Getting Out on Your Terms: Exit Planning for Retail Owners
70–80% of businesses that go to market never close a deal.
Of the ones that do, most underperform, not because the business is weak, but because it wasn't packaged right for the buyer.
Whether you're three years from selling or fifteen, the work that prepares a retail business to sell is the same work that makes it run better today: clean financials, defensible add-backs, a team that doesn't fall apart when you step away.
Join William Lieberman, Founder & Managing Partner of The CEO's Right Hand, and Butch Blum, veteran M1 retail analyst and former menswear store owner. Our experienced panelists will present a straight-talking, free session on what professional buyers actually look for, where retail deals quietly lose value, and how to start building toward an exit on your terms... not theirs.
In this session, you’ll walk away knowing:
The three buyer types circling retail businesses and what each pays for
How $100K in legitimate add-backs becomes $500K in deal value
Four issues that kill the multiple (and how to catch them early)
The realistic timeline from "thinking about it" to wire transfer
Three questions every retail owner should be able to answer today
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Webinar Transcript
Management One: There we go. Hello, everyone! Thanks again for joining us. We'll let our waiting room participants file in here. There we go. Alright, before I turn this over to our esteemed panelists, I wanted to welcome everyone today. Typically here at Management One, we love discussing anything and everything that has to do with the retail ecosystem, even… especially things that are outside of our wheelhouse, and I would think this one definitely applies. We're talking about an exit planning strategy for your business, and how to get out on your own terms, and make sure that your business is prepared and ready, even if you're not ready to sell. Organization and preparedness is… they're two of the top things that we talk about here at Management One, so we're excited to speak with William Lieberman, the CEO's right hand, and Mr. Butch Blum, a seasoned M1 veteran here, who actually has some real-world experience in this. Before I turn it over to you, gentlemen, though, I did want to handle a couple of housekeeping items here. This is a live event, and we want to hear your questions from the audience. So right down below, there's a Q&A button, or there's also a chat as well, so feel free to fire off questions to our panelists. We're going to go over a lot of information in this webinar, and if anything pertains to your business, or you have a question about some of the material, we want to ask our panelists here, so feel free to use that. We are recording this. We understand retailers lead very busy lives. If you happen to have to leave a little early. That's fine. We're gonna send out a recording so you can review this with your team or on your own terms. And that being said, I will turn it over first to William. Thanks for joining us.
William Lieberman: Absolutely, thanks for having me, and glad to be here and sharing some experiences all around exit planning and how to exit a retail business. So, excited to jump in. A little bit about me and my firm. The CEO's right hand, we provide strategic financial, M&A, and HR advisory services to small and medium businesses. We've been working with the folks at Management One for about a little bit more than a year or so, and so happy to be here and chat with you all. And again, as Nico mentioned, please feel free to put any questions that you might have in the chat or the Q&A, and we'll answer them either along the way or at the end of the session. Butch, do you want to do a quick intro for yourself?
Butch Blum: Certainly. Thanks, William. Good to be here with all of you. I am an ex-retailer, my wife and I owned and operated a store in downtown Seattle, men's and women's high-end apparel, for 42 years, and we were very fortunate in January of 2016 to have, sold our business. So, I will jump in, hopefully, with some of my own insights and thoughts about, what we went through, hopefully, that you will find relevant to your particular circumstances. Back to you, William.
William Lieberman: Perfect, thank you. Alright, so let's jump in. So we're talking about, selling your business, and what does it take to make that successful? And even if you're not planning on selling next year, or maybe even in the next couple years. There are things that you can do today to prepare, and so we're going to talk about what that is, and what you can do to make sure that you're ready. When we think about what can go wrong, right, there's always things that come along that, really, preparation will help solve a lot of these issues, right? So, and you're gonna hear us say this throughout the presentation, and one of the big things is. You know, you don't necessarily have a weak business, but you just don't have the preparation, the books in order, or the business records, the financial, the reporting, the documents, etc. You don't have them organized, and you don't have the ability to… easily say to a potential buyer, here's why we are successful, here's how we could be successful for you when you buy the firm, and you don't have that story down. And so you need to understand, what does that mean? Many, many times, most of the times that companies, either retailers or other companies, go to market. They fail, and it's almost always fixable. So, what we need to do is make sure that we present some information today to give you some ideas to think about, because most buyers have done this many times. In terms of doing an acquisition. But most sellers, you folks, you're only going to do this once in a lifetime, right? Maybe twice. But typically, most sellers only sell a business once. And so you need to be prepared. And it's… it's not hard, it takes time, it takes energy, it takes some advisory services, it takes some help, but it's very doable. And you can really increase the probability of success, number one. And you can also increase the value that you're going to get, and I'll explain what I mean by that in a few.
So, who are the actual buyers? When they're buying a retail business, what are the types of buyers that will come knocking on your door, either literally or figuratively? So, the first group, which is really the bulk of it, the majority, are going to be what we call strategic buyers, buyers that are in the retail business today. Lots of those are your competitors, people literally in the same type of business, either in a different geography, or just a different sort of complementary type of business. So maybe you sell. golf apparel, and there's a golf store down the street that sells clubs and other things. So, you know, maybe there's a combination that makes sense there. So strategic buyers come in form of competitors or complementary businesses, and then what we call roll-ups, people that are buying multiple types of the same thing, so they could be combining multiple different fashion retailers into a bigger fashion chain. Right? So that would be a roll-up strategy. There's private equity firms, and we've heard a lot in the news about private equity and what does that mean? And that means that that's a firm that's raised capital from investors to go buy other firms. and they have a specific time horizon in terms of returning money back to their investors. So they're gonna buy firms for the purpose of enhancing their operations, growing sales. and then combining that with other portfolio companies and selling that as a combination, maybe 5 to 7 years from the initial timeframe. So they're always thinking about, well, what combinations make sense? And they're going to be very financially focused. A strategic buyer is going to be thinking about the growth opportunities, and how can we grow this together, and 1 plus 1 equals 3, and private equity and even a family office are going to be a little bit more financially motivated. So, the family offices are kind of like private equity firms, but they're focused a little bit more on the long-term play. They don't have outside investors, so they don't have that pressure to have a liquidity event, 5 to 7 years down the road. A family office has, you know, typically one or a handful of super wealthy folks that have funded it, and typically it's called… what's called patient capital. They're here looking for the long-term investments. So those are the three typical buyers that we see. They each have different strategies and different motivations, and therefore different deal structures. And we can talk about that as well.
So what do buyers look at when they look at buying a retail business? And, you know, these are very specific to retail, firms. Because they are unique, right? As you know. So, number one, and I really want to highlight this, and we'll bring this up again, is your lease. Right? And the biggest question is, can you transfer your lease? So you have a lease with your landlord for X number of years. Can you, in that lease agreement, does it say that the landlord has the right to refuse transfer of that lease, right? Or, in the positive way of saying it, is that lease assignable or transferable to a buyer? And you need to know that now, right? Because you'll see that one of the reasons that deals fall through is because the lease is not transferable. You know, if you sell your, you know, store, and the landlord says, no, I'm not going to allow you to transfer the lease to the new owner, then that new buyer's gonna walk away. And so this is a really critical item in a retail business. Inventory, right? So this is a biggest variable, when you're negotiating the deal. If you have a lot of old inventory that isn't moving. you're gonna get dinged on that price that the buyer's willing to pay, because they're not gonna value that old inventory. So, you want to make sure that you are clearing out old inventory that hasn't moved in a long time, dead stock. Make sure you get rid of that. You should be doing that anyway. I mean, that's the… one of the things of running a healthy retail business. But for sure, be cognizant of what is slow moving, and if there's ways that you can blow it out, or if you have to, just literally donate it, get rid of it, because a buyer's gonna zoom in on something like that as a flag. It's not necessarily a red flag, but it's a yellow flag for buyers. The other thing is make sure that your inventory actually matches what you have in your accounting system, right? It doesn't have to be perfect every day, but on a regular basis, you need to do a physical count and make sure that you're keeping your internal systems updated, so that when you present your financials, which on your balance sheet is the value of your inventory, it actually matches or is close to what you actually have in the store. People are going to be looking at same-store sales, right? Are your stores, growing? Is the sales growing, in that same-store sale, category? Or is it flat, right? Or is it down, right? So, those are the types of things, just like, you know, any other type of business, are you growing your revenues? But in terms of, same-store sales, people are going to want to see that each location is growing, and if not, what are you doing about it? And what's your strategy for growing, your sales within your four walls? And then that leads into store-level profitability. And contribution margin, or what's called four-wall margins, so that you understand what's the profitability of that location. And you can… you understand how to communicate that to that potential buyer. So you have, you know, here's the revenues, here's the cost of goods sold, and here's the profitability, and you take out all the overhead in terms of running the business, so it's literally just how much do we have in revenues, how much do we have in cost of goods sold, and therefore, what's the gross profit for this location? Before you even get to, you know, insurance, or accounting, or bank fees, or, or, that have more to do with running the overall business. And then lastly, the buyers are going to make sure that you… if you want to leave the business, like, let's say you're selling the business, and you say, hey, look, I don't want to stick around, I'll be here for a year or so, and transition the business over to you. the buyer. But after that, I'm kind of gonna go retire, which is great, and lots of people do that. But if you have all the relationships with the vendors, you have all the relationships with the customers, you have all the relationships with the landlord, with the insurance, with the bank, ba-ba-ba-ba-ba, and you don't have anybody else in the business that really understands the big moving parts of the business. Then that's a risk for the buyer, because the buyer's buying something that's 100% dependent on you, and therefore, there's nobody else that can take over from you, and that's a risk to them, because you know, if you get hit by the proverbial bus, or what I always like to say is, if you win the proverbial lottery, and you're no longer available to the buyer, then you're… they're gonna be stuck, right? And they're gonna have to scramble. And so you want to make sure that, at the end of the day. You have other people in the business that can take on a lot of the different functions of running that business.
Butch Blum: If I can interject at that point, William, you know, you've touched upon a couple really critical things. You know, William's talking about relationships, and, you know, you, the owner, and in many cases, the buyer as well, in operating your business, you develop relationships on all different levels. And, what I discovered was, when we were thinking about selling selling our business that, for us, probably one of the best relationships we had was with our vendors. And so, I kind of quietly reached out to some of our key vendors, without spreading it too much in the marketplace. that we might, down the road, be interested in selling our business. And, ultimately, the person that bought our business was another retailer in a different part of the country who, one of our suppliers put us in contact with. And I will say that, once that process began, it didn't take me long to realize that all five of these key points that William's talking about here are crucial. And as much as I always thought of myself as a numbers person, I became much more intimate with all that and understanding what it all meant in terms of determining what was the correct value and fair value. For our business, and we'll touch upon that probably in the next slide or two.
William Lieberman: Absolutely. So, good segue. So, this is just a high-level example of what value is in a retail business, and how do people, how do buyers think about what I should pay for your business? In this case, I'm using a little bit of a larger business, but just to give you an idea, and the math is relatively linear, but let's say we have a $20 million revenue business, it's gonna be probably multiple locations. With a gross profit of $8 million, or 40%, gross profit, so after deducting the cost of goods, sold. And then you have all your operating expenses. So, again, rent, or utilities, insurance, bank fees, etc. And in this case, that's another $4 million of operating expenses. And that leaves a profit of $4 million. We also call in the world of M&A, EBITDA. EBITDA is an acronym for Earnings Before, Interest, Taxes, Depreciation, and amortization. It's a… representation of how much cash the business throws off. It's a proxy for that, but it's an accounting term. But think about it as the operating profit of your business. Part of your expenses can be, and in many small businesses, you will have expenses that aren't going to be taken on by the buyer. I'll give you a great example is, you have a car lease. So you have a car, and you have the company pay that car lease, which is reasonable. But the buyer doesn't need that car, and… because it's your car, and you're walking away from the business at some point in the not-too-distant future, so that car lease is gonna stay with you. Well, that means that your expenses, which include that car lease, you're gonna be able to add back. You're gonna be able to adjust the profits upwards to represent the fact that that buyer is not taking on that car lease. Or, maybe you have one-time expenses that impacted your profitability over the last 12 months. that are not going to recur. For example, let's say you built out a whole new section of your store, and you added some furniture and fixtures, et cetera, et cetera, that you're not going to need to do next year, or the year after, or the year after. It could last for years. Well, that expense you want to take because you get a tax deduction, but it's not going to recur. It's not going to go forward. So you're able to add back those expense… one-time expenses that the buyer will not take, or will not have to pay, when they take over the business. So that gives you this adjusted profit, and that's a very important, number. From there, there's gonna be a multiple, right? So, whatever that multiple is that makes sense, it could be 3 times, maybe on the lower end, and maybe 6 times on the higher end, so that's how we get to 15 million to 30 million in this example, 3 to 6 times 5 million. But that multiple will be dictated by a number of factors, and we're going to talk about what that is, though that multiple is negotiated, and there are ways that you can increase that multiple by doing things well in advance. Literally, sometimes 2 to 3 years in advance of going to market and talking to potential buyers. you can do what's necessary so that when you go to market, when you go to sell the business, you get a higher multiple. So we're gonna talk about that.
Butch Blum: Planning and preparation, as William has indicated, are crucial. you really need to anticipate and prepare for it. You know, I kind of laugh because, you know, when William talks about, you know, the value of being 3 to 6 times EBITDA, EBITDA was something I'd heard of. I was not an accountant by trade, and it was always a little intimidating for me, because I never… I don't think I ever wanted to really understand what it meant. But, you know, once I kind of figured that out, and realized, as you well know, that many retail businesses do have concrete expenses. That are add-backs, but so many smaller to mid-sized retailers, tend to run their lives through their businesses. So, again, in terms of preparing for this, one of the things that you want to do is you want to make sure, because you want a healthier bottom line, that as you're approaching. this transaction. that some of the more obscure expenses that you are running through your business, you're not doing that as often, because you want to improve your bottom line. Hence. When you take the multiple, the value of your business is gonna be greater.
Management One: Gentlemen, I actually have a question from one of our audience members here that pertains to this. David is asking, or stating, I pay my spouse $80,000 for bookkeeping, but she only works about 10 hours a week. Is there a legitimate add-back opportunity there, or is that a red flag waiting to happen?
William Lieberman: That's a legitimate add-back. So, the way that you calculate it is, how much would it cost to go to the open market and hire a bookkeeper to do what your wife is doing, and let's say it's $20,000 a year, then that delta, the $60,000 variance. Is a legitimate add-back, because that buyer is gonna just go bring on an actual bookkeeper to do it for much less money. And we see that all the time. It's a very common thing, where you have somebody in the family doing something, you're paying them a little bit more than market rates, so that you can get a little bit of a tax benefit, which is completely normal, and we see it all the time, and buyers see it all the time as well, so it's a very common adjustment. So, when we think about, the multiple, right, so there's… there's one lever here, which is, as Butch was talking about, is making sure that you have a profitable business, and thinking about what the ad backs are, and just like David's comment, or question, what are… what… how do we increase that adjusted EBITDA number? Well, that's sort of one lever that you can pull. The other lever is… How do we increase the multiple? So it's a multiple of profits. So you can increase profits, of course. But what do we… excuse me, what do we do to increase the multiple? So, things like, making sure that you, obviously, you have growing revenues, growing profitability at your, at your store, and if you have more than one store, each individual store has that growth, history of growth. Making sure your lease is transferable. So, if you're thinking about renewing your lease. let's go take a look at it as part of the negotiation with that landlord. Hey, I need this lease to be assignable, right? That's a condition for me to remain in this location. I've been a great tenant for the past X number of years, maybe even pay a little bit more. You'll give them a little bit of a bone, say, instead of X dollars a foot, I'm gonna pay, you know, X dollars plus 5%. Because this is a… Infinitely valuable term and condition that you want in that lease. If you have, repeat customers, that's a great, great thing that really will increase your price, because a buyer will be able to tap that customer list when you are gone, and have them come back. So they'll be able to email out everybody, hey, you know, we have this new, you know, sale, happening, or new product line, or whatever, that they can then sell into that base. much more easily. So having that customer list is very valuable to a buyer. If you happen to have online presence, and you sell e-commerce, that's another way of increasing the value of the business, because the overhead is way lower, obviously, so that's going to be something where the margins are higher, potentially, and could be growing, could be growing much more quickly. So there's… there's all sorts of opportunities to think about, how do you increase that multiple, and e-commerce being one of them. And so you want… these are things that take sometimes years to put in place, and so that's why, you know, when Butch and I talk about, hey, you need to be prepared, that's one of the things that we're talking about. Adverse impacts, right? So, obviously, the converse, if your sales aren't growing, you know, if the sales are shrinking, but other adverse impacts, like we mentioned earlier, is, you know, if you have slow-moving inventory, right? So you want to make sure that you are moving out and getting rid of that slow-moving inventory, so it's not on your books and not a drag to your balance sheet. And again, a buyer's gonna dig in on your balance sheet in detail, so you want to make sure that you get rid of any, dead stock. If you happen to have It all depends on the type of business. Most retail businesses don't have, one customer that's, like, 60-70% of the business, but if you have customer… what's called customer concentration, that can be a problem. Sometimes there's a specific channel, so if you're selling, fashion goods, and there's a specific distribution channel that, that you're selling through, and it's one distributor that's buying from you, and you have a wholesale part of your business, let's say. You need to be careful, because if that one distributor or one wholesaler goes out of business, and you lose a third of your revenues. That's what's a risk to a buyer. If a lease is tied to you personally, or you're personally guaranteeing a lease, right? So, unwinding that is difficult, and again, there's a risk to that. And the business has to be able to run without you. So, one of the ways I always like to think about it is. Can you take, let's say, a 3-month sabbatical? You know, go to, you know, Europe for 3 months, and the business doesn't miss a beat. That's a great test. Right? So if you have people in place that can make sure that, you know, the trains are running on time without you. That's a fantastic opportunity for you to make sure that you have a business that can survive and thrive to the extent that it can without you, i.e. under a new buyer's umbrella.
Butch Blum: Just to underscore one of William's points here, he's talked about assignable or transferable leases. And, I can't… I can't stress enough how critical that is in the sale of your business. I signed many leases over my lifetime, and you know, there's what they refer to as boilerplate kinds of, really, you know, things, boilerplate clauses in most leases. And in many leases, an assignable lease is part of that. But not always. And it wasn't really until we were preparing to sell our business that I really discovered how critical it was. because… I had to meet with the prospective buyer and the landlord, to consummate the deal. I needed their approval. And the landlord stated to me, you know, hey, we can't unreasonably withhold consent. And I thought for a minute, and I thought, oh yeah, that's in my lease. But again, it's not in all leases. And had that not been there, that could have been a major stumbling block to selling our business. Another retailer who was a friend of mine, wound up, Basically, selling his leases, which is referred to as key money. to two other international tenants, and was able to retire and walk away from his business with a very sizable chunk of change in his pocket because of the fact that these leases were favorable, they were below market. And they were totally… You know, in his hands. So, very valuable.
William Lieberman: And by the way, Butch, that's a… it's a great nuance in a lease, to have the phraseology, if you will, that says the landlord has to provide his or her consent, but that consent will not be unreasonably withheld. That's a really key phrase. Everybody should have that, written down, because when you go to negotiate a lease or renegotiate, if they're sticklers on, well, I gotta be able to, you know, I want to have a unilateral right to, you know, veto this. You say, okay, well, how about this? You know, that right will not be, you know, the right for us to transfer will not be unreasonably withheld as a compromise step. Alright, so, The profit that, you know, buyers are gonna pay isn't always on your books, meaning this is… we're gonna dig in a little bit on the ad back. So I talked a little bit about add-backs before. I used a car lease as an example. David, I think, said he has a spouse doing the bookkeeping, which is a little bit above market. So this is… these are some more examples, and it's really important because This will significantly, change the value, or could significantly change the value that a buyer will pay you for your business. So, if you think about, on the, on the right here, we have, if you have $100,000, and $100,000 in adbacks means $100,000 of expenses over the last 12 months. That you can actually defend as being one time, or a bug market, or something like that, and somebody's paying you five times that. well, that's half a million dollars in your pocket, just by identifying and defending what those adbacks are. And this is a critical piece to any M&A deal. Anytime we're selling a business, we always spend a really good amount of time digging through the adbacks, because They really can change the needle very significantly. Things like… If you pay yourself, above market. So, if you pay yourself $400,000 a year, which, you know, may or may not be, reasonable, but could be significantly more than it would cost for you to hire somebody. So, let's say you say, I'm going to hire a store manager or general manager for this business, but let's say, a general manager for this location. And, you know, I need to pay them if I go out on the market, and there's a way to do this, looking at salary studies, and Salary.com, and, you know, we have a whole compensation database we use. If that job pays $200,000, and you're paying yourself $400,000, well, that difference, you're paying yourself more than the market rate for somebody to do the same function. then that's an add-back. That difference of $200,000 is an add-back. If you had a one-time expense, again, over the last 12 months, you had a lawsuit, and you paid your legal firm, paid your law firm. whatever. $30,000, $3,000, it doesn't matter, whatever the amount is, or there's a settlement, and the dollar amount for the settlement you expense. That's all added back, because that's not gonna repeat. The buyer's not gonna have that lawsuit. The buyer's not gonna have that expense hit his or her books, when they buy the business. If you have a build-out on a new system, or new, again, new part of the store, and you had to go get board approvals, and contracts, and all sorts of stuff to do that, again, those are all one-time expenses that will not recur, and again, the personal expenses, your car, or maybe you have personal travel, or you take your wife out to dinner, and you run that through the business. I do that myself, right? You can add all that back. You just have to have very clean records, right? So, in your accounting system, you need to be able to mark, hey, you know, this is a potential add-back, I want to be able to delineate what that is, I have to have receipts and the general ledger tags, so that you can easily create a report. This says, here are all the add-backs, as you go to that negotiating table. Right? A buyer's gonna, you know, arm-wrestle with you about them. So you need to be prepared, and you need to have all the detail, you need to have the receipts, you need to have the salary studies, if that's appropriate, but you need to have this well in advance of selling the business. Alright. So, what are other things that can impact adversely, the price that somebody's going to pay, or maybe even crater a deal? And we had a client Where they had… it wasn't, it was, I think about a $20 million service… it was a services business, it wasn't a retail business, but their financials were such a mess that the buyer would… came in, and they go, I can't even tell what your revenues are. I mean, literally. We can't tell. And they walked away. And, you know, the seller lost millions and millions of dollars, because they couldn't… justify what the profit and loss on the income statement, what those numbers really were. And so, it causes a red… this is a red flag when you have messy financials. If the buyer has to spend a ton of time and energy disentangling, or it's just literally not GAAP, meaning generally accepted accounting principles, if it's not GAAP, then, you know, that could risk the deal completely. Make sure you close your books every month. You should have 3 clean years of financials. You don't necessarily have to have audited financials. But you need to have an outside accounting firm do a review as you go to market, and you need to show the buyer that somebody else has actually looked over your financials and has blessed them as being accurate. And that's really important. leases we already talked about, but you should look at your lease. You should look at your lease now, right? You should know what language is in there, and as you think about either an exit or maybe just renewing your lease, should… does that language need to be adjusted? Inventory, clear out any aged stock now, and then make sure your system, reflects what your actual physical inventory is. And then, does the business… can the business function without you, right? So, build a team. It doesn't have to be, you know, like a hundred people management layers, that's not what we're talking about, but if you had a couple people that could do, and you could split your functions among a couple people on the team, that's a great start. So, make sure that vendor relationships, buying relationships. other key constituents that you have to deal with. You have somebody else that can play your role as needed. This takes a while, right? So if you want to sell a business, you know, it could take, a couple years to plan and prepare and put in place some of these mechanisms that we're talking about. And then running a process could take 6 to 9 months. Sometimes, if it's really complicated, or, you know, the buyers go back and forth, and they have cold feet, you have cold feet, sometimes it takes a little longer, but, you know, typically, you know, 9 months plus or minus is kind of what we think about. I've seen deals close faster that are very simple, where somebody's super prepared, and they know the buyer, maybe the buyer's a competitor down the street. it ran really smoothly. But, you know, that's… typically not what happens. There's always hiccups. And that's one of the other things I always want to tell people is. Be prepared for the roller coaster. It is a roller coaster, it is emotional. You think you're there, and then all of a sudden the buyer says, no, or, you know, the buyer plays games and say, hey, at the last minute, we're gonna change this or change that, and then you have to decide, is it worth it to continue? Maybe you… You know, play a little bit of, poker, right? Definitely sometimes a little bit of poker comes into play, where you say, alright, I'll walk away, I'm not… I'm not in a hurry to sell, even though you might be. So there's that rollercoaster in making sure you understand the various pieces is important. The time, there's cleanup work, right? So, making sure their books are clean, the releases are reviewed, the inventory, etc, building up a team. That could take a year or two. Knowing your numbers, your add-backs, stress testing the profit, all of that. you have to understand the numbers well enough to be able to communicate that to a buyer, right? Here's my revenues, here's my growth, here's my profitability, here's my operating expenses, here's my add-backs, etc. You need to be very facile at a high level with your numbers, so that the buyer knows that you're on top of how that business functions. Then you go to market, and that's where an advisor comes into play and helps you package up the business, market the business, put together the data room and all the documents. negotiate all of those pieces, it can be kind of complicated, and if you haven't been through it, and you don't know what you're doing, you can really get caught up, and you'd be one of those Cautionary tales, where, you know, 70-80% of the businesses try to sell don't. And then closing. Closing, you know, usually it's about 60 to 120 days after the offer, because it takes time to do the legal paperwork, right? But, you know, the process, if you do it and you're organized, you can have a very successful outcome.
Butch Blum: William used the word roller coaster, That's a… that's a perfect description of what it is. you're selling your business. You're selling your baby. You know, you've spent your life building this business, and… it… it's something that you take very personally, and I couldn't agree more. You've got to understand your business. You've got to understand the numbers behind your business, because if you go in there unprepared, it's not going to have a happy ending. So, you need to understand, you know, the inner workings of your business, so you can explain it. to this prospective buyer. So you can justify the price that you're asking. Just as an example, when we decided to sell our business was basically, kind of in the fall of 2008 and spring of 2009. Well, as many of you remember, the stock market crashed in the fall of 2008, and we went through a pretty rough patch of about 18 months in retail. Business was not good. So, probably not the best time to put our business on the market. Best advice I got from a friend who had sold his retail furniture business recently was. hire people that really know how to do this. You know, understand that you are emotional, and you're gonna take it very personally. You need an objective second or third opinion on this. And so. the advice that I got from the person that he sent our way was. create 3 really good years, as William talked about in the prior slide. You want 3 really healthy years, you clean up all the financials, you get rid of your old inventory, and you make your financials look as healthy as they possibly can look. Whatever, you know, kinds of personal expenses that you're running through that are not true adbacks. you know, maybe stop doing those for a while, or not as many, so that your bottom line looks really healthy. So when you start talking about a multiple, a 3 to a 6 times EBITDA, you know, all of a sudden it starts looking really promising. And that's how we approached it. We had 3 record-breaking years, starting in 2010, and we listed our business in 2013, and sold it shortly thereafter. But when I say shortly, it was a 2-year Roller coaster ride. I can't tell you how many deals we made, we thought, okay, it's a done deal. And, you know, all of a sudden, we got cold feet. The buyer got cold feet. It was on again, it was off again. It was… it was tough on me personally, but we got through it, because we had some good advisors, and we had help. Don't try to do it yourself.
William Lieberman: Yes. 100%. The process itself, right? So once you've decided, I'm gonna sell, what does it take? What is the steps necessary to effect a successful deal? Well, there's putting together the package, which is the materials that a buyer's gonna look at. The financials, the forecasts, the documents that are… go in the data room, which are all the corporate documents and vendor agreements, a lease agreement, insurance, payroll, all those types of records go into an electronic vault or data room. Think Dropbox, right? Then there's the actual marketing of the business, and talking to potential buyers, reaching out to them. You have non-disclosure agreements so that they're bound by confidentiality. You're gonna have management meetings, so you're gonna present the business and the financials, and the forecast and the opportunity to the top buyers that… that the M&A advisor brings to you. The… Maybe you're gonna go to… get to, offers from maybe 2 or 3, so you'll have maybe 20 or 30 or 40 potentials, and you're gonna whittle it down to maybe the top 3. And for those, you're gonna negotiate the best terms that you can, and then you're gonna pick one, right? The one that feels the right, that has the best fit. Doesn't necessarily have to be the one with the highest price, by the way. There are multiple terms that are part of a deal, and the deal structure, and how much cash do you get up front, versus how much are you gonna get over time. There's a lot of different ways. Maybe culture, right? Maybe there's a buyer that is really, you know, family-oriented, and you're family-oriented, and you get along like, you know, peas and carrots. And they're not gonna be able to pay as much as the private equity firm. That's gonna be hard, driven, numbers, financial, you know, investor type. And that's okay, right? But you need to go in with your eyes wide open as to, well, what are the risks and trade-offs between each of these potential buyers? And then once you pick the final one that you're gonna sign that letter of intent with, then the buyer's gonna do really a deep dive on all the documents and the due diligence to understand the intricacies of your business and make sure there's no gotchas That, they didn't really see or understand. And if so, they might have to adjust something. If not, that's okay. But they're gonna make sure that they understand what they're getting into. And the lawyers will start working on the actual documents, and at some point, you get to closing, and the wires get sent, and all of a sudden, you sit back, you look at your bank account, and you go. oh my gosh, after all these years, I did it, right? And as Butch said, you know. it's your baby, and it's really important to do the best possible you can for yourself, your family, and the next sort of phase in your life. And, you know, a lot of times what we see is that people don't really think about, okay, well, what am I going to do next, right? So yes, they might stick around for a year or two to transition, or maybe they're, you know, they're gonna stick around for longer, but for people that are really taking a step back and figuring out, what am I gonna do next? That's a good conversation to start having before you get to the closing table. Because sometimes it's a, oh, okay, great, I'll go take a vacation, which I haven't had in forever, or, you know, I'm gonna go, you know, buy a really nice watch, or whatever it might be. But after that, you know, it could just be, I want to go play golf every day, and that's good. Or it could be, I want to go do this again. And we've seen that happen many times. They take that… that… those proceeds, and they say, oh, I'm gonna go do something different, I'm gonna start another store, I'm gonna do another business. There's all sorts of opportunities for you.
Butch Blum: January 1st, 2016. One of the happiest days in my business life. That was the day that the wire hit our bank account.
William Lieberman: And it's great, right?
Butch Blum: It was wonderful.
William Lieberman: Sometimes it's surreal.
Butch Blum: Yes, it still is surreal. My wife and I pinch ourselves often.
William Lieberman: As Butch mentioned earlier, having the right advisors, are critical, especially, you know, for people that haven't done this before, haven't gone through the process. You know, an M&A advisor runs the process and is a dispassionate voice And represents you and your interests, and can be that, you know, somebody who's gone through this multiple times. And can show you, you know, if you think about this, here's a way to get around that, or here's how to de-risk this. Or here's what, when the buyer says this, they really mean that. All that great advice is critical and pays for itself, you know, 10 times over. So have a really good M&A advisor, have a really good M&A attorney, to draft, the agreements so that they're favorable to you. As much as possible. There's always gonna be back and forth in terms and conditions that you have to, you know, arm wrestle with the buyer a little bit, and the buyer's attorney. the financial advisors, so cleaning up the numbers and all that, before you even go to market, that's important. And tax. Tax planning, is critical so that, you know, you minimize the tax by as much as possible. It's not… you can't, you know, you can't completely eliminate it, but to the extent that you can structure a deal in a way, and we've seen this many times, where you save 10% of the enterprise value in taxes, right? And so if you're selling your business for half a million dollars. 10%, or I'm sorry, you sell the business for $5 million, 10% is half a million dollars. I mean, that's real money. So by just doing the proper structuring, and you do it from the beginning with the potential buyers, you say, hey. I'm gonna do… I wanna do the deal structured this way, and making sure that that works for you, buyer, that's critical. And again, these advisors pay for themselves, because they're gonna either increase the value of the deal just by, you know, negotiating properly, or they're gonna de-risk the deal, tremendously by ensuring that you are protected.
Butch Blum: 100%.
William Lieberman: So what we do, and one of the things that we talk about with our, clients, is think about how do we make sure that your books are clean, we have the books closed, we have the proper documentation, add-backs are documented properly? One of the things we didn't mention earlier is, If you have a lot of personal costs intertwined with your business, you want to disentangle that. You can… you can have a sort of a separate section in your income statement, but you really want to, you know, start to be… run the business a little bit more professionally, because the buyers are going to see that, recognize it, and they're going to reward you for it. Making sure you understand the numbers, that's all critical. And then this way, the buyers will get a better picture. So if you… if you do this, and you close your books, and you have your ad backs documented, etc, and you have a clean shop, all the I's dotted and T's crossed. then the buyers are going to pay you up for that, right? So, you need to make sure that you do what's necessary to maximize the value of the business, and to maximize the probability of success. And that's one of the things that we do all the time. Lastly, 3 questions that, just as a takeaway, make sure you know your numbers, you know, what's the profitability of your business, and do you know that those are clean and good and accurate? Can the business run without you for 90 days? Make sure you have a team that can take over for you if necessary, and back to the leases, making sure that you can confirm that you can actually transfer the leases, and if not, what can we do in advance of something happening so that you're not scrambling at the last minute?
Butch Blum: Anecdotally, William, one of the things that we did at the very end of negotiations that really helped, to close the deal, we had two key employees that had been with us for many years, one for 22 years and one for almost 40 years. We basically bonused them enough money. That they were able to buy a small amount of stock in the company. So they knew that, at exit time, in terms of my exit, my wife's exit, there was going to be a nice little chunk of change for them. And at the same time, as part and parcel of that agreement, we negotiated a contract for both of them with the new owner, so that they would be staying on board. And it made for a much smoother transition, and I think everybody was happy as a result.
William Lieberman: Yeah, good idea. Alright, Nico, I'm gonna loop you back in.
Management One: All right, so questions here, and I went ahead in chat, and I put William's email, and I put Butch's email. If you're too shy to ask a question live here, just fire off an email to them, and they'd be happy to provide their expertise. I saw one question in chat from Tom, and let me scroll up, he's asking… Do you see companies that have both brick and mortar and online sell just the online business only, and then shut down the brick and mortar, since it has a lease or something else that might not be controlled?
William Lieberman: Yes, so, yes, we see businesses that split, either, like you said, bricks and mortar and online, and they can sell one or both of those, and if, you know, the bricks and mortar can't be sold, yes, it can be shut down. So, yeah, I mean, by… the important thing is to be able to delineate in your accounting records, here's all the profits, revenues, profits, cost of goods sold, etc, for the… each business as a standalone. So you need to be able to cast your numbers as if they were standalone businesses. Now, that's hard to do because You need to allocate your overhead expenses to each of the businesses, and, you know, there's easy ways of doing that by just doing it pro-rata based upon the revenues that each business generates. You can get fancier, but you need to spend some time Again, sort of preparing your books so that you can present each of those business lines separately, and then, yes, there are opportunities to sell them individually.
Management One: This one's actually a related question. Mark is asking, I have 4 store locations, should I sell them all as a package, or is it possible to pick them off one at a time?
William Lieberman: So, in my experience, you're gonna get a higher multiple by selling a bigger entity. So, simply by nature of having 4 locations. Instead of selling an individual location for 3 times, maybe you sell all 4 locations for 5 times, what's called multiple expansion, because it's a bigger entity, and a buyer's gonna want to pay you more for that… more of the revenues, more profits. There's a bigger footprint. It's just more… a more valuable business by having multiple locations combined under one big umbrella.
Management One: Makes perfect sense. Final one here from Phil. Does the type of retail store matter? I run a specialty jewelry store. Are the buyers and multiples different from, say, a sporting goods retailer or a home goods store?
William Lieberman: Yeah, so, yeah, for sure, there's gonna be… and this is gonna be, somewhat dependent upon the economy and where we are in cycles, so there… everything goes through cycles. there was a time when, you know, golf was huge, right? And actually, it's probably now. So people were paying more for golf and golf-related, properties. Jewelry, right? So, jewelry goes through cycles just like anything else. So, depending upon what inflation is, depending upon the macroeconomic, variables in the country, they will definitely go through different cycles, and different multiples will definitely apply. So, if you have a And part of it, too, is… you know, how… how many people are there that are potential buyers, right? So a jewelry store, there's lots of potential buyers. If you had a store that sells stamps and coins. A lot fewer buyers, a lot lower multiple, right? So, the type of business absolutely will dictate what that multiple is.
Management One: Excellent. Tom had a follow-up question. So he's asking, when do you start talking to an M&A advisor? He says, we have clean books with a part-time bookkeeper and CPA. Do we use the advisor to review a couple years out?
Butch Blum: At least, at least a couple years. I'd say probably more like 3 to 5. As far in advance as possible, be prepared. What do you think, William?
William Lieberman: Yes, I mean, we work… we've been working with clients for sometimes more than 5 years, but that's unusual. But typically, we start the conversations around 3 years, in advance. And what we're thinking about is… One of the things that we do is talk about what we call value creation. Like, what can we do as advisors to help you increase that multiple between now and 3 years from now, so that, again, we maximize the dollars in your pocket when we go to sell? And some of that is you know, it's not financial engineering, it's actual management consulting and strategic insights as to, well, what makes this business, or what could make this business more valuable. So if you do this, this, and this, or if you tweak that, we can get you from 5 times to 6 times, maybe, right? So those conversations take time, and making those moves take time. So, I would start about 3 years in advance.
Butch Blum: And understand that, you know, what William just said, in creating a multiple, you know, going from 4 to 5, or 5 to 6, you know, on a $5 million business is $500,000. So, it's… We're not talking small num