The Timing and Considerations of Selling a Business with Nicholas Spezio

Show Notes

Nicholas Spezio, Director of Transaction Services at Expo Group, discusses the world of private equity and venture capital. Private equity firms invest capital into mature businesses with long-term growth potential, often seeking a controlling stake. Venture capital firms, on the other hand, invest in early-stage companies in exchange for equity. Spezio emphasizes that private equity investors are attracted to recurring revenue-based businesses, while venture capitalists are interested in early-stage investments. He also discusses the timing of selling a business and the challenges that entrepreneurs face when transitioning to being an employee after selling their business.

• Private equity firms invest in mature businesses, while venture capital firms invest in early-stage companies.
• Private equity investors are attracted to businesses with recurring revenue streams.
• The timing of selling a business depends on the owner's future plans and goals.
• Entrepreneurs should carefully consider their reasons for selling and the long-term implications before making a decision.
• Integration post-acquisition can be a laborious process, requiring financial and operational due diligence.
• Working capital calculations can be contentious in deals, and sellers should be prepared for adjustments and negotiations.
•  

Creators and Guests

Host

Barnaby Cook

What is The Exit Plan: Mergers and Acquisitions for Creative Entrepreneurs?

The Exit Plan is for business owners that are interested in learning more about how to sell their business. Each episode Barnaby Cook interviews someone who has bought or sold a business - either a creative agency, or a production company. The conversation gets under the skin of why they wanted to sell, or were looking to acquire, how the deal was structured, how they agreed upon a valuation and what lessons they learnt along the way.

It's sort of, I always find that a bit
scary, the countdown.

Cool.

Yeah.

So if you could just start by introducing
yourself and telling me a little bit about

your background, that'd be

Yeah, absolutely.

Nicholas Spizio, I'm the Director of
Transaction Services at Expo Group.

We're a boutique advisory based in New
York City with two main arms, the first

being a corporate advisory arm where we do
office of the CFO, finance as a service

support for primarily venture -backed seed
series A, series B type businesses, as

well as some private equity backed
businesses and some owner operated and

founded businesses.

There's the other arm that we have is the
transaction services one, which I lead,

which is helping buyers and sellers
navigate the acquisition lifecycle.

Prior to my time at Expo Group, I was in
public accounting, most of which at

PricewaterhouseCoopers, PWC, auditing big
hedge funds based in New York City.

So Tiger Global was my first client, which
was in the solo West building.

So I got to go up there and look across
and see Central Park and audited a bunch

other big funds and clients like Vanguard,
Fidelity, JP Morgan, a bunch of other

alternative investment funds

Okay, great.

Yeah.

used to, my previous video production
company, we used to do a lot of work for

PWC in New York.

So yeah, came into that office quite a few
times.

What was it?

300 Madison?

that the?

Yeah.

Yeah.

I remember it well.

Yeah.

Many times, many times.

Yeah.

So yeah, I know.

Well, there's a lot of people in that
building.

never know.

Yeah, I'm kind of interested in the sort
of venture capital, private equity side of

things, because I think for a lot of my
listeners, that's like quite a mysterious

world.

And it might be quite useful to just sort
of explain a little bit, just from your

perspective, kind of what private equity
are looking for when they're looking to do

a deal and what venture capital are
looking for and kind of what the

difference is.

I don't know whether that's something you
can speak

Absolutely.

Yeah, I mean, I think the underlying
premise and concept and thesis for private

equity is they're taking capital from
limited partners, endowments, all sorts of

sources, and they're trying to invest it
into companies that are typically

privately listed or private companies that
they can see some sort of

long -term growth plan with and
potentially a strategic fit into an

existing platform or an existing business
and something that fits well with what

they're trying to do.

There's sort of a plethora of reasons of
why private equity goes into a business or

an industry or any sort of kind of move
that they make.

But for venture capital, it's a little bit
different because with private equity,

they're looking at more mature based
businesses.

And typically in private equity, they're
looking to do more of a what's called a

majority recap, is recapturing or changing
ownership doing a control event.

So buying over 50 % of the business or a
complete buyout.

With venture capital, it's more of an
early stage investment.

It's what they call a seed round, which is
really, really early on, one of the first

rounds.

or a series A or a series B.

So as they continue to grow and as they
continue to mature, they do different

types of rounds, whether that be an equity
round where they're continuing to raise

more capital and issue more shares, or
whether they're raising some sort of

venture debt based on the type of
financing and based on their capital

structure.

Yeah, it's interesting with the private
equity thing, actually, because they don't

necessarily need 51 % to take a
controlling stake.

I've seen them take less than that.

But you know, write certain terms into the
deal that give them the control.

They're very good at

Exactly.

Gotta read the purchase agreement.

Yeah, yeah.

You know, yeah, again, a sort of a lot of
a lot of my listeners are, you know,

creative agency, production company,
owners.

What, what would kind of interest private
equity in a sort of smaller service based

business and kind of, you know, what point
do think they would think it would be a

strategic fit for

Great question.

Private equity and investors in general
love recurring revenue based businesses.

So any type of business where there is
expected recurring revenue streams that

they can really count on and they can
forecast on is something that's going to

be intriguing to them.

They don't really like businesses where
there's a lot of transactional non

-recurring one -time events that it's hard
to forecast and plan for.

I don't know if there's a right point, a
right enterprise value, a right revenue

mark, a right EBITDA because deals happen
all over the spectrum, all over the lower

middle market.

And it just really depends on if it's a
strategic fit for that investor and

whether they see an opportunity to invest
in.

Yeah.

So, okay.

And this is more kind of a question
focused around kind of owners and when the

right time to sell is.

Cause I think, you know, loads of small
business owners kind of have that debate

with themselves on an almost daily basis,
right?

You know, some days they're like, I just
want to get rid of the business and go off

and do something else.

And some days they're like, no, no, no, I
totally believe in this.

I'm going to do this forever until

I die.

So yeah, I don't know, kind of what's your
thoughts around like timings and when a

good time to sell

It's a, it's a bit of a loaded question.

I mean, it really depends on what the
seller foresees as what they want to do,

uh, you know, with the business and in
their future, I think a lot of times with

the sellers that we see, these are sellers
that have owned their business for 20, 30,

40 years, and they're sort of selling
because there's no one else in their

family that they want to kind of give it
to, or, you know, sell it to.

And, um, it really just depends on kind of
where they see.

their future for a lot of the sellers that
we work with.

They're going to stay on with the private
equity investor or the platform for a

couple of years, but then they're going to
sunset and that's really it for them.

And they're in the later stages of their
career.

And that's what they kind of see what they
want to do.

Others, maybe younger founders or
entrepreneurs or business owners.

It really depends on again, what it is
that you want to do and the reason that

you're taking on this capital or this
reason that

bringing on some sort of investor and what
that strategic long -term perspective is.

Is it a minority investment that's more so
growth equity that's going to help you

reach more customers or build a marketing
campaign or expand your product line?

It really just depends on what you want to
do and where you want to take the

business.

Yeah, it's interesting.

that you were kind of talking about, I
guess, the boomer generation and there's a

lot of talk of, you know, lot of baby
boomers retiring over the next few years

and it being this kind of big transfer of
wealth and a lot of them kind of sitting

on, businesses that, know, exactly as you
described, they don't necessarily have,

kids that want to take over the family
business.

And that's going to need to, you know,
the, business is going to need to go

somewhere.

How

How sort of in reality, like how much of
that have you actually seen?

How much do think that is happening?

With the clients that we work with, I
would say it's greater than 80%.

Yeah, yeah, yeah, definitely.

We work with a lot of clients that are
purchasing technology companies, on

-premise perpetual license -based
technologies, hybrid technologies, SaaS

-based technologies.

And these businesses are very niche.

They're vertical SaaS -type businesses

ERPs related to very specific industries
or CRMs related to very specific

industries, cohorts of clients of a couple
or of customers of a couple hundred.

So very small technology companies,
anywhere between two and $10 million of

recurring revenue.

And these are people who literally had an
idea 30 years ago, learned to code and

have built these businesses and they're,
they're looking to sell.

And what kind of deals are you seeing?

What kind of deal structures are being put
in place for that type of business?

in terms of asset versus equity or in
terms of earnouts

yeah, and kind of earn out and you know,
how it's all structured, know, how many

people are kind of just, you know, getting
a load of cash upfront versus how many,

you know, how many sort of deals are kind
of blended, you know, with all sorts of

different ways of kind of getting the
money across to the previous owner.

Yeah, it's a great question.

In terms of asset versus equity, it's
very, very mixed.

And it really depends on the type of
existing legal entity that the seller

currently owns.

And there's creative ways to kind of get
around that.

A big thing that we're seeing this year,
more than other years actually, is a

concept of F -reorgs.

So that's one way to kind of shift the
legal entity into one that's more

advantageous for the buyer as they stack
it into their...

legal structure post -close, but it really
depends.

what is that?

What's the F?

An F reorganization, it's a concept that
basically takes a pre -existing S -Corp

and flips it into an LLC because S -Corps
can't be owned by LLCs or C -Corps.

S -Corps can only be owned, they're a US
entity that can only be owned by

individuals and only have less than a
hundred shareholders.

So it's a way for them to shift the legal
entity type and then flip it into their

own legal structure.

So for legal purposes, it's an equity
deal, but for tax purposes, it's an asset

deal.

Okay.

Yeah, we have different types of sort of
company categories in the UK, but I'm

actually just buying a business in the US,
which is currently an LLC, but we're the

holding company that we're setting up to
buy it as a C Corp, because it will be

foreign owned.

So it has to become a C

Is the LLC that you're buying filing as an
S -Corp?

Do they file 1120s, Ss?

I don't know the answer to that.

Got it.

Well, that's, yeah, there's a takeaway for
you.

Yeah.

Yes, I know that.

Yes, as in it's both a pass through,
right?

So they're both reported on the owner's
personal tax return.

That's right.

Yeah, they're K1s.

Exactly.

They flow through.

Yeah, and also S -Corps can't have a
foreign owner.

right.

Yeah, that's exactly right.

So to the asset versus equity, sellers
want equity deals because all of the value

is then taxed at long -term capital gain
tax rates, which is lower in the States

versus asset deals buyers typically prefer
because it really, you leave the

liabilities behind.

You can pick and choose which assets and
liabilities you're going to assume.

Yeah, there's less successor liability and
also there's the step up in basis in the

assets that you purchase so you can re
-depreciate those.

Can you just explain that briefly, sorry,
the step up in basis?

Yeah, so when you do an asset deal, you
effectively will revalue the assets that

you're purchasing to fair value, and you
allocate those assets to different asset

classes on a form called the 85 -94 for
tax purposes.

And both the buyer and the seller agree on
the values that you're ascribing.

Typically, you need to do it pre -close.

And it can be very contentious because,
again, the sellers want as much value

ascribed to classes six and seven, which
are your goodwill intangibles, which are

taxed at your longer term capital rate
gains.

But the buyers want or should want value
ascribed to your PP &E, which are your

fixed assets, because then you get to re
-depreciate those and you have tax

advantages and benefits because you have
that expense that you can push through the

P &L.

Got it, got

software deals, there's not a ton of PP
&E.

There's maybe some laptops and computers
and desks, but typically not much.

But in more capital heavy industries,
construction companies or any sort of

business where you have equipment, it
becomes much more important to understand

that allocation and the deal structure
because there is more taxes potentially

for sellers when you do an asset deal.

And that becomes important when you
consider the dynamics of the deal in terms

of, you know, being a smart seller, if a
buyer is saying, okay, let's do an asset

deal or an F reorg as opposed to an equity
deal.

What are, what's the net impact of the
taxes that you're going to pay and should

you gross up the purchase price by that
amount?

So your net effect is

Okay, okay, yeah, that makes sense.

So I'm kind of interested in sort of
integrations as well and how that goes and

from your experience.

I guess there's how much of the stuff that
you've done is sort of trade deals versus

private equity.

Is it kind of 50 50 or what, what sort of
mix?

I would say 90 to 95 % of our clients are
private equity backed platforms.

Okay, okay.

primarily the sort of integrations post
acquisition have been with, so talk to me

a little bit about how that goes.

I've, you know, from my experience, I know
that people have sold private equity, like

the level of reporting goes up quite
significantly.

The focus on hitting targets goes up quite
significantly.

Yeah.

Talk to me a bit about the changes that
those businesses then go through and how

that goes for people.

Yeah, I mean, it's a laborious process.

It's a very significant piece of what we
do in terms of front loading our financial

and tax due diligence via our quality of
earnings to understand as much about the

business and get as granular as possible
and really even do operations due

diligence as part of our financial due
diligence to assist and streamline the

post -closed integration process because

There's a lot of work to get these
businesses, especially when they're in

their own proprietary systems, accounting
systems or whatever systems that they're

in, over to a buyer that has their own
structure, like a NetSuite ERP or a Sage

Intact.

You have to get that data over.

And then of course, you have to start to
run the books on a gap or an accrual

basis.

For you guys, it would be IFRS.

And that's how a lot of the measurements
are going to be made in terms of the

earnouts post closes.

If you have some sort of revenue target or
EBITDA target or combination of both that

you use to kind of bridge between what you
thought the enterprise value is and where

you ultimately got, you have to understand
what the books look like post -closed

because a lot of times and oftentimes when
private equity investors or independent

sponsors or even entrepreneurs through
acquisition take on financing, they then

subject themselves to an audit, which then
has to be a cruel basis.

So there's really a plethora of different
components of it, but the integration

piece is huge for us.

It's definitely a big piece.

And how do the entrepreneurs find it?

I think, know, often the qualities that
kind of make you a good entrepreneur are

not necessarily ones that make you a good
kind of employee and steward of the

business once you've sold it.

yeah, how's that been for some of the
deals that you've seen?

I, we're not as involved post -close in
terms of our communication with the actual

seller, but I've had conversations with,
some of them.

And I think there's a scale.

I mean, I think you have some that have
gotten really used to running their own

business for 25 years or 30 years.

know, they ran it the way that they wanted
to run it.

And they did things that they wanted to do
it.

And having someone come in now

owns the majority of your business or all
of your business and you're an employee of

can be a very big challenge.

And then you have other sellers who kind
of understand what they signed up for and

understand what the new goal is and what
they need to do to achieve their earnouts

and to continue to grow their business
and, you know, fit in really, really well.

And I think that's part of prior to
selling your business.

It really becomes an important decision to
really understand

for yourself, why you're selling it.

Is it because you simply want a payday?

Is it because you want to build this
business with someone else and you need

assistance?

What is the overall purpose and where you
see yourself over the next five to 10

years?

Because it's not very often that we see
sellers being released automatically post

-close.

Sometimes, but not very much.

Like typically they are in the business
for a couple of years to continue to run

it and so that they have skin in the game
and everyone's incentivized

sort of paddling in the same direction.

Yeah.

And what about for you?

Like what's, what do you enjoy about this
market, about doing &A?

Like what, what is it that kind of
attracted you to it and what do you like

about

Honestly, I love how every deal is
different.

Every single deal that we do, even ones
with smaller enterprise values, maybe call

it a couple million bucks up to the bigger
ones.

Every single one has a unique challenge
and complexity to it that you can't ever

foresee going into it.

And so in the realm of professional
services and accounting and finance,

that's really refreshing to me because I'm
someone that needs to be challenged and I

need

constantly see things that are different.

And I think the other thing that's really
interesting to me that I really enjoy and

have really loved is the strategy behind
it and really the art of the &A and trying

to figure out the most advantageous way to
get a deal closed.

And there's always an inflection point in
the deal where I think things can become a

little contentious and not exactly sure
what's gonna happen with the deal.

And I think just being able

to be buttoned up and have good bedside
manners and help both the buyer and the

seller get past those challenges to
ultimately get the deal closed is really

rewarding to me.

And then I would say the...

I'm sorry to interrupt, but I totally get
you on that.

There's always a moment in a deal where it
looks like the whole thing is going to

fall apart.

And sometimes they do, quite often.

Yeah.

I mean, we've seen multiple deals break
this year.

And I would say the third thing is, even
though we typically represent the buyer

for the most part, is I'm always inspired
and motivated by these sellers and

entrepreneurs and seeing what they've
built and seeing just the years of grit

and hard work and sacrifice that they've
put into these businesses and just the

nuts and bolts

what goes into it.

It's just really incredible to see kind of
the engine of our different economies, but

what's really driving middle America and
the lower middle market.

You have all these small businesses that
are servicing all sorts of people and it's

really inspiring.

It has been for me, it's really opened a
lot of doors and it's been good.

It's been really good for

And you mentioned kind of a few more
deals, maybe the normal having fallen over

this year.

What's your view on the current state of
the &A market?

How do you think it is and where do think
it's going?

I was a little nervous in Q1 to be totally
honest with you.

It, it, but Q1 always feels a little
slower.

Q2 is definitely picked up by everything
that I'm seeing on our desk in New York

and everything that I'm reading from the
new pitch, pitch book reports that just

came out.

Q2 was good as compared to Q2 2023.

It's up like 12 % both in deal volume and
deal value.

And they feel like it's swinging back in
the right direction from

when it was starting to kind of come down
from 2022.

So I feel very bullish and confident that
the market's going to turn back around and

we're going to see more deal activity.

I just think there is still some
uncertainty.

And I think some of the trepidation of the
sellers is you had 2021 where valuations

were so high, just extraordinarily high.

And I was talking to an investor
yesterday, one of my clients, and he's

I have sellers who are still thinking
they're going to get 20X on revenue.

it's like, no one's getting that type of
money anymore.

with the, in the U S you have the election
coming up.

Obviously there's a lot going on with
that.

have interest rates that have skyrocketed.

So financing is most, the most expensive
it's been in years.

But I think all of that stuff is starting
to cool.

And I think there's more confidence going
into the latter parts of the year.

And I do feel very confident that things

starting to swing into the right
direction.

So does your firm do, will you go out and
find targets or do you just work with

clients when they've identified a target
that they want to buy?

just when they've identified it.

We don't do buy side search or investment
banking.

Okay, okay.

And sort of how many deals typically will
you work on in a year?

What kind of throughput have you got?

We'll do somewhere between 35 and 50, I
would say.

Yeah.

And so how many people are working on how
many people are in the business?

Because that's a lot of deals, right?

That's kind of one a week.

In the transaction services business, we
have 12 people on the financial diligence

side and then we have three people on our
tax side.

Okay.

Yeah, I guess kind of what, you know,
looking at it from the seller's

perspective, what can they do to make
their business more attractive?

What can they do to start to sort of like,
prepare?

Yeah.

It's a great question.

I I think the big thing is, is you have to
really understand that the second that you

decide that you want to sell your business
and you start going to market, whether

that's organically or talking to investors
that have reached out to you directly and

you sign that LOI, it's sort of game on.

You have a bunch of people that are going
to

going through your business and dissecting
it, every single piece of it from the

financial side, from the tax side, from
the legal side, from the HR and employee

side.

And I think that can be very, very
overwhelming how quickly all of the buy

side advisors come on.

so preparing for that as best as you can
and being as prepared is extremely

important.

And it also gives you the tools that you
need to best defend yourself.

against the purchase price either being
retraded or you having adjustments that

you're really not expecting because as you
know, oftentimes deals are structured as a

debt -free, cash -free, -free with
normalized levels of working capital.

You have a base purchase price, perhaps
there's an earn out, but that base

purchase price that is quoted in the LOI
is typically not the final price that's

paid as part of the funds flow at closing.

There's typically purchase price
adjustments either to work in capital or

in that debt and debt -like item bucket.

And so for software companies and
technology companies, think the biggest

blind spot for sellers is the concept of
deferred revenue and understanding what

that looks like and understanding how much
of their cash either received upfront is

actually deferred and should be deferred
and needs to be serviced in future

periods.

And they have those performance
obligations.

Because it's a liability, right?

I think a lot of people don't realize that
deferred revenue is actually a liability.

Exactly.

And that's a liability that the buyer has
to service post -close.

And so I think there's a couple of
different ways to look at it.

the contract or the subscription is
refundable, that's huge because the buyer

has to have that cash or that liquidity on
hand to be able to refund the customer.

And even if the seller's like, well, 2 %
of our refund, 2 % of our total sales have

ever been refunded.

So 98 % is ours and we sold the contract.

There's still the element of servicing
that contract post -close.

Yeah.

And it's exactly the same in in service
based businesses as well.

mean, in, in my business in London, we had
a client in December who, know, end of

year, they were like, can we give you X
amount of dollars, hold it on account?

We've spent all of that now, but you know,
we didn't incur the costs for that until

last month, until June.

So yeah, you know,

So what did they do?

You took.

us, they gave us a lump sum.

They gave us 150 grand end of December.

then, and just said, we're going to use
this at some point during 2024.

Yeah, that's right.

So yeah, if we'd sold, if we'd sold the
business on January 1, that would have

been a liability, right?

But I think people don't necessarily see
it that way.

They kind of think, well, look, we've sold
all this business, but you have to service

it.

You have to deliver

You do.

And it becomes very challenging, I think,
both for buyers and sellers when that

conversation happens.

for us, it happens weekly.

And it's never fun.

I think that's part of the preparation is
understanding your books, understanding

your working capital, going into diligence
and understanding as part of the quality

of earnings, what are the one -time
events?

What are the anomalies?

What are your personal expenses that may
or may not have flowed through the

business?

Because ultimately,

In terms of the financial and the tax due
diligence, all we simply want to do is get

it right.

We just want to gapify the financial
statements.

We want to get to the right EBITDA
numbers.

We want to get to the right revenue
numbers.

And the more that management or the
sellers prepare and have that information

ready, the easier it is for everybody.

the less likely it is for the deal to
either get broken or to push out past the

exclusivity period.

And working capital can be very
contentious as well.

Like that calculation, there's often a
real push and pull between buyer and

seller.

how do you see that kind of being resolved
or dealt with in the deals you've worked

Recently, the way that we've seen buyers
get really creative with it, which I think

has been a great solution, is actually
covering working capital within reps and

warranties and having the seller rep that
the financials that they've prepared and

have delivered have been in good faith and
that they'll continue to operate the

business through close the way that they
always have been.

And that way there is less confusion.

less unknown in terms of what that working
capital is going to be and what that

adjustment is going to be at close.

Because I think there's multiple elements
of what makes working capital so

challenging.

One, it's just the framework of working
capital that a seller, if a seller has

never sold a business before, it's helping
them understand more than just what

working capital quote unquote is, your
current assets less, your current

liabilities, but the actual concepts of
setting the peg.

and what normalized working capital is.

And then obviously all the art that goes
into recrafting what those balances that

go into working capital is, and then past
that setting the peg and getting to a

number that both the buyer and seller
mutually agree on.

And then it's the estimate, which could be
in the buyer's favor, could be in the

seller's favor.

And then of course, truing it up post
-close.

So there's all these different markers
that kind of make working capital more

challenging when in reality,

for both the buyer and the seller, the
seller basically wants to be paid what

they agreed to be paid.

The buyer wants working capital in the
business because it's cash -free, debt

-free, and they likely value the business
based on an EBITDA multiple to get to EV.

And they need that working capital to
continue to operate the business and don't

want to infuse a bunch of cash into it or
put a big line of credit on.

So the reps and warranties has been a good
alternative approach that's been helpful.

I've just seen in a few deals I worked on
with smaller business owners, it's like a

completely new concept to them.

They're just like, what do mean I have to
leave money in the business?

That's my money, right?

Yeah, yeah, exactly.

So yes, it can be quite challenging at
times.

It is, it definitely is.

Well, has been great.

Anything else that you wanted to cover?

No, I mean, this has been amazing.

think, you know, my, my advice for, you
know, your, audience is as you can, you

know, start to contemplate or consider an
event where you exit your business, really

think hard and, and do some digging in
terms of what the next five or 10 years

look like, who the perfect partner is, or
who you want your business to go to and

what you're ultimately going to do and
what they're going to do with your

business when you do sell it, because it's
a life -changing decision.

It's a.

very arduous and challenging process as
you do sell it.

you know, really feel good and know that
you want to do it before you do it

because, you know, it changes a lot once
you do and you sign those papers.

Yep, great.

All right, well that seems like a good
place to wrap it up.

So thank you very much.

Thank you.

This was great.