This episode focuses on the realities of selling a business, especially in the lower middle market (businesses under ~$200M in revenue). Here's a breakdown of the main points Steve covers:
- Role of an Investment Banker (Sell-Side): They guide owners through preparation and the structured sale process to maximize outcomes. The biggest "competitor" is often the owner trying to sell DIY—possible, but owners usually miss value-creating opportunities due to lack of specialized expertise.
- Preparation (Ideally 3–5 Years in Advance): Start early to boost value. Common issues include over-reliance on the owner (e.g., as top salesperson), weak teams/systems, or messy financials focused on tax minimization rather than showing true earnings power (EBITDA).
- EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is the key metric buyers use as a proxy for cash flow.
- Adjust for owner perks/non-recurring items to reveal "true" earnings.
- Build transferable sales teams, pipelines, regional presence, clean books, accurate product costing, etc.
- Example: A client left money on the table by not expanding regionally; the buyer did it post-sale and doubled the company.
- Valuation Basics: Often an EBITDA multiple (e.g., 5–10x depending on industry, size, growth; lower end ~5x for smaller deals, higher for stronger ones).
Enterprise value = EBITDA × multiple.
Equity value (what owner gets pre-tax) = Enterprise value − debt + excess cash.
If the business depends heavily on the owner, multiples drop because it's less attractive/transferable. - Sale Process and Timeline:
- Preparation phase: Deep dive, recommendations (often referring to specialists like exit planners, financial consultants).
- Active sale: 6–12 months typical (12 more realistic); faster (e.g., 60+ days) possible with a ready buyer and clean financials, but broad auctions take longer.
- Outreach to many buyers (strategic/competitors vs. financial like private equity) via databases/relationships—often 100–700 prospects screened down.
- Private equity has massive "dry powder" (~$3T mentioned), but some owners hesitate; strategics can be easier/faster due to industry familiarity.
- Team and Advisors: Quarterback the deal; recommend specialized M&A attorneys (not generalists), tax experts, etc., as day-to-day pros often lack deal experience and can slow/kill transactions.
- Post-Sale Realities:
- Buyers often require "rollover" equity (e.g., 20–30% with PE buyers) for alignment/"second bite at the apple."
- Transition periods: Sometimes walk away clean, but often 3+ years expected if the business isn't fully independent.
- Plan early—build to sell (e.g., reference to books like Built to Sell).
- Other Notes: Emphasizes starting planning "yesterday," collaborating with advisors (financial, legal, tax) early, and avoiding last-minute tax-only focus after a sale.
This is practical, grounded advice for business owners thinking about exits. It stresses that while owners know their business best, specialized advisors like Steve's firm bring buyer perspectives and process expertise to capture more value.
What is Wealthyist?
Wealthyist, the podcast that discusses the lifestyles, choices, and strategies of the wealthy. Each week, the Annex Private Client team talks to experts in a variety of areas to discuss trends and paths visited by people who have built or are in the process of building significant wealth.