Episode 27
This episode is part 1 of 2, where we are joined by Mergers & Acquisitions specialist – Zach Vaninger. Zach has spent a majority of his career in the world of Mergers and Acquisitions and has worked on transactions that total over $1 billion in deal value. On today’s episode, Zach is going to share his thoughts on what a seller can do to prepare to get acquired and walk us through the process of selling a company.
Preparing to be acquired
- What are your goals?
- Get good professional advice (lawyer, accountant, investment banker)
- Get NDAs in place immediately
- Get everything in order
- Be open with your management team
- Know your company narrative (what synergies can you bring to the buyer?)
Deal process
- Compile a target list.
- Contact the targets.
- Send/receive a teaser.
- Sign a confidentiality agreement.
- Send/review the confidential information memorandum (CIM).
- Submit/solicit an indication of interest (IOI).
- Conduct management meetings.
- Ask for or submit a letter of intent (LOI).
- Conduct due diligence.
- Write the purchase agreement.
- Close the deal.
- Handle any post-closing adjustments and integration.
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Zach 0:00
You need to expect a review of every aspect of your business and you need to fully disclose everything that’s every secret in your business you need to be ready to uncover. Basically if you go in expecting that everything is going to be reviewed, it’s better to uncover it yourself day one than waiting until someone else finds it for you.
Intro 0:21
Welcome, everyone, to the firing the men podcast a show for anyone who wants to be their own boss. If you sit in a cubicle every day and know you were capable of more than join us, this show will help you build a business and grow your passive income streams in just a few short hours per day. And now your host serial entrepreneurs David Shomer and Ken Wilson.
David 0:46
Welcome everyone to the www.firingtheman.com podcast on today’s episode we’re joined by mergers and acquisition specialist Zach Vaninger. Zach has spent a majority of his career in the mergers and acquisitions world and has worked on a total of Over $1 billion in deal value, that’s billion with a B. On today’s episode, Zach is going to share his thoughts on what a seller can do to prepare to get acquired, and walk us through the process of selling his company. Stay tuned for part two of this episode, where Zach walks us through the things that can kill a deal, and how to increase the value of your company. Zach will also mention five ways to find promising strategic buyers for your business. Both of these episodes, you’re not going to want to miss. Welcome to the show Zach.
Zach 1:34
David, thank you so much for having me. I couldn’t think of a better place to start my podcast debut than www.firingtheman.com.
David 1:40
Absolutely. Absolutely. Now before we dive into things, I think we owe it to listeners to give them a little bit of background on how you and I first met absolutely in so I think it was probably around 2013 that we met. I was working for a middle market consulting company and you were applying for an internship. That’s right. And I’m going to give you kind of my perspective. But I’m interested in in your perspective on this as well. So we were at a restaurant, there was probably 20 or so prospective interns. And one thing that stood out to me was you were the only person with a notebook. And you weren’t just carrying it around, you were taking detailed notes. And I just thought to myself, me and Zach are gonna get along. And so you ended up doing awesome during that interview process and ended up getting hired at the consulting company I was working at. So first impressions, you know, you and I worked together on quite a few M&A deals
Zach 2:37
we did Absolutely Yeah.
David 2:38
And we’ll talk about that in a little bit. But that’s my story. What’s your story?
Zach 2:43
Well, it’s funny, you saw me as the go getter during that event, because I felt like the nerd and I felt completely out of place. It was my first recruiting event in public accounting realm. And it was a very memorable experience. I immediately remember connecting with you and I remember you came, you know, you, I perceived you as a go getter as well and someone that I’d want to work with. And you mentioned you work in the m&a realm. And that was something I was very attracted to. So I knew at that event that that’s where I wanted to work. So, from there, like you mentioned, the experience was tremendous following that event.
David 3:20
Absolutely. And you and I, we, we worked on a lot of projects together. Notably, we had a very active private equity client that was doing a lot of deals and, and there is a brotherhood that is formed amongst a team when you’re in the trenches working late at night, you know, meeting tight deadlines, and, and a lot of fun, but that it’s that bond formed a long time ago and, and I am super excited to have you on the podcast. So to start things off, tell us a little bit about yourself.
Zach 3:53
Yeah, so born and raised in eastern Missouri. I went to St. Louis University got my My undergraduate and master’s degree in accounting. So that’s kind of my education background. And then from there as you mentioned, I worked at this middle market consulting company and dove into m&a due diligence doing financial diligence quality earnings analysis, basically for two and a half years straight. And that work experience set me up. So well I’m so fortunate to have the experience that I got from from that company and roll it into a very interesting role at a large strategic acquirer based here in town. And that professional experience now I think, it’s been almost two years has been just as amazing as the internship and then full time role at the place that we work together at. So currently, my role is literally traveling the country buying small basically roll up companies for our platform entity and it is an amazing role. I’m so happy that I’ve been able to experience that St. Louis is such a great market for young professionals to really get involved and be recognized. And so to be able to do all these very interesting things, and as you mentioned, have 1 billion with a B, dollars in deal value under my belt at a young age has been just a blessing.
David 5:17
Absolutely. So I want to go a little bit more into your your experience. So you’ve represented buyers, you’ve represented sellers, tell me if I’m correct, you’ve represented private companies that have made acquisitions, public companies that have made acquisitions. Right. Is that is that accurate?
Zach 5:34
Yes, that’s accurate. So you know, in the consulting side of things, we were the transaction advisors in a way. So as you mentioned, both buyers and sellers were our clients. And we did the diligence on both sides of the deals. And so that was two and a half years. And very interesting work because you really get into the weeds of the financials. And that was one thing that You know, I get so much deal repetition with just the financial piece. It was leaving me questioning Well, what about the other side of things? Right? What about the strategy of the deals? And that’s kind of where I started looking for my, my exit, right? I really want to understand what is the value behind this transaction. and the value is really driven by the strategy of an acquire. So, for me, you know, a lot of people in public accounting go on these career searches, and they’re looking for, you know, the, you know, 15% raise and just ready to get out of public accounting. And that was not the case. For me. It was very specific, I want to find somewhere where I can leverage my very specific financial due diligence, due diligence experience, and roll it into that more strategic role. And that’s fortunately was what I was able to do.
David 6:54
It’s awesome. And I think you know, we’ll dive into this throughout the episode, but I think it’s really cool that you do have experience on both the buy side and sell side, right? Because there are wildly different goals, right? The seller, they want to maximize purchase price the buyer wants to minimize. And I think, you know, going into a transaction, it’s good to be thinking about, you know, even if you’re a seller, hey, what is the buyer thinking? What are their goals? What do they want to get out of this? Absolutely. And so I’m looking forward to getting into this. I think for a lot of our listeners, they’ve either are about to start a company or have started a company, there may be a couple listeners that are getting ready to sell a company. So let’s start there. First, what are some things that a seller should do in order to prepare to get acquired?
Zach 7:45
Definitely. And I think the first thing that it comes down to is defining what are your goals. And that’s one thing that you and I have talked about personally, we can talk about our personal future goals, but when you own your business, this transaction is most likely going to be One of the biggest deals of your life, maybe career, especially those owners that have owned a business for a long period of time. And that might not be the case for some people who are active in buying and selling, it might be just another transaction to them. But there are a lot of people that have their entire livelihoods tied up in their business. And so this is a big event in their life. And it usually involves a lot of money, and even more risk. So given the size and complexity of a company, one bad merger or acquisition may will ruin you. So because of this risk of buying or selling your company, you need to take gradual steps. When you’re thinking about your goals, is it liquidity that you’re after? Is it involvement in the strategic acquirer post transaction? Do you want to be a part of that company? What are your personal life goals and and do you want to better work life balance? And maybe you want to travel? Really, step one is defining why what are your goals and then I would say it’s As soon as you decide that you want to sell your business, the first step should always be getting good professional advice. And that may be or should be a good lawyer, a good accountant, and potentially an investment banker or broker. And so the biggest thing that I’ve seen in my experience, especially on the buy side, so now we’re talking about the latter two years, my experience is attorneys need to be transaction or m&a related attorneys. There are so many instances where we get into deals now. And there is a standard, you know, maybe divorce attorney, property law attorney and just you know, General attorney, but transactions are so specific, and we’ll talk about this probably later on, but speed of close is very important to a transaction. So having that good legal counsel is a must.
David 9:54
Absolutely, I bet there are a couple people listening to this right now that say, You know my my goal is I want to pay as much as possible. What are they not thinking about? You know, if that’s their singular goal, what are they leaving out? Or what should they be also considering?
Zach 10:09
I think, definitely you want to consider your legacy. I think, for me, at least, I would want to know that this basically, baby, if you will, that I’ve put my time and energy into is going to succeed. Post close. And, you know, for me, I take pride in my belongings, my investments, my relationships, friends, and so this, this transaction is really more than just money, at least it would be for me. Now, some people like you’ve mentioned they, they may not consider that, that part of the deal. But I do think, you know, there’s so much tied up into it. And unfortunately, it’s all circumstantial. So that’s why I think the step one is really what are your goals and then maybe join a tree beyond You know, step one, and two, well, what if I do this? What if I do that and evaluating those different alternatives?
David 11:05
Okay. Now you had mentioned to hiring an attorney hiring an accountant hiring an investment banker. And for those people that are listening to this saying, that’s pretty expensive. Is there a cheaper alternative? But what would you tell them and and at what purchase price, do you think it makes sense to kind of bring in those three teams in order to, you know, help you facilitate the deal?
Zach 11:31
that’s a that’s a really good question, David. And, you know, my experience on the buy side, I’ll address the latter question first. Having experience in deals on the buy side from anywhere from $500,000 up to a couple hundred million dollars, is, at every level, there should be those three parties involved. So I don’t believe that there is a minimum threshold for an investment banker, accountant or lawyer I think it should be involved in at all different levels. And then that may surprise some people but I think the fees can be adjusted accordingly on on the seller side. So if you’re getting, you know, legal representation, I’m sure the law firm that you’re engaging understands your your financial condition, and can adjust fees accordingly. And also at On that note, the deal won’t have as much as much risk on the buyer side, so there won’t be as much diligence involved and probably back and forth. So I don’t think there’s a minimum threshold there.
David 12:34
Okay. Very nice. So, Zach, when I look at my team that I’ve built around my company, I have an accountant. I have an attorney, an investment banker is someone that I don’t have right I haven’t sold my company yet. Tell me a little bit about investment banking and and honestly, like when I think of investment banking, I do think sometimes they get a bad rap. So let’s talk a little bit about that as well.
Zach 13:00
Absolutely, and I agree completely investment bankers sometimes get a bad rap. And there’s also some mystery into what is that business but it truly is a very straightforward operation. They truly are just a middleman or a broker, if you will, into in between the buyer and seller. And so, investment bankers have a lot of value proposition that they offer their clients. First, I think they brought in the exposure to potential buyers by tenfold, at least they know the active buyers in the market. They know how to network, they’re involved in many different associations where they meet business owners active acquires and other you know, for example, private equity firms that are in the marketplace actively looking for deals. And you as a seller might not know those, those folks so it’s good to just get their proposition at the very minimum. And then also, you know, while investment bankers do take a portion of the proceeds at at close, I mean, that’s how they get paid. If the most of the time if the deal closes, they get a certain, you know, proceed or percentage from the deal. They do have, you know, service fees that are pre closed. But a lot of those times if you have good accountants and your businesses have a material size, you’re going to do a what’s called a seller’s quality earnings analysis. And a lot of these fees you can actually add back is one time expenses. So, a good investment banker working with a good accountant and a good lawyer, you could really find ways to almost in a way increase your the value of your business artificially.
David 14:37
I want to dive into that. I think we ought to wait a little bit until later in the episode when we’re talking about add back. So that’s kind of, you know, let’s revisit that. But this is an oversimplified just to kind of recap what you said this sounds to me. Like they are a real estate agent for companies. Absolutely. Is that is that fair? That’s fair. Okay. Okay. However, would you also agree that The work, you know, in real estate when things are going at price per square foot, when you’re selling a company, there’s so many unique aspects of that. And so their opportunity to add value, maybe over and above what a real estate agent could do, is where they really earn their keep. Is that fair?
Zach 15:18
Yes, that’s absolutely fair. I agree completely.
David 15:21
We’ve kind of talked about the attorneys, the accountants, the investment bankers, what are some things that you can do internally to get your business in order?
Zach 15:30
Absolutely. that’s a that’s a great question. And I think the the short answer is you need to expect a review of every aspect of your business and you need to fully disclose everything that’s every every secret in your business, you need to be ready to uncover. And so there is a very important process. That’s part of the deal called due diligence that buyers go through and I’m sure we’ll touch on this in the deal process, but you’re Business is going to be ripped through in every aspect. You’re talking about financial, legal HR considerations, sometimes environmental health and safety if you have manufacturing, distribution organization. And so getting everything in order, basically pre deal really when you decide that you want to sell your business, getting it all lined up, day one is critical and kind of going back on our prior point, an investment banker will will help you do that.
David 16:29
Okay, what are some things we need to say, you know, get things in order, what are some things that you see cause issues in a deal?
Zach 16:38
There could be a number of items, I think the biggest thing is most likely related to mismatch financial information. So, there there are instances where people have multiple sets of books they have unaudited figures that you know sometimes do not reflect the actual true nature. The operation sometimes, for example, on reported cash sales that are not hitting the income statement that’s being basically the income statement does not match what’s on the tax return. Got it. So there’s a lot of items and a lot of it is again, David, very deal specific. But basically, if you go in expecting that everything is going to be reviewed, it’s better to uncover it yourself day one than waiting until someone else finds it for you.
David 17:27
Now, as you’re approaching this transaction, I’m thinking myself as a business owner, there are certain parts of me that would kind of like to keep this to myself. There are also certain parts of me that thinks it would be good to share with the management team to kind of get them on board. What have you seen there from a personnel standpoint? What what seems to be working in the clients that you’ve worked with?
Zach 17:49
Yeah, that’s that’s a that’s another good question. And speaking again from my buy side experience here, deals where the chief financial officer or controller are involved in the transaction process runs so much smoother than deals where the owner is trying to conceal the involvement of the CFO or controller, for example. And I completely get it from a seller’s perspective, there is uncertainty while the deal is being negotiated about close. And so if you disclose this potential sale of your business, that employee may be at risk of leaving and or leaving during the process. And you’re left holding your hands what’s going to happen to my business if I don’t have my trusted controller. So there is a legitimate concern there that we experience a lot from the buy side. However, if you have those upfront serious conversations with your trusted management team, and sometimes you can offer stay on bonuses and potential transaction bonuses. It will expedite The deal process and it will also, I think, relieve a lot of stress and tension on you as the owner because that is something that you carry during the deal process, Will someone find that? Will this person find out? Will they not like me? Or will they quit. And to eliminate that stress through an honest, open conversation is probably the best approach.
David 19:19
I couldn’t agree with you anymore, you know, just based on on deals that I’ve worked on that having a controller on board, because you know, from a financial standpoint, they are typically the people that understand the business, the best that the controller and the CFO. And so, for those of you that are kind of still in the startup stage, a controller is going to be the person that does the day to day operations of your accounting. So if you have an outsourced accountant, this would be you know, a little bit different of a scenario. However, you know, just the person that has the financial understanding of your business is who’s talking about absolutely anything else that we should cover as we are preparing to get acquired.
Zach 20:00
No, I think the only other comment that I would have is just know your company narrative. What are your roots? And how do your values potentially benefit a buyer? And what will your legacy be? And how do you want to define that? At the end of the day, it is up to you. And I think, you know, this is a transformational event in your life. So taking these steps seriously, will will ultimately result in a successful close.
David 20:24
Very nice. Alright, to kind of turn the corner let’s talk about the deal process. If if this is something that you’ve never been through, this could be scary, right? And so let’s start from the very beginning and work our way through a transaction. And for somebody that’s about to sell what what can they expect,
Zach 20:42
right? So speaking from the buyer side, the buyer is going to be active in the marketplace and they are going to have a target list of companies that they want to acquire in the marketplace, because of whatever reason they they might not know your full company profile, but they’re going to be active in the Place and so they may reach out to you one day. And they may ask, you know, Hey, are you open for discussion and it made speech and general discussion, you know, tell us about your business and sit down over lunch drinks, whatnot, just generate a relationship and then the question will obviously come up, will you ever consider selling and so that’s speaking more from the the buyer side of things where it’s an active buyer in the marketplace. However, if you’re a seller, which I think most of your listeners are probably more interested than a seller is going to go to the market, generally through an investment bank or a broker of some sort. And how that is going to work is they’re going to sign a confidentiality agreement with the broker. And that broker is going to ask the seller for basic financial information, company descriptions, what your potential value proposition is in the marketplace, and Then what are you looking for? as a seller? What is your enterprise value of consideration? How much do you want on a business? Okay? And so that broker is going to put together what’s called a confidential information memorandum, which we know is referred to as a sim. And so this sim is going to be distributed to interested parties after they sign a confidentiality agreement stating that they will not disclose any of your confidential information, and they would not tell other market players that your business is for sale.
David 22:33
Now before we move on what is in a sim
Zach 22:37
in a SIM, and they vary significantly, especially when it comes to size of deal, but if you’re on the lower end of the spectrum, a sim will include very basic financial information. It may include some operational information, maybe product line cards, and maybe key vendors that you you. You have customer concentration And so that’s kind of a very slimmed down Sim, if you will, on the lower side of the spectrum. On the other side of the spectrum as sim in a couple hundred million dollar deal, or maybe let’s just say over $50 million, which is a decent size business, maybe six plus million EBITDA business. So a decent healthy size, that same is going to be a little more substantial. It’s going to outline the deal process, in terms of you know, if if parties are interested, it’s going to talk through key deadlines for submitting an IOI/LOI, and kind of expected time of signing close, which we can touch on. And then it’s going to do a more deep dive into what the financial profile of the company looks like. And it really is a marketing tool that the investment banker uses to generate interest. So a lot of times it’s going to be pretty lean towards look at all the fancy nice things of our business and generate interest. And that’s kind of where The investment bankers and seller really generate kind of that list of potential buyers that they want to narrow down to.
David 24:07
Got it. Got it. Okay, very nice. Now what follows the sim.
Zach 24:12
After the sim comes a stage that is called submitted of an indication of interest, which is an IOI. And the indication of interest is a key landmark in any m&a deal. This document is provided by the buyer, and it suggests a valuation range that the buyer is willing to pay for that company. It could be a set in stone price, a pin down price, let’s say 12 million million bucks, or it could be a range we’ll pay you 10 to 15 million dependent on these factors that we uncover during diligence. And so typically a seller receives indications from numerous buyers. And if that buyer, the indicate indication is acceptable. The next step is for Or that buyer to attend a management meeting and then submit a letter of intent.
David 25:05
Very nice. Now what what’s going to happen at these management meetings?
Zach 25:09
Yeah, that’s, that’s another that’s another key event. And generally, you know, now we’re talking still kind of in an investment banker led process that is setting up these management meetings. And I guess it can occur without an investment banker, but these management meetings, you’re really going to want to reinforce those key points that you market it to the buyer, if you marketed that there’s potential synergies related to, you know, facility consolidation, for example, or opportunities and rebate and discount program improvements or whatever value that you really marketed in that Sim. You need to drive home and so this is literally going to be where the buyers team sits in front of the sellers team, wherever the seller is comfortable involving the process. And they’re really good In a, it’s it’s almost like dating. I mean, they are meeting with four different potential buyers and you’re putting your company’s personality, their reputation, and you’re going face to face with the buyer and really trying to generate a good connection that may lead to the next step, which is the LOI.
David 26:23
All right, I’m loving this. I’m loving this. Let’s let’s dive right into that. So, so the the dating happens at the management group meeting, now is an LOI, is that a? Is that a swipe? Right. So
Zach 26:34
no, I would consider that to be a marriage proposal. Really. It’s it’s a step forward, for sure. And so as the name implies, the Li lays out the intent of both parties. So the seller states that they are willing to sell for the proposed terms and the buyer states that they’re willing to pay for those same proposed terms. So this is generally a new Maybe four to 10 page document with more definitive terms than the IOI. But less definitive terms than a purchase agreement, but it will outline very key terms. And so this basically says that both parties are agreeing to move forward and close a deal based on the terms in the document. Key Point though, it’s it’s not binding. So it’s not enforceable in court at this point, you don’t have a done deal except for the parts about confidentiality, which you have to you know, stick with, but it does not bind the buyer to the deal. And in fact, any party can walk away after assigned LOI at any point. And so, this process is really driven by the buyer, the buyer’s lawyer will be the one to actually craft the LOI And generally, it will be in close coordination with the sellers attorney again, going back to very important to have an M&A transaction related attorney so they can work through this document quickly. And after the LOI is ready to be submitted, it’s generally sent over email and it’s signed between, you know, between the buyer and seller. And at that point you have a marriage proposal.
David 28:16
All right. All right. Very nice. So you have the proposal. What comes next?
Zach 28:23
Well, after the proposal, which you know, you do have to recognize that proposal is stating the purchase price, the terms closing date, length of exclusivity, approvals, and much more, you have to be willing to go. And so this process is where the buyer will go ahead and complete what’s called due diligence. And we mentioned this before, but due diligence allows the buyer to confirm all that information that they propose with. And so this is contracts, finances, customers HR information by gathering all this in information, the buyer is better equipped to make an informed decision and close the deal with a sense of certainty. So as soon as that ello is signed, there are going to be kickoff calls and diligence is going to be started immediately.
David 29:17
Okay, okay. Now for those of our listeners that are not familiar with diligence or due diligence, what exactly is that? What does that mean?
Zach 29:26
Due Diligence is a review of very pertinent deal information that generally involves the risks that the buyer is going to face in a transaction. So let’s talk about financial due diligence. For example. Your earnings of a company are presented on a reported basis and the investment banker may make adjustments called management adjustments, which we may touch on, but due diligence is really confirming what is reported or represented is accurate. So the buyer is certain that their risks in this transaction are minimized and at an acceptable level for them to actually close the deal.
David 30:11
Okay. Okay. And I can, you know, I can speak to this from from when you and I were working together, this is where we’re going in and looking at the target company, and making sure that that everything makes sense that that what is reported is, in fact, real, right. From a buyer standpoint, I think this is a really important process to go through. Because, up until now, what they’ve seen is only on paper. Right? And as you and I have seen, oftentimes what is reported on paper, and what exists in in actuality are two different things. Right. And so this is a pretty lengthy process where where, you know, there are another round of management interviews. Absolutely.
All right. So assuming that everything goes well in the due diligence process, what comes Next in the deal process,
Zach 31:01
The next step is writing the definitive terms of the purchase agreement, which is ultimately the binding document that the buyer and seller are going to sign that states that the business that the transaction is closed.
David 31:13
Okay.Okay. And that is that is putting the wedding ring. Absolutely. On, obviously you’re okay.
Zach 31:19
It’s a done deal at that point.
David 31:21
That, to me seems like the end of the end of the deal is that correct?
Zach 31:25
There, there are a couple of lingering points to a deal that you have to consider as a seller and you know, there will be stuff in the definitive Purchase Agreement such as potential net working capital true upset, you have to consider escrow agreements where there will be funds released from the escrow accounts that are contingent upon certain conditions defined in the agreement, but also any integration related items. So if you’re staying on as a part time consultant to help transition the business, there is a section or consideration that you need to keep in mind related to integration. But at that point, the deal is for the most part considered
David 32:02
closed. Well, very nice. Very nice. So that concludes this part of the episode. Stay tuned for part two of the episode where Zach reviews things that can kill a deal, how to increase the value of your company, and a list of five ways to find promising strategic buyers for your business. sec. This was an awesome episode. Thanks for hanging out with us. Thanks for having me. Thank you everyone for tuning into today’s www.firingtheman.com podcast. If you like this episode, head on over to www.firingtheman.com and check out our resource library for exclusive firing the man discounts on popular e commerce subscription services that is www.firingtheman.com/resource. You can also find a comprehensive library of over 50 books that Ken and I have read in the last few years that have made a meaningful impact on our business or that head on over to www.firingtheman.com/library. Lastly, check us out on social media at www.firingtheman.com, on YouTube at www.firingtheman.com for exclusive content. This is David Schomer and Ken Wilson. We’re out
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