The Game with Alex Hormozi - How to Sell a Business | Ep 384

Episode Date: April 28, 2022

Win negotiations before you even start them! Today, Alex (@AlexHormozi) talks about the steps and the process he learned from selling a business in order for you to know what to expect and what to look out for in order to get the best deal for your business.Welcome to The Game w/Alex Hormozi, hosted by entrepreneur, founder, investor, author, public speaker, and content creator Alex Hormozi. On this podcast you’ll hear how to get more customers, make more profit per customer, how to keep them longer, and the many failures and lessons Alex has learned on his path from $100M to $1B in net worth.Timestamps:(3:13) - My process of selling businesses(4:28) - Phase 1: Prerequisites(12:01) - Phase 2: Find a banker or broker(20:09) - Let’s start the processFollow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

You have to be willing to walk away from the table in order to get the best deal, which is why you win negotiations before you start them by having options. Welcome to the game where we talk about how to get more customers, how to make more per customer, and how to keep them longer, and the many failures and lessons we have learned along the way. I hope you enjoy and subscribe. I'm going to talk to you about how to sell a business. And if you're wondering, who is this dude in his mama's basement's closet wearing a wife beat or have anything to do with talking about how to sell business? How does he even have the right, the audacity to talk about these things? Let me first make a quick intro. I've sold eight businesses.

My name's Alex from Izzy. I own Acquisition.com, which is a portfolio of companies that does over $100 million a year. And I make these videos because I was once broke and were these beaters out of necessity rather than out of choice and was in my mama's basement out of necessity rather than... Actually, I'm not in her basement. This is a $5 million condo in Vegas. But that's not the point. I just like working in places that have no windows. So I have sold eight businesses over my career.

Just to name a few of them, I sold Allen, which is a software company that did 12 million in trailing 12-month sales. I cannot disclose the price that I sold to. But that was the top line revenue. The NDA is actually fairly common in sales agreements, especially of an appreciable amount of money. And the reason for that is because they don't want a potential new acquirer in terms of if you were to roll in other companies after they buy your company to know what you got for yours because then it hurts their negotiating power. Now, that being said, the next two companies that I sold in 2021, I sold for $46.2 million and I was able to do that because I negotiated that in because I was tired of not being able to talk to the other one. And so there's the press release from that.

And on top of that, you might be like, well, I don't have businesses that big. That's okay. Fear not. I also sold five brick and mortar locations prior to this. And so I've sold, actually that's seven. I don't know why I said eight. I shut down one. There you go.

There's eight. I had five brick and mortar locations that I sold. And here's what's even cooler. I've actually sold those businesses to six different types of buyers. I sold to financial buyers or private equity. I sold to and family offices, that's what FO is, so private equity or family offices, which is all forms of private equity, but institutional buyers or family offices. Second, I've sold to strategic buyers, which is the one who bought my software company. I've sold to friends.

I've sold to competitors. I've sold to customers and I've sold to partners. All right. So I've done a lot of these deals. And interestingly enough, as it was going on, I never thought, wow, this is someday going to come in handy in that I can help other people go through this as well because I've gone through all these kind of weird scenarios. All right. And so I've learned a lot in the process and I would like to make this because I get questions all the time about valuing companies and buying companies and we have companies that reach out to us. So for Acquisition.com, we work with specifically service-based companies, especially internet, service-based businesses, guru businesses, e-learning businesses, course business, et cetera. And we purchase minority stakes in those companies to help grow them, which is what the portfolio does now, which is why it does over $100 million. That being said, we're very familiar with this process. And so I wanted to walk you through this. There's a lot of people have questions about it. All right. And so I'll walk you through the overarching process, and then I'll dive into each of them in more detail. Sound good? Awesome. Say yes. Fantastic. So phase zero, zero is the prerequisites. These are these things that must be done

or even, even are required for you to be able to sell or have any kind of enterprise value to begin with, which I'm going to be really rude with you. Most companies, most businesses are not valuable at all. All right. Most of them are just assets. You might have equipment. You know, if you're a physical presence. And if you're an online business, you've very little value unless you have a lot of these things in place. All right. So most people want to try and go in business, sell their business and find out that no one actually wants to buy it because people are not stupid. All right. So next is once you have these prerequisites, which I'll go over, you have to find a banker or broker. All right. And this is something that I've gone back and forth with. I sold some of them

without. I sold some of them with. I'll go pros and cons. And I'll explain to you kind of how to negotiate that process and figure it out. After that, now we can actually start the selling process. We have a bank. We have somebody representing us to help us go sell our stuff. All right. And so this is the prep. This is phase one. All right. Phase two is now that we have. have prepared all the stuff. Now we go market the thing so that we can sell the thing to somebody. All right. Phase three is now that we have people who want to buy the thing, now we've got to close the deal. All right. And so I'll walk you through each of the intricacies of these. And there are, honestly, a lot of steps in this process if you want to have a big number money in the millions for a deal.

All right. So let's start at the top. All right, prerequisite. So these are deal killers. These are things that make a deal not actually happen, which I'll be real with you is the vast majority of the time. Okay. Most companies are just not that big. And when I say this, mind you, I'm talking about institutional sized businesses. So if you want to have a deal that's $5 million plus, which is about the smallest deal that any like real institutional investor, private equity family office will look at, is there has to be a big enough size for it to make sense. Right now, you can have tons of people who do a lot of private investors and retail investors,

people who just have a little bit of money saved up, they might want to buy a dry cleaning business. They might want to buy a by a gym or they might want to buy a whatever, right? Like those are normal businesses, but those are, that's not what we're talking about here. because those are all one-off and they're not going to make you rich. All right. And so that's why I'm focused on the how to make you rich type sale because these are much more difficult to understand and the process is a little bit more nuanced.

All right. It took me a long time to learn this and guess what? No one taught me this. Like I didn't see this anywhere and it took me a long, long time. It took me a year to just kind of understand how the entire process worked end in. So that is what I'm trying to save you as a year of painstaking effort. And I have nothing to sell you. So like all the people were trying to tell me had a vested interest in trying to take

something from me and I don't know who you are. So I'm making this so that there you go. All right. So the biggest one, though, is that people are too small. The next one is that there's a customer concentration, meaning you have two few customers that equate to the business, right? If you have like 10 big customers, if two of them leave or three of them leave, all of a sudden you lose like a third of your business, that is very risky.

All right? People don't like that. And so they will give you a massive discount on the value of business or not even be interested because it's too risky, all right? And especially if that's like those relationships were there because of you. And they like you and you're the kind of like relationship manager, which happens really commonly in small. businesses. Next one is no defined sales process. A lot of times people don't really have an

acquisition process for getting new customers. They don't know how they get customers. They just kind of come their way. And so if you don't have a repeatable or reliable way of acquiring customers, ideally through multiple channels, which are covered in a second, you will probably not get a very good multiple or even want to get any kind of deal at all. Next is that when people do start this process, a lot of the mistakes that make is they don't go through enough potential acquires. They're not trying to target enough people. They're like, I talked to 10 people and no one wanted to buy. Well, no shit. You talk to 10 people. We've got to talk to 500. Right. And that's how you can get, somebody's going to give you the right kind of multiple on your business if you want to sell to an

institutional investor okay next one's getting timing wrong so everybody always thinks that like man if i said another 18 months i cannot tell you the amount of times like it's almost like the standard response of entrepreneurs is i'll be ready in 18 months because a year they know they're not ready but 18 months for some reason feels like it's far enough out that they'll like somehow magically have we have their one and all their problems will be done which is not true all right so getting the timing wrong is a huge issue and a lot of people sell too late very few people sell too early most people sell too late, in my opinion. And in so doing, they can't sell at all. And so the thing is, I heard this quote from the managing partner of APG, Frazier Preston, really, really bright guy.

He said this on one of our calls. She said, well, business is always going to go up in value over time, except when it doesn't. And in case it becomes unsellable. And so it was very, very interesting to hear that because that is kind of the truth. It's like either people see this thing as like, oh, wow, this is a growing asset that's increasing in value. And even if you stay the same for a period of time, just more years under your belt makes it actually more reliable. So it's less risky. So literally the older a business gets, even if it stays the same, it becomes more valuable, right? That being said, if you get the timing wrong, as in it starts going down, no one wants to catch a falling knife, all right? Especially in private deals like this.

Stocks and whatnot, people are trying to time it. It's a big enough company. It's been around long enough, et cetera. It's different than small businesses, which is what vast majority of people who are watching this video have. Small business being defined as less than 100, I think, employees. Okay. So next one. You think it's worth more than it is.

And this is a big one, right? A lot of people are like, man, I heard this. that, you know, so-and-so got 20 times top line. It's like, yeah. And that's because that's why it's newsworthy, because it's weird, right? It's not common. If there's a completed sale, I think I just I can't remember where I pulled this stuff from. So the median number for M&A deals for for this was, I think the median was $5 million. I can't, I screw that. The point is that the multiple was 6.7 times trailing 12 months. And that is for institutional buyers. Right now, you might not have an institutional buyer, which is why the vast majority of businesses that get sold, gets sold in private deals for like

1x, 2x, 3x. And it's because they're not really reliable businesses. For the most part, they're just kind of asset sales. Like I'm handing, you know, a handful of employees over with some kind of working model. And I'm just moving on to do other things, which is honestly, the vast majority of businesses that get sold, gets sold for almost nothing. All right. So we hear about the big wins, but that's not the majority. All right.

And so I want to be clear in that most businesses either don't get sold or get sold for very, very little money. And so the point of this presentation is how to sell it for lots of money, all right? Which you have to meet these requirements to even be considered. Okay. Now, the next little do-dad that we have on our listicle here is not growing, big enough Tam or growth stories. There's three different things. I put in one book because I needed to fit it in one place.

All right. So if the business isn't growing, you're going to get a big discount on it. Now, I said earlier that the longer business is in place, the more valuable is, which is true. But if you're not growing or you don't have like a waste of growing or it means that like the strategy you're doing is no longer working, people will see that as a risk. So if you have even a tiny amount of decline, people see that as a big red flag because then they'll extrapolate that into infinity.

On the flip side, if you have a tiny amount of growth, people do extrapolate that out further. So like flip it around and sustain that growth for 12 months, 18 months prior to the deal to get a much better number. Big enough tam. So people might think, oh, this is a, this business is cool. It's a niche, but it can't expand beyond this niche. So you need to have a good growth story, as in how are we going to really 10x this thing? Because people are buying, not to buy your business. They're buying your business for what they think the business will become.

All right. That's what kind of private equity is all about. No one's really trying to buy the thing. They want to try to buy what things would become. All right. And so that's when you make great deals, right? That's on their side. So you have to tell them or explain to them, the story.

story of how it's going to work, right? And the more they can believe that story that it's likely to occur, then the more valuable your business will become. Next one, and this is a huge one for small business is key man risk, as in like, are you the one who's the rainmaker? You're the one who's bringing in, you know, all the deals? Are you the one who's, you know, the special man who does all the fulfillment? All that kind of stuff. Like, are people coming for you? If they're coming for you, then they're not going to come for your business, which means that when you leave, business is worthless, right? And so you're a big risk. And a lot of times, I'll be frank with you, in Acquisition.com, we work with companies that have key man, and we work them over the next three to five years.

to help them not have keyman risk, which is how we were able to exit gym launch, which was started as kind of a more guru-esque business and then transformed into just a true licensing business at an enterprise level. And so there is a process of getting through that and you have to take the time to do it. If you don't, your business will not be valuable. Okay. And then finally, and there's more risks. These are just some of the big ones. Single channel dependence, meaning you only have one way of getting customers. You have no other way. And if tomorrow, that shut off, you'd be screwed. Right. People just imagine, well, if it shut off, then I would lose my money and good investors don't take risks like that. They don't want to go to zero. And so

that will massively impact the value of your business. All right. So these are deal killers. These are things that get you to not sell or sell for very, very little money. And so you must check off these boxes before you can get big institutional money. All right. So this is the big bottom line of that section, which is enterprise value is a discount applied to future sales, which means, which means you have to take the total amount of sales that of business stakes between now and the end of time, and then you apply a discount to it, which basically means risk. What's the likelihood that occurs? All right. And so if you can show that you have a lot of future sales that are going to happen and it's very, very likely that they, that they're going to occur, then you have a very, very valuable business. If you have a small amount of future sales or a declining amount of sales, then the likely that it happens is low and the amount is also low. All right. So that gives you low enterprise value. So that we want to show is we want to show that we're going to make lots of sales and continue to grow and the likelihood of occurring is very, very high. They should be asking you, why are you selling this business and you need to have a good reason for it. Okay. So checked off that box. Let's go to phase two. Let's say you check all those boxes. and you're like, okay, I think I have all those things.

I now want to find a banker or broker. And quick difference here. Bankers are what you're going to need to sell to an institutional for the most part. Brokers are usually when you're selling for less than $5 million. You get a broker and they have different fee structures because the amounts are lower and they have to do more deals, all that kind of stuff. All right. And to be fair, I think sometimes being a broker is even harder because you're selling shit.

Let's be real. Okay. So the way that I did this, and so I'm just being real, like the way that I did this is that a network for interest. It's very hard. I think you can try it. Go, you know, Google Investment Banks, Google Top, whatever investment banks. And specifically, you'd want them in your market and your size. So there's two components. It's, you know, do they, have they sold supplement businesses? Have they sold e-commerce businesses? Have they sold e-commerce? Have they sold e-commerce? Have they sold e-commerce? Have they sold like $500 million? Top-line? You're not going to be a fifth of them. Because the buyers that they already know, are are not going to want to buy your thing because the check is too small. All right.

And so these guys write, like, checks proportional to the fund size that they have of the capital, right? Like, if you have a billion dollars, you're not going to make a thousand dollar investment. It just doesn't make sense. At the time, investment makes no sense. All right. So I use my network, which means I just called everybody I possibly knew and said, hey, do you know anybody who knows anything about this? And so you can start with entrepreneurs.

You can start with people. You can start with your actual bank where you go, like actually to do banking. And you just pull threads. And this is what took me a long time is that like networking to try and find these introductions was a pain. I didn't, I don't know anybody. You know what I mean? Like I wasn't born into an investment bank, so I have no clue. And so you network for introductions to these banks.

Okay. Once you have some introductions, right, you then give them a one page summary document. You send them because they'll be like, okay, well, send me, send me a teaser, right? It's like a sizzle, sizzle page of like all the sexy things about your business, the assets, your lists, how you, you know, it's just literally a one page summary that should look really sexy that someone can look at and be like, I would like to take another call with these people. That's it. That's the objective. Just to get them to say, yes, I'll take a call with you.

Once they say, yes, I'd like to take a call with you, you then basically sell them on selling your business. So you sell them on selling your business. And then if they do like that, they will usually fly out to you and meet with you in person with a team. And then they will sell you on why they should sell your business. And so the process here goes, like you network for as many introductions you can to bankers who are relevant to your size and your space.

You send them the one page. page teaser so that you can get them interested, they then, a certain percentage of those will take a phone call. Of the phone call, you sell those people on why it's a good deal. They will then follow up with you and say, yes, I think it's a good deal. Let's talk in person. You'll then probably meet with, you know, four to six bankers to tell you why they think they would be the best ones to represent you and get you the highest enterprise value. And that's where you're going to negotiate their fee structure and you're going to be asking them questions around what other deals like yours they have sold and what their network looks like. Now, they're all going to say they know all the

people and all the decision makers and all the things, right? But the real thing you want is people who have sold businesses similar to yours in terms of market and size in recent history. All right, because that means that it's recent. They're in the know. It's not like they sold something three years ago that was similar because they're way out of touch. All right, you want people who do this type of deal all the time. Now, the typical fee structures, what to watch out for. So their fees and agreements, they usually have an upfront amount. Sometimes that's all these things are negotiable. You can negotiate that out. You can negotiate it in. They usually ask for upfront if the number is lower. So if they don't think that it's likely that they're going to sell,

they'll ask for an upfront, which you can use a negotiating point, which is like, do you don't think you can sell it? Because then it gives you a point to argue back to somebody else, right? They'll give you targets for what they think they could sell for. And then they will give you ratchets, which is like, and if we sell for over X, we get X percent. And we suffer over Y. We get Z percent. What bankers will actually do is once they will help you package the business and they will go out to market and they will pound the pavement and they will talk to hundreds of buyers and they will walk you through this process. But it's good to have an understanding of this process by and large so that you can not sound like an income poop when you're talking to them.

There's usually also a breakup fee which you can negotiate out of the deal or at least decrease it. And you can also on the flip side have minimums, which is like if you guys don't sell me, if you don't get an offer above X, then you don't get paid at all. And so we had minimums in our deal so that they wouldn't actually get paid. So they're super incentive. So the things that like you really want to be cognizant of is the minimums. and especially how they're going to get paid, like what number they're getting paid off? Are they getting paid off the total enterprise value? Are they going to get paid off the cash you receive?

Right? And you want to negotiate off the pass you receive, not the enterprise value? Because let's say you sell 10% of the company for a billion dollars. I'm just saying for, you know, silly math. So you'd get $100 million. If let's say they got 4% of enterprise value, right, they would get $40 million of the $100 million. All right. So there's little things like this that they will use to fuck you.

All right? So like be cognizant of these things. And the targets and the ratchets that they put in place, it sounds like it's like you want you want them to be really excited to push it but the things that I really would want you to pay attention to are going to be the minimums and what they're getting paid off of and breakup fees and up fronts all right because at the end of the day you know the ratchets and targets hopefully you're happy with us on the front end because what happens sometimes is the reverse which is people all of a sudden start hearing the LOIs and whatnot and start getting

greedy and I don't think that's wise like decide write down a number before you start the process and talking to all these guys because they'll blow your mind up and they'll tell you that you're going to sell for a billion dollars and then you sell for not a billion dollars, okay, for much less, less than that. So write down the number, write it to a letter to yourself and say, I would accept this for this reasons, all right, because this is one of the most emotional processes you can possibly go through, selling a part of yourself, selling part of your identity, and so you can get tied up in it. Okay. Now, you will sell your company better than almost any banker, right? So they are going to be experts in the process. You will be the one who's going to be an expert at selling

your company, especially if you're a promotional entrepreneur, you know how to sell, right? And so you want to be very instrumental in giving them the selling store because they're going to be the ones who are doing the selling, but you're also going to be doing selling as well. So you need to be giving them the salient points. You think that they're going to say that they're experts at this. They're not, even though they've sold a handful of companies, they've only sold a handful, right? They just sold five like yours. That's still a ton, just like yours, but you want to have the really salient points that only you will know because they don't know your business. Right. You got to give them the really sexy stuff. Right. And as a reminder, these people are like real estate agents. They're trying to sell both sides. They're trying to get a deal. done more than the best deal, even though they have ratchets, even though they have these things, the big thing they're trying not to do is not close a deal. And so they will do everything they can to get both sides to just meet in the middle and sell, but that's not necessarily in your best interest. Okay. So just remind you here, it's not necessarily your best interest. All right. Now, this was the false belief that I had, which is they will know what they're doing and we'll get you the best deal, which is not true, which I just explain this. And so this is the negotiating point.

This is a writer downer for you. They only responded, and I had to learn this the hard way, to if I don't get this point, the deal is off. Otherwise, they basically just steamroll you. And you might say, like, well, maybe you had bad banking experts. Who knows? But I'll just tell you, this is my experience, is that you have to be willing to walk away from the table in order to get the best deal, all right? Which is why you win negotiations before you start them by having options.

All right, you want to have an amazing business. You want to have a business you don't want to sell. That's the best way to sell a business is to not want to sell it. Right. And you have to get there. If you're like, I would just get rid of this thing for nothing, then prepare. be prepared to get rid of this thing for nothing because it's because it's going to get there because they're going to drill you because these are professional negotiators on the other side table.

This is what they do all day long. You might have sold your business one time. They buy businesses every fucking day. All right. So they know exactly how you feel and they know exactly how to manipulate your emotions to get you to say yes to the lowest price. Okay. So what you want to say here is that if I don't get this, the deal is off. And it took me a really long time to learn this. And then all of a sudden when I start speaking in this language, the beggars started responding and be like, oh, no, this is really a big deal for them. Like if they don't get this. And then all of a sudden, they start negotiating for me because what will happen. in this world of institutional is they just say no to everything. Unless you say you're going to walk,

then they're like, okay, fine, we'll give you that one. Right. So they will just say this is our deal structure. And unless you take it or leave it, unless you say I'm willing to walk on these points, all right? And then they will start moving. Just my observation. Now, I'm telling you, I'm sharing this stuff because no one showed this with me. All right. So we covered finding the banker, how to negotiate the fees, what to look at in terms of how to interface with them to negotiate on your behalf. Now let's start the actual process. All right. Amosination, quick break just to let you know we've been starting to post on LinkedIn and want to connect with you. All right, so send me a connection request and note letting me know that you listen to the show

and I will accept it. There's anyone you think that we should be connected with, tag them in one of my or layless posts and I will give you all the love in the world. All right. So let's get back to the show. So there's the prep. And this is a big, big picture of what the, what this whole process looks like. Once you've got audited financials, once you've got a sim, which is a, shoot,

I don't even know what the, it's something model, I think. But basically it's like this 100 page plus thing of really in depth of the financials and the story and the competitive analysis and the marketplace and the growth trajectory and all the stuff. And that's what they should be doing for you. They should make that thing. And they will send the teaser out to all the, you know, 500 people of those people, a certain percentage will sign NDAs, which is not disclosure agreements because then, because it's anonymous. They won't, they won't, when you're sending out the teaser, it doesn't disclose what the company is. That way, you know, employees and things like they don't get scared by you just shopping the company. all right so this is how i recommend doing so you have 500 buyers contacted and you'd want to ask these

questions how many buyers are how big is your list what are what are your potential acquires right 98 NDAs from there you'll usually get like 14 or so iowis 15 percent right from there about half of those you'll do kind of like management presentations from there you'll get two to four LOIs and iOI's indication of interest which is non-binding and LOI is also typically non-binding but it's a letter of uh of interest which is like this is what we're prepared to pay for the business from there you negotiate them against each other and then you get one deal right and then you sign the LOI and then you go through the diligence process and then you close okay that is how these sales numbers break down if you've talked to 10 people then lo and behold you probably are not going to

get a good number right and so that's how this process works and the thing is a lot of these guys are lazy so you have to push them on these numbers to send out more like repeat follow up with these people and I'll be honest with you on the deal that we ended up doing it wasn't the first set of buyers that we got to the table it was actually somebody that my CFO pushed our bank to follow back up with again that ended up being the final acquirers. All right? So like you want to push them because at the end of the day, they're going to try and do as little as possible to get paid.

I'm just being in real with you. That's the real world. All right. So let's do it. So now that we have to understand how the sales process works, this is now you're working with the bankers. You got to get this prep stuff done. So you've got to get your due diligence in.

You got to get organized. A lot of people don't have this stuff. Draft of the SIM. There it is. Confidential information memorandum. All right. So you got to complete that, get a review. That's a huge amount of work.

All right. And these weeks are just rough, all right? These are rough amount of weeks. All right. I'm going to show you 20 weeks in this presentation, but like that whole pre-process of getting the bankers took another like three months. So I would say roughly from the time you want to, from the time you start this process, the time you get a check in your bank count is usually 12 to 18 months.

All right. I'll say 12 is a nice like if you're like, if today you decided you wanted to buy, it would take a year before that actually you'd have a check in your bank count. All right. So then they're going to put together the list of potential buyers. or investors. Then they're going to have the summary fact sheet and the NDA is agreed upon. And then that's it. That's the prep phase. All right. That's it. Simple. Simple. Now we start marketing because we got all the materials done. Now we market them. Okay. So now we contact those prospective buyers. We go

teaser, then NDA, which is the one to three page blind description of the business. Then the data room, which is basically like they have to put the stuff like in the cloud so that people can always have access to it. So all these potential buyers are going to be sifting through all your your resource to come up with questions that they're going to ask you or say that's not a good deal for them, right? This is when you have your kind of your pitch deck, right, of what you're going to present to them, right? You're going to dry run, practice it, et cetera. Potential investors will then submit their IOWIs, all right? That's the indication of interest that they're like, we might be interested in buying this business.

And they'd give a rough range, right? And then you have potential people who are, I'm trying to go through this part faster because it sounds boring, but this is the stuff. This is how it works, right? So potential investors visit company. You provide access to the data room of all the diligent stuff that they're going to need. So they have a cursory idea of what they need. And you do the data room so you don't have to do all this interaction. Just put all the shit up there and they can all have access to it.

And then when you start the actual offers, which is here, week 18, final offers received and evaluated, strategy is determined for moving forward with final parties. So this is where you bid them back against each other. And then you get final offers, which is LOIs. Okay, letters of intent. Okay. Now, once you have the letters of intent, and you've bid them back together, you're going to have different deal structures that are going to be presented to you, which I think is covered here. Okay. So you start negotiating those, go back and forth, et cetera. Now, here's the thing. There's the price and then how it's paid. It's price and terms. And I can't tell you, like, getting good terms is worth discounts, right? Now, it depends on why you're selling. You just want to sell to have a story, then that's one thing. But if you're selling to get rich, then the terms matter a lot, all right? So people share a big number. Like, for example, if I wanted to say I sold, you know, Jim Launcher Prestige Jobs for $100 million,

I could have gotten $100 million in paper. All right. So hear me out. So if I said, hey, pay me $25 million earn out if we do a billion dollars this year in sales, sure. They'll sign it. And then I could say that added $25 million to my enterprise value on the sale. I will be transparent with you. I had no seller financing.

I had no earn out. I did do. I did a real equity because I sold 66%. And I had no transition services and no consulting. All right. And that was because that was the agreed upon way that I wanted to sell this business. And I said that up front to everybody. I said this is a full leadership exit.

I will not be involved. I will not have a transition. Because the thing is if they're like, sure, if you just keep working for the business for two years, yeah, we're fine selling to you. It's like, well, I might as well just own the darn thing, right? And I'll just grow up myself. And so this is where this is important. Now, mind you, acquisition.com, for example, for our business, we only do minority

investments because we want the leadership team there. So we actually want to just participate in the growth and help grow the companies from $3 million to $10 million to $20 million to $50 million and beyond, right? we want to participate in the growth and we're happy taking a smaller slice of what we consider to be a bigger pie rather than ripping out the management right so we're we work with people who are like not tech not really ready for institutional yet but want to get that 20 million dollar 50 million dollar 100 million plus exit i'm going to get them ready just for context all right so these are the things that will discount you so if you had a hundred million dollars for example for an exit they might say okay

well we're going to put 25 million in earn out 25 million is going to be seller financed you're going to roll 20 percent, which is 20 million. So there's $30 million left. And so we'll give you $30 million in cash. And you say, oh, I sold my company for $100 million. Right. And then of the 30, you've got the bonuses and you've got other equity partners if you have those. And then you've got the taxman. So all of a sudden, let's say you've got 20 percent that's given to your team. So now you're at 24 million. And then taxman takes his 30, right? And you've got closing fees and things like that and escrow fees. And so now you're at 18, 17 million. So you sold your business for $100 million, dollars, we only got 17 million bucks, right? That's why this stuff matters. Okay. So you want to make

sure that you know why you are selling and what the most important things are for you. And you need to ruthlessly, ruthlessly communicate that to the bankers. Okay. Very important point because they will negotiate on those points for you. Now, the things that they're also looking for for them is, is it's a fit within their portfolio. Like a family office, for example, it's just going to buy something that they think is a good cash flow investment. And the price is going to be very important to them. a strategic buyer would be somebody who's going to be, let's say you own a car wash, you know, chain or whatever. If there's a bigger car wash chain that just wants to buy yours, they'll give you a better

multiple because they already have all these systems in place. So they're going to make more money from your business than just a generic buyer will. So the ideal way to exit is to a strategic is you'll get the best multiples. But to be fair, there are more financial buyers than they are strategic. So that's kind of the tradeoff. And you want to make sure that your business is in good hand so that you want people who have relevant experience. We were very fortunate that the people that we felt were most

equipped to buy the company, we're also the ones who ended up giving us the best offer. And so that doesn't happen. We were very fortunate and ended up working that way for us. But it doesn't always happen that way. And then this is a really simple one. Do I like these people? Well, my team like these people because ultimately the team's going to be working with them. Right.

So you want to ask those questions as you're going throughout. All right. So like you can have assholes who pay you a little bit more and then really nice guys who pay you a little bit less. Life's short, man. So like I would go with people who a lot of people regret just taking the highest offer rather than 10% less and having a much better life. Okay. Now, at this point, you would sign your LOI. All right. Most of the times it's going to be

exclusive saying like if you have a tremendous amount of interest, you might be able to sign LOIs and have them not be exclusive and they still bid all the way up to the purchase agreement. Most times that's not the case. They don't want to, they don't want to expend the money. So like the, so APG when they bought us spent probably about a million bucks in diligence, just in diligence, right, to figure out whether our company was worth buying. Right. And again, you're not going to attract guys who are going to write a hundred million, you know, do a million dollars of diligence for a $5 million deal. It makes no sense. Right. It's like if you want big money numbers, you have to, you know, got to follow the big money process.

All right. So at this point, you signed an exclusive L.O.I, meaning you can't shop the business to anybody else during the period of the, of the due diligence. Now, I'm going to say it at the end, but I'm going to say it again. All right. And I've got a special tree for you, which I'm now remembering. At the end of this video, I'll actually, I videotaped us actually having the escrow hit and the final signing and you can actually see it go down for real. all right it's very anticlimactic but you can see it for real and see what a 50 million dollar cell looks like okay so the due diligence will begin they're going to try and negotiate time saying like oh we can get a faster close if blah blah blah blah if you accept this lower price bullshit they're going to take as long as they want literally ignore it they seriously they will try and use speed i had every single person try to use speed as a selling point i thought it was legit the first time

they said 30 day closed and it took 112 days and i i accepted worth this is on one of the other companies we sold. I expected worse terms on that. Right. So the next time I came around, this is why I'm giving you this stuff. Next time I came around, they were like, oh, we could do a fast because I was like, whatever, take your time. My company's grown, do whatever you want. Right. And when you do it that way, you're in the position of power. Okay. So they're going to audit your quality of earnings, which is something that you have to get the bankers to explain how to do that, which is to make sure that your numbers are legit, that they are what you say they are, right? Anybody can put numbers in Excel sheet, but are they for real, right? Then they'll do

legal diligence? So they're going to make sure you actually own the company. Do you have any lawsuits against you? Are you breaking any laws? Which actually is fairly common when it comes to claims and things like that. Like FTC, things like, like, it's actually fairly common. So you want to make sure that stuff's our and that stuff can blow deals up. I had an acquaintance of mine that had two different deals blow up that were like nine figure deals multiple years apart because they were not compliant. All right. So like, and they thought that the lack of compliance was one of the reasons that they were so successful. And so they didn't want it. It's too risky. All right. What they'll then do is they'll start interviewing your customers. All right. This may sound freaky, but that's what they're going to do.

They're going to talk to your customers. They're going to talk to your employees. They're going to interview them. The firm that purchases spent like $250,000. I'm pulling that number out of error, but it's a lot on research to see what your customers think about you. So if you're terrified to think about what your customers who are past customers who no longer pay you, think about you, be prepared, right?

They're going to talk to them and be like, should I buy this company? Is this a good company? Right. What's your experience been like? Right. And same thing with your employees. Now, they're not going to ask them about the stuff. They're going to only talk to people already know about the deal.

But they're going to interview them really heavily to see what's your involvement. And is he really, is he really passively involved? Like, what do you do on our daily basis? What do they do on the daily? Because they want to know that if you leave, it's still going to keep going and growing. Then you've got background checks of you and your management team to make sure no one's, you know, a convicted criminal or something sketchy, which more realistically is like financial fraud.

Employment contracts to make sure that if you leave, they don't all leave with you or they're like only there for you, et cetera. And you're like, okay, I feel like I'm done. Nope, there's more. Okay. So once you've gone through this whole diligence process, which takes 60 to 90 days. Now, if you're tracking with me, there was like three months, you know, know, of looking for bankers and figuring that part out and making sure that your business

is ready may take much longer than that. But like assuming your business is ready, right? And you have met the prerequisites. It might take you 12 weeks to find the right bankers. From there, it's 20-ish weeks to get to this point. And then you might have another 60 to 90 for diligence. Now, bankers will say that it's going to take less time. They're incentivized to tell you that it takes less time. So I was talking to a good friend of mine who was like, hey, man, I got, they said their 30-day diligence and a quick close. And I was like, dude, it's not going to happen. And it was for a nine-figure number, right? And lo and behold, 90 days later, he was like, yeah, fast, they said. Wrong, they were. Right. And he's like,

why didn't you tell me this was going to be so much fun, right? And he's now, I think, like, five months into his process of post-agreement sign. Right. So, like, I'm not saying that that's typical, but I'm saying, like, you need to be prepared for a year. Like, and it's going to be a year slog. And a lot of your focus is going to go to this process. So, like, you really need a strong management team, a place who can continue to grow the business without you. All right. And that'll prove the point. And this is a note.

The longer the process takes, it is in the buyer's advantage that it take a long time. All right. So you want a fast close. They want a slow close. And being real, the only way to speed up the close is to keep growing like crazy. Because then they're going to realize that all of a sudden the valuation from the beginning to the end will have changed. And then you will have much more negotiating power and you can break the agreement and get other offers.

Right. So important point there. So once you've gotten that point, you'll get a purchase agreement. Inside of the purchase agreement, you'll have these different pieces that you have to watch out for. Indemnities are the things that you're liable for. These are the things that will keep you up at night. You need to negotiate hard on these things. Now, give the things that are reasonable.

Like, yes, like fundamental, you know, indemniquet warranties, I think is the name of the clause, whatever. It's like, you actually own the company. You actually own the trademarks. Like, yes, you have to, like, yes, otherwise the whole purchase is off, right? And you could be liable for the total purchase amount for that stuff, right? Now, that's the indemnities. But the other indemnities are things that, like, are completely out of your control. So you want to make sure you negotiate those things out.

And again, with all these negotiations, you have to be willing to walk away and say, like, I don't, like, if this bullet's in there, the deal's off. Like, and if you can't say that, you're going to get raked over the coals. Okay. Now, non-competes. Depends on why you're selling and what you want to do next. But you want to be very specific. And this is one of the hardest things that you're going to get into negotiating, especially

if you have a skill. If you're really good at, you know, trash compacting, then they're going to not want you to touch anything trash related for a long period of time. All right. And what's really tricky about this is that if you roll equity into the new company that they're going to be buying your company in or whatever, they will write in the Articles of Corporation that none of the people who have that can compete. And so even if you have a purchase non-compete, you may have a non-compete as long as you are an equity holder in that other company, which means that if you want to breach your non-compete, you would have to give up the equity that you rolled. That's once the other non-compete expired. So you have to be very, very careful

about how these non-competes are written. And the definitions that you have around this is so important. Like I can't tell. Like so, for example, if you were selling, let's say a skincare line, they might say, the first one you get might just say like you can't be in beauty anymore. Well, that'd be freaking ridiculous, right? Because you know the space and you're not competing with your company. If instead of skincare, you start getting into makeup, right?

And you have to make that argument. Right. It depends on the size of the deal and what you're willing. Like if this is the one deal that's going to seal all deals for you, then maybe you'll be willing to give more, right? and be like, all right, I'm not going to touch the space for a long time, right? On the flip side, if you're like, I already know what my next thing's going to be. And the best thing to do with the non-competes is know what you're going to do next.

Because if you know what you're going to do next, then you can be very specific with the language and you can make sure that you're 100% covered. And just tell them, this is what I plan on doing next. I just don't want that to be affected. And if you say that, and I'm telling you guys, the best way to negotiate these things is to be honest. Just tell them what you want. And a lot of times it's much easier than trying to guess and ascribe blame and all that kind of stuff.

Schedules is all the stuff that you provide. it's basically another word of like proof, right? We're doing all this based on these assumptions. And the assumptions have to be true. For some reason, the schedules are not there. Like we did this based on this, you know, customer segmentation analysis. If you mentioned it in the selling process of getting them to say yes and negotiating,

but then you don't include it in the agreement as a schedule, it's as though it didn't happen. And then they can come back and screw you. Now, this all sounds scary. Most of the times these agreements don't get repealed. All right. But you want to make sure that you include all the stuff and that stuff sucks. But you got to do it.

You got to have a good lawyer for it. All right. Definitions. this is kind of interesting as a total philosophical point. The agreement itself is almost as long as the pages of definitions for the terms that are used in the agreement. And I think Socrates said, wisdom begins with the definition of terms. And so, like, fundamentally the agreement is like party A as defined by X agrees to pay, Y according to these terms, two party Z according to these terms.

So it's like all these things are just terms that have to get defined. And so I'll give you an example, a term that we were able to redefine, I think it was, actually, I think we redefined a term within the non-compete that dramatically changed the meaning of the document and made it much better for us to do whatever we wanted to do next. And so like just changing the definition of a single word can run through an entire agreement. And sometimes rather than fighting on clauses, it's better to really narrow down the definition of what you're trying to define. So the scope might be geography for a non-compete or it might be like there's a million things they define in the these documents, but making sure that you read the definitions for what these words mean is really important. Now, the few points, and this is just the points that you want to negotiate, there's a zillion other things. These are the big hitters. Networking capital. This is the very end. You've already

agreed on everything. You already agree on the terms. You already agree on the price. Right. Now you have to agree on networking capital, which is how much money you're going to leave in the business, right? And this is we're going to try, they're going to try and get you there, too. Right. It's like, hey, let's see you've got a million bucks of working capital in the bank account. They're going to be like, well, you've had a million dollars sitting there for a whole year. So that comes with the business. You're like, well, I've just had it there because I didn't take dividends out of it, which why, by the way, is a good reason to dividend out stuff and keep, you know, little in the bank account if you're a smaller business. Now, if you're reinvesting

and buying and doing M&A and stuff, then that's a different question, which most of you guys aren't doing that right now. So, that being said, now working capital is how much money is required to run this business so that when we have this transition, it can continue to work as normal, right? And you want that to be as little as possible so that you can take as much of that cash to the bank account in addition to what they're going to pay you, all right? And then finally is the escrow amount. So let's say you've got that $100 million deal, like I said earlier. And they might say we want to keep 20% in escrow. All of a sudden, you've got $20 million in escrow. And again, we still have the escrow. We've got the seller financing. We've got the earn out.

We've got the splits that you have. We've got taxes. We've got all these other things that are going to come out of it. All right. So you got to make sure it makes sense. And so escrow amounts, like if you can keep it under 10%, you're rocking. All right. Now, they're going to probably keep some of it there. And that's because they keep that as insurance. Like if something else comes up or there's some bill or blah, blah, blah, that's your fault, some back taxes, whatever. They take it out of the escrow amount. All right. That's how they do it. And then usually they will release that. And again, when they release it, they can release it in phases. I think there was like a 90 day and then a one year for ours. But like, it can change. Some people have escrow that holds for two years. Some people don't have any escrow, but it's a negotiating point. All right. And I'm repeating this. Don't let speed be a negotiating tool used against you. All right. It doesn't matter. They're going to take as long as they want. So don't

let them use that against you. All right. Finally, you've done all this stuff. You've negotiated all the, the hard points. You've gotten here and it's now payday. All right. So first off, it's very anticlimactic because it takes all this time and then all you do see is just like a big deposit in your bank account. You're like, oh, well, I guess I am the same. So I'm just telling you that's what's going to happen. All right. That being said, you actually don't even sign papers. There's so many papers that you actually have to pay someone to sign them because it takes so darn long.

So we actually paid our attorneys and I think it took them like six hours just to sign on our behalf for all the documents and do that for us. All right. Now, once all the documents have received by the escrow company, both parties have signed everything. at that point, they initiate the deposits to the parties that have already been predefined. So if you have payouts that go to, let's say your bankers or brokers, that comes off the top. If you have payments that go to the escrow company comes off the top, if you have distribution that come to your employees or other equity holders or investors, that then all comes, and then you get your piece. And just hold on because I'll show you the actual video.

It's only like, I think, 30 or 40 seconds of the actual signing moment for us. And you can see what it really looks like to close a $50 million deal. But just a few closing thoughts on this is that they're going to, treat you like you don't know anything. All right. And so you got to get smart. You got to read stuff. Watch this video, rewatch it and understand the pieces that someone's going to try and do to screw you over. And, you know, a trust is going to be a big component of this. Right. So like you have to trust the people that you're going to do business with. And if you don't, it's going to be really difficult. Now, that being said, you can trust them, but you still want to verify, right? You still want to make

sure that the words say what they say they say. And a lot of times that's not the case. All right. And so big picture, if you do get to this point, congratulations. It's very, very hard to grow a business, do all this stuff, and sell to an institutional buyer who will pay tens of millions or hundreds of millions of dollars for a company. These are just some of the lessons that I learned, and this is the process. It took me a long time to even just figure out how it worked. And for Mosey Nation, I make these videos because no one told me this stuff. And so I'm hoping that for you guys, this helps you out.

And if you're doing over $3 million, you can hit us up. And we'll see what we can do to help you out and help walk you through the process. So, anyways, lots of love, everybody. Keep being awesome.