Business Innovators Radio - Episode 261-Paul Spradling on Selling or Getting Funding for Your Business with Lois Sonstegard,PHD

Episode Date: July 26, 2023

Welcome to Episode 261 of Building My Legacy.Paul Spradling is the co-founder of Pacifica Advisors, which was named one of the top 25 investment banks in 2022 by Axial, the largest online platform for buying, selling, advising and financing private companies. Paul’s company works with small to medium-sized businesses, helping owners sell their businesses and, for those looking to grow, find capital investors.In this podcast Paul talks about exit strategies and new funding options for businesses. He understands the emotional connection owners have to their businesses. His advice will be helpful for business owners contemplating retirement as well as those who see growth opportunities and may want to take on an investor who will provide funding in exchange for a non-controlling interest.So if you want to know:Five tips for owners who are thinking about selling their businessThe biggest mistake owners can make in exiting a businessAbout the differences between private equity and venture capitalAbout “search funds” and when it makes sense to consider this new funding alternativeThe importance of knowing “what comes next” after you sell your businessAbout Paul SpradlingThe co-founder of Pacifica Advisors, Paul Spradling has helped hundreds of businesses exit and attract growth capital investors. A graduate of Cornell University, Paul raised more than $350 million in capital before the age of 30 and has worked with Blackstone, Goldman Sachs and other large names in the industry. With his business partner, a corporate finance professor, Paul established Pacifica Advisors to focus on lower middle market companies and today works with companies with an EBITDA from $1.5 to $25 million. By concentrating on this largely ignored market, Pacifica Advisors has grown and was named one of the top 25 investment banks in 2022 by Axial. More information is available on his company website, www.pacificaadvisors.comAbout Lois Sonstegard, PhDWorking with business leaders for more than 30 years, Lois has learned that successful leaders have a passion to leave a meaningful legacy. Leaders often ask: When does one begin to think about legacy? Is there a “best” approach? Is there a process or steps one should follow?Lois is dedicated not only to developing leaders but to helping them build a meaningful legacy. Learn more about how Lois can help your organization with Leadership Consulting and Executive Coaching:https://build2morrow.com/Thanks for Tuning In!Thanks so much for being with us this week. Have some feedback you’d like to share? Please leave a note in the comments section below!If you enjoyed this episode, please share it with your friends by using the social media buttons you see at the bottom of the post.Don’t forget to subscribe to the show on iTunes to get automatic episode updates.And, finally, please take a minute to leave us an honest review and rating on iTunes. They really help us out when it comes to the ranking of the show, and I make it a point to read every single one of the reviews we get.Please leave a review right now. Thanks for listening!Building My Legacyhttps://businessinnovatorsradio.com/building-my-legacy/Source: https://businessinnovatorsradio.com/episode-261-paul-spradling-on-selling-or-getting-funding-for-your-business-with-lois-sonstegardphd

Welcome to Building My Legacy Podcast. This podcast is designed for leaders and entrepreneurs who want to leave a legacy and will provide strategies that focus upon key elements for legacy creation, determining your desired impact and its benefit, increasing your legacy's reach by engaging key stakeholders, planning, prioritizing, and executing. Here's your host, Dr. Lois Sonsdegard. Welcome, everybody, to today's Building My Legacy podcast. I have with me today, Paul Spreadling.

He is co-founder of Pacifica Advisors, which was named one of the top 25 investment banks in 2022 by Axiol. Congratulations, Paul. That's pretty amazing. Thank you. Thank you. We're very proud. You should be.

Yeah. Paul is in charge of strategy and helping businesses exit and get growth capital investors. that right now, I think, is a huge thing because people are struggling to get investors. So we're going to talk a little bit about that with Paul. He's a graduate from Cornell University. He has raised over $350 million in capital, and he did that. Guess what? Before the age of 30.

And he has worked with some of the biggest names in the industry, Blackstone. Blackstone, Goldman and Sacks, and the list goes on. So with that, Paul, I'm going to get into, how did you get into this industry? And pretty remarkable that you've done what you've done at such a young age in terms of accomplishments. So how did you get started? Yeah, thank you. Yeah, well, first of all, I kind of started in the sales career in real estate.

residential real estate. I started selling residential real estate. Then I moved into doing more commercial real estate. As I was doing the commercial real estate, I started meeting more institutional type investors, investors more interested in diversifying where they're, where they were going to allocate their capital. And through that, I met a couple of different families, family offices that were looking to buy businesses. And me being a good middleman in the real estate world, I thought, okay, maybe I can be a middleman with businesses. I didn't know much about businesses. My business partner is a corporate finance professor, so he knows all the underwriting and the math part of things, and I knew all the relationship stuff. So that being said,

we started with one small company, helped kind of broker it to this one family. And we didn't love the process. We didn't love the current brokers in the market, the investment bankers, focusing on these lower middle market companies, which was what we were focusing, which are companies with a value of like less than a hundred million. That's what the industry considers lower middle market. But we, but we focus more on these companies that are around 20 to 30 million dollars in size. And we'll go as small as a five, six million dollar company. But that's kind of how we got started out of necessity, we just didn't see anybody doing what we were doing. Got it.

Okay. So, Paul, when somebody wants help and wants investment, how do they find you? How do they know about you? And why you? Why would they come to you versus somebody else? Yeah. So a lot of people find us online. I think we have a stronger online presence.

We do a lot of direct reach online marketing. we're also directly reaching out to business owners. And yeah, we focus a lot on helping them exit and we offer a lot of free help. So that's, I think, one of the reasons they come to us because when they don't know how to raise capital for their business to grow or they don't know how to exit. So we help them and all of that. And usually if they are ready to exit within the next six months, We'll do almost all of this stuff for free. We'll help them in a broker opinion of value, which is like evaluation.

We'll help them with their books and guide them through the process. So we have a streamlined process in-house, our own team. So I think that's why people select us. So, Paul, do you work primarily with real estate companies or when you say in small companies, five, $20 million, what kind of industries are you working in? We work in most industries, different sectors. I have several advisors that work for us. I believe we're up to almost 12 advisors now in different industries.

Manufacturing, healthcare, QSR, which is quick service restaurants, financial services, you name it, like, from everything, just to give you an example, from a mold and remediation company that just helps people. fix their homes after a flood all the way up to, you know, a neurosurgeon practice. We'll sell any type of business as long as it has positive evita cash flowing. So no startups. So we sell more established businesses that the guy wants to retire or something like that as an example. Okay. So selling a business is an art and knowing when to sell a business is also an art.

So how do you help people navigate that? Yeah. You know, it's a lot of coaching, a lot of very personal, emotional connection, right? You kind of have to, it's the most emotional thing. I always tell people, you know, your home is very important. Telling your personal home is very important. And selling your business is almost as important or even more emotionally connected to your business than your home. Right?

your business, something you built for years. It gave you pretty much everything you own. So it's a very emotional process. So we guide them with trying to being always available, answering all their questions, and having great team to be answering what we don't know and also telling them, let me look into that. Let me find out.

So we're always very patient and with them. That's mostly what we do. So if you're thinking of selling a business, what are five tips that you would say, five things that somebody should really think through and have at their fingertips? Yeah, I think the first things, if you want to be the business owner and you want to be prepared, have your documents ready, have the most common things people ask for is your last three years financials, profit and losses, P&Ls, balance, sheet, have that ready, spend the money on a good CPA, a good firm that can help you put that together. Have a succession plan. Number two, who's going to replace you if you want out or do you want to stay on board,

make that decision? Three is have your tax planning in order because it's a surprise, right? You'll have this liquidity event. So you've got to have your taxes. Have your next step ready, I guess, number four. A lot of questions we get is like, now what, what am I going to do? That's a lot of money. I can sell this business for that much, Paul, thank you.

But what next? So have your liquidity issues resolved? And number five, and I think also very important is, you know, select the right person to guide you through the process and sell to the right individual. So they can sell you to the right person because a lot of times, whoever buys your business is going to want you to be involved for a year or two. Got it. What are the biggest mistakes you can make if you're exiting a business? Yeah, the biggest mistakes is probably that one I just mentioned, selling to the wrong individual.

That is usually the story we hear. There is somebody always, every story, every business owner I meet. They're like, oh, an earn out. What is an earn out? Oh, that means you roll back some of the equity that you sold. You sold your business for 10 million. you want to stay on board, perfect. So you roll in back $3 million and now you're a partner again with this group. And that's very common in our industry. So you got to think about it. You are essentially a lot of times, maybe like 60% of the time becoming partners with these people. So you have to make the right decision to who just sell to.

You know, I think often when people are selling and getting out, you hear like, like you say, the stories about the mistakes and the relationships gone bad. And because I don't think we think enough about what are the implications of we're mentally out of the business, perhaps. But we've been taken back in. And so now you're in a very difficult position because you no longer own the business. But your money is still tied up in the business. and you don't know how to get out of that gracefully. Yeah, correct.

Yeah, it's very challenging for people to wrap their head around that. And yeah, I often hear the word powerless or whatever. Like they used to be the CEO, the founder. They had ultimate power in their company. Now there's just a limited partner and taking orders. So it's hard for them to swallow. Taking orders, going from being the leader to taking orders, is quite a change. Talk a little bit, if you would please, about private equity versus venture

capital because we hear those words used interchangeably, but they're different. And the expectations are different depending on where you go. Yeah. On my experience, on my two cents, I only deal with private equity. So private equity companies are investment pool vehicles, usually institutional investors or high net worth investors that invest in operating businesses usually with positive divida, positive cash flow. Businesses that they usually focus on strategies called roll-ups. And so they'll buy a company in whatever industry you want to pick, healthcare industry that manufactures medical devices,

and they will go and roll up other companies in this medical device to grow their Ivid so they can sell it at a higher multiple than they acquire them. And it's a multiple arbitrage. And venture capital focus more on startups. I don't deal with them. But yeah, venture capital is an earlier stage series A, series B, pre-cash flow a lot of times. It may be recurring revenue, but no Ividam.

So that seems to be the biggest differences. Venture capital is heavily invested more in software and technology. and more technologically advanced companies, and private equity goes in everything. Really, anything you can think of, private equity has their hands on. So if you're sitting and trying to decide which route to go, and let's say you've been in business three years,

you have a positive cash flow, how would you sort which way you want to go? Yeah. Well, if you have a positive cash flow and your company established, you've been in business for many years, saying you don't have like a your business is a simple business. You are not like a revolutionary technology. Yeah, your options probably only private equity at this point or selling to a family

office or in a strategic buyer. So a competitor. So it could just be a competitor in the same industry, a family office, which is just a wealthy family that likes to acquire businesses and invest or a private equity. So those are probably your only three options to exit. Got it. Private equity, their goal is to grow the business quickly, turn it, and get out and make a new investment. So in a sense, part of what that, and you tend to also bring in your own management team. Is that correct or no? Sometimes. Sometimes private equity brings in their management team. Depends on the size and depends on the company. I've seen it all. I've seen it, you know, sometimes they want to strip

everything. But most commonly in our industry, in the smaller size, they want to buy good management teams. Private equity kind of has learned. It was more in the leverage buyout time that they would fire everyone and do big turnarounds. That happens more in distress. Lately, they like to buy companies with amazing CEOs, amazing executives. And a lot of times the word you hear is, we are buying the staff. We are buying the people.

And so, yeah. Let me pause this podcast for a moment and tell you about an amazing offer that will enable you to unlock the power of collaboration and forge new opportunities to scale and grow your business. I invite you to join our three-day, rule up your sleeves, build your collaboration ecosystem architecture summit.

You will learn how to select the right collaboration partner for you, the steps to building a collaboration ecosystem, and you will develop your action plan upon which you can execute when leaving the summit. Collaboration is not just a buzzword. It is the new business imperative. It is transformative, and it will enable you to dive deeply into the nuts and bowl. of collaboration. I will be there every step of the way to guide you. I'm Lois Sonstigard, author of Start with Collaboration. I've helped businesses worldwide as

they develop collaborative partnerships. If you are ready and interested in building your collaboration ecosystem, email me at Lois at buildtomorrow.com. That's Lois at buildtomorrow.com. And now back to our podcast. So Paul, tell me, what is one of your favorite stories of an investment you made and how it worked out? Yeah, well, we don't make investments directly, right? We're always, we're just assisting people, but on the company, but I can speak on some of my favorite stories in the company. Let me think. Probably my favorite story is the story about we were,

working on, well, I'll give you one that just happened recently because I'm just thinking about this one. We're working on a large deal selling QSR portfolio around 15. QSR is quick service restaurants. Okay. A quick service restaurant such like franchises. So we're selling a 15 unit portfolio of quick service restaurants, fast food restaurants. And, you know, the business was making call it $3 million a year. So the multiples in an industry are lower. They're around four. So it was a $12 million sale.

That's what we thought we were going to do. Unfortunately, for whatever reason, COVID was a bad year for them. Then, but then you recovered. 20, 23, they're kind of peak, 2022, sorry, they're doing well again. But then 2023 starts off as we start marketing it. starts off rocky. It starts up not doing as great. There's been some rehab in the area. Climate in this particular area of the country was in the Midwest. There was heavy snowstorms in the beginning of the year. For whatever reason, their business is being affected. And so we have to kind of

regroup last minute. We have three or four offers at this number, but they want to buy it into a trailing 12th number, which is the last, the counting as of January and February, how is the year going to look? So we're brainstorming. Interest rates are going up. A lot of these guys purchasing are borrowing money. This is a small enough company that you can borrow from the SBA or other government facilities or just banks. So everything looks terrible, looks like we're not going to be able to sell it. Private, it's too small for private equity. And here comes the third, I mean, the fourth buyer. I said strategics, private equity, family offices. There's this new industry that's really growing and we really like it called search funds. Search funds are

the search fund. Yeah. And we started learning a lot about them through this transaction. And search funds are individuals that have a lot of experience in management, that they are professional CEOs, you can say, or professional entrepreneurs. And they go to investors and say, stake in me. Invest in me. I'm going to go buy a business. They don't tell what business, but they get a commitment from investors to go buy a business. And then this guy finds a good business that he thinks is going to have incredible upside. And that's what happened to this particular deal. A search fund was the only one that could figure out the creative way to make it work because he thought it had upside. And he was able to pay pretty close to what the owner was

asking. So it worked out because this is a whole new industry. So that's a great story and something that is changing drastically in the industry that search funds are disrupting. Isn't that interesting? Because we don't hear much about search funds. and so tell me, and a search fund is that groups of CEOs that are, have formed a business together to market themselves to companies to run them

and make them profitable so they can be sold, resold. Exactly. So it's mostly, it's usually one, the head of the search fund. Let's say you were an executive at Procter and Gamble. You were a logistics expert manufacturing beauty products.

So you go and say, I am a beauty product expert, and you go to high net worth individuals and say, hey, I need $50 million. I'm going to go and buy a business and run it myself. I'm going to go acquire other companies. I'm going to do essentially what a private equity firm does, but with one single company. I'm just going to focus on this one company and you stake me. Believe in me. So that's what they do.

They believe in the CEO and he makes the decision what company to buy, et cetera. Okay. So that's a very fascinating industry. How does, so there's these different products on the market. There's investment bankers. There's PC or PE. There's VC and now this fund. Search funds, yeah.

Yeah, search funds, yeah. The search fund. How do people find these different groups? How do you sort? How do you choose? Your company has been rated one of the top 25 by Axial. That's remarkable, given that there are a lot of companies that are in the investment world. So what are the criteria you look for when you're looking for somebody to work with?

Yeah, so the questions are simple to the seller. Do you want the most amount of money is one. So if you want the most amount of money, you're going to have to have a very strong management team in place. You're going to have to have someone replace you as a CEO right away that has super, super experience. So private equity will buy you. That is usually the highest and best use,

the pay the most, or in the strategic. Do you have something that your strategic competitor needs? Those are the two highest payers. So if your decision is not so much focused on you staying in the long run and you just want to cash out the maximum amount of money, those are going to be your best options. If you do not have, unfortunately, a really good team in place to replace you, you're going to have to start looking into the search fund industry. The search fund industry was created with that. There is millions. I don't remember the exact number, but millions of baby boomers that are aging out and they are retiring. And their children don't want to take over the business. And they never really trained anyone else to take over the business. So it's going to be the largest transfer

of businesses in the next coming 10, 15 years that we ever seen. And I think based on this is where the search fund industry started to grow. Characteristics. Are there characteristics that you want to look for? Or is it sort of ubiquitous? It doesn't matter. No, of course there's characteristics. It's, yeah, it's very dependent on the seller. What does the seller need? And then, of course, the seller, if it's a good company, the seller will receive multiple offers. Usually, even in today's economy, we, are receiving multiple offers, four or five offers for a business is not uncommon. So we go through

the different offers and it's simply just an indication of interest at the beginning. Then we'll go maybe into three LOIs, more of a letter of intent, a little more serious after an interview process. So we tell them the seller to look for certain characteristics. What do they like the most? This person is going to be running their business. So ask them whatever you want. It's your decision ultimately. You can ask whatever you want. So it's your decision. You can sell to them for whatever reason you want or for whatever reason you don't want.

I did not like that guy's suit. I am not selling to him. That's up to you. It's your business. Isn't it funny? We do get into specifics that probably are not so meaningful. So tell me, once you've sold the business, then what? What comes next?

Yeah. Well, on our side, We sell the business and usually we are out. We are there to help and assist in anything you need afterwards and to be a support. But usually you as the seller, as the owner of the business, did the integration part, merging the new cultures, who is the new buyer, the culture within your team. So merging all of this and now becoming an employee. You are running the company and training whoever acquired it.

So a lot of times, most of the time, 90% of time, you have to stay at least a year, at least one year to train the new CEO, even if you are leaving. So you are basically training the new CEO. So that's kind of what happens day two. Day two, you are, you are now teaching someone to do your job. Right. So you're not finished. You still have a commitment.

And I think that is one of the struggles that people sometimes. times have. When they get to the point of selling, they're done. Mentally they're done. And to be re-engaged can be a problem. Yeah. So when somebody is sitting and choosing and trying to decide what to do with their business, biggest mistake they can make is what?

I think the biggest mistake is not seeking guidance, whatever be your wealth manager, your tax advisor and investment banker. You see a lot of bragging in the industry on private equity going direct. And, you know, unfortunately making offers, they sound good, promises. And then unfortunately, you don't get what you thought you were getting or you sell your business to cheap or you didn't plan your taxes right or you didn't plan what to do with your money properly. and they run out of money.

And they're not, they cannot retire how they expect it to retire. It's very different because these businesses are selling on a multiple of cash flow. So, you know, it's a lot of cash flow to replace. It's very difficult to replace the same amount of cash flow you're making in your business in some other investments. And so they have to make the right decision and sell for the right amount of money. Yeah, that's very good advice.

It's your pre-planning that's so important, isn't it? So getting all the parties involved early enough. So you've really thought it through. Well, what have we not talked about that we should have talked about that you would like our audience to know? I think one other very important thing that talk about in the industry is, yeah, is take your time. don't wait till the last minute to sell. Take your time. Call me, call your investment banker,

call whoever you choose to do business with, up to a year early. So you just think about that. If it's January and you want to be selling next January, you should start talking to us. Or six months is what we ideally recommend because it is so long process. You know, there's onboarding, there's creating the documents, et cetera.

You need to have enough time for your tax planning. You need to have enough time for everything. So the earlier you start in the process, the better and the smoother the transaction will go. I'll ask you one other question. How do you determine the cost of a sale? Like, you get paid. So do you take a percentage of the sale price or how does your fee get calculated into this? Correct. So we only work in, if it's an exit, we only collect a success fee. So we get a percentage

depending on size of the company. If it's a smaller company, the percentage will be smaller, I mean, bigger. And if it's a bigger company, the percentage will be smaller. And yeah, up on closing when you receive your money, we'll receive our percentage. Okay. So the risk to a business is quite low because you sell it, you get the terms, you agree to it. you move on. What else, Paul, have we missed that we should have talked about? No, I think that Tava said. There is the other conversation that we can have very quickly is the conversation regarding selling a piece of your business, growth equity, which we do sometimes. Growth equity is you have a positive cash flow in business. Let's assume you're making $2 million a year.

and but you know if you buy this particular set of machineries you build this new warehouse you will be able to make four million dollars a year but you've been reinvesting all your money so your business is probably worth ten million dollars so why not buy why not get an investor to come in with three million by 30% of your business non-controlling interest he's a silent investor and now you use those three million you you reinvest them in the business right away and you grow the business together. Or you can take some money off the table for a life event that you need, but most of the time is to grow the business and get it where you need to be. So even though you are making money,

it might not be enough to grow the business how you want it. So we do that as well. I think that's a really important addition because if you're moving and growing in any way, you're going to have that next capital need. And you've got to plan for it somehow. So thank you for that. Paul, thank you so much for your time and for being with us and building my legacy podcast today. For those of you who are listening, we will have information about Paul and his company in the show notes.

We encourage you to contact him, especially if you're thinking about selling a company, buying a company, getting involved in growth, and looking at various mechanisms you can use to finance or to exit what it is that you're doing. I think too often we don't plan early enough, mostly because we don't have the information. So I urge you to contact Paul and his company to get the information, at least to get started in your thinking. So thank you so much, Paul, for your time today. Thank you. Thank you all. And thank you.

Louis. And for those of you who are listening, we encourage you to also go to our websites at www.w.w.biltomorrow.com with the number two. So the two is a number two. And our second website, which is start with collaboration.com. So again, Paul, thank you. And to our audience, thank you. You've been listening to Building My Legacy Podcast with Dr. Lois Sonsdeguard. To book your appointment with Dr. Sonsdegarde, visit www. build tomorrow.