"What do I need to do to exit?"
All the forbidden knowledge, at your greasy finger tips
This is a three part series.
And it is honestly the best content I have ever written.
Part 1 and 2 were shared on twitter, if you missed them, I copied them below.
Part 3 is new, exclusive content just for the email list.
Putting it higher up, but if you havent read part 1+2, just scroll down a bit.
You guys are special.
Thanks for reading my random thoughts every week.
Part 3- Actionable steps to exit
2020-2021 was the golden era to exit.
That era is behind us.
But that doesnt mean deals are dead.
I met with one of the busiest bankers in LA on Friday.
“Deals are slow, but every PE group I have talked to is gearing up for the biggest second half since 2020.”
In March 2020 banks froze.
Deals did not get done from 3/10/2020-7/1/2020.
No one knew if the world was going to implode.
But when the world learned to live with lockdowns (and gov stimulus hit), ecom exploded and so did deals.
More deals were done in Q4 2020 than all of 2018.
Thats a real statistic and I have data to back it up.
Q3/Q4 of 2022 were relatively slow.
The Banker I met with thinks Q1/Q2 of 2023 will be slower.
Deals will still happen, but PE groups want to see how companies preform in a potential recession.
The market is dynamic.
High highs, bring lows.
Lows will rise.
What I am trying to say is:
Now is a good time to make an exit plan.
The market is cooling, nature is healing.
In the next 12-36 months things should be normal.
Not 2021 feverish, but healthy.
So, assuming you have an asset you might want to sell, lets talk through a 2 year gameplan to get that done.
Terms:
The biggest factor in getting a deal done is knowing what kind of deal you would say yes too.
Optimize your business for that.
Understand what your business is worth, understand how deals are structured, and understand your number.
Do the soul searching and write down your ask.
“I will only sell 80% at a 12x valuation.”
Knowing what to ask for is half the battle.
The worst thing you can do is get far along with a firm, start spending the money in your head, and be trapped in a deal you would have said no to.
WRITE IT DOWN.
FRAME IT.
THATS YOUR DEAL.
Seriously, spending the money in your head is real, especially for a bootstrapped founder.
KNOCK IT OFF.
You need to have a defensible number, because the details will kill you.
Next week I will do a whole write up on preference and how that unravel a deal.
Any type of deal can get done.
Minority, majority, 100%.
Figure out what you want 2 years in advance.
Structure:
Your business needs structure.
They are buying your asset, not you.
Hire a COO, CFO, and a CMO.
Have someone you will hand the keys to internally.
If you sell, this person steps up to run it.
And if you dont sell, you can retire and the business still functions.
It hurts profit sure, but you will get an extra 1x-2x EBITDA by having a functioning team.
Process:
If your deal is 8 figures, you will need a Quality of Earnings analysis (QOE) and an Audit.
A QOE is an in depth review of your business.
An audit proves your numbers are real, a QOE looks at the mechanics of those numbers.
The colonoscopy of the business world.
A QOE needs to be done 12 months before you go to market.
In an ideal world you have two years of audited financials.
Growth:
PE doesnt look for rocket ships.
Sure they will buy one, and if you turn out to be one, great!
But they get spooked by rapid revenue increases if profit isnt there.
The best thing to do is plan quarter by quarter for the year leading into a sale.
Figure out how to show:
10-30% YOY revenue growth
10% YOY profit improvements
Slight margin improvements every quarter
Easier said than done, I know.
But the best thing you can do is show that your business is steady and sustainable.
We arent SAAS.
You dont need 100% YOY revenue growth.
Just steady, improving basics and cashflow.
Mentorship:
How do I know all this?
I learned it.
And I am sort of dumb.
You can learn this in 6 months.
Find people who have done deals similar to yours.
Find a banker that does your industry.
They will have a book of happy, rich, founders they have worked with.
Ask for intros and befriend them.
People who are rich and retired miss being in the weeds.
They want to help you. They will have all the little things they got fucked on that they wish they did different.
In one year I was able to meet 2 dozen owners who exited for 9 figures.
What you are reading is just a regurgitation of their experience.
Just put yourself out there and ask for help.
Wrap:
Part 3 is a wrap.
If you are thinking about exiting or need help figuring out what to do, feel free to DM me.
Its fucking hard.
I was so naive when I started this process.
Now I am the smartest and strongest person alive.
Thanks for reading, sean :)
Part 1+2 below…
Part 1- Valuations
"What's my business worth?" I get this question all the time. The easy answer is "what someone will pay" But lets actually add value to the community. How do you value a deal? Who buys companies? Who sells companies? A real value add thread, where I try to help and not troll:
First, the size of the deal matters. Under 10 million/year you are not a brand.
Smaller deals have more risk. A little wind flips a paper boat. A passionate founder can hold together a horrible business with vision and grit. But you arent selling you, you are selling your asset
Less revenue, smaller team, less time in business- Smaller valuation. Really 4 buckets- Under 1m in EBITDA Over 1m, but under 10m. Over 10m, but under 50m. 50m+ in EBITDA.
Lets break these down:
Under 1m in EBITDA: This small of a deal, EBITDA is also called seller discretionary earnings. The goal of both sides is to reach an adjusted EBIDTA number that feels fair. It gets adjusted both ways Add back in the credit card points, take out a manager salary to replace you.
In 2020/2021 you would see a sub 1m adjusted EBITDA deal get done at 4x. Now it is really 2x. If a business is shrinking, has problems, hasnt been in business a while, bad category, its 1x. Great category, growth, potential, 3x. The challenge sub 1m is someone is buying a job.
Who buys this? Strategics, someone trying to extract synergy. I bought a few companies in this range. New blood getting into an industry, someone from FAANG with some cash who is bored. A self funded "PE" group. Someone trying to make a name for themselves with family money.
Who sells the deal? You do lol
Its so small a banker wont care. Bringing in a true M&A lawyer will take 10% of the deal proceeds. This is a boiler plate deal, with a buyer from an online auction site or cold inbound. If you are over your biz, sell, but terms arent great.
Over 1m, but under 10m EBIDTA: Here EBITDA definition makes or breaks a deal. Deals are almost always cash free/debt free, unless specifically stated. Its why Adjusted EBITDA exists- We look at how your business could perform in a debt free environment.
Now- In a hot market, whats adjustable is up for debate. New cars every year? Office rent thats really your house? Team trip to Rome? You try to add it all back, and thats for you and the buyer to hash out. What for sure gets added back is equipment costs and debt servicing
Once you have a ballpark, there are two scenarios. Which path you take comes down to: Pain tolerance, Brand perception, desired outcome, and a million other things. You either go to a broker or you hire a banker. Whats the difference?
A broker should have a list of qualified buyers. They generally specialize in full sales, with you exiting your role in the business. Closing times are MUCH quicker, weeks or months, not quarters. But multiples will be a lot lower. You pay for time.
Bankers run a process. They spend 6 months working with you to build projections, a deck, a story. They then spend 3 months lining up dinners, meetings, generating hype and interest. You get offers, you choose one to go under contract, and then the deal takes 6 months to close
Bankers will always get you a higher multiple. You pay for that in time and effort. Also, banker led transactions tend to look the same. 75% sold to a PE, leveraged buy out, you roll over 25% and are expected to work there 1-2 years.
Bankers get 1-4% of purchase price as a fee, plus $25k-100k down as a retainer. Time to close from first convo is 12-24 months. It takes forever. Brokers get 3-10% of the purchase price. Havent seen too many cash up front retainers. Close can really take 3 months.
All multiples depend on the Brand. Its hard to paint with brush strokes. Subscription revenue gets a kicker. Consumables get a kicker. Higher Margin gets a kicker. DTC rev over amz gets a kicker. Its so deal depended that some reply guy will be in my dms yelling at me either way
Banker deals start at 7x adjusted EBITDA. 10x is considered great right now. 12-14x would be huge and only for a special brand. Brokers just cut that in half. 4x-5x would be a fantastic outcome right now. You really pay for flexibility and speed. 2 years ago, add 2x on top.
Who buys these businesses? Almost always PE. This is where PE can start deploying capital. There is a whole class of PE that just does 20-40m deals. And thats who you need to get to know. For a while it was the roll ups, but they are all basically dead now.
You know what- I am going to stop here. Share this tweet if you want me to do a breakdown on how to sell a 10m+ EBITDA brand. And if you dont share this tweet I will find you, you bastard
Part 2- Large deals
Selling a business for $100,000,000+ Who buys 9 figure businesses? What do these deals look like? What do these companies look like? Part 2 in my series of: "real advice to help people" a THREAD!
To start- If you are closing a 9 figure deal in 2023, congrats. To get that done right now you would need:
- at least 10m in EBIDTA
- EBITDA growth over 2020
- 30% CAGR over the last 3 years
- 15% EBITDA margins min
- 3 other C suite execs
- Something "special" about your brand
Multiples are suppressed here, like every where else. Maybe they are less suppressed than the 1-10m range, but 2020/2021 had some crazy deals getting done. 15x felt standard, 20x was happening. You heard of deals getting done at 25-50x lol Now, a great deal would be 15x.
Why is it harder to get that 15x? It comes down to public market. Public markets are the eventual buyer of all deals.
Right now, Lululemon is trading at a 22x multiple.
Would you rather own lululemon, with billions in revenue and stores, or your brand, for the same price?
October 2021 Lululemon was trading at 176x.
So yeah, buying you for 25x felt like a steal lol
So now best in class brands are selling for 15x. Thats still a GREAT outcome by historical standards btw.
So who is buying these companies?
Strategics or financial sponsors. Legacy corp rolling you up, like Beyond Yoga and Levis. Or a PE firm making an investment. Lets explore both paths:
Strategics happen when they want to.
Inside of any company there are a limited amount of people who can say yes.
Basically 1/500. If an org has sub 500 people, only one decision maker can approve your deal. I often hear "we want to sell to walmart" Who do you know there?
A strategic deal only happens when the buyer wants it too. The stars have to align. That decision maker has to know your brand and WANT it. If you want that deal to happen, it takes three years of shoulder rubbing to get it done. They need to have M&A DNA...
PE is different.
They HAVE to do deals. Its a company full of decision makers, 1/10 people can approve a deal. And its full of people who want to make their mark. A PE deal isnt easy, but it is predictable. When you are ready to sell, there is someone ready to buy.
What does PE need to see to buy you? Its their business to do deals. They see a lot of them. They need to be protected from any and all downside.
They want:
- An exec team outside of you
- years and years of profit growth -
Growth happening without spend increasing
They want:
- LTV growth every quarter
- Margin increasing over time
- some massive opportunity that you were too busy to seize
They want the best businesses for the lowest prices. They dont buy on revenue 99% of the time. They need cashflow and stability.
The reality is, you will leave. 95% of founders arent with their biz after 18 months of a PE deal. They know that, you just got a fuck ton of money. So they need a business to function without you. And hopefully improve after you leave.
Thats what a these companies need to look like and who buys them. Know we can talk deal terms.
What does it take to get that 100 million wire?
Who do you need in the room with you?
A CFO
an M&A attorney
a third party audit firm
a banker
a personal CPA.
You have a PE group making an offer. 100m. What happens next?
We nail terms. What percent of the business is up for sale? What percent of the proceeds are staying in the biz as primary capital? How much are you rolling over? How much are you rolling over for employees?
We are using easy numbers and a fake scenario so shut up spreadsheet boys: - 100m valuation. 1% is for legal and accounting fees. 3% for your banker. 1% for "advisors", kick backs mostly. You are selling 75%, 10% roll over employee stock plan, 10% for primary capital.
There are infinite ways this deal gets done. So anyway I write it will be technically wrong. Where does the stock come from, who dilutes for it, where does the primary come from. All I am trying to show is the drop off between valuation and wire.
A 100m deal, where you sold 75% of a biz you own 100%. Wouldn't be uncommon for you to net out 65m. And only own 10-15% that you roll over for the second bite.
Thats it. Part two is done. If you share it, Ill make a part 3. If you dont, this secret knowledge will be lost forever...