Transcript

We're talking about the risk takers in the world. Maybe some of the biggest risk takers they're rational, they're brilliant, they're dreamers. It's those founders that started a business. I'm Stephanie [? Mathis ?] with Michael Yip on MYWP's MarketCast. And today we're bringing in a guest to talk about when that business owner decides it's that crucial time to sell. Stephen Ng is with Crosbie & Company. Welcome to Stephen and Mike. Good to see you.

Very pleased to be here.

So the two of you have a unique collaboration going. Can you tell me about that, maybe how it is that Stephen came to be on your podcast?

One of the things that I think advisors at big banks are sometimes criticized for is people think that we only bring in the solutions that our bank provides. That's actually a myth that we have to dispel a lot of times. For business owners you can imagine that some of the clients we work with have various levels of net worth, various needs, various personalities, and when they are going to go through hopefully the biggest transaction and most important transaction in their life it's important to find the right fit.

Sometimes our bank has a very good M&A group. Sometimes that group is appropriate for our clients, sometimes it's not. I feel it's our job to actually provide our clients our thoughts and some options and people to speak to that we think might be a better fit. And certainly Stephen and Crosbie & Co have been one of those connections that we've felt confident putting in front of a few of our clients.

Yeah, and Michael and I met, what, about a year ago barely. And I think we became fast friends because we share a similar mindset around being able to think outside the box, and coming up with solutions that actually work for an entrepreneur. If you think about wealth management and in particular managing the wealth of a business owner, it's very much a team sport. Neither of us could do this on our own and serve our clients in the way that they need to be serviced. And so it's not just the wealth manager or the investment banker, it's also the tax advisor, the accountant, the lawyer, and any other service provider that helps with the business owner who's got a million things going on and most importantly needs to focus on building his business.

If these entrepreneurs are founders, let's call them, took the risk and contributed in such a significant way to our workforce whether it's in Canada or internationally in the economy and they now want to sell, what's the first thing you say to them?

The most important thing is that clients need to prepare for this because everyone is always thinking about selling, but it's really about what you're doing about it and getting ready for an eventual sale.

But when it comes time to sell that's a once in a lifetime event, maybe twice, maybe multiple times for the very few. Tell me about the psychology of going through that with your clients.

One of the things that we want to do with our clients is to give them a realistic view as to what a transaction can look like and what life can be post-transaction. Sometimes they're only selling a portion of their business and are bringing on a partner, whether it's private equity or somebody else. And it's important to understand what that world looks like. And price is obviously something that matters a lot to entrepreneurs and everybody's thinking about it. But that can be a complicated topic sometimes because owners will always have something that's in their minds as to what they think their business worth.

But then there's the reality of a situation. And this is where I think we can add a lot of value as well because value can be created through a thoughtful sale process. It's not just standing there and saying, well, my business produces this much revenue and cash flow, therefore, I think I should be worth this.

Not to mention the emotional attachment that comes in and adds extra value or extra expectation of revenue.

That's right. Nobody wants to be told that their baby is ugly and it's no different in the business world. Nobody wants to be told that their life's work is only worth something less than what they think.

You guys always have those hard discussions.

And very close to a very prolific Canadian entrepreneur. They have substantial value and brand that was built over many decades, and everybody would know this client. What happened is that over the years their business was quite valuable for a while, and the client failed to do a couple of things. Number one, they failed to build out a proper succession strategy for themselves. Their management team is in their 60s right now and retiring. The industry changed. The wind behind the business it's certainly not there anymore, and the climate is much tougher now.

So the takeaway here is that the value 20 years ago that people quoted was, let's say, $200 million. And at the time the client wanted north of $200 million to part with the business. And I think a lot of it was ego. Today that business is probably worth less than 50 million.

And you're having this conversation in the family.

Absolutely. And they come back to saying we've invested x tens of millions into the brand. The brand has to be worth more than that. And the reality is things change. So Stephen talked about planning. You really have to have a plan. These businesses are living and breathing things that if they're not nurtured and well thought of, they could die.

But how do both of you address that emotionality that's attached to the valuation? You're both looking at me like I don't want to answer this.

Well, it's a great question because a large part of our job is, frankly, playing psychologist. So I think it's a mix of fact. It's art and science in other words, which is no different than how we value a company. There are conventional metrics you can use to value a business, but at the end of the day a company or any asset is only worth what somebody is willing to pay. I love the quote from Mike Tyson, which is everyone has a plan until you get punched in the mouth. And that's when you need advisors on your side that what they're doing and how to navigate what's happening in real time. Something could be happening in your particular industry that impairs valuation. Another war breaks out. Who knows. Anything can impact value. So in other words we as investment bankers we have to make a market.

It's not like you're going to a chart.

You can't just hit the sell button and say, we're going to sell 100% today and that's it. And so how do you make a market? It's complicated. And that's where we come across business owners sometimes that think that selling a business is not that much more complicated than selling their house. It's the same intuitive logic and negotiation process.

And what I find is a massive disconnect psychologically is that as you know you're a business owner and they've gotten the call from a competitor or they've gotten a call from private equity. Private equity has been very aggressive. They go down a list and they call every private business owner and talk to them about how great their business is. They take them for lunch, they wine and dine them, and they give them a number. And that number is probably a bigger number than they've ever heard before. And they're very flattered. Some of them will entertain going through a private sale process without having an advisor involved. And what amazes me--

Stephen, you mean?

Stephen. What I think is you wouldn't do that with your house. Why would you do that with your most valuable asset?

And there's a technical term for that. It's called the country club valuation, where my friend Bob at the country club sold his business for x, so therefore I surely I must be worth that. We hear that all the time, and that's the extent of how people think about valuation in simplistic terms sometimes.

That's bragging rights too. They want to be able to go back to the country club to tell Bob that they just got the same [INAUDIBLE]. How much do we know about what drives a successful exit?

One is the preparedness of the information. And it may sound so basic, but it's easy to throw a number out. Michael said people are calling people all the time and saying, I'd love to buy your business and I'm prepared to offer this. It's easy to say it, not so easy to actually do it, and write a check for that basis. People are going to go through due diligence, and with how difficult the financing markets have been for the last year and a half, due diligence is absolutely at a premium, where folks are taking their time to evaluate what they're truly buying to make sure that they're actually getting that.

You may think something is worth x, but unless you create some competitive dynamic around it there's no way to ensure that you get that price. And then the funny bit is all the other soft factors around how you come across, how you position the value of your business, the story you tell, and most importantly positioning the value of you as an entrepreneur. Not every sales situation is when a business owner just wants to wipe their hands clean and walk away. Sometimes the business owner wants to be a part of that new story going forward. And private equity, as an example, loves to back the jockey not the horse. So they're going to evaluate you as an individual.

Meaning they're on the hook to continue working even though they were thinking they were out?

Absolutely. But they'll do that because they think that the second bite at the apple is going to be bigger than the first. You sell a portion of your business today at some value, but together you're going to grow the remaining entity to something even bigger.

If they pick up the phone and call me and say do you an M&A advisor, I think that that's too late in a way. I have a belief that they should be working at this five years before, ideally.

Just as an example, with the proposed changes in capital gains tax it's really stirred up a lot of thinking amongst business owners that maybe weren't prepared to move on a sale as quickly. So there will always be things that are within your control and things that are outside of your control.

If you were going to talk to someone about due diligence, what should their expectation be in terms of a time frame?

I think it varies. I think it's more along the lines of being prepared to have every stone turned over. And sometimes there are some things you can do ahead of time to ensure that the story you're presenting and the data you're sharing are better positioned. Are you really a data-driven business or are you an entrepreneur that just operates on gut feel?

But the due diligence is going to require documentation. Here's a scenario I think comes up fairly often, where you're coaching someone to go from the concept of a legacy succession to the reality that a family member doesn't want the business, or that no one that they know wants to take over the business. How do you handle that, Stephen?

The beauty of being able to run a process is that it provides options. So a family member may ultimately change their mind as you're going through a process and realizing that wait a minute I'm no longer going to have any association with business, maybe I do want to stay on. But the key is you won't until you run a process to figure out what the business is worth, who is actually interested in buying your business, and what role you may or may not have in the business going forward including your family members.

But this is a scenario that you encounter?

We see it quite often. Again, I would say, let's take the opposite scenario where there is an apparent heir who's going to take over. We've seen situations where that heir suddenly runs into personal financial challenges and can't afford to pay their share to take over the business.

Do you have those conversations with your clients as they come in?

All the time. We tend to have those very, very long-term relationships where it will probably go over several generations. As a result of that we're having some really meaningful conversations about what they think about their kids taking over the business, what they want from their kids. Less than 50% of businesses transfer from the original founder to the next generation. And less than 3% of the businesses transfer two generations. So grandparent to grandchild as an example. It is very rare that it actually gets to multiple generations.

And the way I look at it is you have objectives for your children, which are they're safe, they're thriving, et cetera. It's not necessarily true that attaching them to the business will help you as a parent achieve those objectives. You have to have a family discussion about what's the right thing to do with this wealth that's created, and is it going to help the next generation after that thrive? I have two daughters, and I don't think that they have a birthright to my practice. And I don't think that they would be necessarily in the best position to give our clients advice because they don't have my experiences.

Now if they built a career and showed an interest, and I felt like it was a value-creating strategy to have them in the business, I would consider it.

To be fair need to give them about 15 more years.

That was good.

So last question is more a question from the heart. You're both navigating very critical times inflection points in someone's life. Do you have an understanding and how do you tackle the impact of your roles in their lives at that time? The transition of what happens after they leave a business.

I think of the saying that it's lonely at the top. It's absolutely true. As a CEO or an entrepreneur or owner of a business, sometimes you don't have anybody to bounce ideas off of or to share your biggest fears or concerns about the business. And we oftentimes step into that role.

It's a partnership at that point with you?

Ultimately, we're going to get hired because the founders they trust us and there is a rapport there to not just execute on what we've been specifically brought on to do. We have to serve as that confidant.

We go through all their life events, their happiest events, their saddest events. And I think a big part of what we do is, again, be someone to talk to that can provide some frame of reference or guidance. And frankly, we're sometimes navigating unique events together.

What do you want people to remember from this discussion?

We Crosbie and investment bankers we want to be your allies. And selling a business is a once in a lifetime event. We add a lot of value to these processes.

It's about fit to. I think it's very important to think about that. But at the end of the day I strongly, strongly believe you should have access to all the resources you can to learn and understand as you go through this process. That's what I want people to take away from this.

Where are we going next?

Well, I think the first thing people would say to me if they're trying to join our practice generally is what rate of return can we get? That's a very common question. And I'd love to tackle that head on from a couple of different angles.

Great. Thank you, Stephen. Thanks, Mike.

Thank you.

Thanks for having us.

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