Episode 261-Paul Spradling on Selling or Getting Funding for Your Business with Lois Sonstegard,PHD

Speaker A: Welcome to Building My Legacy podcast. This podcast is designed for leaders and entrepreneurs who want to leave a legacy and will provide strategies that focus upon key elements for legacy creation. Determining your desired impact and its benefit, increasing your legacy's reach by engaging key stakeholders, planning, prioritizing and executing. Here's your host, Dr. Lois Sonstegaard.

Speaker B: Welcome everybody, to today's Building My Legacy podcast. I have with me today Paul Spradling. He is co founder of Pacifica, uh, Advisors, which was named one of the top 25 investment banks in 2022 by Axial. Uh, congratulations, Paul. That's pretty amazing.

Speaker A: Thank you, thank you. Very proud.

Speaker B: You should be. Yeah. Paul is in charge of strategy and helping businesses exit and get growth capital investors. That right now I think is a huge thing because people are struggling to get investors. So we're going to talk a little bit about that with Paul. He's a graduate from Cornell University. He has raised over $350 million in capital. And he did that, guess What? Before of 30. And he has worked with some of the biggest names in the industry. Blackstone, Blackstone, Goldman and Sachs. And the list goes on. So with that, Paul, I'm going to get into. How did you get into this industry? And, um, pretty remarkable that you've done what you've done at such a young age in terms of accomplishments. So how did you get started?

Speaker A: Yeah, thank you, thank you. Um, yeah, well, first of all, I kind of started in the sales career in real estate, uh, residential real estate. I started selling residential real estate. Then I moved into doing more commercial real estate. As I was doing the commercial real estate, I started meeting more institutional type investors, investors more interested in diversifying where they're, where they were going to allocate their capital. And through that I met a couple of different families, family offices that were looking to buy businesses. And me being a good middleman in the real estate world, I thought, okay, maybe I can be a middleman with businesses. I didn't know much about businesses. My business partner is a corporate finance professor. So he knows all the underwriting, uh, and the math part of things. And I knew all the relationship stuff. So that being said, we started with one small company help kind of, kind of broker it to this one family. And we didn't love the process. We didn't love the current brokers in the market, the investment bankers focusing on these lower middle market companies, which was what we were focusing, which are companies with a value of like less than 100 million. That's what the industry considers lower middle market. But we but we focus more on these companies that are around 20 to 30 million dollars in size and we'll go as small as a 5, 6 million dollar company. But that's kind of how we got started. Out of necessity, we just didn't see anybody doing what we were doing.

Speaker B: Got it. Okay. So Paul, when somebody wants help and wants investment, how do they find you? How do they know about you and why you? Why would they come to you versus somebody else?

Speaker A: Yeah, um, so a lot of people find us online. I think we have a stronger online presence. We do a lot of direct reach online marketing. We're also directly reaching out to business owners. And yeah, we focus a lot on helping them exit and we offer a lot of free help. So that's, I think one of the reasons they, they come to us because when they, they don't know how to raise capital for their business to grow or they don't know how to exit. So we help them in all of that. And usually if they are ready to exit within the next six months, we'll do almost all of this stuff for free. We'll have them in uh, a broker opinion of value, which is like a valuation. We'll help them with their books and guide them through the process. So we have a streamlined process in house, our own team. So I think that's why people select us.

Speaker B: So Paul, do you work primarily with real estate companies or when you say in small companies, five, $20 million. What kind of industries are you working in?

Speaker A: Uh, we work in most, most industries, different sectors. I have uh, several advisors that work for us. I believe we're up to almost 12 advisors now in different industries. Manufacturing, uh, health care, uh, qsr, which is quick service, restaurants, financial services, uh, you name it, like from everything. Just to give you an example from a mold and remediation company that just uh, you know, helps people fix their homes after, um, after a flood, all the way up to, you know, a neurosurgeon practice will sell any type of business as long as it has positive EBITDA cash flowing. So no startups. So we sell more established businesses that the guy wants to retire or, or something like that as an example.

Speaker B: Okay, so selling a business is an art and knowing when to sell a business is also an art. So how do you help people navigate that?

Speaker A: Yeah, um, you know, it's a lot of coaching, a lot of very personal emotional connection. Right. You kind of have to, it's the most emotional thing. I always tell people, you know, your home is very important. Selling your personal home is very important. And selling your business is almost as important or even more, ah, emotionally connected to your business than your home. Right. Your business, something you built for years, it gave you pretty much everything you own. So it's a very emotional process. So we guide them, um, with trying to being always available, answering all their questions and having great team to, to be answering what we don't know and also telling them, let me, let me look into that, let me find out. So we're always very patient and with them that's mainly what we do.

Speaker B: So if you're thinking of selling a business, what are five tips that you would say? Five things that somebody should really think through and have at their fingertips?

Speaker A: Yeah, I think, um, the first things, if you want to be the business owner and you want to be prepared, have your documents ready. Have the most common things people ask for is your last three years. Financials, profit and losses, P L's balance sheet, have that ready. Uh, spend the money on a good cpa, a good firm that can help you put that together. Have a succession plan. Number two, uh, who's going to replace you if you want out or do you want to stay on board? Make that decision. Three is have uh, your tax planning in order because it's a surprise, right? Uh, you'll have this liquidity event. So you got to have your taxes, have your next step ready. I guess number four, a lot of questions we get is like now what, what am I going to do? That's a lot of money. I can sell this business for that much. Paul, thank you. But why? What next? So have your liquidity issues resolved. And number five, and I think, uh, also very important is, you know, select the right person to, to guide you through the process and sell to the right individual so they can sell you to the right person. Because a lot of times whoever buys your business is going to want you to be involved for a year or two.

Speaker B: Got it. What are the biggest mistakes you could make if you're exiting a business?

Speaker A: Yeah, the biggest mistakes is probably that one I just mentioned. Selling to the wrong individual. That is usually the story we hear. There is somebody, always every story, every business owner I meet, they're like, oh, an earn out. What is an earnout? Oh, that means you, you roll back some of the equity that you sold. You sell your business for 10 million, you want to stay on board. Perfect. So you roll in back 3 million and now, uh, you're a partner again with this group. Uh, and that's very common in our industry. So you got to think about it, you, you are essentially a lot of times maybe like 60% of the time becoming partners with these people. So you have to make the right decision to who to sell to.

Speaker B: You know, I think often when people are selling and getting out, you hear like you say, the, the stories about the mistakes and the relationships gone bad. And because I, I don't think we think enough about what are the implications. We're mentally out of the business perhaps, but we've been taken back in. And so now you're in a very difficult position because you no longer own the business. But, but you, your money is still tied up in the business and uh, and you don't know how to get out of that gracefully.

Speaker A: Yeah, correct. Yeah, it's, it's very, it's very challenging for people to, to wrap their head around that. And yeah, they, I often hear the word powerless or whatever. Like they used to be the, the CEO, the founder. They had ultimate power in their company. Now they're just limited, um, partner and taking orders. So it's hard for them to swallow taking orders.

Speaker B: Going from being the leader to taking orders is quite a change. Talk a little bit if you would please about private equity versus venture capital. Um, because we hear those words used interchangeably but they're different and the expectations are different depending on where you go.

Speaker A: Yeah, on my experience, on my two cents, I only deal with private equity. So private equity, uh, companies are investment pool vehicles, usually institutional investors or high net worth investors that invest in operating businesses, usually with positive ebitda, positive cash flow businesses that they usually focus on strategies called roll ups. And so they'll buy a company in um, whatever industry you want to pick, healthcare industry that manufactures medical devices, and they will go and roll up other companies in this medical device to grow their EBITDA so they can sell it at a higher multiple than they, then they acquire them and it's a multiple Arbitrage and venture capital focus more on startups. I don't deal with them. Uh, but yeah, venture capital is a earlier stage, series A, series B pre cash flow, a lot of times maybe recurring revenue, but no ebitda. So that seems to be the biggest differences. Um, venture capital is heavily invested more in software and technology and more technologically advanced companies. And private equity goes in everything really anything you can think of, private equity has their hands on.

Speaker B: So if you're sitting and trying to decide which route to go and let's say you've been in business three years, you have a positive cash flow, how would you sort which way you want to go?

Speaker A: Yeah. Um, well, if you have a positive cash flow and your company established, you've been in business for many years and you don't have like a. Your business is a simple business. You are not like a revolutionary technology. Uh, yeah. Your options, probably only private equity at this point or selling to a family office or in a strategic buyer. So a competitor. So it could just be a competitor in the, uh, in the same industry. A family office, which is just a wealthy family that likes to acquire businesses and invest, or a private equity. So those are probably your only three options to exit.

Speaker B: Got it. Private equity, their goal is to grow the business quickly, turn it and get out and make a new investment. So in a sense, part of what that. And you tend to also bring in your own management team, Is that correct or no?

Speaker A: Uh, sometimes. Sometimes private equity brings in their management team. Uh, depends on the size and depends on the company. I've seen it all. I've seen it. You know, sometimes they want to strip everything, but most commonly in our industry, in the smaller size, they want to buy good management teams. Private equity kind of has learned it was more in the leverage buyout time that they would fire everyone and, and do big turnarounds that happens more in distress lately. They like to buy Companies with amazing CEOs, amazing executives, and a lot of times the word you hear is we are buying the staff, we are buying. And so yeah.

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Speaker A: You.

Speaker B: I'm Lois Sonstegaard, author of Start with Collaboration. I've uh, helped businesses worldwide as they develop collaborative partnerships. If you are ready and interested in building your collaboration ecosystem, email me at Lois. Ah, buildtomorrow.com that's loisuildtomorrow.com and now back to our podcast. So, Paul, tell me what is one of your favorite stories of, um, an investment you made and how it worked out?

Speaker A: Yeah, well, uh, while we don't make investments directly. Right. We're always, we're just assisting, um, people. Ah. But on, on the company. But I can speak on some of my favorite stories in the company. Let me think. Probably my favorite story is the story about we were working on, um, on. Well, I'll give you one that just happened recently because I'm just thinking about this one. We're working on a large, um, deal selling QSR portfolio around, uh, 15. QSR is quick service restaurants. Okay. Quick service restaurants. Such like franchises. So we're selling a 15 unit portfolio of, uh, quick service restaurants, fast food restaurants. And you know, the, the business was making, call it $3 million a year. So the multiples in an industry are lower. They're, they're around four. So it was a $12 million sale. That's what we thought we were going to do. Unfortunately, for whatever reason, you know, Covid was a bad year for them then. But then you recovered 2023. They're kind of, um, peak 2022. Sorry. They're doing well again. And. But then 2023 starts off as we start marketing. It starts off rocky. It starts off not doing as great. There's been some rehab in the area. Climate in this particular area of the country was in the Midwest. There was heavy snowstorms in the beginning of the year. For whatever reason, their business is being affected. And so we have to kind of regroup Last minute. We have three or four offers at this number, but they want to buy it into a trailing 12th number, which is the last, the counting as of January and February. How is the year going to look? So we're brainstorming. Interest rates are going up. Everything is. Interest rates are going up. A lot of these guys purchasing, uh, are borrowing money. Uh, this is a small enough company that you can borrow from the SBA or other, other government facilities or just banks. So everything looks terrible. Looks like, looks like we're, we're not going to be able to sell it private. It's too small for private equity. And here comes the third, I mean, the fourth buyer. I said strategics, private equity, family offices. There's this new industry that's really growing and we really like it called search funds. Search funds are search fun. Yeah. And we started learning a lot about them through this transaction. And search funds are individuals that have a lot of experience in management, that they are professional CEOs, you can say, or professional entrepreneurs. And they go to investors and say, stake in me, invest in me. I'm going to go buy a business. They don't tell what business but they get a commitment from investors to go buy a business and then this guy finds a good business that he thinks is going to have incredible upside. And that's what happened to this particular deal. A search fund was the only one that could figure out the creative way to make it work because he thought it had upside and he was able to pay pretty close to what the owner was asking. So it worked out because this is whole new industry. So that's a great story and something that is changing drastically in the industry the search funds are disrupting.

Speaker B: Isn't that interesting? Because we don't hear much about search funds. And um, so tell me, in a search fund, is it groups of CEOs that are have formed a business together to market themselves to companies to run them.

Speaker A: Mhm.

Speaker B: And make them profitable so they can be sold. Resold.

Speaker A: Exactly. So it's most, it's usually one the head of the search fund. Let's um, say you were an executive at uh, Procter and Gamble. You were a uh, logistics expert manufacturing beauty products. So you go and say I am a beauty product expert. And you go to high net worth individuals and say hey, I need $50 million. I'm going to go and buy a business and run it myself. I'm going to go acquire other companies. I'm going to do essentially what a private equity firm does, but with one single company. I'm just going to focus on this one company and you stake me, believe in me. So that's what they do. They believe in the CEO and he makes the decision what company to buy, etc.

Speaker B: Okay, so that's a uh, very fascinating industry. How does. So there's these different products on the market. There's investment bankers, there's uh, there's PC or pe, there's VC and now this um, fund. Huh? Huh?

Speaker A: Yeah. Search funds.

Speaker B: Yeah, the search fund. How do people find these different groups? How do you sort, how do you choose? Your company has been rated one of the top 25 by Axial. That's remarkable. Um, given that there are a lot of companies that are in the investment world. So what are the criteria you look for when you're looking for um, somebody to work with?

Speaker A: Yeah. So the questions are simple to the seller. Do you want the most amount of money? Is one. So if you want the most amount of money, you're going to have to have a very strong management team in place. You're going to have to have someone replace you as a CEO right away that has super, super experience. So private Equity will buy you. That is usually the highest and best use the pay the most. Our and the strategic. Do you have something that your strategic competitor needs? Those are the two highest payers. So if your decision is not so much focused on, on you staying in the long run and you just want to cash out the maximum amount of money, those are going to be your best options. If you do not have, unfortunately, a really good team in place to replace you, you're going to have to start looking into the search fund industry. The search fund industry was created with that. There is millions. I don't remember the exact number, but millions of baby boomers that are aging out and they are retiring and their children don't want to take over the business. And they never really trained anyone else to take over the business. So it's going to be the largest transfer of business in the next coming 10, 15 years that we ever seen. And I think based on this is where the search fund industry started to grow.

Speaker B: Characteristics. Are there characteristics that you want to look for or is it sort of ubiquitous? It doesn't matter.

Speaker A: No, of course there's characteristics. It's um, it's. Yeah, it's very dependent on the seller. What does the seller need? And then of course, the seller, if it's a good company, the seller will receive multiple offers. Uh, usually even in today's economy, we are receiving multiple offers. Four or five offers for a business is not uncommon. So we go through the different offers and it's simply just an indication of interest at the beginning. Then we'll go maybe into three. Lois, more of a letter of intent, a little more serious after an interview process. So we, we tell them, um, the seller to look for certain characteristics. What do they like the most? This person is going to be running their business. So ask them whatever you want. It's your decision ultimately, uh, you can ask whatever you want. So it's your decision. You can sell to them for whatever reason you want or for whatever reason you don't want. I did not like that guy's suit. I am not selling to him. That's up to you. It's your business.

Speaker B: So isn't it funny? We do get into specifics that probably are not so meaningful. So tell me, once you've sold the business, then what, what comes next?

Speaker A: Yeah, well, on our side, uh, we sell the business and usually we are out. We are there to help and assist and any, anything you need afterwards and to be a support. But usually you as the seller, as the owner of the business, ah, did the Integration part, merging the new cultures, who is the new buyer, the culture within your team. So merging all of this and now becoming an employee, you are running the company and training whoever acquired it. So a lot of times, most of the time, 90% of the time, you have to stay at least a year, at least one year to train the new CEO, even if you are leaving. So you are basically training the new CEO. So that's kind of ah, what happens. Day two, Day two, you are, you are, you are now teaching someone to do your job right.

Speaker B: So you're not finished. You, you still have a commitment. And I think that is one of the struggles that people sometimes have. They, when they get to the point of selling, they're done, mentally done. And to be re engaged can be a problem.

Speaker A: Yeah.

Speaker B: So when somebody is sitting and choosing and trying to decide what to do with their business, biggest mistake they can make is what?

Speaker A: Um, I think the biggest mistake is, uh, not, not seeking guidance. Ah, whether it be your wealth manager, your tax advisor, an investment banker. Um, you see a lot of, a lot of bragging in the industry on private equity going direct and you know, unfortunately making offers, they sound good promises. And then unfortunately, you don't get what you thought you were getting or you sell your business too cheap, or you didn't plan your taxes right, or you didn't, uh, plan what to do with your money properly. And they run out of money and they're, they're not, they cannot retire how they expected to retire. It's very different because these businesses are selling on a multiple of cash flow. So you know, it's a lot of cash flow to replace. It's very difficult to replace the same amount of cash flow you're making in your business in some other investments. And so they have to make the right decision and sell for the right amount of money.

Speaker B: Yeah, that's um, very good advice. It's your pre planning that's so important, isn't it? So getting all the parties involved early enough so you've really thought it through. Well, what have we not talked about that we should have talked about that you would like our audience to know.

Speaker A: Um, I think uh, one other, one other very important thing that talk about in the industry is, um, yeah, is all it's take your time. Uh, don't wait till the last minute to sell it. Uh, take your time. Call me, call your investment banker, call whoever you, you choose to, to do business with up to a year early. So you just think about that. If it's January and you want to be selling next January, you should start talking to us. Or six months is what we ideally recommend because it is a long process. You know, there's onboarding, there's creating the documents, etc. You need to have enough time for your tax planning. You need to have enough time for everything. So the earlier you start in the process, the better and the smoother the transaction will go.

Speaker B: Let me ask you one other question. How do you determine the cost of a sale? Like you get paid? So do you take a percentage of uh, the sale price or how does your fee get calculated into this?

Speaker A: Correct. So we only work in if it's an exit, we only collect the success fee. So we get a percentage depending on size of the company. If it's a smaller company, the percentage will be smaller, I mean bigger. And if it's a bigger company, the percentage will be smaller. And yeah, up on closing, when you receive your money, we'll receive our percentage.

Speaker B: Okay, so the risk to a business is quite low because you sell it, you get the terms, you agree to it and um, you move on. What else, Paul, have we missed that we should have talked about?

Speaker A: Um, no, I think that Tavra said. There is the other conversation that we can have very quick, quickly is the conversation regarding selling a piece of your business growth equity, which we do sometimes growth equity is you have a positive cash flow in business. Let's assume you're making $2 million a year. But you know, if you buy this particular set of machineries, you build this new warehouse, you will be able to make $4 million a year. But you've been reinvesting all your money, so your business is probably worth $10 million. So why not buy, why not get an investor to come in with 3 million by 30% of your business, non controlling interest. He's a silent investor. And now you use those 3 million, you reinvest them in the business right away and you grow the business together. Or you can take some money off the table for a life event that you need. But most of the time it's to grow the business and get it where you need to be. So even though you are making money, it might not be enough to grow the business how you want it. So we do that as well.

Speaker B: Got it. I think that's a really important addition because if you're moving and um, growing in any way, you're going to have that next capital need and you've got to plan for it somehow. So thank you for that, Paul. Thank you so much for your time and for being with us and Building My Legacy podcast today. For those of you who are listening, we will have information about Paul and his company in the show notes. We encourage you to contact him, especially if you're thinking about selling a company, buying a company, getting involved in growth, and looking at various mechanisms you can use to finance or to exit what it is that you're doing. Um, I think too often we don't plan early enough, mostly because we don't have the information. So I urge you to contact, um, Paul and his company to get the information, at least to get started in your thinking. So thank you so much, Paul, for your time today.

Speaker A: Thank you. Thank you all and thank you.

Speaker B: And for those of you who are listening, we encourage you to also go to our websites@www.buildtomorrow.com with the number two. So the two is a number two. And our second website, which is startwithcollaboration.com. so again, Paul, thank you. And to our audience, thank you.

Speaker A: You've been listening to Building My Legacy podcast with Dr. Lois Sonstegard. To book your appointment with Dr. Sonstegaard, visit www.buildtomorrow.com.