Dave: Hey everyone, Dave here with the Philly Tech podcast where we feature members from the community and share their subject matter expertise. Today I am speaking with Tom Connelly calling in from Wayne, PA. Tom is a proven technologist, a business leader, a serial entrepreneur who has sold two startups in IT services to private equity, and has subsequent experience with more than two dozen acquisitions and successful company integration for growth. Tom, how are you doing today?
Tom: Doing well, glad to be talking here.
Dave: Awesome, glad to have you. We talked a little bit about doing things a little bit different, usually it’s a little bit of a kind of a Q&A, but in this case, we’re going to go into a bit of a presentation where you’re going to talk about selling a business and preparing for an exit, which I thought was an interesting topic for a lot of reasons. Firstly, it’s something that not a lot of people have experience with. It’s a journey to get there, but it’s also one of the kind of business life events that can be both positive and negative. You know, it’s not always positive, right? Like everyone’s always excited about selling, but it could go either way. I’ve sold a few businesses of varying sizes and I’m excited to hear what you have to say on the matter. That being said, Tom, if you want to share your screen and get into the presentation, I’ll switch to active listener mode.
Tom: I sure will, see me okay? I see you, and I am waiting for here we go.
Tom: Considering an exit, right? That’s it, take it away. Alright, so essentially four key points I’ll make here, got a slide on each. Get clear on your why, understand your expectations for a sale, and then spend a little bit of time on the process, kind of the standard process, and then talk about some other approaches. Feel free to jump in, Dave, if I’m not clear on anything. So really important to decide if you really want to sell or not. There are a lot of emotional as well as financial considerations and sometimes selling is a necessity, sometimes it’s what the owners want to do, other times it might be something that you really hadn’t considered. So open discussion on when and if to sell. In my case, in two startups, in both cases from day one it was planned to grow it to a certain level and then sell the company, ideally sell to a private equity and continue after that as part of a larger organization. And in the second, I’ll talk mostly about the second company, BISC. So it was a larger enterprise, we had a little more experience, got a little better at the process. So we had a revenue target of $20 million in a five-year timeframe and, well and behold, 12 years in, still going at it, we had grown to eight partners, SL owners, and we were stuck at about the $15 million range. We’d gotten up to 18, we’d gone back down with the financial crisis in ’08 to about 10, and we’d kind of been hovering around 13-14. Been a longer ride than we planned and I looked around the group, we discussed openly and decided it was time to move on. So the group was in agreement, be my next point here is technically if you have multiple partners, it’s a majority, you know, the majority ownership or multiple owners can control this decision most certainly if you have voting stock or preferred stock that may be an element in that, only a subset of the partners have that control. In our situation, for cultural reasons, and it’s a good group, we did a straight-up discussion and vote with each partner kind of having an equal voice. In the end, it turned out that it was unanimous. We had all decided that that was a good move for us to pursue. Other side note here and this is something folks don’t think about well before the sale, certainly during the sale it’s part of the process, but managing the share price and equity distribution if you are going to go down the path, if you’re not a sole owner you’re going to take on a partner or multiple partners thinking about how you price the shares even before you do an external sale to an external buyer. It’s a very sensitive topic and it’s one that affects every transaction throughout the life of the organization if you bring in a partner and you set a share price $5 a share, you know, in 2021 a year later your business may have grown, it may have shrunk, you may be performing better or worse, the share price at that time should be relatively, you know, easy to defend and explain to the prior shareholder and any external auditors and of course the new shareholder. So you really have to think about how you’re going to manage that distribution of equity as you’re growing the organization and then of course at the end whatever the ownership is that’s pretty much how you divide up the proceeds of the transaction. Hope that makes sense and that can get a little bit more involved I’ve been through a number of valuation formulas and processes, probably a good topic for another discussion, there are a lot of different ways to value a company. Now let’s get to the biggest factor at the end of the day, the financial consideration is what folks give the most consideration to, although I don’t want to minimize the emotional and other factors, you know, it’s kind of cool to be a CEO or owner of a company and you know whether it’s a lifestyle company and you’re doing alright and you just enjoy it, that you know after the sale a lot of folks you know experience some of that seller’s remorse where “wow, you know I’m not CEO anymore, I’m not an owner of a company and I don’t have as much control over my destiny.” So while there is some financial benefit to selling a company, it’s not the only consideration. Now just mention a few of the others when you think about selling a company, the structure of the deal meaning most specifically is this a cash deal, is this a stock purchase or a combination of cash and stock, is there some payout schedule, are there earn-outs for the first year or two years that you have to achieve certain milestones in order to maximize the consideration for the sale. And probably important for most folks, not everybody, if you’re looking to sell and retire then that’s fine, but if you’re like my team we were looking to sell to a strongly backed company that had growth considerations for another exciting run at building the company to the next level and perhaps being part of another transaction then the role that you would assume after the sale is probably pretty important as well. So all those factors need to be considered, talked about openly in most cases. My mindset has always been to has generally been to maximize the financial consideration by being flexible in the other areas. By that I mean if someone’s going to give you a million dollars and they’d like to pay it out over three years, I was like cool, I’d rather have $2 million paid out over three years than $1 million lump sum upfront. And you know, that’s just kind of time value of money as long as you’re comfortable that the organization buying you is not going to go bankrupt or run out of money, then it generally is a way to help maximize the overall consideration for the sale. So that’s a good consideration, other things like you know if your buyer wants you to stick around and guess what even if you want to leave on day two you don’t need to say that, so they’re buying a lot of times they buy the management team, in our case that was definitely the situation, we had a young team, a really talented group, and I coached the team and said look these guys want us, they want the team as much as they want what we’ve done, the customers and the revenue stream that we provide. So it’s definitely useful to think about what your mindset of your buyer is and to a degree you know try to maximize what they’re looking for as well as what you’re willing to give up or accept. Hey, my last point here is we consider this, it goes along with a minimum acceptable offer. What do you do if you go out you think oh we’re worth $10 million, we’re worth $50 million but you don’t find any buyers that are willing to pay that. So we had open discussions about that as well, how to move forward if that happens, you probably know it fairly early in the process, you start to get a feel for what other firms are willing to pay for your company and what do you do, you might learn from that experience and set some goals to say two years from now, three years from now, here’s what we need to do in order to get to a position, position so we can sell. You might learn from speaking to buyers or advisors what they value and it may adjust the path that you’re on in order to again position yourself for sale. In our case, we had mostly consulting driven practice meaning revenue upon delivery of services, but we had a small growing recurring revenue business and we certainly knew that that was valuable, ended up being you know almost as valuable as our consulting practice even though the consulting practice was about five times larger. So one consideration, we could have said let’s step back, let’s focus on growing the recurring revenue further for another year, two years, three years, and potentially had a you know a larger consideration at the time of sale, get away that with the pros and cons, you know three years from now the market may be different, we may not do better, we’ve been fighting the battle for 12 years. So you know we had all those discussions openly and decided to move forward, had a minimum number. The other, so let’s look at my story. I, as I said, over 12 years I had done four acquisitions, smaller companies, so I brought on partners with each acquisition, had a partner who bought in as a partner and one who just kind of sweat equity became a partner. So we had a pretty good group and with eight partners our expectation was always that we would grow to be a 30-40 million dollar practice at that size. But, well and behold, we’re a $15 million company. So we had become like it or not more of a lifestyle company, we enjoyed what we did, we’re good at it, we made good money, not great money, we weren’t super growth-oriented, and some of us had some stronger career plans. So if we didn’t get the number we’re looking for, you know, I certainly as a CEO, and I talked openly about this, said you know we’re going to push a more aggressive partner growth plan, meaning for this number of partners we either need to get bigger and more profitable or we’re going to end up reducing the number of partners. You know, some folks if you kind of put a number on it say you’re managing to a plan you don’t meet those numbers then you’re going to have to give up partnership or just not be part of future equity distributions. So again, clear expectations for the sale. Now let’s talk about what the process is, we’re teams all in agreement and you know what your number is, you know what your non-financial targets are, process pretty typically I’ve seen this dozens if not hundreds of times play out, goes essentially like this, got I think eight or nine bullet points here. So first, get your story ready, get your numbers ready because you’re going to have to get in the game so you don’t have well-organized financials and well-organized presentation on who you are, what your value parameters are, value drivers, why someone would be interested in your firm, let’s get it all organized. You’ll be more effective. The standard process really revolves around getting an advisor, and my first piece of advice would be solicit feedback from multiple advisors. First time I sold a company I didn’t do that, I enlisted my accounting firm to act as advisor and that was probably a mistake. I don’t think we maximized the sale, they’re good folks and pretty capable but they weren’t professional M&A advisors. Second go around I had a very good process where I met with four or five financial advisors and not only about it’s not just about selecting an advisor, it’s as much about learning the process and getting that feedback as to what your value might be and what the value components are, the things to emphasize, how to present your firm and how to maximize that value. If anyone’s curious, there are different ways to structure the fee structure but the most common one I’ve seen was a sliding scale where if you kind of are sold for a low amount there’ll be a rather significant price tag, perhaps 10% of the first million dollars, was what I was, you know, I’d seen typically and then it reduces from there, 8% on the second million, 4% on the third, 6%… I’m sorry, 4%… 6%… 4%… and then 2% or anything less. And if you’re a larger sale then it kind of averages out to somewhere in that, you know, three to 5% overall of the total deal. So that’s kind of a typical structure but it’s whatever you negotiate with whatever advisor you end up working with. So dig into my story a little bit, like I said, first company engaged my own accounting firm, good folks, and it ended up working out pretty well, but probably not the best approach. Second go around here I said about learning about what your company is worth, I had estimates from different advisors as low as six million and as high as 15 million, it’s a pretty big range, and you know to some degree it was this firm just didn’t think we were that valuable and real, I think that was about their maturity or involvement in our space and not having a clear path to where they knew buyers that would pay a higher amount for our organization, and that was good I learned more about the organization, our company, and value as well as the type of advisor or the specific advisor I wanted to work with, the ones at the higher end had done more deals in our space, they had tombstones or actual qualifications over the last year where they could say here are the companies we’ve sold that are similar to yours, here are the deal structure that was put together, so learned a lot there, um interesting don’t be surprised if some advisors say thanks but no thanks, I had two or three that just said you know we weren’t appropriate for them, not entirely a criticism of our group as much as the size, so some advisors only work with rather large companies, some advisors work with really small companies, more like business brokers, and the funny thing here is unusual one of the folks had said no thanks ended up introducing us to a PE firm just as a courtesy they said hey you know introduce you to firm MC Partners in Boston and that group ended up being one of the firms that was involved in making us an offer and ended up being the the firm that we went with, so in the end advisor good guy I still talk to him from time to time but he missed out on a pretty nice success fee by by saying thanks Beno thanks but he was true to his you know to his practice we were a little smaller than what he typically worked with and he just gave us a courtesy introduction moral Thor is is you you got to get in the game you got to talk to a lot of people got to network you got to get a feel for um where you fit best and the type of advisors and buyers that you uh you want to work with um now here’s my other side note because while I’m sharing with you the standard process in the end uh we stopped short of executing with a financial advisor uh and as kind of a dry run for this I had also prepared my own you know presentation offering and was talking to some potential buyers in my network and ended up getting two buyers involved and very high interest and uh decided at kind of the 11th hour right before signing a contract with an adviser that we would accept the offer from one of these uh two other potential buyers so uh I’ll just pause there and say we didn’t file the next steps but doesn’t take away from the fact that this is uh and we probably we potentially could have made more money um but we had uh some I’ll say industry or or um uh Market condition that we were concerned about and going through a full cycle might add another six months to the process and we felt that it was best to move forward with with the buyer that we had already identified that said here’s what you would do next select that buyer and you put together your your offering usually a PowerPoint presentation and almost always I think pretty much always a one-page teaser and the interesting thing is you know we had beautiful 50-page uh PowerPoint that that went through our history and our operational metrics and financial numbers from several different angles different business units uh it was wonderful the one pager is probably what sold the company um and it usually is people have have tend to have a short attention span you know pretty quickly if uh if they’re interested in your company and you get a quick sense they’ll get a quick sense of whether uh we’re in the ballpark for what they’re looking for so that’s technically what you do the next step’s pretty critical and probably the biggest reason for having an advisor is uh the ideal way to sell a company is with multiple buyers so and those advisors should have a Rolodex and and probably a database of financial buyers operational buyers strategic buyers in your space if they don’t then that’s probably not a great fit for you and not worth the fee the success fee that they’re uh that they’re going to charge um what do they do at this point they send out that teaser to you know could easily be 20 30 50 100 potential buyers and see what kind of interest you have and that’s the key it’s getting more buyers involved once you get that interest you want to schedule your road show just like a real IPO where you go on a road show to investors in this case you’re going to have a very brief window typically not more than two to four weeks Max and you’ll go share your story you walk through your presentation you interactive uh discussion with the with the buyer they may have their financial buyer the operational folks that want to understand your secret s how you do what you do um what your team is like everything that could be important to to buying your organization it’s very exciting time one of the things to think about is who should be part of the Road show start with the obvious the CEO uh the financial advisor would be there helping to coordinate and kind of speak in the lingo of the buyer but you may and sometimes that’s it a lot of times you know you don’t need more than just the CEO and the adviser but it’s pretty typical for the CFO to join if you want to drill into the financials and if the CEO isn’t really strong in financial review and financial discussion um and depending on your organization you’re a really cool tech company you might want to have your CTO there talking about how awesome your technology is if you have a great goto Market strategy you might want to have your Chief Revenue officer or sales officer there it’s all about you know creating your product and delivering your services maybe you’re coo so small group good presentation keep it tight ready to handle objections questions what have you your advisor should coach you through that do some dry runs keep it brief because everybody’s got a short attention span hit the road show two to four weeks and now we go ahead and sit back and collect offers and negotiate this is the fun part hopefully you have multiple buyers interested and just as you might expect if you ever sold a house recently can be pretty exciting um kind a little bit of uh auction between the buyers um you may have some follow-up meetings if they want want to understand a little bit more your advisor can facilitate how to drive the negotiations but guess what my experience not just my own personal uh selling of two companies but in general the CEO is probably the best person to be driving those negotiations directly with the CEO or the managing partner of the buying organization so in my opinion you don’t want to entirely rely on your adviser to do that you want to be part of that process there are usually non-financial considerations being discussed as well as the financial terms themselves um and yeah I had a good time this is part of the process did have two solid buyers in the last week we had a little bit of back and forth um between the two buyers and I’ll I’ll I’ll tell you a genuine interest you know our team had genuine interest in both of them first of all hopefully it’s genuine um and if it is then there’s nothing wrong with uh a little bit of you know gamesmanship um I must have said many times to one or the other buyer I really want to join your company you guys are the ones that I want to be with the most but that other company’s givin us a little bit better offer and I really feel compelled to take that one so you know that that’s just natural and I think both buyers understood that but they’re going to negotiate hard they’re going to see if they can get better terms for themselves and they’re going to push you hard to see what they can get in my case both buyers had valid reasons for being the best fit for our organization so that was a good thing we decided ultimately to go with the smaller of the two financial considerations aside I think I had more control over my own destiny with that company so that was important to me and you know it’s funny looking back as as we all were talking openly you know we would say you know what if we could just get two million more and then one of us would say hey what if we just left on day two and the other would say yeah but then we’d have a two million less uh so kind of interesting as you go through that the process of getting the company ready for sale what your mindset is what your expectations are uh throughout the process but um in the end both exciting exciting companies exciting offers I’m sorry we picked a exciting company and um and that was the one for us so let me know if you have any questions about uh about that process uh Dave and I hope that’s helpful for the team.
Yeah it’s super helpful I mean there’s a lot there um uh that was great I mean it’s you know it’s a great real world example of you know how the process works and and you know there’s a lot of real lessons in there for sure um just a couple things I wanted to kind of dive into you mentioned you know having a clear expectation of why you want to sell and and you know making sure that everybody’s aligned on that um and and it sounds like you know you had a couple different buyers and you know there were different things about both of them that were appealing um how did you kind of deal with that you know you had eight partners right and and not all of them are going to feel the same way about about every aspect of the potential buyers so um you know how did you kind of deal with that yeah so that was uh you know that’s that’s a great question and um you know something that we we had to address uh head-on and openly um so it was really just kind of going through that that list of uh of non-financial targets and getting a feel for what was important to each of us um you know as it turned out you know some folks were more um interested in the uh in the lifestyle aspect and were uh they were like hey you know this one buyer uh you know offers this or we feel like we could get to this lifestyle company um you know a little bit easier a little bit sooner um uh where others you know we’re looking for uh you know a little bit more of a uh of a growth story um I think in the end we all recognized that uh you know that um having a little bit more control over our own destiny was was more important uh than than getting uh um you know you know squeezing out an extra million dollars or two um and and uh and so you know I I think that’s just part of the process of openly discussing what’s important um you know what our expectations were and and um and just kind of recognizing that you know there are there are no absolutes and and there are trade-offs in any decision and and you know getting getting the majority uh to agree uh and and it was a unanimous decision um so you know it’s it’s always a challenge uh but but um you know I think we were uh we were able to get get to the end there with with a decision that was uh that was you know good for everyone um and you know in the end that that company ended up being uh you know a fantastic place for for our team and um and uh you know we’re all uh you know pretty happy with with how things turned out um so yeah it’s a it’s a it’s a good question it’s a it’s always a challenge um and and it’s it’s one that uh you know you just have to uh you just have to work through um so that was that was good.
It’s perfectly fine to wait until the day is sell um and last but not least draft the purchase agreement. Purchase agreement is the legal document that has all the contractual obligations liabilities uh future liabilities how those get handled of course the financial terms and any operational um terms or considerations as part of the deal. My story first sale is all stock pre-IPO buyer meaning this is a privately held company that plan PEB plans to go IPO in the near future it was uh super risky but super exciting.
Big upside if they did go IPO in hindsight was probably riskier than than we should have done um I was like 31 years old and full you know visions of exciting IPO and you know 10x increase in valuation uh we were very fortunate with one of uh the companies that did go live uh shortly after Y2K early 2000s did go IPO but advice is that’s generally you know unless you’re you know for me this was my total worth right I uh was a majority owner in a $5 million company and um probably would have been a smarter move to take some cash out of the deal if not 100% maybe 70 or 50% and uh and still get some upside with the stock um and cor to that non-financial terms are certainly important as well that’s about it uh if you’re good on that everybody just gets together and executes the deal and uh you go off and have a nice little party and celebrate your success so that’s the process fairly standard repeated over and over again um can take as little as you know three months maybe even a little shorter or more likely it can take uh six months if you go through., six to nine months if you go through a pretty formal process and you’re a larger organization with more complexities more due diligence more preparation for the Road show um but those are the steps that help ensure that you’re going to have multiple buyers you’re going to get the best buyers at the table that would be a good good fit for you uh both financially and operationally last slide I had was just to highlight a few of the other things that that um other ways that companies go through an exit um you could which in the end is you could run a cycle yourself without an advisor benefit being you don’t give up five to 15% of the consideration so that’s cool in fact it was one of the factors that we considered um and ultimately the path that that we did with bisc so process is pretty much the same just do it yourself prepare your own deck solicit your own buyers um go through the negotiation process yourself my advice here would be is you still could get some help with your presentation you could pay the same professional advisers but pay them on an hourly basis you might not give up 10% of your company uh 10% of your proceeds if you do that you might pay someone 50 hours or 100 hours to help you put together a really good presentation um similar you might need help Drafting and nego iting the purchasing agreement but there are good lawyers and m&a attorneys who can do that for you by the hour biggest challenge in my opinion is that the adviser typically brings a lot more buyers to the table that’s probably the number one reason to go with professional adviser is to make sure that you get a a good uh group of buyers all right next option friendly sale to a partner organization so a lot of companies don’t plan to sell but in the course of business you work with other companies maybe you go to market together some Cas maybe you compete but you’re friendly competitors you win some deals you lose some deals and and you have respect for the organ other organization that organization might approach you one day and say hey why don’t we join forces we have some resources we’d like to buy your organization or merge with you or you might decide to approach them so that’s a very common way that exit occurs um typically doesn’t provide maximum Financial return not always it could but it may be ideal if you have a really strong partner who you know is a good fit for your organization so nothing wrong with this approach you still could go out there and do a limited cycle to kind of validate your value and then uh give that you know key partner kind of write a first refusal and say look I think we’re worth $10 Million uh we’ll take nine because we really like you guys and let’s uh just lock arms and and move forward all right the other approach that’s fairly common is sell to your partners or your employees if you’re the sole or majority owner and you want to exit strategy for yourself um it’s a certainly a feel-good option the other folks that are now getting Equity opportunities that maybe didn’t have them before are going to feel pretty good about the company doesn’t typically yield a maximum return or maybe not in the short term this is part of a long-term strategy to transition Equity over five 10 years it could be a good Financial option but it’s oftentimes a good option if you’re just looking to sell partial interest and and incent other people to help Drive growth and success of the company over the next few years so uh so that’s a common option the other one that’s pretty common is don’t sell and keep it in the family which at the end of the day is still a sale whether you hand it to your your kids your heirs or you uh set together a financial buyout structure over a period of time um especially if you have multiple kids the common is everybody gets an equal share but not always the case maybe one of your kids is involved in the business um and the others are not so my advice here is hire a professional advisor and accountant to help guide the process and be very sensitive to your family relationships because um usually somebody’s not gonna be happy with the way it the way it unfolds if you go this route but it’s still a great route believe me uh I have plans in the future to perhaps do another startup and and that would always be a nice way to uh think about how you transition have a legacy uh succession to your kids all right last but not least call this the fire sale if you really have to sell and you can’t really go through a competitive process the value isn’t something that they’re strong enough interest in um you may have to do other things and as I wrote that down because it’s a it’s a real option I don’t have that experience so I’m not I don’t have a whole lot of insight I don’t have any insight to share with you here um I’ve never had to go through a process I’ve helped some customers who have been through that process Quai bankruptcy and and recapitalization and bringing in friendly folks to give you as much money as you can get and sell off some of your assets maybe the company survives maybe it doesn’t so we’ll just say that that’s not necessarily the best thing um I will share one story My Last Story here uh which is you know not a great story but has a happy ending my dad was an entrepreneur before me and he built up a nice successful Consulting business over 20 employees and um he was a sole owner he didn’t sell Equity he had no plans to sell the company or share Equity um I was rather young I was in my early 20s and perhaps he would plan to you know pass it on to myself and my siblings which would have been awesome but he developed some health issues and he couldn’t keep the coming going so you took a pretty successful company and it went down to essentially slowly decline down to zero revenue and they kind of closed their doors so that was that was sad because you always want to as they say sell high and buy low so he missed the opportunity to sell at all um the ending is that a couple years later I was ready to start something I’d always planned to get into an entrepreneural startup and it worked out well that his uh company um they just closed their doors so I was able to work with my Dad we we basically kept the company name we kept a lot of the you know the history in terms of we were an established company so we had credit relationships we had some customer references and use that to start a practice and that with that intent because of my dad’s situation um built that up with three other partners I brought on board and we sold it four years later and uh my dad retained 30% ownership in the company so he got some money for his retirement and uh we made some money and we had a good experience so that’s it that’s all I got Dave those are that’s been some of my experiences I hope that’s helpful or um if anyone has questions or wants to reach out and talk about this any further I’d be happy to to share further insight.
Dave: For sure Tommy I really appreciate this um nice mix of just kind of educational value intertwined with like personal experiences that you know are very unique and appreciate that you really kind of shared um we’ll call it sensitive details you know some specifics around the number of the partners um some of the figures that you’re considering um real good stuff that’s just kind of hard to come across so um definitely relate to this um to a degree um in some of my uh earlier Endeavors um you know sold the business and then you talk about that sellers remorse aspect of like okay but but now what now you have maybe no company no team um no cash flow coming in um you know not to say that you’re with nothing but those are things to consider and it’s just you know what I learned is that how important it really is to plan for these types of things um so much planning goes into starting the business and the journey uh but a lot of times we Overlook um the sale and that’s in some way I hate to say the most important thing but it’s h you’re missing like a big opportunity um if you don’t take time to think about it and the planning really starts like a year or more out because in in the way that you might approach you know that year for growth you might cut back on certain expenses things that you you know are on your Five-Year Plan all those things you might kind of scale down to make the numbers look better for the potential sale those are all things that you know we kind of Overlook so um yeah I think this is great stuff here Tom very true people that want to get in touch with you how how how should they find you
Tom: Sure um email I’m in the group so you can reach out through slack um my email is t Connelly@tiptop-us.com
Dave: Awesome
Tom: And I’m on LinkedIn so Tom Connelly Philly boy myself
Dave: Cheers okay thanks again Tom for uh putting this together uh making it the easiest podcast I’ve ever done because all I had to do was just listen content um if and anyone would like to get in touch with Tom he’s in our slack group um so thanks again awesome