The Final Months Before a Sale Can Make or Break Your Exit

Speaker A: You're 18 months out from selling your business. You have a growth plan. You have a pipeline, you have a story. But the playbook you wrote two years ago or even six months ago no longer matches the economy you're selling into. And AI is rewriting what buyers think a great growth plan even looks like today. The companies commanding premium values in this market aren't just growing. They're growing in ways that prove the business is built to what comes next. Today's guest, Mark Emmer, is president of Optimize Inc. A Vistage international speaker, an Inc.com contributor, and author of How Companies Decide what to Do Next. Mark facilitated strategy for more than 200 organizations, and he spends his days helping CEOs answer exactly that, what to do next and why it matters now. Mark, welcome to the podcast.

Speaker B: Thank you, Keith. Good morning. Greetings from, uh, Southern California.

Speaker A: Well, we're glad you're, uh, in sunny Southern California. We're catching up with you this spring. Summer, uh, is around the corner. So, you know, I always say buyers pay based on historical earnings, but they buy based on growth. You know, you've worked with hundreds of companies to help them maximize value and prepare for exit. You know, you know, what are, what are some of these key takeaways, some of the key patterns you see or you work with owners or CEOs on to help them get there. Say, you know, whether it's 12 months, 24 months, 36 months, or longer, they have that growth story ready to go.

Speaker B: Yeah. I'm sure it's intuitive to many of our listeners that to sell a business requires many of the same things as just running a successful business. But I'd say there's a couple of things that jump out at me. First of all, surrounding yourself with the right advisors is really critical. I think people like you are worth their weight in gold. But also having the right transactional attorney and the right cpa, your current CPA may not be a transactional cpa, and of course, right management team people, people, um, such as strategy consultants and that type of thing. But I think that the biggest, uh, issue is your market position. So you don't want to put your banker in a position where they have to spin for you. You want to already achieve some form of market, uh, leadership. I think most commonly what happens in private companies is the premium transactions are for those who have positioned in a way that a larger entity, maybe even a public company, wants to buy their way into a market. And you're, you happen to be the company that is controlling that market. So I think, I think market position is just as important or maybe even more important than the economics of the deal itself.

Speaker A: Yeah. So you know, that's really important because we, like you said, we have to spin it sometimes, right?

Speaker B: Yeah.

Speaker A: And when we're talking we, you know, we run our process and we do, ah, we call a question answer, um, um, a phase, uh, through it we have submit questions and we'll get answers and whatnot. But you know, they always say why aren't you doing this? Or uh, how come you're not doing this? Right. And um, and we have owners who are, you know, at the, at the back end of their careers and a lot of the things we're talking about require investment. And so we say this is an opportunity for you, this is an opportunity for you, um, to monetize that long term. This is important to you. So how do you prepare them for that growth discussion? Because it is a stumbling block. Because you're at the back end of your career and you're thinking exit, you're not thinking growth, um, but it's all about growth. That's where the value premium is like you were talking about earlier. How do you work with them and have that discussion? I'm sure you've had multiple discussions with owners at various stages of the career, but give me a couple ideas how that works. So they actually can command a premium valuation when they're looking to exit?

Speaker B: Yeah, well I think you're right. They're not always hyper focused on the growth story and often they have a lot of uh, client concentration risk or they may have sector concentration risk. So often when we're hired to do strategic planning is when companies are trying to grow their way out of that. Right. So that's often about diversity, diversity diversification, entering new markets. Um, it might be doubling down on the markets they're already in. But to your point, I think what happens for the business owner is, you know, they get stuck in their own head. Um, and that's why uh, a lot of the data suggests that when sellers have earnouts, you know, they only get to the end of their earn out like half of the time because they get kind of checked out. Right. So to your point, I think the entrepreneur really needs to prepare themselves mentally for what an exit might look like and also what it's going to look like, uh, on the other side.

Speaker A: Yeah, I think, I think that's important because you know, um, in today's market we are seeing more structure in deals that um, is contingent notes, earnouts and you know Typically we talked about this before. Typically the owner is going to be invested in staying on with the business to help achieve that so they can maximize that earnout. And you said, uh, don't check out, right? They tend to check out and they got a nice big payday, whether it's high, seven figures, eight figures, whatever at closing. And it's like, okay. But sometimes their priority switches, um, to the detriment of themselves and their family because of the money and also the buyer. Because if they're not hitting the earn out, they're not hitting the growth. And there's always this misconception out there, um, in my opinion, uh, because people hear horror stories, uh, with sellers. Well, earn outs, I'm going to get, I'm going to get, quote, unquote, I'm never going to get it. They're going to do everything they can not to get the urn out. I don't agree with that. I think they want you to get the earn out. They want that because if you're hitting it, the value's there, the company's growing. And that legacy of what you've achieved for all these years and is now you're going to realize that because it's going to continue on past when you retire, after you finally leave the company. So executing on that growth plan is critical. So, um, especially in today's economy, there's a lot of moving parts, I call it. Last five years have been frankly chaotic for various reasons. Whether it's Covid, whether it's tariffs, whether it's war, whether it's tax policy, whether it's elections. There's something that's constantly happening. I mean, we had a wonderful, incredible, uh, high valuation pre Covid with, um, you know, um, but back in 20, uh, 19, before the COVID And now you're trying to work on a, uh, strategy when there's a certain uncertainty and lack of visibility. You know, how do you, how do you work with the companies, you know, to get ready for that or work in that environment, I should say.

Speaker B: You know, I often like to tell a story of, um, about a time when Wynton Marsalis, the great jazz musician, appeared on 60 Minutes after his father died of COVID And he talked about the principles of improvisation. And he said that in times of chaos, we need to be more deliberate, we need to be more process driven. In other words, we earn the right to be agile through preparation. So, you know, as a strategic planning consultant, I'm in the preparation business. And I think that if you really want to be Agile. It's about building out the right systems and having the right people and the right process and the right business model and all of that so that you can adapt quickly to change. And clearly the companies that survived the liquidity crisis or Covid or any of the other chaotic events we've had in recent years have been the ones who've done the contingency planning. Um, they're the ones that had a succession plan, they're the ones that did all the work that we're going to be talking about today so that they're in a position to succeed regardless of the marketing environment, regardless of the market.

Speaker A: Yeah. So when you're in a, you know, you're working with a client, you're consulting with them, strategic planning, you may have the uh, CEO maybe, maybe co CEOs, right. It may be two brothers or brother, sister or father, son, father, daughter or multiple family members at the table.

Speaker B: Right.

Speaker A: Some people don't agree surprisingly on what we should do with the business. You know. And uh, and, and we, for our perspective is like we're, you got to keep it behind the wall here. You can't show any kind of inconsistency. You have to have common message from everybody when you're dealing with a buyer pool because if it comes from different ways and different things, you know that that raises the skepticism meter, which means it lowers the valuation, it gets the buyer nervous. So when you're in that room with you know, more than one. Right. You know, and there's a possibly um, a dominant figure who the father has been doing the business and the two sons or two daughter whoever, and you're trying to help them create a ah, growth strategy so they are in a position to maximize value. How do you work that crowd?

Speaker B: Yeah, well, and I wouldn't say it could, I wouldn't say it would be dissimilar with any management team whether it's family held or not. Right. But you know, I think of uh, a, uh, strategy like it's a sheet of music and we're a symphony and everyone has to play their part or the music's not going to sound very good. But I think if you're uber clear on what success looks like and what the end game is and all of the family members or members of the management team are marching towards that same end game, um, then when you achieve it, there should be agreement on, you know, where you have arrived. So I think if you're executing strategy well and you have the right process, you know, it should enable a company to reach that desired endgame and maximize, uh, their valuation. But that's also, you know, that's hard work. That's everyone doing their part. And so, um, again, if you're pre exit, you got to be doing the right things. Your buy sell agreement should make it very clear who's in control in case there is that conflict at the end. So, um, there's things that you could be doing along the way to make sure that you're in the right position when that day comes.

Speaker A: Yeah, I think it's interesting. And this is, uh, a side note, when you say the buy sell, Right. I mean, some of these buy sells are written 40 years ago, 30 years ago.

Speaker B: So bad.

Speaker A: Yeah. They're just not relevant today. And so you have a descending shareholder, uh, you want to do a stock deal because why? Because it's cleaner. Um, traditionally the tax implications are less than an asset deal, capital gains versus maybe ordinary income. And you got to get everybody on board. And then you have a shareholder who, even though you can do the transaction because you have a majority, you still have a minority shareholder dissenting. And they say, I'm not doing the deal. So what do you end up doing to get it done? If the buyer's agreeable, you end up doing an asset deal and it costs you money. Everybody include the descending shareholder. Right. So I mean, I think, you know, you know, having, reviewing those documents as part of, you know, moving forward as you're preparing that legal due diligence piece, as you said, that buy sell agreement. I mean, some of these things are, um, lack of better word, stale. They just are not relevant in today's marketplace. So.

Speaker B: Yeah, but I think what you're speaking to is something even broader than that, and that is people don't want to have crucial conversations. Right? You don't, you don't want to have a crucial conversation when you're, when you're in a sell process and the, a buyer's now come forward with an offer and we're not aligned on what success looks like, that work needs to happen well in advance.

Speaker A: Right. And it's the, uh, planning. It's that 24 months before or 30 or 12 months before, is that getting that alignment. And even sometimes you don't get the line, but you're moving forward the transaction. And you, uh, know, it's unfortunate because these are typically, you know, either brother, you know, partners. Right. And you know then. And you don't want to see that dissension. But alignment's key to a growth strategy. A, uh, common, a consistent message to the buyer once you're in market is critical because once that gets uh, any, you get any breaks in that messaging, uh, it raises questions and a lot of buyers will flee right off the get go. So you know, as, as we're talking through strategy, it's not just about growth, it's about alignment, which is, which is kind of leans into your strategy of growth, uh, when you have these conversations. But I'm sure when you're sitting there talking about growth, all this other stuff comes up through the uh, as I call, comes seeps through the floorboards, um, uh, of things that people have ignored, um, not addressed or not spoken up about. And there you are sitting in a room thinking you're talking about growth. Next thing you know you're acting as a therapist.

Speaker B: Yeah, well that happens to me all the time. I'll tell you when I think it's particularly troublesome is uh, you talked about the family businesses earlier. Often what happens is you may have a change of control that's generational. And you know, Dad's in his 80s and uh, the kids are all posturing for who's going to run the business and dad's in bad health and then they decide they want to exit and they're negotiating from a poor position. You know, if, if you have the right line of succession and everyone's roles are responsible, those are clear and the family has actually had a conversation about who's doing what and why and what their wealth is going to look like on the other side, then maybe they have a chance to optimize their value. And if they don't, don't do that, they're going to have a very clumsy transaction.

Speaker A: Yeah. So it's interesting because I'm just popped in my head right now is like you're brought in for a growth plan as uh, the message, but when it comes down to it, you're also brought in from a succession perspective because you need align, everybody needs to be in alignment. So you find yourself talking about strategy and then not just from strategy of the business, but strategy of the family or the stockholders is that everybody is in sync because that's critical. I mean I can tell you, you know, where we've had, we got over the finish line. But it was challenging behind the curtain. Um, I mean I had a situation where you know, the son and the father, the son didn't, didn't want it to go and the father says I need to go. Right. And, and he did everything in his power even, even though he's a minority Shareholder to block the business, including setting up another company in a different state that does similar work that, uh, we disclosed to the buyer. But it took a lot of, uh, let's say a lot of long, hard conversations to get him finally to understand this. What's important to his father. Right. Is it's time for him to go. And you're here because of your father, not because of what you've done. And, and those are hard conversations. And it took a long time, but the buyer really wanted his business, so they stuck in it. I would say 99 of the buyers would have walked away, but they stuck in it. So to your point on this, you know, alignment, growth, preparing for sale. You know, it's also preparing everybody to be in a line. And we've, we've had deals that fall apart because of that. And that's a shame because the, uh, the founders really needed to get out.

Speaker B: Yeah. I would also say that rubs two ways. So I think generally there's an impression that when there is a very successful family business and a new generation comes in, that those younger family members might be entitled in some way. They probably grew up with some wealth and so on. Um, and they may not be as dynamic as the original entrepreneur was. And sometimes that's true, Sometimes the opposite is true. Sometimes the kids come in and they're more technologically savvy, they're more ambitious, they want to grow faster, they're willing to make investments their parents were unwilling to make. And sometimes they are actually the growth engine. So it's the answer to any question in business. It all depends. Um, but I've seen that, uh, work out, uh, in different ways. I also wanted to mention something you brought up earlier. You know, I think the reason why earnouts often don't work out is because the seller is holding on too tight to what they did before. You know, so if you're in an earn out situation and now you're working for somebody else, it's not your problem anymore. Someone else owns the business. Right. So you are there to shepherd a successful transition and you should do that responsibly. Um, but it's a little crazy to be holding on to things that you did before the transaction when it's really somebody else's responsibility at that point.

Speaker A: Yeah, they want you to drive growth based on certain skill set you have, whether that's the customer relationship, um, getting out there and selling new product, whatever. Uh, you're right, though. Holding on to everything after post could be a detriment to getting to that number That's a very good point.

Speaker B: So, also, one other thing. Um, you talked about some of the trials and tribulations with sellers who go to do the earn out. And for whatever reason, um, their perception is that the buyers will resist paying them out. I agree with you that that is not necessarily true. And in fact, I've had several clients in transactions recently that not only did they max out their earnout, they got stock in the, uh, purchasing company, which was more valuable than their business was. I've had situations where the earnout was extended and maybe, um, the person was elevated to a more senior role in the business so they actually were able to earn and enjoyed, uh, working for someone else instead of having all the responsibilities of running the business themselves.

Speaker A: Again, if you find the right buyer and you do your due diligence and you work with folks like us to make sure you're bringing, high qualified, um, uh, ethical buyers to the table, the outcome could be very rewarding. And I said, when you roll equity to a new company, that second bite of the apple, as we call it, and a lot of times it's worth more than the first bite. You got 10 million for your company you stayed with for three years. They sell out down the road at a 3x or 4x or 5x, and next thing you know, you get another check for 20 million. Right? And you contributed. And as you said, you did the stuff you'd like to do. And everything else was. So the wealth equation becomes just magnified by a successful, uh, outcome like that. So, Mark, this is such an important topic. Growth is key to a successful transaction. The implementation and awareness of AI. Uh, there's so much to talk about. We'd love to have you come back, uh, for another podcast to kind of continue our conversation. Um, if you enjoyed today's podcast, uh, we have similar episodes by clicking the link below. Again, my name's Keith D. President of Osage Advisors. Thank you for being with us and have a great day.