Addison Adams 5:44
you know, cash, there’s so many I’ve closed 1000s of deals, and everyone feels good. And most of them, you know, it’s interesting, because it does seem like there’s always something right and selling a business, or buying a business, there’s a set usually takes a few months worth of of hard work of looking at every single, you know, agreement and looking at the employment pool, looking at the articles of incorporation and bylaws and other corporate documents, and just sniffing out things. And so they all require something to get there. But I did close a deal very recently, which was a nice, you know, north of $20 million deal. And the buyer was a absolute professional buyer, which you don’t always get a professional buyer. So this buyer was by professional, I mean, it was a multibillion dollar publicly traded company that had bought other businesses. And rather than come in with your standard, law firm, accounting firm, and two people at the company sort of coordinating between those two, they had a team on every single topic. So they would dive deep in on, let’s say, inventory management. And we have a zoom call with maybe 15 people on their side. Only one lawyer, one accountant, but then all their internal inventory people, you know, that know how to ask all the questions about recognition. And when do you hand cow? And you know, how do you handle the in and out? And well? Does this balance sheet item reflect like something on the truck coming from the supplier? Or is it already in the warehouse, just the level of detail that was very impressive. And it was like that on employee benefit plans on you know, record revenue record, just down the road, we had so many calls that were these giant calls with this terms of number of bodies, and then everybody was prepared. And they asked really good questions. And so that one, that one felt good to to get done, get the you know, get the client got paid. I think we have a closing dinner coming up next month. So it’s just you know, it was it was a feel good or all the way around.
Luis Scott 8:05
I mean, that sounds like a great deal. $20 million deal, you build something get 20 million for it. That’s not too bad.
Addison Adams 8:11
Yeah, well, in that case, it was all owned by one individual who started the business less than 20 years ago, from nothing. And, you know, essentially took the revenues, you know, the first year revenues were like, minimal, you low six figures, and, and then grew it up into a giant business and, you know, manufacturing company. So that’s yeah, it was it was it was a good one.
Luis Scott 8:38
So what makes a business worth buying? Because I know in the legal industry, it’s hard to sell a law firm. And I know people are trying to monetize their law firm, whether it’s through the building their brand, or having assets that are worth something such as a website, or, or maybe even even some some literature and so forth. But speaking outside of the legal industry, what what makes a business worth buying if a business and this is something that I’ve always asked if a business is making revenue, and you can essentially continue to earn that income from from this particular business for years to come. Why would someone else? Why would someone sell it? And then what why would it be worth something to someone else losing the key, the key owner?
Addison Adams 9:25
Right, great question. And the answer depends on a lot on the type of the business. And sellers have different reasons to sell. But most often, the seller is someone that’s approaching retirement. They’ve been doing this for 20 3040 years, and they don’t have a family that they you know, children that want to run the business that get handed down to them. Or or you know, maybe they might have children but the children aren’t capable or aren’t interested. So they want to they want to sell it right and then from the buyers point of view, the business it really depends So if it’s a, if it’s a manufacturing business, or if it’s a large services business, a lot of times you get the multiple on EBIT. And this is more of a financial analysis of valuation. Other times, you might have an out of state buyer that’s buying that wants to break into a local market like California. So rather than try to do it, you know, on their own, they’ll just buy someone that already has a workforce and customer list. Other businesses have good IP. And so they’re getting bought, there might be a medical device company, or biotech or something. And so they’ve got a patent library, or, you know, trade secrets, something that the buyers really more focused on that. And or maybe there’s unique talent that they’re interested in picking up. So that’s actually a great first question to ask yourself as a potential seller, is what is totally replaceable about my business, and what is unique and special, that’s going to be a strategic benefit to the buyer. Because once you know that, then you kind of know what’s driving your value. And you also from a legal point of view, you know, what to protect, you know, so if you’re an IP company, you better protect your IP and have really strong patents, trademarks, and things like that. You know, whereas if you’re not, if you’re more of a, like, if it’s a customer list, a service, you know, business, you might want to start thinking about questions of portability. And so a lot of at least smaller businesses, and I work with a lot of smaller businesses, the founder is integral to the clients and has a great relationship with the customer list. And that can be a little bit problematic, because you want to be able to have sort of that first hear of lieutenants, that also have a good relationship so that you can have the ability to, for example, take a month off and the business runs fine without you. That’s a good way of knowing that that a buyer has a chance of stepping in and having a seamless transition. You know, and a lot of times, the buyer will want to hire a founder like that for, you know, 123 years. And yeah,
Luis Scott 12:16
I actually ran into somebody one time who had had a business and they sold the business, but stayed as the vice president of a particular part of the business for like five years. And just to make sure that everything went went smoothly. And yeah, and so I could see that that happening. But what I’m hearing you say is monetize all the assets of the business. And make sure that as the owner, you’re not the most integral part of the business. And that’s going to give you the best chance of finding a buyer.
Addison Adams 12:48
That’s good advice, whether you’re selling or not. Right, back to the word delegate. Right? And if that’s, you know, if that makes sense, because you do want a business that can more or less run itself. You know, I think you’ve mentioned law firms selling a law firm has that problem, because so many, you know, clients of the law firm have a relationship with, you know, the attorney that’s killing them. Yeah. And so there’s that fear of, well, if the attorney goes to another firm, and they’ll take the client, the clients will follow. And so that’s always a risk in any service business when you’re buying it, but it does seem to be uniquely special with with lawyers. Yeah. You know, but whether, you know, it still makes sense, I think, to buy service businesses, they work out, you know, real well, often, and but there is a little more focus on, on retention. And so that idea of hiring, the key employees, not only the owner, but the, you know, the people that you really need to stick around giving them some incentives. What I’ve seen lately, there’s always been this issue of earnouts, which you might have heard about. But related turnout is a real equity rollover, and on, especially on the bigger deals, that’s becoming more and more prevalent where, and in case that someone doesn’t know what an urn out is, that is a way to bridge the gap on purchase price. And so let’s say the deal is for $10 million, as an example. But the buyer is not sure it’s worth 10. They’re comfortable at 8 million, but the seller is not selling for less than 10. So how do you close that $2 million dollar gap. And so an earn out would say, Well, we’ll see how this business does in the one or two years or three years after the sale. And if you hit certain revenue and profit targets or other kinds of performance metrics, then the buyer will kick in the extra money. And so that’s how you get an urn out. It’s a contingent purchase price paid on a deferred basis, based on the business doing sort of as projected, or at least not worse, you know, not too bad. That’s similar to but different from a deferred purchase price where you can have like seller financing, and just going to pay a couple years later. And then there’s this equity rollover idea, which is, which I’ve seen pretty, you know, worked out pretty good. Many times when the buyer is some strategic buyer, that’s private equity owned, and the buyer has a plan, they said, Look, we’re buying you, but we’re also buying five other companies like you write them all together, we’re gonna put our economies of scale and our, you know, amazing executive team to supplement your team. And we’re going to grow and we’re going to sell the whole thing, you know, five years for billions of dollars. And as part of that, we’ll let you roll over. So in my example, the $10 million example, there could be a $2 million equity rollover, where you get paid the 8 million at close and the 2 million and gets turned into equity of the parent company.
Luis Scott 15:54
And then when it sells, you get the extra,
Addison Adams 15:57
then you get a second bite at the apple on the bigger price, a lot more than 10. Right, and it gives you gives you an incentive to help the buyer succeed and grow. You know, obviously, you’d be an expert on what you sold them. And you know, but now you’re part of the bigger thing. Yeah,
Luis Scott 16:15
I like that idea, actually, because I, I’ve thought before that that it would be it’d be cool. If like one of the big i By the way, I’m not selling my consulting business. But if like a big consulting business came in and said, hey, we’d love to make you part of our thing, work with us for a little bit, and you get a piece of the big pie. Like, I’ve always thought that I didn’t realize that there was an actual mechanism for making that a reality. So that’s kind of cool that there’s like a legal way to do that. Tell me about opportunity. Because, you know, I, I’m pretty young. And but I do think about how am I going to expand? And the question is, do you expand by brute force and marketing and expansion? Or do you buy a business? And that’s something that I’m always thinking about, you know, I go online, and I research like, consulting firms I may be selling and, you know, how do I how do I expand? So but how do you find the opportunity? Like, how do I know that I have a good opportunity and and also go ahead and touch on on a question that we had in the in the in the pre show, which was about baby boomers, because I heard recently, that you need to go out, you need to start befriending baby boomers, and have them sell you their business. So talk to me about that strategy. And how you actually find this deal. If you’re wanting to buy, sure happy
Addison Adams 17:31
to do that. What I see most often in terms of the companies that are getting bought is they’re getting bought by someone that they know someone in the business in the industry, it’s a competitor, they may already be selling or buying, you know, with them as part of their business. And so there’s, there’s a relationship, and a lot of times it goes back for years. And and that’s a way for there to be a higher level of trust, right, you’ve already got some, some experience with them. And they with you, and so you, your friends, that kind of thing in the business. And so that’s a great way to find a company to buy, or to get bought. You know, because a big part of either one of those is what happens right after the closing, because you want it to be a successful integration of the two businesses, the cultures, those types of things. So setting that aside, as you know, what else can you do? To find a find something to buy? Typically, you can go on some websites. So I know that there’s been a lot of small businesses getting listed on biz buy sell is a is an example. You can hire biocide, Business Brokers, or even investment bankers. Both of those do similar functions, they have different licensing requirements, the Business Brokers tend to be in the under $10 million range, more or less, and the investment bankers are in the over $10 million range. And so but both of them tend to take on, you know, both a combination of a kind of a fee and monthly fee, do the look and commission on clothes, if they find something that you go ahead and buy.
Luis Scott 19:14
So those are typical commission on something like that it does vary or there
Addison Adams 19:20
is so when you’re at the bigger numbers, you know, the north of 10 million, so you get the 20, you know, you might see something that’s around 5%. And it might even be like a scale. So they might say, you know, might start at seven and it might go down to three as you hit different like price points. And then at the below 10 million range, you see higher percentages, you know, as much as 10%. And and for both of them, there’s usually going to be some kind of cost, like a monthly cost to As your and or an onboarding costs that might be anywhere from five to 20,000 a month, you know, or as an onboard fee to put together like the whole pitch deck and presentation materials. The fees, you know, makes a big difference if you’re talking about a, like I said, a small business or a big business and and the
Luis Scott 20:18
cost involved. When you say 20,000 A month that’s For how many months just during the time of the of the snap before,
Addison Adams 20:25
like a big and get like a big engagement, something in the 3040 $50 million range. Yeah. And, and it would just be ongoing until you decide and you’re done. You’re done with that.
Luis Scott 20:35
So So are baby boomers the right place to go find friends, because you said it’s usually sold to somebody they know for four or five years. So is that the place to go? Like, are they selling their businesses? What’s happening? Today?
Addison Adams 20:47
They are and so a friend of mine Bertram, mashallah AMCAP advisors put together a nice slide deck. He’s a banker. And it’s sort of a, you know, it’s the idea is the potential for baby boomer retirement to drive m&a activity. And so the analysis he did is he said, Alright, if people retire around, I think it’s age 65 Is the goal. Then you say, well, when were they born? And, you know, so this year is retirees is at one of the, as far as people, you know, the baby boomer bolds, we’re right in the middle of the height of that, in what is it 19. It started in 1947. And kind of goes until like the early 60s, right. So so. So the, so this year, the last two years, actually, and and the next three years, is at the height of when the baby boomer generation is looking to retire. So that is perceived as a lot of built up demand to sell people want to sell when they retire. So I guess the context here is, and I understand your question is where do we go to find them? And I guess the quick answer is, well, they’re everywhere, right? Because, you know, it’s like, well, but the fact is that, you know, you’re right, there’s a lot of people that want to retire around now. And so that should be pushing the number of deals higher, you know, but we do we have seen 2021 was just a giant year in terms of deal flow. 22 was less than 23 was less. And so the question is, well, which way is 24 going to go in terms of number of companies available to buy, and actually getting, you know, bought, and so we have high interest rates, which depresses the ability to buy businesses, it certainly affects private equity, who always does equity plus debt. And so if your debt is expensive, then you can, you know, doesn’t, you can’t afford to pay as much for business. You know, so, so we are predicting this will be a another, like an increasing year, as far as number of deals, because we’re seeing signs that interest rates will go down. But we also see some sign that people have been, you know, waiting to sell. And there certainly seems to be capital in the wings. Yeah. So. So
Luis Scott 23:18
I will see, it’s a good time, then. It’s a good time. Yeah, it’s a good time all around if you know, if you have if you’re prepared. So give me the three things a person wants to buy. This is of great interest to me personally, because I am. I have considered I’m not in the market actively. But I have considered buying a business to accelerate the growth of my current business. What were what would be the three things you would tell me that I need to have, in order to make this successful? What would be those three things being?
Addison Adams 23:53
Well, for a consulting business, the first thing I would want to understand is, that sounds like a people business. And so I suppose the first question you’re asking is, am I buying the business? Does it have name brand value? Or am I just hiring the people? And, and so maybe, you know, because there’s, you can always just hire people, rather than buy the business, you know, that’s a way to do it. You know, assuming someone’s willing to come work for you. Now, if you’re going to come in and try to basically buy the whole business, then the first thing of course, is to understand what everyone’s goal is, is anybody planning on going home and you know, retiring, or did they want to come work for you? What’s in it for them? You know, so, great idea all the time. What’s in it for them? Ask yourself that? Of course, you need to see their financial statements, you need to see their actual collections, their billing, you know, do they have any kind of collection problem, look at their clients, you know, look at their Top 10 Top 20 clients how solid are they? How are they going to stay? You know, because if a, if you buy them, you know, assuming certain revenue, and then they lose their number one client, you know, price goes down. Yeah, so I would say those are the two, the two number one things. And then you know, and then kind of there’s this feeling that you get, you do need to follow your instincts, like do you like these people? Do you like this business? Is it a good fit for your business? Is it a good complement? How’s it going to actually work? Are they in a different state? Are they down the street? You know, are you going to? Are they going to integrate? Well? Do you have sort of any policies and procedures that are going to rub people the wrong way? In? Or do you need to come up with some that are going to make things smoother? So you can keep tabs on things? What about rates, you know, are you going to make them raise their rates and lose their clients. So as you can see, a lot of it is very practical advice. And that’s a big part of my job as a lawyer is helping clients walk through the checklist, like business reality business practical questions. Yeah. And then, you know, then I guess you can get into some of the brass tacks about Office leases and contracts. And does anybody have, you know, windfall rights to get paid something? You know, that’s part of the diligence. And,
Luis Scott 26:29
you know, it’s interesting, as you mentioned, that this is just practical things. But when you’re in the moment, you don’t even think about the practical things like you need someone who guides you through that process, because you can miss something, that that’s common sense, because you’re not experienced enough to be, you know, in that environment. And so I, I do believe, you know, getting somebody like yourself, who, who has done a lot of deals, who understands the market is actually the best, the best way to do that. So, we’ve,
Addison Adams 27:02
it’s very helpful, I think, because I, my team, and I, we do come in in a very organized way, right? We have our, our list our checklists, and we say, Okay, let’s go, let’s go through it. Who are the owners? Can we prove it? What’s the chain of title? Okay, what legal contracts? Have you signed to give us copies of everything? Okay, how’s your payroll? You do it? Right. Do you have any employment problems? Are you paying people’s contractors that should be employees? You know, we just kind of go through that happens a lot is all the way down. Right? Of course, you know, always find problems. Be you know, but then you say, Okay, well, how are we going to fix that? You know, and, you know, is there five years of doing something wrong, and there might be a risk that, you know, someone has to pay attacks or do something, you know, suddenly we say, alright, let’s just put it on paper. Who if that risk happens, who’s paid for it? Awesome. Yeah, I agree.
Luis Scott 27:59
I agree. Well, we’ve been listening to Addison Adams, who is the lawyer who closes deals from California. And one last question, what does it take to be a successful business owner, entrepreneur, you’ve seen so many deals, you’ve seen people buy and sell you, yourself are an entrepreneur? What does it take to be a successful entrepreneur?
Addison Adams 28:21
Gosh, that is a great question. I feel like there’s a long answer and probably 1000 books on answering that question. From what I’ve seen, though, it’s a calm demeanor. A a well reasoned approach, and a trust in your advisors. And so you know, hiring the right accountant, the right attorney, the right Vice President, I mean, you just have to, you know, build anything big. You can’t do it on your own. And you do you need to bring in the right person for the job. And there’s a lot of jobs that need to get done. So, you know, and then of course, there’s there is no, there is no way around, you know, hard work comes in handy. Just being willing to do it right.
Luis Scott 29:12
The other day, I posted something I said that the secret to success. And then I put hard work. And I think that that’s absolutely true. If there’s a listener out there who’s interested in buying or selling, or getting more information about the process of a deal that they may be working on, how can they get in touch with you?
Addison Adams 29:29
So I have started a firm it’s called Adams Corporate Law. That’s our website, Adamscorporatelaw.com. We’re a team of lawyers that are focused on one thing, which is closing deals, we write contracts, you can send me an email, Addison@Adamscorporatelaw.com. You can also look me up on LinkedIn, at Addison Adams, and you’ll know you found the right one if it says the lawyer that closes deals.
Luis Scott 29:56
Awesome. Well, we’ll put all that in the show notes. And so if you have a question about closing a deal buying selling Adams Corporate Law you can get in touch with them by going to their website. Addison, thank you for being on the show. You’ve been listening to The Guts and Glory Show.
Outro 30:12
You’ve been listening to The Guts and Glory Show for more. And to learn more about Luis hit the website at LuisScottjr.com for consulting opportunities, 8figurefirm.com That’s the number 8figurefirm.com We hope you’ve enjoyed this show. Make sure to like rate and review and we’ll see you next time on The Guts and Glory Show.
