The Exit Playbook: How to Sell a Business the Right Way

Welcome everybody to another edition of ATL alts. This is your host, Andre Sendate. I'd like to welcome back for our third and final episode of this three part series with Brad Gunter, the CEO and founder of High Point Advisory Group. Brad, It's Friday, it's June 5th.

I know we have a long weekend, well, not long, but a busy weekend ahead of us. So I'm glad that we could record part three today, June 5th, and talk about the exit in our three part series. But how you doing? Good, good.

You mentioned it's long. Even the long ones are kind of short for me. So we'll get to it. Enough fun.

Yeah, we both have a lot going on and busy work days and busy families. So today we want to talk about in episode three, the exit, episode one, we talked about helping as advisors, as RIAs, as intermediaries to clients. You know, how do we go about assisting them and being a strategic advisor as an RIA or an intermediary, a family office to a business owner who wants to make an acquisition, how we can position and partner with you guys, how we're doing that at gpwa. So episode one, if you have not checked that out, I'd encourage you to go back and check out episode one where we talked a lot about due diligence and being an asset, you know, and, and helping a business owner client through the diligence process and through, you know, acquiring assets.

Episode two, which we recorded, you know, just recently, we talked about operationalizing the infrastructure and really running the business. And today we're going to talk about the exit. And it seems like everybody wants to feed at the trough when there's a liquidity event, right? The M and A, the bankers, the attorneys, the tax people, the RIAs.

And I think what we're trying to make the argument is that there's a great opportunity to insert yourself and to be assistants to the CEO and founder along the way. So this is going to be kind of the natural, you know, peak of the, of the three part trilogy, if you will. And it's really where I think GPWA EnduranceX and really high Point can, can, can shine because I think we in unique ways can add a lot of value to the client around this liquidity event, which is a unique situation.

So I'd like to talk a lot about that. But really keep with the rhythm of episodes one and two, which is trying to transfer a lot of value to RIAs and others who are listening to the show. So let's talk about this mindset shift. We spent the Two episodes talking about building up to this moment.

We've bought the business or the business is running, it's generating cash flow, we've operationalized it, we've got really good metrics, we've got governance, we've got all sorts of policies and procedures in place and things are going well. We talked a lot about that in episode two of institutionalizing it and running it like an asset right in the portfolio. And now we're at the exit. For most owners, this will be the single biggest event, and sometimes it's a serial event, but sometimes it's the single biggest event in their financial lives.

This liquidity event and we've talked about this could represent 75, 80% of the client's net wealth, net worth. And so it's a meaningful opportunity not only for the client, but also for the advisor, right, to really step in and support their client. What's the mindset shift, Brad, that has to happen before we can navigate this exit well, and where do most owners get stuck? Yeah, I mean it's, it's really a, it's a complete shift in their life.

Right. I think, you know, you kind of ask yourself, you know, everybody says, great, I'm ready to sell. That doesn't mean you're exit ready. Right?

You know, that's one is a feeling. One is very black. I mean, it's never black and white, but there's, you know, scale of 1 to 10, you're above an 8 probably, if you're well prepared there. When I think about this from kind of an exit ready versus a, you know, I'm ready to sell standpoint, you kind of need to think about this from a buyer's perspective, right?

So you've got, I mean, just like with cars, right, You've got people that want to buy the brand new Rolls Royce, you know, pay top dollar for it, maybe a tax write off their business owner, but they, you know, they're, they're looking for that top shelf asset with no flaws, no anything. Then you've got other people that, and they just want to deal with, right? If, if you've got hair on it, if, if there's something wrong with it that they can easily fix. Sweet.

Let me offer you a huge seller note and something like that. So you want to think about that spectrum and there are good buyers on both sides of that, but which one do you want to exit for? One's paying three to five times ebitda, four to six times ebitda, and getting very creative with the, with, with the terms and that type of thing. On the other end of the spectrum, you have private equity buyers that are saying, hey, I have cash, I need to allocate, I need, I'd like to do it for something that's not going to be a massive headache from an operation side once we enter our operation phase where we try to realize more value on it.

So when you think about where those businesses go, one is a much higher multiple than the other and you want to make sure you're on the right side of that. So, you know, I think the clean test there on are you actually ready to sell is could a QE team, could a, could lawyers, could a lender go through the business without having substantial issues and completely readjusting it? If you can say yes confidently or you hire a third party to evaluate that you are exit ready at that point?

Yeah, yeah, it sounds like it's almost in a way. There's a lot of operational steps that need to happen. We've talked a lot about that in episodes one and two. So I hope people will go back and especially RIAs who again, what we're saying with Endurance X and GPWA is we are here to try to assemble a team of what we feel like are experts in their craft, experts in their space.

And so High Point Advisory Group for us is a really strategic partner because when we have clients who are thinking about buying businesses, selling businesses or enhancing their business, we as the RAA are not stepping in at GBWA and doing all of that work. What we are doing is bringing alongside us the High Point Advisory Group team and Brad to help inform the conversation and help educate the CEO business owner. Obviously most RIAs want to be there at the table and know when these meaningful events are going to happen and they want to be there ahead of time.

But it almost sounds like there's a philosophical conversation too, which is there's a lot that goes into running this exit process and a lot of time that's invested ahead of time and it, it then opens you up, you know, to a lot more options if you're exit ready. Is that fair to say? That's absolutely true. I mean it is.

You know, I wish you could just wake up and decide, hey, I'm selling today. But it is, it's a years long process if you do it right. Some people take that approach. It doesn't usually go well, but I mean, just organize, organizing your advisors, finding a buyer and selling for anything less than a fire sale is going to take six months to a year at warp speed.

Yeah, yeah. So There's a phrase that comes up in the wealth management world or the, I guess the advisory world, which is the wealth event, you know, in quotes. You have clients that have worked for 20, 30, 40 years, maybe multi generations. And we're seeing a lot of this today in the middle market, the lower middle market, where business owners are just either fatigued or they're, you know, they've hit that age of retirement, they've worked their whole life and their children don't want the business or, you know, maybe there's some type of family event, maybe a health issue, a divorce and the business is, is going to be sold.

And for the client, they've been an operator, right. They've been a manager, they've been building this, that, you know, company over decades with their management team. And yet it's the single biggest event for them financially, you know, maybe in their whole life, you know, greatly eclipsing the sale of a home. Right, etc.

So you're talking about, you know, somebody that might have a nine figure portfolio at the end of this, right? And, and certainly it could be for a 2050, 100 million dollar revenue business on a multiple of four, six, eight times. Right. That's a substantial liquidity event.

Why is this transition, when you talk about those big dollars, why is this transition just underestimated by people? And why is this mindset that we can prepare at the last minute to do this still pervasive? And really, what's the RIA's role in helping to make sure that, that you don't have that type of scenario on your hands for your single biggest client? Yeah, no, that's a great question.

I believe. You gotta, you gotta realize who some of these people are. Right? They are, you know, they've been at this for 30 years.

They are likely either they've taken the time to prep and engineer their way out of the business and they're operating on the business. That's a select few. I would say it's, it's probably less than 30% of businesses are actually doing that. A lot of them keep that head honcho in there making the, making the calls, calling the shots, really driving the business forward.

In their mind, they've been successful at everything else that they've done. Why would this be any different? Right? I mean, why you're telling me some accountant's going to come in and tell me how to run my business and exit it better?

Yeah. Right. Okay. The thing I think a lot of these guys and ladies forget is, you know, they're an expert at that business.

They are the best person in the world at running that business. There's also different skill sets. Kind of like we talk about with endurance X and the whole platform. Andres, I'm sure I could teach you enough to be dangerous in, in what we do.

That said, you're never going to be a master at it because you're focused on the liquid side. Right? We've chosen to focus here. You want a specialist, it's kind of like the surgery.

You want a, do you want a general surgeon doing heart surgery on you? Do you want them doing brain surgery? You know, we're doing heart in the morning, brain in the afternoon and knee surgery the following day. No, you want specialists that take nothing but reps in this field to do do it.

So I think that's probably the biggest issue is folks just not understanding the complexity to do it. The other big piece, and again, call me bias on the financial side, a lot of these guys go into it and say, oh no, I understand the financials based on gut feel and what I've been looking at the same P and L for 30 years. I know what's really going on with these numbers. I'll just explain it to them.

I hate to tell you this, you're a little bit biased at that point. And also if you manipulate it for every dollar you know, you made the illusion it's not really five to eight times. It may be 10x if you're above $100 million, but it may be much more than that depending on the industry. I mean, we've got some data center clients that are trading at 20, 25 times multiples right now.

Every dollar you can manipulate is a drastic upswing in price. The same thing on a QOE when it gets shifted down. So at the end of the day, you need your accountant and their accountant and the quality of earnings team and legal and everyone else to come to a meeting of the minds and on what exactly your business represents and what the go forward EBITDA is going to be. That's all that matters.

You can't sell it. Right. A lot of people think you can just sell it through that process and it's just not going to happen. Yeah, we talk a lot about at gpwa and I know this is something that we, you know, we, we aligned on really well was this continuum of wealth.

And you know, in episode two you talked about this off, you know, family office roadmap readiness. Right. And it's order to get to a liquidity event and to the point where you can really establish a thriving family office. And we know that those all look and act and behave differently.

Just you look at one, you've seen one, they're all operating differently. But this continuum of wealth construct that we've talked about is similar to this family office roadmap journey that I think you guys are taking clients on, which is really establishing at point zero. Like, do we have a successful, healthy, yes, we can tweak it and improve it, but do we have something that's generating cash flow that necessitates now all of us, you know, and, and, and gives us all the opportunity to participate?

Because if we don't have a successful thing, a business, an operating company that's throwing off cash flow consistently, there's, there's really no point, right in, in all of these discussions that we're having, but that's just the beginning. From there, this continuum of wealth expands. Right? We talked about real estate, we talked about ip, we talked about setting up different operating structures.

And so I think that's where, you know, for me, the light bulbs really gone off. And talking with you is RIAs have the opportunity to partner with somebody like you guys, and there's great firms out there, but, you know, you guys are right here in our backyard and we sit with clients and we can educate them on this continuum. We can help them understand where you guys fit in at High Point Advisory Group in terms of quality of earnings work, financial and accounting work, assisting them through M and A and capital markets and capital raising, which, which we can complement one another on.

So I think this, this continuum of wealth and this family office roadmap, I mean, they can be really great tools for those RIAs out there that are listening. Let's talk about the sell side playbook though, and let's get into some of the mechanics because, you know, when an owner says, you know, hey, advisor, I'm thinking about in 18 months, you know, we're selling and is that enough time? You know, what's the honest answer? What does an advisor need to be saying back to them in terms of what's a realistic prep timeline?

I know we've talked a lot about start early, get organized, you know, have the data and the metrics and, you know, really focus on cleaning it up. But what does the timeline look like? Yeah, I would say there's always a timeline. You know, preferably you start planning for the exit the day you start the business.

Right? I mean, that's, that's the dream scenario. But some of this takes time. A buyer is going to look at at least three years of financials.

Okay? So a common mistake in the lower middle market is especially if you've got an S corp, you've got a lifestyle business where you're running things through it, every dollar you save in taxes is multiplied by whatever your multiple is, right? It's four to six times. You can't.

There's nothing I can do, Andre. There's nothing you can do. There's nothing your client can do to, to fix that, right. Unless you're gonna go refile tax returns and admit that, hey, I, I undercut my tax bill two years ago.

Let's figure out how to speed this thing up, which no one does, right? So there are some things that you just can't affect. The bigger one is the tax planning, right? I mean some things, you know, QSBS is a great example that's going to take five years to get in place and actually start the clock on it.

Those tools aren't even those clubs, if you like the golf analogy. It's not even in the bag if we don't have the full five years to do it. Now there are some other strategies. I know we've talked lost and that type of thing.

There are other things we can implement and go from there. So I would say if, if they, there's something you just can't do, right? If, if we've got a health issue and the owner is just forced to take a step back, I would strongly recommend a sell side assessment. We do a lot of quick hit assessments to say, hey, we're not going to spend a month with three people diving into this from a quality burning standpoint.

But let's quickly check the boxes and see what we can fix. It's worth the ROI to try to fix as much as possible going back in time. Some things we can't touch, right. If you've got an inventory system that's never been maintained, if you've got no WIP or job costing, I can't just make those numbers up.

But there are some items we can go back and clean depending on the types of business. So depending on the type of business, that may be a solution. If it's 18 months in advance or so. Again, I would try to go backwards to the extent possible and then start prepping there.

Ideally three years is kind of the magic number five if you want the full tax planning. But that, that's kind of what it looks like. Is that answering the question? Yeah, it does.

Because I think as advisors, like I said, we, we are in this cadence of having regular dialogue with our clients and if there's an RA listening, right. They, they have a book of business and that book of business is all over the board. Perhaps it's concentrated in, maybe they've gone after the five to $10 million families, maybe they've gone after the one to three million. Maybe they're focused on the, you know, the people that have had liquidity events or multi generational family office type wealth planners.

We have an audience that's all across the board. But I think all of them probably interact with business owners. And those business owners own businesses, they have holdings, they have investments, clearly. Right.

That's why they've retained an independent advisor. I think the big thing is we have that regular call. I think what we're saying is the cta, the call to action for people listening is start having conversations early and start thinking. The moment you have an owner who's thinking about acquiring businesses, start thinking about who's your advisor partner that you're going to put next to you on one of those quarterly calls or semi annual calls or when not to talk about the business.

And what's the roadmap look like, what's the exit readiness look like, what's the timeframe look like? And there are sounds like alarm bells should be going off if somebody says, hey, we want to sell next year. Yes. And, and, and obviously if that's the first time you've heard that, you might not be, you know, in the post liquidity event plans.

Right. There might be another advisor like waiting in the wings. But yeah, I think, I think you addressed it. Oh, so just to kind of double down there, you don't have to ask, hey, what's your exit plan?

The, the question's more hey, what's the five year strategy? And if your client's 75 and doesn't have a five year strategy that involves an exit, that's where I would double down into it. If they're 45, I mean you never know when folks are starting to play on this kind of thing. You see it all the time where an entrepreneur treats it like, you know, use car lot, hey, I'm gonna trade this one in, I'm gonna buy something else or I'm gonna invest here, invest there.

Right. So I understand the plan and we're not trying to leave you guys on an island. Right. Again, I don't, I don't handle any investments for my clients.

I say Andre or one of our other partners on the platform. Can you help allocate resources or look at specific investments for this client. That is not my area of expertise other than from an operating evaluation standpoint. We're happy to be that expert on it.

So again, I'm not asking you to say to ambush your client on a call, but it's more, hey, let's, let's see what this looks like. Right? Like we've got a firm that does quality of earning analysis all the time. They know exactly how this thing's going to get adjusted or what it could potentially be worth.

We're happy to walk in the door and do a complimentary assessment of what we see there. Now, the risk they might not like it, but they're not going to like it no matter when that pops up. Right. Whether it's five years for best case scenario, we write a report and say, you guys are the cleanest company we've ever seen.

See you at the exit table. That sounds awesome. I hope we get to do a quality of earnings on you because it's going to take me a week. It's going to be very clean and I can write a nice pretty report and call it a day.

You go on your way. Worst case scenario is a little bumpy. It's, hey, here are the things you need to address. But at least you're finding it now with time to plug those holes, fix those gaps.

So you're, you're kind of filling those things in or, you know, you're caulking it and painting over. So there's no adjustment downwards at the exit table. At that point, it's just too late. Yeah.

And you look like a hero as an RIA. And again, all of this is meant to empower RIAs in the Endurance X marketplace to have the ability to say, hey, Brad, I have this new client. They've got this complicated structure. They own real estate, they have a couple of operating businesses.

This one's crushing it. This one they just bought. I've never had somebody like you to be able to go into the client and sit down with and say, can I introduce you to our, to our new partner? Right.

And that's what this is about. Right. That's why we're doing this whole series, is to just equip and empower and inform ras to know this is another important tool in the belt that you can now take to go win clients, to go enhance the client conversations. So I hope that RAs are hearing that through the series that we're doing.

Let's keep going with the sell side playbook. Walk us through the quality of earnings. If you Could I know that we've used that term over the first and second episodes and we've talked a little bit about it. Most owners probably assume that the buyer will run the QOE and don't see why they'd pay for one themselves.

Like why a seller, right, would engage a firm to do a QoE. Why is this one of the most expensive mistakes that an owner can make and talk us through it? Maybe you have some examples. Yeah, I'd say so.

In episode one, I think we walked through this. I'll be repeating a little bit of that input. It's kind of the same thing, but from the other side of the table here, the quality of earnings just to quickly reset in case anybody missed that episode. You're verifying EBITDA that's going to move forward with the purchase, right?

So with the current staff, the current operations, the current sales team as it's going to be sitting there the moment after the transaction, what is that EBITDA going to look like? Okay, the reason, I mean, there are a couple of reasons you do it on the sell side. One is you want the answer and you want to walk into negotiations and say, no, this is the price done, or these are the terms done and we've already had somebody. Now you're still probably going to get a buy side QE as well.

Right? But now there are two group to two highly qualified groups arguing about it, not just one. It would be like showing up to a boxing match and one team gets a boxer, one team gets me. We're going to get killed, right?

Like there's just nothing we can do on it. You want to make sure you're, I mean, or showing up to court without a lawyer. You don't even know how to play the game at that point. So you're looking, you're basically, I would say, kind of strength.

You're nailing down your defenses at that point and going ahead and verifying anything. The other piece of it is you can punt the sale for six months or a year or however long it takes us to clean it. It may be two months, right? If there's something minor we can clean up, let's find that out and go for it.

I mean, again, I've seen a recent one where it goes from, hey, it's a $50 million exit 5 and earn out 10 in cash to 3 million in cash and the rest is an earn out that they may never see. Right? That's their entire life's work boiled down to very little. I don't know that they'll have enough to retire at that point.

So that kills the entire sale. And again, Andres, I don't know about you, if you've ever tried to reinvest a seller note, it doesn't really work as well as cash. Right? Yeah, right.

I was just saying, like an RIA is going from maybe getting 5 million to invest and 10 million to maybe two and a half million and then maybe in three years you're going to get another, you know, few million. So it's like, why not being you have a vested interest as an RIA to help this seller get the maximum value and the best terms. Right. And is it, you know, better to have, you know, one in hand, two in the bush?

That's a, that's a, that's a decision. But it sounds like what you're talking about is that a QOE actually can enhance the deal terms and it can obviously increase certainty of execution. It's kind of like, you know, you're negotiating something. Do you want to do on your paper or theirs?

Where do you want to start is kind of the one way to look at that. The other thing just to kind of double down on that as well. There are other groups that require this. Right.

So don't. If there. And I was talking about this with the M and A advisor the other day. Brokers, M and A advisors and investment banks all do the exact same thing, all very different processes.

That's, that's kind of the gap there. The more sophisticated in that stack you get, the more likely you're going to see a sell side qe, frankly, because they're going to spend a lot of time, resources and cash prepping your company for sale or for some type of minority investment. They want to make sure nothing's going to come up at the closing table. For instance, that scenario.

Do you think it's great for the bank that they're not going to get their fees or they're going to get them in five years or whenever the earn out takes place or the seller note takes place? No, they're not happy with that either. And in that point they're looking at broken deal fees. So a lot of banks will require it.

More and more M and A shops are requiring this type of thing. So we have arrangements with a couple of these where, you know, if it's a big enough deal, you know, if your business is a pizza parlor, probably don't need to do that. Right. It doesn't make sense.

We can do a quick checklist on that one if you want we don't do a lot of pizza parlors, for example. But you may not want to spend the money when you're, you're talking 20, 30, 50 million, $100 million dollar, we've done up to 450 those transactions. It's worth the money for either a sell side QE or at the very least an assessment. Right.

We don't have to write the full report with all the liability that comes with it. We can look at it and say, hey, here's what they're going to find here. Are these skeletons, would you like to exhume those and take care of it or would you like to find a way to at least kind of iron up that process a little bit? Yeah, yeah, no doubt.

I mean it sounds like it can be a very expensive valuation, oversight or mistake. And hopefully RIAs that are listening and folks that are advising, you know, these owners are thoughtful to, you know, get a partner, right. Get somebody started in that conversation with the client and, and hopefully try to avoid those. Let's keep moving.

You know, the, the buyer universe. If you look at private equity over the last 20 years, it's just dramatically changed, right? Like you, you probably had a lot more strategic transactions, a lot more buyers selling to other corporates or other middle market, you know, companies. Now you've got private equity over the last 20, 30 years, that's just become a massive player, the financial sponsor community.

But you also have search funds, you have ESOPs, you have family office, you have found the sponsors, you have independent sponsors with this litany of buyers out there for a business, for a 20, 30, 40 million dollar revenue business. Right? Who's at the table today across all those groups, you know, who's buying and, and you know, maybe we go through several of them and talk about like, what is the ideal deal for those different types of groups? Yeah, no, great question.

So let's start kind of at the bottom there, I would say. I mean the. Sorry. On social media you see a lot of the memes and stuff making fun of search funds and the sweaty MBA is trying to compete with private equity and they're trying to deal a lot of the search funds.

It's an SBA transaction is what they're looking for, which is, it's extremely common. Right. So those deals, the SBA caps currently at about 5 million, I believe it's about to go up to 10 or so. I know there have been a number of opinions on some of the things that have come out there, but let's say that does go up to 10.

So now you're saying 5 to 10 million dollars or is the max loan purchase or loan agreement. Now what we talked about, I believe it was episode one as well, is there's a lot of liability that comes with that. Right. You're not going to get an SBA loan where you don't lose the house depending on the state.

You know, I know there are some homestead states where you can't really touch that, but you're going to personally guarantee it. Right. You are on the hook for that loan at that point. So that's what you're going to find there as a seller.

Welcome to the sba. It's not the most fun process to go through expectations. I've got, I've actually got a great SBA guide if anybody needs one. But expect warp speed, 60, 65 days.

Realistically probably 90 days or so. Just going through the banking process now. You can layer on diligence, you can layer on legal diligence, you can layer on all those things during it, but it is not a fun process. It's like getting excited about an audit.

It's just not going to happen. Right. Moving up the stack. Some independent sponsors, we work with quite a few of those.

Those are more sophisticated, sophisticated buyers at that point. What they're doing is going out, locating the deal, negotiating the terms and then turning around and finding the capital. Right. So we're actually helping one right now.

They found about a 3 million dollar EBITDA company. Looks great to the, to this point, without getting too specific, we're going to verify ebitda. Then they're going to turn around to their investors that they've already touched base with and gone to market with. And what those guys are doing is they are kind of floating some of those initial costs on the qoe, on flying around to meet with people.

The, the higher in the stack you go, the more important that face to face interaction seems to be to show interest. With a lot of business owners, they take this very personally. It is their baby. And then they're, they're kind of transacting there.

So that's become a lot more popular, I would say in the last five years or so with the independent sponsor side, you skip up the stack, you get into more of the private equity realm. Right. They used to be 2 million plus, period. They're starting to creep down.

Right. You're seeing more and more small private equity firms, I think, I mean, just the pure number of private equity firms over the last five, ten years. I mean there's some Interesting statistics that have come out on that. But seems like everybody and their brother have a private equity firm of some type at this point and that's causing them to compete a little bit more and drive them lower and lower and lower.

They would prefer to write bigger checks. I mean you're not having KKR or you know, TPG come down to the $2 million deals very often, but there are some that kind of are swimming in that market. They're taking a more sophisticated process and they've got more money than a lot of folks. And to, to kind of what we talked about earlier, they're not having to go through a 90 day SBA process.

It's hey, here's a check, would you like it? We can get this done in six weeks. If you, if you're prepared on the diligent side to kind of go through that strategics, if you have the chance to exit with the strategic that's, you know, at the, at a two million dollar level, probably not happening at the. Depending on the industry that is likely.

That is a fantastic case for a lot of buyers. It's somebody with an absolute war chest that's saying, hey, we're trying to address all of the gaps in our offering and you solve this one, those buyers are willing to overpay according to what it looks like. So if you look at the multiples of these folks are compared to pay a strategic might say, yeah, I'll pay 10x, that solves a problem. It would cost me exponentially more to fix and years to get to the point that you're at right now where a PE fund is looking at it saying, whoa, I got to, I got to exit this thing.

I can't do that. Right. So I think there's a number of parties and there's some kind of hybrids in there too. There's some family offices that kind of function like a private equity firm.

They're kind of the go back and forth. There are again, it's kind of the wild, wild west, the lower you get. But that's. Yeah, it's a.

Yeah, I think it's an RIA that's listening is probably going to be pretty familiar with what a family office is, what a family office does. They're going to be, you know, familiar with private equity. They might even be allocating to private equity and serving family offices from the standpoint of alternatives. Right.

But maybe they don't know all the ins and outs of that family office and how they're looking to acquire assets. Maybe they're just Working with the family office on investments. And so, you know, one of the things that I think is really interesting is decoding all the signal, you know, and finding, you know, true insight right. From all the noise that's out there.

Because nowadays you can go on AI, you can go on social media, you, you know, you can gather up a bunch of data. But how much of that's noise and what's the real signal in it? And that's really where I think you're talking about is understanding different motivations. What kind of capital do those people bring to the table?

How likely are they to close? There's a lot that goes into that. I think that's one of the reasons why when you're going to sell, you got to have the right advisors at the table to understand. Well, I think the other piece of that that we touched on is I think, Sorry, I took that, maybe more on the capital side, hey, here's what these groups are looking for.

The operation side is completely different on those. Yeah, independent sponsor may ask you to stick around for a year or two, but it's not that different from a search fund. They're going to have more expertise, they're likely more sophisticated. When you talk family office, they could buy it and hold it forever.

Right. There are a lot of family offices that have held companies for 50 plus years. Granddad bought it and I plan to pass it to my kids. Right.

I mean there's also, I would say different speed thresholds there. So let's talk kind of the post transaction math with it. Family offices are more sophisticated than some of these other buyers, but there's no horizon. Right.

They don't have a, hey, my investor is expecting a 20% return, post fees. I've got to juice this thing. So management either needs to perform or I'm going to insert management and remove. Folks, heads will roll.

Right. That's the private equity model. Right. I have been a part of that.

I've been inserted by private equity before. And you're talking about an overgrown startup where they come in and they're like great quarterly board meetings, Weekly check ins KPIs and nobody has a clue what they're doing. It's a very different cadence between those two. But if you think about it from their perspective, they've taken capital and owe a return, otherwise their next fund isn't getting raised.

So their entire bet is where going to be able to execute this and apply pressure to get done what needs to be done. Yeah, yeah, no question. So I think there's a whole lot that that goes into, right. Not just the price, but also what's the time frame, what are they going to do with the employees?

What are they going to do with, you know, the, the, the role of that business in that community. Right. All those things matter to sellers, right. Today, especially if they've been in a community for 30, 50 years, 70 years, right.

And they've got employees that have been with them for decades. So it is price, but it's price plus plus, plus. So really, really critical stuff. Let's talk about the second bite at the apple structure, though.

You brought up a couple of, of potential buyers, right, where there's going to be an SBA note. You've talked about what a seller note is and how that works and mechanics. We're seeing more and more of these sponsors that don't have a fund, right, Like a, a capital committed fund, like a traditional private equity fund where they've gone out and gotten LP commitments, they've got the money locked up for seven to 12 years. But we're seeing more of these sponsors without a fund.

Maybe they just have expertise, maybe they've just got hustle and grind and they just got that MBA and they're ready to go out and buy their first business. But what are some of the mechanics of this equity rollover? What should a seller be thinking about? What's market, what's not what, what have you seen?

Yeah, it's going to vary industry to industry and situation. Situation, right. If, if you're talking, I mean, there's one bank we work with and there's a company that has been. The guy kind of flirts with selling every once in a while and say, I think I'll run it for a few more years.

This guy is 90, okay? He is 90 years old and has no plan to transition this one. That guy's probably not getting a second bite at the apple because that's not the right situation for him. Right.

A second bite at the apple is a great opportunity and it's usually used especially when they want somebody to stay around and stay motivated. So someone who wants to take some chips off the table, but also recognizes, hey, with an institutional backer and capital, I can grow this thing a lot quicker. And so say I'll sell 80% today, I will roll 20% of my equity in. That helps their capital stack, by the way, that's 20% that they don't have to come up with to inject into this business to acquire it.

So say, you know, they're getting a note, you Know, some senior debt for 60%, 20% comes out of, you know, the second bite at the apple, that equity roll, they're only having to come up with 20% down. It could be less depending on the structure and depending on some of the regulating entities in there. The way it works though is typically you're trusting that fund or the, the sponsor or I mean, you see it sometimes in search fund MBA style deals. When you take me a style, SBA style deals, you're basically betting that the upside on that 20% is going to be much larger.

So let's say, you know, I'm going to sell my business for $10 million, but I trust this private equity group to expand EBITDA 50% over the next five years. And when you do the multiple math again, I'm happy to put something together if anybody's curious about what this looks like. And it probably would have been a great graphic today. But you're saying, hey, my 20% is probably worth more than the first 80 that I sold at that point.

Right. You're saying, hey, the real wealth is letting a professional come in and take this to the next level. So a lot of times that's used as kind of a carrot to reduce some of the cash at close and kind of help that on the capital side. Yeah, fantastic.

Yeah. I mean, so many times it's the headlines, right, of hey, the business sold for this or it sold at this multiple. And you know, I think we both have seen client situations where they get real focus on rate, they get real focused on price. And it's almost like we can't look at it in a vacuum.

Right? Yep. It's, it's, it's just one aspect of the deal. It's one aspect of the relationship.

We talked about that just a minute ago. There's, there's employees, there's reputation, there's what are you going to do with the business? Are you going to plan to grow it? Right.

There's, there's so many things that go into it. Working capital reps and warrants, escrow holdbacks. I'm just looking through my list. Earnouts that may or may not materialize.

Of all the different mechanics that can be inserted into a deal process for a seller. Again, this is sometimes the first and only time they've ever done this. That's a lot, right? To be coming at you in addition to price.

Price, I think everybody can kind of understand, it's like, how much cash am I taking out of this thing? I've spent 30 years building it but then there's all these other mechanical things that savvy sophisticated groups are going to ask for or put in that have to be worked out. All the reason why having an advisor, that's why we went out and found you guys, why I'm you know, really asking the raas listening think about who the advisor is going to be there, right? This stuff gets very complicated.

But when you talk about all this stuff, reps and warrants, earnouts, you know, the things that can also, let's call spice up the deal or add aspects to the deal. Which two or three are going to add the most to the net Economics. Yeah, I mean they're all a little bit different, right? I mean I think trying to think about how to answer that on the think about it all from a time value money, right?

So ras on this call are going to be experts in this, right? You're looking at hey, I can make X percentage per year, right? Most operators see I've got cash in the bank and I'm going to spend cash. Therefore the purchase price is what really matters.

So they're using a lot of these to spread money over time, right? I mean it's, I mean think about just the basic seller note here, right? It's very often that we, especially when we're advising on the buy side. Great.

Beat their number. They're asking for 10 million. Give them 12 and spread it over a longer period of time or with the seller note tied to a forgivable that goes through these types of things. It's.

And this is kind of what kill. I would not say kills, but it's what makes it just extremely important for operators to have as they're exiting just because you know, they may think about a manufacturing owner, right? He's probably negotiated thousands of contracts, thousands of arrangements, pricing on both sides, both with vendors, suppliers with customers. I mean they're probably used to that because he knows the environment he's negotiating in.

This is a completely different wheelhouse. You don't want to be on ChatGPT on the side, on the, on your second screen figuring out what these terms mean as you are negotiating. If it's in a virtual setting or you're at a table and you have to ask your can someone explain that to me what does it mean? Right?

So you need somebody that can explain it understands if it's simple enough you can do it with quick math but really can develop a model and show you. Okay, great. Here's what the cache of close is going to look like based on your tax Expert. Here's what you're going to take home.

Here's what the burden does over the next couple years. And here is if they hit this number, you get this. If they hit that number, you get that. It's that simple.

And unfortunately, like, you know, again, these guys are fantastic operators. You don't want them in spreadsheets, but now's the time to have that spreadsheet resource showing them exactly how to pay for this deal. Yeah, yeah. And I think this is, this is really important stuff where we talk about escrows and holdbacks and earn outs and, you know, pay you more, but you got to earn it over time versus give you a little less up front.

RIAS may have, you know, an opinion about that, but it's not their business, right? It's, it's, it's not what they've spent 30, 40, 50 years building. So a lot of really important ramifications, I guess, in terms of how the capital is spread out over time. So the time value money concept totally makes sense.

And I think those are the types of graphics. Like that's what we're doing this for. Brad's to go back to why we set this whole series up and say, if you're an RIA and you're thinking about going after this higher end, more affluent customer that has businesses, you better have resources and advisors ready to go. Like this isn't something where you can sit down with the client and say, oh, okay, that's what you need.

Let me go find that. No, that's not how this works. You're sitting down and saying, hey, Mr. Customer, Mrs.

Customer, I'd love to manage your wealth or a portion of your wealth, but actually let's talk about the business that's 80% of your net worth anyway, right? Let's talk about how we can grow that and make that, you know, $100 million exit today. What do you think it's worth? Maybe they don't even have an idea.

Maybe they do have an idea, but maybe you could, you could center it that way. And that's why we are, you know, really doing this series. Let's talk about taxes, right? If there's anything that could put, you know, a room full of people to sleep that aren't CPAs and aren't tax experts.

It's discussing taxes. Let's talk about, you know, in episode two, we talked about the structuring, right? The entity structuring you. You offered up the idea of setting up a structure and just laying it out so you have Opco you have Holdco, you have IP, you have real estate in isolation.

Let's talk about QSBs. And, you know, there's. There's things like F reorganizations and charitable structures and estate freezes. And I'm no tax expert, so this is an area, right, where I think we have to sort of tread a little lighter if we're not going to get into too much specifics.

But I think the point is, is that there are some things that need to happen. You talked about QSBs, for example. They need to happen on a certain time frame if they're even going to be relevant at the closing table in the future. Can you talk to us a little bit?

Maybe we double team on some of the areas where we just need to be thoughtful in giving guidance to these CEOs and to these owners around tax ramifications. Because there's probably a few big ones that if done right and done at the right time, can be meaningful when it comes to the exit. Yeah, no, I hear you. I mean, we can start with, you know, kind of the basics on this, right?

The short term versus long term capital gains. I have a family member who may listen to this podcast at some point, but sold a business about 350 days after starting it and learned the hard way what happens when you don't have long term capital gains versus short term. Basically, you're paying income tax rates on the sale of a major asset like that. It got acquired pretty quickly and the accountant didn't catch it, in my opinion.

I, you know, I don't know what actually happened in that situation. That's, you know, if I made that mistake, I'm getting fired. Right. And I likely should get fired.

Okay. Outside of that, I mean, qsbs, you mentioned, it's. Without getting too deep in the specifics, I'm not exactly the tax expert either. So I would say that's where we kind of bring in another one of our partners, which would probably be another great episode in the series, by the way.

I'm just talking about how to position some of these things. It takes five years for that actually to kick in. Right. So essentially the first $10 million of value kind of creation at that point, if it's a C corp, it's in that type of stock.

There are a few other wires you have to trip on it. But that's tax free. Right. That's a way to drastically preserve wealth at the closing table so you can change hands from, hey, it's locked in this business over to Andres or an RIA or someone else on the platform to allocate it.

Right. So by making these elections far enough in the future, future, you're helping maximize that cash close. At the end of the day, I think people, I mean, tact is very complex, but at the end of the day, what you're trying to do is maximize post tax income. Right.

Maximize the amount that goes in your pocket. You don't want me advising on that. I know enough to be dangerous. I know enough to tell you when to call somebody.

You want someone who does nothing all day, every day but deal with high net worth individuals that structures these types of things. The more time you give them, the more time they have to get creative to move this. I mean, we've got some clients that, I mean literally have moved to foreign countries before a liquidity event like this to claim certain benefits without getting too deep into it. So we've been involved.

Again, I know what to look for, I know where to direct people. But as for the specifics, you want someone that is doing that all day, every day. Yeah. One of the things we did when we set up EnduranceX, Brad was really thinking about the whole portfolio and guidance around sophisticated clients that were asking about alternatives.

Right. There's three big forces happening on the wealth management side and when you talk about people who are looking to invest their capital. One is, you know, more and more RAAs are recognizing that they need to have alternatives as part of their toolkit. Right.

I think everybody can look at all the data and see that alternatives for RAAS is just a growing space. RAs recognize they need to be sophisticated enough to have a conversation with a client, you know, that's got a million, two, three million dollars, not to mention clients that have five or 10 or more. They've got to be able to talk about alternatives and they've got to have some solution. Right.

Two, you have more and more of the asset management community that recognize that the wealth community, the wealth space, the individuals, the families, the RAAs, that's a source of growth. Right. And they've got to be able to target and offer solutions abilities to that segment of the market. And we've seen that space really, really grow over the last decade.

But third and most important, which doesn't get talked about enough, is the actual client that's deploying the capital, that's investing the dollars. They are woefully underserved, I would argue, and undereducated and underexposed when it comes to altern, because again, it's not what they wake up and think. About all day. They're running businesses, they have large families, they have complex, you know, portfolios, and they're not waking up thinking about, where can I go get more yield?

Necessarily in private credit. There are folks that are out there doing it themselves. But generally speaking, the convergence of all three of those forces is all happening at the same time. Right?

So the client is asking their advisor, hey, tell me more about alts. The advisor is saying, we got to get smart on alts. And at the same time, the asset management community is saying, man, there's a big opportunity to serve more in the private wealth space when it comes to taxes. This is an area where we feel like with the platform Endurance X, we can really differentiate and add a lot of value.

So we've specifically added things to the platform around, you know, qualified opportunity zones and being able to do long, short strategies where we, you know, can basically take concentrated liquid stock, right, or diversified stock across, you know, let's say a portfolio of 7, 10, 12 names. And we can create passive losses for customers. They don't have to sell the stock. They can create passive losses.

All these strategies are things that we've brought on the platform because we said, you know, to really serve advisors, we can't just offer growth investments. We can't just offer income investments. We've also got to offer investments that help defer delay, you know, and diminish the tax bill. Right.

And I think that you're talking about a lot of the same things. So whether that be, you know, deferred sales trust or charitable remainder trust, or thinking about qualified opportunity zones or 1031s, there's a whole lot of tools in the toolkit, and we've tried to make a lot of those things available through the platform. And I think that's one of the areas where we're going to be doing a lot of collaboration with you is, you know, we're not CPAs. We're not the tax experts.

But what we've done is we've gone out and found really great strategies which we think can help our clients, but we also think they can help the RAAs that are on the phone or listening to the call. There's a coordination problem, though, clearly. I know that you see it, we see it. When it comes to these exit events.

You have five or six different parties that are potentially involved in a typical exit event. And there's got to be some kind of structure or coordination around how to keep the client from going nuts through this, this. This event. They're approaching liquidity.

All These different parties have different interests, but they all want to serve the client. Right. Let's just talk about the platform decision or the advisor decision. What does that look like?

What's, what's an effective model look like when it comes to preparing for an exit in terms of all these different advisors? Yeah, I mean you want everybody at the table as soon as possible. It's very difficult to negotiate, to prepare and to really set up for exit if you're being brought in and learning the business at the same time. Right.

We can do it. Right. And we've done it many times. Bring us in.

You know, it's going to take us a couple months. We'll get up to the beat and we'll go from there. But you want these parties put together as quickly as possible. There are different models for doing that.

The players you want, want at the table, right. You want your M and A advisor. Right. So whether that is a investment bank, whether that's an M and a firm, whether that's a broker, you want someone who's going to be handling the sale, right.

So that, that's one you want the wealth advisor who's going to be inheriting the money, who's going to make sure, okay, how much do we have? Where are we going to take it? What wires do we not need to trip? You want a tax advisor, certainly.

And hopefully that's someone you've been involved with long before something like this. So all of these strategies can be employed. You're going to want your accountant, right? We are not a cpa.

We don't do, you know, tax filing, that type of thing. But you want your accountant there and then what you likely, not likely what you want running the process is likely a cfo, Right. So if you're big enough to have one, that's a luxury. They should be running a lot of this process from a financial standpoint.

Now you may have a controller, an accounting manager pulling up information or coordinating the data room and that type of thing, but that's your quarterback in this type of situation. Right. So whether it's there, we're able to offer fractional CFO services on this type of thing. So again, a lot of a, the large majority of clients between about 10 and $150 million depending on the industry, they don't want to pay for a full time cfo, nor do they need one.

But you have one that's been there for, you know, five, ten hours a week for a year and wait, hey now we need to scale your bandwidth up as we Scale up to exit and go from there. It is worth its weight in gold. The ROI is massive on just having competent professionals for each of these lanes. The worst mistake you can make is expect, hey, I've got my cpa.

He's just going to do the whole thing. Your CPA may be the best CPA in the world. I guarantee you they're not a wealth advising expert. I guarantee you they're not.

They don't have the same skill set on the ria. I guarantee you they're prepping for diligence. They've never done that. But they've either done all of these things once and they're okay at it, or, or they've done one thing very deeply and they've never touched the others.

You want a specialist for each one of these to make sure nothing gets dropped and you go out the right way, capturing as much value as possible for your life's work. Yeah, what we've tried to really do at gpwa, and this is just a practice that, you know, some RAAs already may be doing it, that are listening, but certainly we would encourage RAAs that are listening to think about it, is put yourself in that quarterback role. Find a competent advisor client relationship where you can have this dialogue and you can be in that position to not take over the conversation when it comes to taxes or when it comes to setting up the estate plan or when it comes to the legal or M and A issues or the, you know, or, or the, the QOE questions.

But quarterback it, right? Be that coordinator. Be the one that can say, I'm going to invest the time because, you know, there's a liquidity event that's coming. And you know that there's a lot of these parties that aren't necessarily going to be invested in the three to five years leading up to that.

So you're, you're naturally in a great position to be that quarterback, but it is going to take time and you need to really think about having a very strategic conversation and bringing, like in our case, you know, we're bringing in High Point Advisory Group and bringing in you, Brad, like way earlier. And that's for a lot of the stuff we've talked about in episode one and two. Let's finish up by, you know, at some point the wire hits, right? Some point the deal closes, hopefully it's successful.

And maybe the, the, the, the, you know, the investable assets go from, you know, seven figures to eight figures or eight figures to nine figures. But there's, you know, there's probably Some, you know, split in the road where we're talking about generational wealth has been built or now there's a slow erosion and there's a playbook that, that you see happen. What do you notice happens are these operators wanting to redeploy capital because a lot of times they're wanting to redeploy, they're not wanting to exit the game, they're looking to go do something else.

And if they're liquid entrepreneurs and they're entrepreneurs, they're just entrepreneurs that are now liquid. Yeah. So what are you, what are you seeing? Well, I would say, I would say it depends on age, but you can't tell them.

That is the other thing. You know, you see guys exiting their first business at 30 and you see some exiting their first business at 90. Right. Those are probably two different scenarios.

You know, one has a, a hopefully decades left. I mean hopefully they both do. But you know, just speaking average age limits and that type of thing, the again, I think if they're able to successfully redeploy without tripping non competes and the like, you know, a lot of times you've got a five year lockup or two or three year lock, that type of thing, or going to something else, it's going to take an adjustment to stop from scratching the itch of being able to call the shots, go forth and do it.

Frankly, their spouse is probably going to tell them, hey, get out of the house, I don't need you here on a Tuesday. Like I need you to run and go and be or do something else. But there's also, you know, the thought process of let's take some chips off the table. And that's where the wealth advisor can come into play here, right?

Yeah, yeah, yeah. They can basically say, look, you just made $100 million. You don't need to invest all hundred million. I think the famous ones, I think Elon Musk, if I'm not mistaken, he bought SpaceX and Tesla.

Right. He bought those two companies with earnings from PayPal. He invested everything back into it. Most people shouldn't do that.

What you should do is take chips off the table, say great, you just made 100 million bucks, here's 20 to play with. I'm going to take 80. You know, you're going to live off 20, you're going to invest 20 in a new business and we're going to take 60 and we're going to ensure your family is taken care of. Yeah, it's generational wealth events like this where you're diversifying into illiquids and privates and you're able to see the benefits of portfolio construction really take hold.

Right. Some people have made all this wealth in the public markets and, or in their business and think that the public markets are the only place to go. And that's one of the reasons why, you know, as an advisory firm and setting up Endurance X, like we've been leaning heavily into the alts conversation because we think, you know, family offices and endowments and institutions have been investing in this stuff for decades. And yes, they might have different time horizons in the average family, but if you're looking at multi generational wealth building, which a lot of people, when you talk to them, say, what are you going to do with your wealth?

Well, some people are going to give it all away during their lifetime. Right. But a lot of people say, well, I'm going to leave it to my kids and my grandkids. Okay, well then we're not talking about a 20 year time horizon.

We're talking about an 80, 100 year time horizon. It's called compounding capital over multiple decades. Right. And it's one of these conversations where you start that early with a client and say we put $5 million away and we diversify it and we grow it at 10, 12% a year using some of these more liquid structures.

Yes, you don't have access to all that capital, but you know what 10% over 50 years looks like. Right. I mean that's, that's a dynastic type of conversation. That's why we get so excited and motivated to talk to more advisors about alternatives and show them what we're doing with, with Endurance, with some of these specialists and unique and differentiated strategies that we've, we've, we've brought together.

Let's wrap it up. I think there's a lot of really interesting things we could still cover, but for the sake of time. I know you've got a lot going on and, and, and we do as well. We've talked about this, this journey, acquiring, operating, exiting over the three episodes for the RIAs that are listening and hopefully that took notes.

We've said this, you know, throughout, like we're trying to equip you with tools, with a, with a framework and with mindset, shift around, putting yourself in the conversation with the operator early to help them grow the business so that when they do have that exit event, it's, it's meaningful not only for them, obviously they've put the work in, but for you to continue to service them and and have more assets to. To invest. We're sitting with the real client in mind. If they walked away with one shift, the raas listening, what's one shift that you would hope that those RAAs and this is your chance to talk to them, Brad, like what's that one shift in mindset that you'd like to see as they're thinking about these clients with 75, 80% of their wealth tied up in an operating business.

Right. That they've spent their lifetime. What's that one mindset shift you'd like to see and really say to raas that are listening? Yeah, I think it's the shift from just assuming you'll get the money one day to maximum.

You know, again, I don't want any of you to have to go in and read financial statements every month to your client and advise them on which levers to pull in the business. What you want to do is say, hey, we're thriving with your liquid assets. Your biggest asset is largely, you know, independent right now. Who's running that?

What's the plan for value creation? And don't be afraid to bring in experts, whether it's us or someone else. I'm proud of the work we do and we can create quantify impact across many clients. But again, if you've got another party, that's great.

Bring someone in whose specialty is, hey, let's juice this operating business and make sure to maximize your exit. Yeah, I love that. It's a great way to end it. Brad Gunter, CEO and founder of High Point Advisory Group.

Really appreciate you joining me today on ATL alts, but also for doing this three part series. We're super excited about the partnership that we're building, the impact that, you know, we are having on. On clients. I know you guys are on just the very beginning of what will be a really exciting journey yourselves.

So appreciate your time and commitment to the community of advisors that we're supporting through Endurancex and the clients that we're supporting through, you know, Gramercy Park Wealth Advisors. And I look forward to, you know, for us to build the partnership, you know, for, for many years to come. Yeah, thanks for having me. It's.

It's been a lot of fun. Episode four and five. Maybe we get those on the calendar at some point if you've got enough topics to come back. But listen, would love to be a resource for you or anybody else listening.

All right, great. Have a great day and enjoy the rest of your weekend ahead. Awesome. Thanks, Andres.