Strategic vs. Financial: What To Consider When Selling

[00:00:09.040] - Rich Veltre

Hey, everybody. Welcome to another episode of Books and the Biz. I'm Rich Veltry, and I'm here having a conversation with my buddy Dan Paulson. Hey, Dan, how are you today?

[00:00:21.750] - Dan Paulson

I am wonderful, thank you, Rich.

[00:00:24.130] - Rich Veltre

That's awesome. Very cool. So I'm starting off today because had this conversation this morning with someone and it led me to remember our five questions about when we were doing an exit strategy. We were talking about people who are looking to prepare their business for a transition, and we had five questions, and one of those questions had to do with the strategic versus the financial buyer.

[00:00:54.810] - Dan Paulson

I remember that question. I remember not knowing a lot about that question.

[00:01:01.400] - Rich Veltre

I think it becomes a very interesting question and something maybe we should talk about today, just because it is exactly that. People don't necessarily know the difference between the two and why it's important. So I think maybe we should explore that a little bit in the conversation. And I think just quick definition. I think we did this in one of our other episodes, but the strategic buyer is someone who's looking at your business from a standpoint of a vertical or horizontal move for them. So in other words, it's maybe one of your suppliers that wants to get into your neck of the woods or your line of business, or it's someone who's already in your line of business and just wants to see if they can make it bigger by bringing you into their fold. And the financial buyer is purely an investor. They're purely coming into it from, I'm going to put money in, and when I put money in, I'm expecting a return on that money. I'm expecting it to go to work for me. So the financial buyer has a little bit different perspective when they look at your business. Is that your understanding, Dan?

[00:02:11.590] - Rich Veltre

Do you agree with that?

[00:02:12.880] - Dan Paulson

Yeah, that makes perfect sense to me. So from the operations side, often with the questions that we've talked about in the past, what I really get is I'll call it degree of frustration. So how frustrated the owner is or how tired the owner is determines how they want to step back in their business. And for me, so then looking at these two options, really, in my world, kind of depends on how much involvement that owner expects to have as the sale is going through or beyond the sale. So when I look at things, I'm looking at how much does this owner want to do? Do they want to be involved for a couple of years and kind of wean themselves out of the business, or are they just done whatever might be hiring or whatever they want out, in which case they want a quick sale and they want to disappear? Maybe you can explain which one of these is better for which option, and we can talk a little bit more about that. But I'm guessing there's quite a few people that are going to want to step back in their business, because I know my clientele, I'm watching their ages climb, and they're definitely getting to the point where they're calling it quits.

[00:03:33.010] - Dan Paulson

Let's put it that way.

[00:03:34.840] - Rich Veltre

And that's a great point because there are statistics out there at this point that are basically saying that 51% of all businesses in the United States are owned by baby boomers. And those baby boomers are looking to transition out of their businesses over the course of the next ten years. But I think that stat actually was ten years from the year 2019. So we're already in sort of the middle of this.

[00:03:59.350] - Dan Paulson

Yeah.

[00:03:59.920] - Rich Veltre

And I believe that the SBA said it was something like 10 million businesses that were going to change hands. So I think that's why this is such a popular topic, that people are starting to get to the point where the baby boomers were the big that was the big population that is now headed towards retirement. So you've got 10 million businesses that are looking for, well, what's our next step? What's our next play? And so it's very important, I think, for people to realize that there is a big difference between a strategic and a financial buyer. And one of the big ones is not necessarily price. One of them is sort of this legacy of what happens after the owner is out, whether the owner was really immersed in the business or just was the main salesman of the business. What happens after that? What happens to the people that are in the business? One of the key things in reading about this stuff and looking at these things as we went through our last podcast where we were talking about the five questions, I looked at it from a standpoint of okay, there. Might be some price differences because a private equity firm, which would be considered a financial buyer, would clearly have funds that they want to put into the business and they might not necessarily care how you run the business going forward.

[00:05:19.020] - Rich Veltre

I take that back because I really came out wrong. They necessarily put more of the stock in the people that are already there. They basically invest in the management. So they might be willing to put more funds in or increase the value because they see management is going to be able to take that money and build it to something bigger. Strategic buyer already has their own infrastructure in place. They already have their own management in place. So if they come and take yours if they come and buy your business, what do they do with your management? What do they do with your management team who have been loyal to you to that point? Will they be able to have a job going forward after because in a transaction like that, they already have a robust management team. They may not have a need for a second one.

[00:06:11.020] - Dan Paulson

Yeah, I often see they let people go, they clean house. If they have really good talent, they might find a way to integrate them into the corporate structure. But I agree with you. If there's redundancy, there usually again the people on the outside will continue to be on the outside.

[00:06:30.000] - Rich Veltre

Yeah. And I think the other thing that really kind of struck me in doing some reading for this particular topic, the other thing that was interesting to me was beware of the private equity firm that's disguised as a strategic buyer. Because if they're particularly interested in a single industry, they have honed their management team to really focus on what they want out of that industry. So you almost have to make sure you understand what are the motivations of the people who are looking to buy you. And then the other thing that struck me was from the financial standpoint, a lot of times you have to realize that a financial buyer doesn't necessarily hold on to you for very long and then they may sell you to another financial buyer until you get to a size point where they look for a strategic buyer. So the timeline comes into play that it's almost like eventually you should expect that someone's going to want to put this to a strategic buyer. It's funny when I read that too, because I had a client that was backed by private equity, sold to another private equity firm, then they sold again to another private equity firm.

[00:07:53.720] - Rich Veltre

And when I read this article I said, you know, they're probably on that point now. They were in orthopedic shoes. I have to wonder, are they looking for a shoe company, a big one to acquire them?

[00:08:06.960] - Dan Paulson

So this is interesting because I was actually having a conversation with client yesterday and maybe we can talk about this in here somewhere too. So this is in the dental industry and right now there is a lot of consolidation going on amongst the dental practices. So for most part for years, dental practices have primarily been solo practice, maybe a couple of offices, a couple of associates type thing. We're seeing a lot of DSOs dental service organizations, I believe that's what that stands for, come in and scoop up all these practices. And what's interesting is a lot of these individual practices aren't producing after they get gobbled up into the conglomerate, if you will. So I think one of the things we also have to talk about related to this is legacy. What's the legacy you want for your business and which of these choices provides the best legacy for your company? Ongoing. And really kind of what I'm hearing from you is ultimately one bleeds into the other. How far after the sale is really, I think, relevant? On again profitability and growth and things like that. But ultimately it seems like one rolls into the next eventually.

[00:09:27.320] - Rich Veltre

Yeah. Interesting. The DSO concept. I have a client that had done exactly that. They built the DSO. And interestingly enough, I would tell you that they are a success factor. I would not label them as a success because of financial. I would label them as success because the first thing that they've said is when we got together to do this, we focused exactly on patient care, not on financials. They focused on patient care.

[00:10:00.660] - Dan Paulson

And that doesn't seem to be the norm.

[00:10:03.220] - Rich Veltre

One of those things where you hear people say, focus on what you're doing and the money will follow. And I think that's pretty much a key for the DSO side. You really have to do that. You have to focus on what you're doing and then the money will follow.

[00:10:21.660] - Dan Paulson

I'm curious. So in a lot of this discussion, what we're talking about here is outright sale to somebody else. I guess I'm going to ask this question. How does this factor in, say, if the owner wants to sell to an employee or a group of employees, which bucket does this fall into? Is this a financial buyer?

[00:10:43.360] - Rich Veltre

I think it's strategic.

[00:10:45.070] - Dan Paulson

Strategic, okay.

[00:10:46.820] - Rich Veltre

I would label it as strategic. Now somebody could call me up and say, no, you're wrong. Okay, but tell me why. But financial is in my eyes anyway, the financial is more along the lines of I have money to invest and I need to park it somewhere and have it make more money.

[00:11:05.830] - Dan Paulson

Got it.

[00:11:06.790] - Rich Veltre

And I can't help it, but I laugh. I know I'm promoting Shark Tank here, but I used to watch Shark Tank a lot because the guys would make me laugh. But they basically would tell you, I need to make my money work for me, right? And so I lean towards anybody who's following that side of it. I lean towards it being a financial investor, financial buyer. Strategic, though, seems to make sense. Like strategic really puts you in the driver's seat of I'm going to sell it to my employee, I'm going to stay on for three years, and I'll groom that employee to do the way that I've done it for 20 years or so, that I've owned the business. And so I see that as strategic. I see that as leaning towards your comment about legacy. You can almost have some control over what's going to happen after you've exited because you've groomed someone to do it the way you want them to do it. Eventually they'll do it their way, but in the beginning at least, they're going to follow you.

[00:12:11.820] - Dan Paulson

And that's probably also the option where if the owner wants to stick around for, we'll say, three to five years more or less as an advisor or a consultant, that seems to be the common method, is they step back, but they're still there to ask questions, still there to share history, all that kind of good stuff. That seems like a better fit than just a financial where more than likely at least what I see is you're paid for about a year and then you're pretty much done. Or they decide if they want to keep you on after that.

[00:12:44.840] - Rich Veltre

Yeah, I think there's definitely more intricacies to that kind of model set up. I'll give you an example, some of the examples of who would be a financial buyer, and one of them is a search fund. And the search fund is a very specific model that goes with a recent business school graduate wants to go into buying a business. And they look around and they search for a business to buy and they either get backers or they use the SBA, the Seven A program for loans, and they would borrow from the SBA to buy the business. SBA has very specific rules about how long an owner can stay in the business. And it used to be one year. I think they've extended it now to two. But that one year requirement would be what you're seeing. So I'm curious if that was who your buyer was, if they use SBA funds, there might have been a requirement that the owner could only stay for so long.

[00:13:54.880] - Dan Paulson

It's very possible. What I often hear the reason for keeping the owner around is, again, there's still a lot of connectivity. Even if the owner has a good leadership team on how the business works and all the little details that you don't know because the owner is actively involved in the business for however many years, keeping that knowledge base, internal or around, is very helpful. I've also heard in some other situations where part of the reason for keeping the owner on is to prevent some sort of non compete. So again, they have a lot of knowledge. Are they going to leave the company and go start another business? Especially if they and I've had this happen, or I've heard this happen, where the owner sells the business and then they don't like the way the person treats the business, so they go start their company all over again.

[00:14:46.800] - Rich Veltre

Right? Yeah, I've always heard also, I mean, I've always been a little bit torn because people are always like, oh, get the owner out as soon as you can. Keep it as short as possible so that the company becomes yours. So while I understand that, while I somewhat agree with that, I've always told myself the CEO of a company is always the company's biggest salesperson.

[00:15:13.250] - Dan Paulson

Right.

[00:15:13.830] - Rich Veltre

So the biggest fear for me is always, okay, so I rush that person out, but the relationship could go with it. So this is a balancing act. You're walking a fence, I guess, as.

[00:15:25.520] - Dan Paulson

I'm listening to all this. How do we help an owner figure out what's the best move here from operational side? I kind of alluded to it earlier on where when I'm talking with the owner, I'm trying to figure out their degree of stress with where they're at in their business. Are they completely frustrated to the point where they don't want to do this anymore, they're burnt out. Or is there some this is often where the question of legacy comes in. What do you want this business to become? Is it going to stay ABC Company or do you not care if it's ABC Company anymore? And I've had owners change from one to the next. So in one moment it's like, yes, this is going to be my I want my name on the company after the sale and then after stresses and trials and tribulations, all of a sudden it's like, no, just give me the money, I want out.

[00:16:22.160] - Rich Veltre

Yeah, I think that's what I've seen too. I think it's a combination of legacies of peace, but usually I see the financial or the need. Are you at a point where you need to sell? And that doesn't necessarily mean a financial need. It could be a family need. It could be something else that comes along that says you have to do something and it kind of forces you out there. I think otherwise, I've seen it where it is just purely financial. But I think there's a loyalty factor. I don't know if I can put loyalty under legacy. I think legacy is you're. Right. I want my name on the building. I want to always have my name on the building. I want to forever be on that building. But I think there's a loyalty part too. You've had people that have worked for you for a very long time, potentially. And what do you do if you have to get out for a need or something else financial? Or can you just list the business and say, look, I'm looking to retire because I'm a baby boomer and I've got five more years of me, let's list it and see what happens?

[00:17:34.820] - Rich Veltre

And I think at that point, understanding the difference between strategic and financial will decide what you can achieve, like what you can get out of what you want. Okay. So I think the more time you have, the more selective you can be, the shorter the need. Then it becomes a little harder because you're going to have to look around and see, well, what's out there?

[00:18:03.620] - Dan Paulson

Right?

[00:18:08.080] - Rich Veltre

I don't want to jump too far to the left or the right here, but sometimes faster is better, the slow buy or the partial buy. Some of these financial buyers might only want to make an investment in your company somewhat if they only make a 60 or 70% ownership investment you're still in, but you no longer really control. You may put all the agreements you want in place that you're still in control, but they put up 70% of the money. You're not in control.

[00:18:44.300] - Dan Paulson

Exactly. Well, there's also, I think, the length of time too, and this really I don't know if it's legacy, but we both kind of talked about employees and you mentioned you can have some employees that have been there quite a while and what are you going to do when you sell that company? Or what are they going to do when you sell that company and all of a sudden they're no longer needed. So there is also an option there. And this is why it's important to start planning early on versus waiting till the last minute, where maybe there's some equity stake, where if there is a sale, they kind of get a bit of a golden parachute out of it. There's different things and this I'll point back to you again. There's obviously other things you can probably structure financially where in that sale that there is going to be some sort of soft landing that you can provide for your staff if you really value who they are.

[00:19:41.440] - Rich Veltre

That's what the shoe company did when they went and they had the original private equity firm. None of the key employees had bonus equity stakes when they sold to the next one. In order to get those people to hang on until the next sale, they were given ownership stakes. And when they went to the next sale, all these guys said, keep working to get this sale done because we're going to get the payday after this one.

[00:20:11.500] - Dan Paulson

Right?

[00:20:12.060] - Rich Veltre

And so pretty much knowing by that point they're in sort of that second stage of the private equity buyer journey. And so they knew when they got to that one, there was less likely that they were going to have a continuing job after the transaction. So I believe that's what happened. I wasn't there anymore when the second one happened, but I'd be interested. I'd probably have to go back and find out how did you guys make out in that one?

[00:20:43.360] - Dan Paulson

Well, either way, it's just a sign that there are different ways you even have to look at a financial versus strategic sales structure and you have to plan for what could eventually come out of that. And the biggest risk you have is having your talent walk out the door out of fear of change.

[00:21:03.480] - Rich Veltre

Yeah. Based on all this information, what's your take?

[00:21:09.720] - Dan Paulson

Well, my take continues to be that we really need to make sure, or an owner needs to make sure we obviously if we're helping them out, but an owner needs to really look ahead and make a decision on what they're going to do with their business. And when we looked at those initial five questions, the last question we ask is what do you want to do? And to me we're talking about this question here and we brought up a number of different scenarios that you really need to look at, which is why we left the last question as what do you want to do? Because I believe the strategic versus financial approach is going to really vary after you assess all the different variables that are in place. And like any buying decision, you should be at this point, looking at each side and trying to decide which one's going to be the best fit for you. And then as you're getting to that final question, you have it laid out as to what you have in your mind is going to be the best choice to make.

[00:22:11.840] - Rich Veltre

I agree with that, and I think that my biggest takeaway is the stress on the timeline. You definitely have to get started as early as possible. Again, at least letting it start out as an idea and put it down on paper, get it down that this is the direction that I think I want to go in. This is what I think I have to do to get there. Again, if they're going to be looking at bringing in a financial buyer. Financial buyer is very interested in your infrastructure. Strategic buyer, not so much. So, again, you have to decide which of those things are affecting your decision to go one way or the other. And then what can you do to improve based on what you think you're going to wind up with? So if you know they're going to be investing in your infrastructure, beef up your infrastructure, take the time to do that, it improves your value. So that's sort of my kind of key takeaway.

[00:23:12.320] - Dan Paulson

And that's really where having a third party come in and do an analysis and figure out what might be the best fit. So you get a good educated choice of what to make.

[00:23:26.180] - Rich Veltre

Sounds good. So that wraps us up, I think. I think this is a good stopping point.

[00:23:32.360] - Dan Paulson

Great.

[00:23:33.340] - Rich Veltre

I think, Dan, if people have questions, obviously they could always call us or reach out to us. And Dan, how should they reach out to you?

[00:23:41.000] - Dan Paulson

Well, they can get a hold of me at Danpalsonletsgo.com. I've got all sorts of ways you can get a hold of me there, including a form you can just fill out and send me the information. I can get back to you on that. Rich, how about you?

[00:23:53.440] - Rich Veltre

You could send me an email at Rveltre@veltregroup.com or go to the Contact US page on Veltregroup.com. And there is a way you can actually book a time for us to have an introductory chat, so feel free to reach out.

[00:24:07.600] - Dan Paulson

And also, I believe we're going to be talking about some of the other questions coming up in the future. So this is a good reminder to, like, subscribe set your notification. You can definitely visit our podcast page at booksnbiz.com that is, Books books, the letter N, biz.com. And that's how you can find us.

[00:24:29.720] - Rich Veltre

Sounds great. And until next week, have a good one.

[00:24:33.770] - Dan Paulson

You too rich. Take care.

[00:24:35.260] - Rich Veltre

All right, take care.