers and I need, I'm going to need some help.
That would be my, my parting word. Get the help. Excellent.
Leah Tolton: [00:45:46] Yeah. Jeff, this has been a wonderful conversation. Thank you so much for joining. Thanks for having me. I am sure there are many people who have obtained many pearls of wisdom from you today and I thank you so much for taking the time. Well,
Jeff Cullen: [00:45:58] I, uh, I've enjoyed it.
Always nice to, uh, spend some time with you and, uh, we've been trying to get this together for awhile so I'm happy and yeah, thanks for having me. I got a couple of gifts for you here. Oh, fabulous party gift. So, uh, thank you. First is a book called Exit Smart Volume 5, of which I am a contributing author.
Oh, congratulations. Thank you. It's got me my Amazon author page. Oh, very good. Thank you very much. So if people want to buy it, Exit Smart Volume 5. I don't get any money out of it. Actually, I had to pay to be in the book. Well, thank you anyway. The other one. No, it's good read though. It's, it's, it's a bunch of advisors that are just talking about all the different aspects.
So it would actually be a good book for an owner to just start thinking about it. Right. The other one is a book from Sunbelt. So our ish who Tom, who is our. owner of the Edmonton office here, wrote The Secret Trump Method of Selling Your Business. Turns out if you put the word Trump in something on Amazon, it goes to the top of the, yeah, of the list.
Leah Tolton: [00:46:58] This is a bestseller in Canada.
Jeff Cullen: [00:46:58] Yeah, exactly. That's right. So again, it's a, uh, this is a book we give our clients or, or our prospects that just, again, starts that thinking process. Because I think you hit on it early on, most people just go, either they think they know what they're going to do, or they're so, I don't even know where to start.
Right? So that's a good place to start. Just a dialogue. Hey, what would it be like to sell the business? Oh, think about this. Think about that. Do this. There's all these parts.
Leah Tolton: [00:47:24] Well, thank you so much, Jeff. I Thanks for joining me on this episode of Beyond Succession, a series within the Bennett Jones Business Law Talks podcast.
Make sure to hit the follow button on whatever platform you are listening from so you get notified whenever we release new episodes. Also, don't hesitate to reach out if you have any questions about challenges or issues that you are facing in your family enterprise. Take care. I'll catch you in our next episode.
Please note that this publication presents an overview of notable legal trends and related updates. It is intended for informational purposes and not as a replacement for detailed legal advice. If you need guidance tailored to your specific circumstances, please contact one of the authors to explore how we can help you navigate your legal needs.
For permission to republish this or any other publication, contact Amrita Kochhar at kochhara@bennettjones.com.
Bennett Jones