Buying Carve-Outs for Future Exits

Buy-side carve out deals

Joe: In one of the transactions, we started by engaging an investment banker who was in between jobs and we had a list of big companies in the New York area. We wanted them to reach out to their corporate development decision makers and see if they have anything that they might consider divesting. So it gave us a lot of credibility that he was reaching out. He was a good person with a good background.

Matthew: He had worked for a top-tier, grade A bank. Whereas if it was just Joe and I reaching out, they might or might not probably have taken the call.

Joe: In that case, they were selling an asset, which turned out to be what we call the Wellness Network, but they were TV channels in a hospital. One is the Newborn channel that almost every mom in the country has to watch by law. They have to watch a show when they have a baby. And there are other shows about diapering and breastfeeding and things that moms have to watch. 

So it's a great business, but it was buried in the world of NBC in a division called iVillage and they wanted to sell that business. They had a process and we were not the highest bidder in that process. Someone else bid more money–it was a private equity-backed company. So, we were sent away and about 90 days later, Matthew decided to call up and see what happened.

Matthew: We were in the process. There were several people in the process. We bid what we thought was a butt-lower price, and they rightfully pursued it with somebody else. We kept checking the trades to see if the announcement didn't come on the 90th day. 

Joe and I still haven't seen the announcement yet so we decided to send them a letter and tell them, a little bit tongue in cheek, that we're self-financed and we'll close in a week. We did send that letter and they did call us back the next day and they said they weren’t sure they could really talk to us because they’re kind of trying to close the transaction with somebody else.

They didn't really think they could talk to us. But of course, because they were talking to us, we knew that they would do something, so we said we'll close it in a week and they have to let us in. 

They didn't say yes. They went back to the other buyer and they said they were taking too long and if they're going to keep doing this and procrastinating, they will go with this other company. And of course they basically called their bluff and the other buyer told them to go off and do it then. And we did make the offer. They did engage with us and we did close, and they were shocked. We did buy the business. 

After we did that transaction, we became a part of the patient ed business, which we were in for five years. We’re a big player in that business. Very quickly, we came to meet and work with the party that we beat. I mean, it was bound to happen and very quickly, we ended up meeting that guy.

Joe: We laughed about it over a drink and he said, they were a competitor of ours and a private equity-backed company. And he said, we were going a little too deep on the due diligence and DC was frustrated, so good for them for making it happen.

Matthew: The advantage we had was speed because we don't know what they bid, but they certainly outbid. But NBC just wanted to get rid of this division. Time was of the essence. You got quarterlies. The deal team needs to move on. There's something five times bigger. It's like we can't be spending another four months doing this. And so speed and flexibility was what got us that deal.

Key approach to due diligence

Joe: Partially, it was a slim down diligence process. And partially, when you're buying a business from NBC or a big company, they're very buttoned up. They have a lot of lawyers, accountants. It's highly unlikely there's some surprise buried in there that would be problematic. And Matthew and I do have a bit more of a team than the two of us.

We have a lawyer that we've worked with on all our transactions for the past 15 years. We have an accountant and we have various consultants we can bring in. One for HR, another for other kinds of financial due diligence. So we have our mini team and we are scrappy and resourceful. And we do dig deep, but we probably don't dig as deep as a big company.

Matthew: Two people running the deal have one conversation. Three people running the deal have three conversations. Four people running the deal have 10 bilateral conversations. Joe and I are on the same page every day. We're looking at the same documents, we make a quick call, our experts advise us, and we just keep moving. We're tearing forward at a terrifying speed, frankly.

Unbinding a company

Joe: We've had transition services agreements where they continue to run the business for some period of time, where we can make sure that we smooth out any kind of business issues that take time. But we can close quickly and, and still have the momentum, but make sure we don't have any bad bumps along the way.

Matthew: Fantastic though, when the seller is going to give you finance to buy the company and enter into a TSA to run the company for you while they're lending you the money to buy it. So it means that you don't have to create the organization to receive it in advance.

We're laser-focused on the most important terms of the overall deal. When you're getting down to the reps, warranties and indemnification, at the end of the day, you can dig forever and at some point you just have to say there is risk there. We’ll take the risk.

I'll give you a specific example. On that deal was a business that had recurring annual contracts, millions of dollars. So you're going to inherit millions of dollars of deferred revenue–a deferred revenue obligation, the obligation to provide services in the future without the cash.

You have to recognize the revenue, but you're not gonna get the cash. Is that schedule right? Is there really that much deferred revenue or not? We gave it our best shot to try and just to validate it was correct. 

It wasn't correct, but again, the deal was still a good one anyway, so was the difference material? Ultimately, no. But if you're in a corporation where you can get fired from making a mistake, you'll have to do due diligence on that deferred revenue schedule with hundreds and hundreds of lines. You'll have to diligence that to death and we have to eyeball it, do a bit of math, and take the risk.

Why carve-outs are difficult

Joe: It's very hard to find the deal. It's very hard to identify those little unloved divisions that are swept in the corner somewhere in the basement of these big companies. We've tried sourcing companies a few different ways. 

We've tried networking with people we know, we've tried hiring, in that case, an out of work investment banker. Another time we hired a corporate development executive who was in between jobs, he also found us a deal. We've tried using databases. It's challenging though, and it can take a long time, and it's very unpredictable. It could take you a month to find a business. It could take you two years to find a business.

Matthew: Once you get down to subscale opportunities, it's very un-corporate. Whereas, the corporate acquisition or divestitures screen has parameters, officers, executives, admins–they all run it. They all kind of march as an army and you know, keep on track. 

Whereas we have to be very entrepreneurial. Go off the beaten path, look under some strange stones, be prepared to adjust our approach at a moment's notice. And so when you look at the deals we've done, we've done a couple from searches. We did one out of a database. One was somebody you were mentoring at the time who sold their business to us. 

You have to be flexible in everything, not just how you do the deal, what the structure of the deal is. Is it an SBA, is it an APA? But also how you finance the deal, how you find the deal. You've got to be comfortable ad-libbing it. If you're in our space, if you're up with an extra couple of zeros, there probably isn't a lot of ad-libbing going on. Be brave–that’s the secret formula.

Conversations with the right people

Matthew: In the first few deals that we did, because we’re just two from very large media organizations. At N B C, which was at the time, a multi-billion dollar business, you just aren't going even six runs down. You're not even at that level. 

You are talking to biz dev people who've been tasked with the disposal of an asset. They are the right people to talk to. Trying to go over your head won't do you any good. We'll get or create bad blood. Even if you know the CEO, that's not going to help here. 

The way in which the business tells you they want to sell the asset is the way in which you should address them. Well, what I'm saying is don't sneak around. We go in there and when you see that Rolls-Royce, I know you think it's worth a hundred thousand dollars, but it's old and it's tired. We'll give you 15,000 cash and we'll give it to you today.    

We will approach the buyer directly. We're straightforward. We will close. We have a track record of bidding and closing, and we're very direct, and we don't take any tangential approach. There's no asterisk in the contract, whatever we say we're going to do. And some of the times the PIP person says, I'm not going to sell you my Rolls Royce at $15,000. Are you mad? But occasionally somebody does. You earn a Rolls-Royce of $15,000.

We’ve knocked on a lot of doors and there are people who aren’t selling.

Joe: We have and we make them aware of us. And so, when they do decide they have a division or a small business unit they want to divest they think of us. 

We’ve tried to reach out to companies and say this is who we are. We’ve brought some businesses, if you have something, please consider us. But more likely, it’s through a relationship. It’s through someone who knows someone. Could be the business development person at a large company. It could be an operating executive who knows that a division is going to be sold.

Matthew: My experience may be a little different. I would say that in today’s noisy business environment, if you hit the right person at the right time, they will call you back immediately, if it’s relevant. If you hit the right person at the wrong time, or the wrong person at the right time, they will never call you back and they will never remember you. 

So the strategy must be to reach out at all times to all people about everything and look for who responds. Don’t go planting seeds and then go take a break and wait for one of the people to call you, it’ll never happen. You just have to pound it and call these people. And eventually, you find somebody who is actually selling and pushes this deal through.

Joe: Together we bought six businesses and we’ve solved five of them. They were not all corporate carve outs, but I have complimentary skills, and eventually, we’ve come to an agreement on each of these deals.

Key things to consider when doing a carve-out 

Joe: Well, interestingly, in one of our deals, one of the most important factors was that the people were taken care of. The people who worked at NBC were to be taken care of in our smaller company, our new entity that hired them. We knew that these people were important and were key people. And one of the things NBC wanted was to make sure that these people had similar compensation and similar benefits to what they had in the world of NBC.

Of course, we have a small company, we didn't have the ability to give them all the benefits that a big company like NBC had. But we had to make sure that we at least compensated them in a way that they could have those benefits. So there are those factors that are not necessarily about purchase price, but are important to the seller and we abided by them.

Matthew: Just talking about that specific deal, they had these key executives. They'd already slimmed the team down a great deal where they had a number of people they thought were important to them, key resources, and they were selling a skinny down team. 

When we negotiate the transaction, we come to a price, and then somebody pipes up and says they just want to make sure that you have similar pension agreements in place and 401K in place for the executives. And we're like, no, there's nothing at all. And so we did a quick one day analysis of what the dollar value of those benefits would be, and we asked them to discount the price so that we would financially compensate the executives for the loss of benefits and NBC agreed.

In that deal, they were very ethical. They cared about their employees, they wanted them to be treated right. So much so that they would take a small reduction in the purchase price in order that their employees would be adequately and equally compensated post-close. And that's how we got to an agreement. That was a very large organization that showed remarkable flexibility and moral fiber.

Joe: And on the HR point, I'll add that often we find that people coming out of a large company are not as comfortable in a scrappy little entrepreneurial company like ours, but there were some real entrepreneurial people there that were successful in the world of NBC and were successful in the small world of Joe and Matthew.

Matthew: Also on that deal as well, we had an external HR consultant who themself had been very senior in a media organization. And so we didn't walk in, arm in arm and say welcome to the toy shop. We brought somebody with us who was one of them basically. They knew who she was, they knew where she worked. And so we brought this person in as our HR transition expert that would transition all of these employees and settle them. That also helped. 

We had some alignment with the management team pretty early it sounds like before close. This was unusual. Some sellers will let you interact with their employees before you close. Some sellers do not want you to interact with the employees before you close. In this case, we were encouraged to visit the employees in their places of work, not just New York, and we did that. We got to know the employees somewhat well before we closed that transaction.

It all comes back to energy, earnestness, flexibility, and all of the things that a lot of corporations don't have too much of. You're playing the violin and they say, play the cello. And you gotta take the violin and put it on the floor and play the violin like the cello immediately.  

Walking away from a deal

Joe: We've walked away from deals. I'm not sure it was about the people. There was one in the sports category that we walked away from, but there were a few things wrong with that deal. But one of the positive things about these deals that we haven't addressed is that when you pull a little business out of a large company, you remove these corporate allocations so you no longer have to pay for the CEO's private jet or fancy offices in Midtown Manhattan. 

When you run the business as we do out of a tiny little office on 57th Street with a window facing a brick wall and much more modest rent expense, it becomes even more profitable. Those corporate allocations coming off the PnL immediately make the business profitable, not to mention other things that we do.

Matthew: A business that looks unprofitable within the corporation can in fact be profitable on day one outside the corporation. 

Considerations in the carve-out model

Joe: We go to great lines to put together a performa before we buy the business and make sure that in the worst case scenario, it is still going to be something that we can live with and that we're somewhat happy with. But there’s still risk, there's still uncertainty and you never know until you're in it.

So Matthew and I talked about this moment when you're about to close and you're about to wire a large amount of money, millions of money, you have to be just a little bit crazy or a real believer that you are going to be successful. 

Matthew: I remember walking across the street because our bank was across the street on 57th Street. We went down and wired the money. Joe and I go down there, we show up at the bank literally. Actually, at the time it was a retail bank and we went there to wire a few million dollars to somebody. 

They were shocked so we sat down and they asked how many numbers are on this wire? And so we did the wire. Joe is looking at me and making sure if I wanted to do this. I mean, this isn't just vacation money. This is real money. Ultimately, we've done the numbers and this is going to be okay.

I would say that in all of the deals we've done, the modeling we did proved to be very accurate for the first year or two. There was never a misrepresentation of what the business was. Most of what we modeled would have been very minimal revenue enhancement in the first year, but some realistic cost reduction and all of those things proved to be true.

In one of our deals, we had some representations from the selling entity that revenue per binding contract would rise. We looked at those contracts, looked like it was going to be true, bought the company and proved to be true

So for people doing our size deals, you have to stop at 10 contracts. There was one company that we bought that had 2,400 contracts. You could go on forever, you could go on down that list forever. But once you've seen, once you've looked at the top 25 and they're all solid, the other 2,175 are gonna be fine. But you have to be a little bit brave to say, I've looked at the 25 biggest, it looks good. That's what counts.

Challenges on the buy-side of carve-outs

Matthew: As we did more deals, we paid more attention to cash flow, working capital, and true ups because when somebody says to you that this is going to be an 11.5 million dollar transaction, you have to think through all of the networking capital and changes in networking capital because that can, depending on the business, vary radically from quarter to quarter.

And we've gotten better at thinking of the number above the headline price, which is term 1.1 in the contract. When you run down through it, there's a lot of other numbers that you have to think through to do with the working capital balance sheet and adjustments.

Or the headline price is one of the most important financial aspects of the deal. But there are many other financial aspects of the deal, including networking capital, true ups, balance sheet items, financing, and so on. It's not just the headline purchase price.

Joe: And in some cases, even closing transactional costs can be significant. We're very careful and we have help to make sure that we can do it carefully, but inexpensively. But we've seen others do M&A activity where those transactional costs can be very high.

Managing carve outs

Joe: You have to surround yourself with people who have done it before and can help you avoid some mistakes. 

Matthew: We chose not to hire a big law firm even on our first transaction because I knew that I would start yelling at them very quickly because I’d get frustrated. Because they’d say that on the matter of patents, we’ll bring the patent team in and they'll talk to the IP team, which will talk to the labor team and this will drive me crazy.

So we happened to find an attorney who had been in a very large, prestigious firm who was just like us. He set out with his own stall to help people like us buy assets from big companies and doing these, he was like a guerrilla attorney and he would just kind of run in there amongst the opposite team and they'd all fall over dead without even realizing he'd worked them over.

He was fantastic because he was one of them, but they didn't realize he was one of them, but he was on our side of the table. So you need to have a good lawyer and a busy lawyer–a lawyer that doesn't need your iris to make his number. He's already busy. Doesn't matter whether he is billing you or he is billing client six or seven. You don't want a guy who's just filling his hours full of the nonsense he could think up to do for you.

On the other side, for the companies that we've bought, the seller has always had outside counsel, never inside counsel. It's always outside counsel. And, they're all the obvious people, people from the most famous law firms. 

There are squads of them. They come in like mushrooms. You deal with five of them, there's five more of them and they're just hundreds of thousands of dollars. They're just running the clock. And we don't have anything to do with that. 

So on a transaction cost, our cost might be $75,000. Their cost might be $675,000. Because you see it all in the 85, 94. At the end of the day, you see your deal transaction costs, they see yours, you see theirs, it's kind of crazy. 

Evolving the operating model

Joe: One of the things that we do is put a lot of thought and effort and time and money into growing sales. And in a big company, sometimes a small division will just get swept in the corner and doesn't necessarily get the sales and marketing supported needs. And so when you focus on that and you reinvest in the sales process, you can get good results simultaneously as you gather from our conversation. 

We're very sensitive to costs and making sure that wherever costs can be trimmed or things can be done in a more efficient way, we do it. So almost everything we'll do will have to do with raising revenue and cutting costs.

Matthew: I don't want to scare your listeners, but we used to have these policies where it was like 2.5 star hotels, or was it three star hotels? But, I would fly in. I would stay on a Motel six, just to make the point to the other staff to not come to us and ask to stay in an intercontinental because I'm staying in a Motel six. So we're very frugal and we have to eat our own dog food. I remember the hotel we stayed at in New Orleans where there's basically a bit of murder. It was one of those motels with the pool, and there was a murder three doors down. It was taped up with police tape. There were roaches in the hotel. You don't have to go that far.

Joe: The point is, we are very sensitive to the cost, travel costs, cost of operating the business. And we live it, it's not like we're traveling business class and everyone else is traveling coach. No, we're careful in how we run our businesses and I think it's paid off.

Matthew: People respect you if you're prepared to stay in that motel six and you bring donuts to the introductory staff meeting, you're setting the expectation. I'm not neuro fiddling around while you employees work. I'm in there with you. We're going to make this work together. We're facilitators, financiers, planners. It's not them and us. We're there with you. We're traveling the same way you are.

Joe: And in terms of now in the world after Covid, people are remote and people don't need to have an office for the same reasons they used to. But when we have bought our businesses, we've always had a very modest office because we didn't really have clients coming to that office anyway.

As long as it was clean and it was safe, it didn't matter if we had a view of a brick wall or others might want a view of Central Park here in New York City. But it didn't seem like a good use of our money to add color to that.

Matthew: So our first office, we had a music executive. He ran to record labels. He had all of his colleagues walk out. He had three offices to rent and he was in the back corner. We moved in, and the carpet was so bad that when we left that office and upgraded, we cut a piece out. We had it mounted in a frame and we put that on our wall. And when people would come in, we would say, there's the carpet from our first acquisition. Look how disgusting it is because we prefer to put money into the business than spend it on the carpet.

Think of it as an entrepreneur. Like you've done it, you've bought this business. You're the boss! You give orders, people take those orders, it's incredible. Let's go out and buy myself a beautiful recliner and sit at an enormous desk. NO. Go buy a plastic table from Staples. Sit down and get to work. Don't do any of that nonsense.

The right time to exit

Joe: The best time to exit is when someone comes and approaches you and says they want to buy your business. I have an internal time clock. Matthew will tell you about it.

Matthew: So basically, when we buy the business from the day we close, Joe puts the date five years into the future, and it's like we will have sold by this day, the fifth anniversary. And from day two and day three, he's like, can we sell the business? We're not really going to sell the business, but Joe is always interested in selling and I'm never interested in selling.

And so we fight it out, but we do always know that the five year clock is coming and we need to exit on or by the fifth year, because by that time, as entrepreneurs, you've done whatever you can do. You can grow a business from two to 10 million dollars, and maybe you can convince yourself you're the right team to go from 10 to 20, but there's probably a better team who can take it to the next level. If you haven't done it in five years, let's reset and do what we do again for another five years in a different organization.

Joe: But it's important that when the time comes to sell the business, the business is healthy, it's growing, it's profitable, and the machine is well oiled.

How working with an investment bank is different

Joe: We have hired investment bankers to do deals, run a process, and that has been effective and well run. In a perfect world, someone comes and approaches you, but more likely and more often for us, we have engaged the banker. We've made a list of the potential acquirers. We put together a CIM and prepare the management team, and it's a disciplined process that works. 

Matthew: Hiring a competent outside bank will guarantee that you expose the opportunity to all relevant, appropriate buyers. You may not like what you get. You may not like the response you get, but you will have covered the market. 

If you choose to do something in a private way, somebody approaches you, you never quite know how the market would speak. Whereas if you go out wide using a bank that has contacts in the particular sector, the sector prices the deal for you. I prefer the bank process as a seller. Unless I'm very sure that the list of the buyers is very small and I know them all.

Joe: When a buyer comes and approaches you and you know by comparison, by looking at comps and other deals that have happened, that you're being offered a very healthy purchase price can be quick and simple. Quick because the process with an investment banker has not been quick for us. When we hire a banker, it sometimes can be a prolonged process.

Bank process vs Proprietary deals

Joe: It's hard to say which is easier, but which is quicker, I already spoke about. But which is easier, it varies.

Matthew: I hate bank run processes. I really do because they will start talking about PowerPoints. And as soon as somebody mentions the word PowerPoint, I get hives all over my skin. It's like I gave up PowerPoints in the 1980s.

I'm not doing any PowerPoint slides, but they do this deck and it's got a hundred slides and it drives me crazy. If ideally you would sell to a knowledgeable, informed person that's already in your business, they could quickly deliver you the value because they're knowledgeable.

But for some businesses, the pool of potential buyers is extremely wide: strategic buyers, investment buyers, left or center buyers and you do have to engage a bank. But I'm allergic to large companies, so I do get the highs very easily. 

Joe: I don’t mind a slide deck. If it’s a hundred slides, it’s painful. And who pays attention? But if it’s 10 slides, I could get through it and there’s real value there.

Key lessons

Joe: One of the biggest lessons is don't miss your numbers. When you go through that exercise with an investment bank and you put together your CIM and your projections, you better make sure that those projections are realistic and that you're going to hit them. If you miss those numbers, there’s a direct impact on the purchase price.

Matthew: Bankers will want to show you the hockey stick and it’s going to be a quick sale. So the broken hockey stick, that’s somebody else’s problem. But we know that the sales process can take a year. And so, whatever you forecast for the next year, you’re going to live it and you will have to justify it. So we tend to resist the hockey stick. We want a realistic set of numbers. 

Also, be realistic about your expectations. When you start a process, by the time you sign with a bank, you should be done 365 days later. Nobody will give you that number. They will all talk about four to six months, but you may well still be working on that project 365 days later. You can't get ahead of yourself, get frustrated or annoyed. The process does take time. Sometimes you get lucky.

Timing

Joe: I think there's a famous quote along those lines from Jimmy Goldsmith, who is a very successful UK based business person. Someone asked him, how did you get so rich? And he said, “I always sold too soon.” And so if you sell too late, it can be very problematic. 

Matthew: Joe will always want to sell and I will always want to hold. And so it's only a matter of time before Joe overwhelms me and we sell. 

Joe: One of the craziest things that we did that we saw in our experience together is a small asset that at one time had an offer north of 20 million dollars I think. We saw the LOI and then the world changed and we ended up buying that for $10,000. If you don't sell when you can at the right price…

Matthew: You don't close that deal. When that money's on the table and the world changes, the tide goes out, you're left naked.

Communications

Joe: It’s about confidence that you will close.

Matthew: As the buyer, we always give exceptional confidence that we will do what we say. We may not offer the price they want, but if you want to sell and you want to be certain of closure, we will close. And we look for the same thing when we exit 100%. 

No point in somebody dangling something in front of our eyes with an extra zero on it. If they don't have the financing, many people don't. If they're not actually going to close, many people aren't. If they're shopping for many other deals at the same time, they'll pick another one. 

Confidence to close is really important. That's a radiation, a sense, a trust, a business sense about somebody. Also their track record. We got to a point where we'd bought five, where people were asking how they could trust us. Well, there's an announcement 5, 4, 3, 2, and one over the last eight years, you'll be number six, it's all very straightforward. But there's also personal judgment when you look somebody in the eye and you assess whether you know you can trust them or not.

Alignment on post-close operations

Joe: We did buy one business from a founder, an elderly person who didn't have anyone who wanted to take over the business in his family. And he said that he had a higher offer from someone else, but he sold it to us because he thought that we were going to do right by his business, and he knew what we intended to do. And he thought that was more important than taking more money from someone else, which I thought was interesting and kind of nice and reassuring.

It’s part of the approach. We have a track record of doing right by our employees and making sure that they have some ownership and that they are treated well and find working with us rewarding. And many people, when they sell a business, it's a top priority, it's how they feel about the team.

Matthew: Also, when you come out of a deal, everybody has to feel good about the deal because we're not going to do one deal. So if you only do one deal in your life, you can create a lot of destruction and bad will amongst people.

But we do many deals, so we always need everybody, the buyer, the seller, the buying bank, the selling bank. Everybody needs to talk well of us, and everybody needs to speak well of us because there'll always be some connection from the next entity somehow to the old entity.

So you can't have a reputation that follows you that you're a poor person morally. People know that we're straight and they know that we are value buyers and we do close quickly and that serves us well. We sleep better at night and we get more deals.

Advice for first time sellers

Matthew: Sometimes we underestimate the importance of our attorney as the third person around the deal team. He's not with us as we run the business, but the same guy that buys the business with us is there at the end and selling the business. And that person can save you from disaster 50 times when you're buying and selling a deal. You have to listen carefully to what they say, because unfortunately, they don't always agree with you. But as a first time buyer and a first time seller, ignoring your attorney's best advice is not a wise thing to do, if you've got the right attorney.

Have a fantastic lawyer. You have to interview a bunch of lawyers and find somebody that sees the world your way and not somebody who's 70% booked and wants to use you to get towards being a hundred percent occupied.

You want to find a lawyer who's already 100% working flat out, because that's a guy who's got a lot of clients that want to buy a lot of his errors. You want to steal some errors from that guy, not fill in an attorney's schedule who hasn't got enough clients. 

And again, when you negotiate a lot of the terms, a lot of the terms are principle to principle, I'm going to buy this for 10 million. You're going to buy it for 11 million. Your attorney doesn't negotiate that. You negotiate that. 

But then you leave the room and then they get into all of the holdbacks, indemnifications, the escrow amounts. And so that attorney is going to run points on several of those deals. And so he has to be completely aligned with you and you need to pick that person very carefully. Joe and I will do all the principal terms, a lot of other terms that get put into that 40-page APA.

Joe: Another piece of advice for someone if there are entrepreneurs who want to do what we do and find these businesses and acquire them, is start small. Because the first one, invariably will have some surprises and it may not go as you hoped, and you want to make sure that you don't bet the farm on the very first deal.

Negotiation considerations

Joe: It's very difficult to have control over the situation once you've sold the business. If you have a strong team and they take on your team, you can be a bit more confident. But still, there's often the us versus them when an M&A transaction occurs and some things happen that are not the way you would do them or want them to unfold. 

So it's difficult. I do keep tabs on the businesses we've sold and some of the people, and sometimes it went great and sometimes it didn't go quite as well. And even though I found that a little frustrating personally, when it didn't go well, it was sold. So it was out of our control.

Matthew: You are walking on very thin ice if you are trying to tell a buyer what to do in any way once you have walked closed that door and sold. It's like trying to put your hand through the hinge. good luck. Because they want to be able to call on you for advice, but they don't want you having any string. They don't want to be attached to you or forced to do anything at all. 

And even though you might want to lean forward and protect a key resource, the way you do that is you make sure before you close that there's some agreement that gives them protection after close. 

Effectively, we're going to have nothing to do after closing. And we're going to significantly reduce the amount of money we have to pay after closing that is in any way contingent. Or either as a buyer or a seller, you want to reduce the amount of contingency because you just don't want the arguments after close. We sell, we move on.

Sometimes there's a three month TSA or something like that. If you've got things like earn outs, unless it's a very simple earn out, a percentage of revenue, for example. That might work. But if you're looking at any percentage of net profits two years down the road, forget it. It's never going to work. It's going to be fuzzy math. They're not going to spend money marketing your business. They're going to merge streams of revenue together. You have to try and keep it simple.

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