David McCombie: How to Sell Your Business - What Private Equity Knows That You Don’t

Full Episode Page: David McCombie: How to Sell Your Business - What Private Equity Knows That You Don’t

Episode Summary
Host Nick Berry sits down with David McCombie to reveal what really separates regret-free exits from cautionary tales. David is the author of Selling Your Business with Confidence: A Practical Playbook for Mid-Market Owners, and if you plan to sell your business in the next decade - or just want the option - this conversation is your field manual.

Find Out

• How prep boosts sale price and peace of mind
• What exit planning timeline top sellers follow
• Whether DIY deals match banker-led returns
• His take on valuation, fit and private equity
• The worst timing mistake owners still repeat

Links

• McCombie Group
• David McCombie on LinkedIn
• McCombie Group YouTube Channel
• McCombie Group Insights

Chapters
01:00 The Middle Market and Business Valuation
03:38 Top Seller Mistakes in Selling Your Business
05:56 Why Professional M&A Advisors Matter in Business Exits
08:13 Emotional Dynamics of Selling a Company
10:45 Navigating Buyer-Seller Relationships in M&A
12:11 The Role of Fit and Alignment in Business Exits
14:50 Psychological Aspects of the Business Exit Journey
18:58 Preparing for a Successful Business Sale and Exit Planning
21:23 Strategic Planning for Business Growth and Exit
23:46 Maximizing Value in Business Transactions

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Transcript

01:00 The Middle Market and Business Valuation
03:38 Top Seller Mistakes in Selling Your Business
05:56 Why Professional M&A Advisors Matter in Business Exits
08:13 Emotional Dynamics of Selling a Company
10:45 Navigating Buyer-Seller Relationships in M&A
12:11 The Role of Fit and Alignment in Business Exits
14:50 Psychological Aspects of the Business Exit Journey
18:58 Preparing for a Successful Business Sale and Exit Planning
21:23 Strategic Planning for Business Growth and Exit
23:46 Maximizing Value in Business Transactions


David McCombie (00:00)
Look, the statistics say about 75 % of business owners two years after transacting often regret it. And my opinion is that that's actually a lot lower than what I would have expected in that, think about it this way. you were to say, you know, the tallest person to cross the street over the next 24 hours, I'm going to marry them and they're going to be my spouse. What's the likelihood that that's going to be a healthy, strong, sustainable relationship? But if you take a...

a transaction and treat every buyer as a commodity, you're essentially doing the same thing.

Nick Berry (00:46)
Today's guest, David McCombie, is a veteran dealmaker, entrepreneur, and the CEO of the McCombie Group.

Would you like to know what it actually takes to sell a business with confidence? Is it only about getting the highest price? Maybe finding the perfect buyer? Or maybe just willing to let go at the right time?

Today, David and I dig into what every business owner needs to be thinking about before they move toward an exit. Expect to learn how the best business owners prepare years in advance.

Whether or not you should try to sell a business yourself. David's take on finding the right buyer as opposed to finding the highest bidder.

How emotions sabotage even the smartest entrepreneurs when they come to the

The mistakes that they make that are costing them millions of dollars.

The best and the worst ways to get the top value for your company? What most owners get wrong about timing the market? How to avoid becoming one of the 75 % who regret selling within two years? Why fit matters as much as the price? And all of the questions that you need to be asking before you ever sign on the dotted line. Let's get into it.

Nick Berry (01:43)
Can you define middle market for me? then like, why, how did you settle there?

David McCombie (01:48)
Sure. Great question. If you ask 10 different people, you probably get 10 different answers, right? For purposes of my book, I took a pretty broad definition, which was 10 million of revenue to a billion of revenue. And that's pretty, pretty wide. But really what matters rather than the actual dollar amount is we're not talking about big multinational companies. And at the same time, we're also not talking about a mom and pop. It's a business that has enough infrastructure.

and scale of which it has an organizational team, an organization and a leadership team, and really can be sold as a going concern. And the reason why I personally like the middle market, I have done work with big multinational companies as a consultant and previously as an investment banker, but I found that there's a lot more fulfillment, honestly, in dealing with founder owners.

there's a lot more impact that you can really drive advising them relative to somebody that's highly sophisticated and just wants the technical answer. What would I really find amongst most middle market clients that I encounter is they're both economically and emotionally invested in the business. For them, it's their baby and it's probably a lot of their net worth wrapped up in it. And so...

It's not just about what is the rational or logical answer. It's also thinking about psychology. It's thinking about education. And so those are all things of which I really enjoy interspersing into how I advise as opposed to, you know, we just focus on, you know, what's the highest number and, and, and, and that's it.

Nick Berry (03:17)
And you've mentioned that wealth financially, that this makes up the bulk of it, right? And we're not talking about like 50 or 60%. We're probably talking about like close to a hundred. Is that right? I'm coming up with this, I don't know the statistic, and their identity, probably a hundred percent.

David McCombie (03:29)
100%.

Yeah, so the statistics say 80 to 90 % of their net worth is in the business, but it's probably pretty wide. If you think about earlier stage entrepreneurs, they probably are negative because they're taking debt with personal guarantees. They may have very little liquidity outside the business. And then you have people that have been running a business for a long time that's mature and may have some material wealth outside of the business. But one way the other, it's a big number. And so when you're dealing with a transaction of that size, it just has so much more

impact on your emotional stability, right? It really is a roller coaster of emotions. Every time you think that it might be getting lost, the deal is gonna go south or there's a big development, it whipsaws your emotions and mindset.

Nick Berry (04:15)
So what kind of mistakes are these sellers making when they're coming into transactions like this?

David McCombie (04:20)
Great question. I think there's two main ones and quite frankly, are costing sellers millions or tens of millions of dollars. The first is really the lack of preparation. I find that only about one out of four business owners has done any preparation before selling. And it's really a shame because before you sell a house or any other piece of real estate or whatnot, you generally would go and prepare it ahead of time. But for a variety of different reasons, I find that business owners often do not do that.

And my interpretation, Nick, is first and foremost, they're busy. They've got families that they want to attend to. And the urgent pushes out the important, right? That's the first. The second is I find that a lot of business owners essentially choose to sell, going back to the statement that emotions are an element, emotionally. What I mean by that is because their identity is so wrapped up, because there's so many other things to focus their time and attention on, they typically

are not planning to sell. And then all of a sudden something happens that changes in their life. The close friend passes away, they get sick, they just are at wit's end and they wanna get out. And so they basically move from, I'm not selling to I need to sell now. And so unfortunately that leaves a tremendous, it's a missed opportunity because had they gone and done a lot of things intentionally in the six months, a year, multiple years ahead of time,

they could have had a dramatically better outcome. So that's the first that we often see. The second is business owners attempting to sell themselves. The reality is that as an entrepreneur, you can sell yourself, right? You're an entrepreneur, you can figure things out. The operative question is, can you sell yourself as effectively as you could with an advisor? And so what I often find is,

know, many say, well, you know, the dollar amount is big and therefore I'll just do it myself. I think it's a mistake for a variety of different reasons. One, there's a lot of different studies that have triangulated from lots of different approaches and they all basically say about the same thing, which is people that have an investment banker advising them typically get about 25 % more or one and a half turns of EBITDA. So that's a material amount for a lot of businesses. But, you know, perhaps what's most important

to take a look at is, and I guess it's applicable in both of these points, is that private equity, and private equity is in the business of trying to maximize their returns, maximize their exit. They're not in the business of charity. They almost always, and in fact, there's studies that show over 99 % of the time will use an independent investment banker. And that's particularly noteworthy because almost every private equity professional used to work in investment banking.

Nick Berry (06:58)
Mm-hmm.

David McCombie (06:58)
And the

reason is, is because structurally there's a lot of things that a third party can do that you as a principal cannot. And one of the most important things is just being emotionally objective and neutral. So, you know, I've done two private equity investments or I've exited two private equity investments and I've always hired a third party, you know, deal maker to negotiate for me. Because if you think about the small emotional tells using a poker,

analogy that you reveal, there's no way that if that person is being effective, they're not going to justify the couple percentage points and fees that they charge. Similarly, on the preparation front, private equity typically has from the get-go, even before they close, a game plan of what they're going to do and how they're going to exit. Most of the time, they have their CFO have

Nick Berry (07:33)
Mm-hmm.

David McCombie (07:48)
all the documents ready and continually rolled forward or updated on a monthly basis so that they're ready at a moment's notice of being able to sell their business. And so in a lot of ways, whether you like them or not, private equity is instructive of how some of the best people are handling the exit and maximizing the exit.

Nick Berry (08:08)
Okay. So what you triggered first there was, Somewhere I read a quote, think it was from your book, level the playing field against professional buyers. And so that's something, you know, I've been through the process a few times

That was part of the experience that I definitely neglected was the disadvantage of being in the room versus the advantage of having someone there on your behalf. So you can kind of remove the emotion

David McCombie (08:33)
And it's also

negotiating tactics, Nick, because when you go buy a car, for example, it's not random that the manager is never coming out and negotiating directly with you, that the sales rep always has to check with his manager. Ultimately, it's called a negotiation, negotiating with limited authority, right? So they can basically get you to make concessions, but they can't make commitments themselves. And so they have two bites at the apple. And so there's a lot of different things that are structurally built in.

that the buyer uses and that a seller can as well. And I think you rightfully pointed out that unlike most sellers, almost always the buyer is a repeat professional buyer and definitely their team of advisors, whether it's a law firm or the accounting firm or whatever, this is not their first rodeo. So going back to could you sell yourself? Of course. Entrepreneurs have figured a lot of harder things out, but the question is,

when you're going against a counterpart that really knows all the tricks and your level of understanding is a very cursory level where you don't even necessarily understand the right questions to ask, how are you going to get the best outcome? And so the way that I always recommend to people is you got to think about your net result, right? If you pay a lot of money to your advisor, great, as long as you're making more money. And so there's different ways in terms of engagement where that

can help align those interests. But almost always it's going to be an accretive result. then the other thing which is important is, particularly with mid-market companies, it's a lot of work to do the transaction. On average, it takes about 1,000 hours. And we have documented playbooks. We've ran as a team multiple times through the process together.

efficient and effective can you be and more importantly, ensuring that your EBITDA and your numbers are holding strong during that period. you know, there's also just an element of there's a lot, even if you were exceptional at it and most private equity guys used to be exceptional investment bankers, what's their highest and best use of time? And most of them, even if they wanted to and decided to do it, they just figure it's a much lower risk.

approach to focus on running the business while the advisor focuses on the sale of the business.

Nick Berry (10:54)
Yeah. And so when you couple that with the 25%, I mean, the numbers are the numbers, right?

David McCombie (11:01)
Mm-hmm.

Nick Berry (11:01)
What do people say really about why they choose to represent themselves? Does it always come back to numbers and how do they respond to that 25 %?

David McCombie (11:09)
So it really comes down to, in today's day and age, there's a tremendous amount of people cold calling business owners to try to sell their business. In fact, I hear roughly once a week, people are getting a cold call. And unfortunately, most of these business owners don't really know how to distinguish who's legitimate, who's not. But that creates the perception in the business owner's eyes that they've solved it, that they've got a quote unquote offer. And I hear all the time, this means, I have an offer from somebody.

They don't even have an NDA sign, right? They haven't even shared information. So there's this unfortunate misunderstanding of what the process actually entails, which typically is a many month process. And the level of scrutiny and all of that that's going to occur is very significant. Unfortunately, many people try to liken it to selling a house and saying, well, you I've done that before and how can it be that different?

But the reality is that there's a number of significant differences. First and foremost, this is an organization comprised of lots of different people. And they're diligently not just the business itself, but typically you as the owner are to be a critical component of being on the management team. And so they're analyzing the company simultaneously at a number of different levels. Similarly, unlike in the sale of a piece of real estate,

Where you essentially at closing receive your check and you give them the keys and you guys walk away The reality is that most middle market transactions are not all cash at closing they tend to have various forms of payment that occur and Ultimately tie the seller and the buyer together for a much longer period of time could be as small as two years it could be ten plus years together and so

that complicates things because A, it's hard to compare two different offers. This one has a $120 million offer, but it's comprised of 50 million of cash upfront and 50 million, let's say, of equity. And this other one has a $100 million offer and it's 90 million of cash upfront and 10 of equity. so depending upon your assumptions of what's going to happen in the future, either one could actually be the superior offer just on a financial basis.

But more importantly, when you go back to the point which is you essentially are in a financial relationship almost always with the buyer of some sort, then as an owner operator, I think you really have to focus on and think about things like fit. You the reality is you're probably gonna be doing fine financially after the transaction. Life's too short to be partnered with somebody that is not a good fit for you. You know, I personally have stories of...

good partnerships and others that are not the greatest partnership. The reality is it's not necessarily because somebody is evil or ill-intentioned. It just often is about alignment. I like to say using the analogy of it being a financial spouse, before you get married to an actual spouse, you ask, we going to have children? What religion are we going to practice? These are foundational value-based elements. doesn't guarantee that if you're on the same page, you have

an automatic blissful marriage, but it's almost guaranteed if you're not, you're going to have issues. And so too many people don't spend the time in terms of asking the right questions and really making sure that when they sign that this is somebody that you're really entering into a partnership with as opposed to thinking about it purely just from the exit. Because even if you got 95 % of your money out and you're totally independent financially,

Nick Berry (14:07)
Mm-hmm.

David McCombie (14:27)
your level of satisfaction and happiness is going to be severely impacted if you're, you know, everyday complaining about, you know, having to go into work and deal with somebody that is just not a good fit for you.

Nick Berry (14:38)
Yeah, I'm glad that you mentioned that because I think there is a stigma around...

around the private equity, being involved in transactions, but it's not always like that, right? I I think I like hearing your perspective where there's a bit of a matchmaking, like, you know, find the right fit. It's not just about the numbers aspect of it. How common is that? and how common are

the more negative outcomes that maybe were the source of the stigma that I'm talking about.

David McCombie (15:08)
Yeah.

Look, the statistics say about 75 % of business owners two years after transacting often regret it. And my opinion is that that's actually a lot lower than what I would have expected in that, think about it this way. you were to say, you know, the tallest person to cross the street over the next 24 hours, I'm going to marry them and they're going to be my spouse. What's the likelihood that that's going to be a healthy, strong, sustainable relationship? But if you take a...

a transaction and treat every buyer as a commodity, you're essentially doing the same thing. And so, from my vantage point, it's a critical element. It's a perspective I guess I've developed having been both a seller myself and a buyer. But I think it's a relatively rare perspective in the industry. It's a lot easier to just say, well, we got you the highest number, we ran an auction and this is the number.

And the reality is we do that as well. But we believe that it's a lot better for somebody to identify who they think is the right fit and use the competitive process to get them as the numbers highest possible, as opposed to just saying, whoever's the highest I'm to go with. Now I understand if you're in a corporate job, you have a fiduciary obligation, you may need to do that, right? But if you have the luxury as a founder owner, and most of the time you haven't worked for somebody for years or maybe ever.

Right? So it's that much more important for somebody like that to really understand who they're getting in bed with. And what I mean is, you know, it's not just about the trust on the structure and all that, you know, what is their management style? Are they going to be micromanaging you? What is your day to day life going to look like? And so you getting a much better understanding of that allows you to make the most informed and confident decision possible. It doesn't mean that it's a hundred percent guaranteed. The other thing I think is really important is

You should be doing your homework and doing character and reference checks. Very few sellers do that. But the reality is if you treat it like a partnership that it is, then understanding how these people have reacted in the past, particularly when things may not have gone well, is really informative. Ultimately, what I want to know is how did this person react when the unexpected happened? Were they reasonable? Were they constructive in trying to work it through?

Did they try to take advantage of their partner? Those are all things that I think are really important and often don't get asked because it's a lot easier to just assume, they're all the same. I'm just optimizing and let me roll the die.

Nick Berry (17:37)
Yeah, you seem like you're really in touch with the psychological component, the journey that the seller is going on. And then knowing a little bit about your background. you're an entrepreneur in banker's clothing, at least work for a while, right? That's the entrepreneur side of you that is coming out.

David McCombie (17:57)
Yeah, look, it's driven by that. You know, I think regardless of where you end up, you're an entrepreneur at heart. And I think that impacts a lot of different elements. I think it impacts how I practice my craft in particular. You know, a lot of people don't realize that only 50 % of letters of intent actually close. And it's really an exercise of trying to

overcome obstacles, right? Random things are going to come up, surprises are going to come up, and you basically need to kind of systematically go and address it. It may have nothing to do with finance or law or accounting. It may just have to do with other things that are prerequisites that need to get done in order for the deal to continue along. And so that is something that I found to be a huge asset. And many of our teammates are entrepreneurs as well.

But on the psychological side, I think it's also informed just by my own life journey. I'm turning 42, and I think as you get into your 40s, you tend to reflect more and I guess crave more authenticity in terms of how you live versus trying to live for somebody else. And so for me, a lot of the philosophies that I have

basically picked up over time through life experience and quite frankly, mistakes, inform how I coach somebody. At the end of the day, it's their decision, right? They're the ones that are gonna have to live with whoever they sell to. But hopefully I can bring not just the technical expertise to the table, but I can also bring some real life experience of things that I've seen that have worked and not worked and help them ask the right questions. At the end of the day, they're the ones that are gonna have to find the answer.

One of the things that I personally live on a personal basis, and I think many times people that choose me to advise them also have kind of a similar philosophy is, at the end of the day, once you've reached a level of success, you have the ability to intentionally design your life, right? Whatever is important to you, you can basically build that in, whether it's spending more time with your kids, doing a passion.

project or hobby or whatnot. And so, you me personally, in terms of my craft, you know, I, you know, I enjoy what I do. But you know, what's most important is that I work on stuff that I learn with people that I admire, right. And that is my North Star. From a professional, you know, standpoint, I also have some non professional things that are important to me.

And so it's really working backwards and saying, okay, what is it going to take so that I can have those things in my life? Similarly, you find that a lot of business owners, whether it's they're looking for a quieter mind, know, less travel, less stress, whatever it is, that often a transaction of some sort can help them as a component. It's not the silver bullet, but a component of kind of a broader approach towards

know, really designing and living the life that they really want to live.

Nick Berry (20:50)
Yeah. So is that where the book came from? Like what, prompted you to decide to write a book?

David McCombie (20:56)
Yeah, it's a great question. Long story short, I'd observed that my biggest competitor is actually not another investment banker or advisor. It's actually business owners trying to sell themselves. And so I figured the best way to combat that is to show them what excellence looks like and to show them the questions that they don't even know the first answer to, let alone the next, you

of the onion. And that, from my perspective, was the best approach to have them understand the need for somebody like myself. Ultimately, I ended up writing it and probably did it at the worst possible time. My daughter was born three months before I started. But the publisher basically said, look, you have a year to write it or we'll find somebody else.

And I reflected on it and said, you know what, there's never gonna be a great time. There's always gonna be something else that's an excuse or challenge. And I bit the bullet, but quite frankly was very challenging to do because, know, blocking out big blocks of time as you're supposed to, or at least how they recommend to write a book did not really occur for me. was between feedings and, you know, a lot of craziness.

Nick Berry (22:07)
Right.

Yeah. And it's selling your business with confidence. I have not read it yet. It is on its way. I will read it and I'll make sure that I follow back up with you.

David McCombie (22:19)
Yeah, I got a

copy here. So we'd love to hear your thoughts, when you do end up reading it.

Nick Berry (22:25)
Definitely. Yeah. I'm looking forward to it. just think I really like the perspective that I mentioned earlier. Like I mentioned earlier that you bring is kind of a been in your shoes, helping like be a true guide. Maybe for someone who is, you know what they're trying to accomplish and you kind of know the ropes and can help them do that without sabotaging what they worked so hard over so long.

David McCombie (22:37)
Mm-hmm.

Nick Berry (22:49)
to create. So I definitely have an appreciation for that.

David McCombie (22:50)
Sure.

And Nick, you've gone through the experience before. When you went through the experience, of what was, what was, how did you experience it in terms of your mental state, in terms of your energy levels? You know, what, because at least me personally, what I can say is because of, you know, often having so many eggs in your basket, because of it being your baby and often being defensive of, you know, people

Nick Berry (23:04)
Yeah.

David McCombie (23:17)
really digging in and critiquing it. And just the extreme amount of work that's required at the same time. I personally felt like I was under a cocktail of emotions. I was not at my best from a judgment and decision-making standpoint because there were just so many different things of which I felt uncomfortable, out of my element, rushed, whatever. I'm curious if you had a similar experience.

Nick Berry (23:41)
Yeah. Yeah.

So I think, yeah, that's a good way to describe it. So it's kind of like the, it's like getting an audit, workload wise and critique wise. And then, but all of the feedback is to basically tell you that you're not worth as much as you think that you're worth. And, at least that's the way that it can feel.

it may not actually the way that I'm receiving that may not actually be the case. So I just need to be try to stay as logical about it as possible and then and go through the process. But even being aware like that, you just can't humanly, I don't think, separate it completely. So it's there, it's in the room with you and it's a lot of work. And I remember thinking like, this sucks.

This is not the job, right? Like this is not what the work that I like to do. you said under the weight of, like an emotional cocktail, think it's definitely under the weight. It is just like heavy. and mine didn't go poorly, but fortunately, but yeah, I could see how it could go sideways.

David McCombie (24:38)
Yeah.

Nick Berry (24:45)
Even if you are prepared, I feel like it could be a lot to carry. I'm just thinking about it from the business side of things. When you get into someone's identity and what they've created for themselves or what they've created over time, man, we can be a mess.

David McCombie (25:05)
Yeah, and what I find is, particularly people that have more of an anxious personality, is there's a lot of just different elements that really challenge them in ways that they would prefer not to be challenged. ⁓ One thing that I find, the unique DNA that makes entrepreneurs successful sometimes can actually hurt them in the sale. So for example, most entrepreneurs have a high sense of urgency. You want to get it done yesterday. But unfortunately, in a deal, in order for

Nick Berry (25:17)
Mm-hmm.

David McCombie (25:32)
you not to be coming across as desperate, you have to let things unfold. And so often you're sitting with uncertainty or sitting for response or whatever that I find places a really heavy kind of psychological burden on my clients. And so unfortunately I can't take that burden for them. They're living in their own head, but I can...

take that journey alongside them and help kind of explain, well, you this is actually pretty normal, or this is the buyer's perspective, and this is why they're doing it. And this is why it's in our best interest not to, you know, call them up, you know, an hour later. But, you know, to go through thing, it doesn't necessarily make it any easier, that experience. But I think knowing that there's somebody alongside with you in the process is, you know, pretty valuable and

Like I said, even myself that does this for a living, when you're in the actual seat and there's so much at stake, you can react very differently than if you're just looking at it from a more objective standpoint, like a doctor would, a patient.

Nick Berry (26:39)
wanted to ask you, so you have a reputation from what I know of, like the deal maker and putting together some big deals like record setting deals. What's your secret as best, as much as you're able to share? What makes you really good at what you do?

David McCombie (26:53)
I think it's two things. One, which is really on the client side, it's about listening and figuring out what success actually looks like to them. Record breaking is something which you can kind of objectively measure. But the reality is what to me is most important is, two years after, are they excited? Were they happy with it? Are they going to say, David did the best possible job for me and helped me improve the probability of a successful outcome as much as humanly possible?

So, you know, I think there's that. The second is from a structural standpoint, when you think about, you know, the best possible economic terms, put aside fit, a lot of it is really driven by your competitive universe and the process, right? So not to say that you need to go to 200 different prospective buyers to get that best price, but incrementally, you need a

a baseline number of interested buyers are willing and able to acquire the company to be able to get the best outcome. so that combined with fairly traditional tactics within the industry are what allow you to get the best possible outcome because ultimately there can only be one buyer.

If the person really wants to have the luxury of being able to buy you, they're going to need to be able to come with a price in terms that is going to be compelling to the business. So one of the critical elements that a lot of sellers don't necessarily appreciate in that competition is the importance of synchronizing the competition. Meaning, if you have...

a lot of people, but there's one guy that's much ahead and has a mediocre offer and everybody else is a couple months behind, you have a problem, which is you either have to accept this mediocre offer or you decline it and hope for something better. What you really want is to have all your options available at the same time so you can evaluate them and make the best decision at that moment. And so one of the art elements of deal making, and it's very much underappreciated by people that don't do deal making,

is the synchronization of essentially bidders, right? So people are really fast. How do we encourage them, but slow them down? People that are slow, how do we speed them up without signaling that we're desperate? There's a lot of art to that. And quite frankly, there's plenty of curve balls that come up. The client has a unexpected vacation or life event that they need to change your schedule.

But ultimately getting everything in sync is hugely important in terms of being able to maximize the maximum price in terms.

Nick Berry (29:28)
Yeah, that makes sense. And that seemed like that would be well down the depth chart of things that the individual, like I would have been able to handle in my scenarios, like anybody trying to represent themselves.

David McCombie (29:39)
Well, and what happens, Nick, is

you essentially, if you did it yourself, aside from the challenges of outreaching confidentially, you're going to have a relatively limited number of people that you can really have initial conversations with and it not take a real negative impact on your business's performance because it's just a lot of time and energy. so typically the process that most advisors take is what's called a two step

a process and ultimately what they do is they initially send out NDAs with what's called a teaser. So it's kind of like an anonymized summary of the business opportunity. If the prospective buyer likes it, they're going to sign the NDA and receive a packet of information. And they'll probably have some introductory call or two with the advisor. The advisor basically shields the seller, excuse me, from all of those conversations. So they may have 50 or 100 different

you know, same introductory conversations. And ultimately, in order for them to meet with the seller, they need to submit a preliminary offer. It's typically called the indication of interest. And so then the seller has the opportunity to say, okay, I'm to look at 15 different offers and I'm going to choose the three to six, you whatever is the right number for them that they will actually meet with. And then they will have meetings and then ultimately they will ask for

the best and final essentially, the letter of intents that will be submitted at a deadline. But what that has the effect of doing is it minimizes the amount of time and burden that's placed on the business owner. it's virtually impossible for them to replicate that and have everything in sync. They could replicate it and do it sequentially, say, I talked to this guy, I didn't like it. Talked to this guy, didn't like it.

They also didn't have any leverage to get the best outcome because they didn't have multiple people at the same time where they can really confidently say, hey, you know, I've got somebody better that's offered me something like this. If you can come in like that, then you know, we, we have a deal.

Nick Berry (31:34)
there's a big difference in being able to do it and being able to do it well.

David McCombie (31:37)
Sure.

Nick Berry (31:38)
So the two-step process and the synchronizing of the that's the type of information that's in the book that you're trying to convey to these potential sellers. This is the stuff that you need to be thinking about that you may not even be aware

David McCombie (31:52)
Correct. So it goes through pretty much the full range of topics that business owners want to understand, whether it's how they value their business, what do buyers look for, how are buyers structured, so who are the people that they're engaging with. Typically, there's a variety of different team members, and so what do each of them do? What does the process look like? And helping them ask some of the right questions around determining fit.

determining what's the right solution for them. it's pretty comprehensive, but it's written to be accessible. The reality is you don't need to be a finance major. You don't even need to be a college grad to be able to read it. Selling a business is, the fundamentals are relatively simple, not that it's easy. And so the reason that

for me it was great to be able to write it, is particularly since it's such an anxiety inducing process, having an understanding of what's going to occur in advance, even if it's not a very pleasant experience, but at least knowing what's going to happen can significantly reduce unnecessary stress. And so there's also common reactions and kind of some of the psychology of it that's also embedded throughout the book.

Nick Berry (33:07)
Yeah, the unknown is scary in itself, right?

David McCombie (33:11)
100 % and what we often find is there's actually a psychological phenomenon called Ambiguity aversion, right? People would actually rather have guaranteed unhappiness than uncertainty So you'd have situations where the person, know could have a great deal or the deal You know gets blown up and nothing happens, but they'd rather have quick certainty that okay just blow up and I can move on with my life as opposed to waiting and so

Managing yourself in the sales process is half the battle.

Nick Berry (33:41)
you described the mid market as 10 million to a billion. So the 10 million and below, like the guys who are a little bit too small to be fully attractive for these transactions right now, what do they need to be doing? What's the competency that they're missing or where do they need to be focused to move up into that juicy target tier?

David McCombie (34:01)
Sure, sure. It's a great question. So one of the most important factors I think that's important to understand is that valuation multiples increase significantly with size. So as a business gets bigger, it actually has a higher valuation multiple than a smaller business. And that's actually how most private equity makes money. They make it called through consolidation. So they're trying to arbitrage or take advantage of the fact that big things have

higher valuations and small things. So what do they do? They put together lots of small things and make the spread when they sell it as one big, you whole. So I think understanding where you have to get to from a size standpoint so that you could be interesting to, you know, large institutional buyers at, you know, at a higher multiple is really important. And then developing a game plan to get there.

The other thing I think that's really important is, you know, most of the time valuations move in cycles. And ultimately it generally is driven by interests, particularly by private equity. So private equity tends to like an industry and all rush in when they see, you know, one of their counterparts making, you know, significant returns on an investment. But the converse also occurs. If you have a major bankruptcy or failure within the industry, you often find that some

buyers are spooked, or more importantly, because private equity needs to exit in order to make their money, they're worried that there will be less buyers in the future than there are today. And so they're less inclined to participate. What that means is that the tide can go in and it can also go out, right? And so there's windows of time of which multiples are materially higher than average. And that's a critical time that you should give disproportionate emphasis

to thinking about selling as opposed to there's other situations where it's basically been fairly stable for a long time and it's probably not gonna go up or down too materially from that, right? It's a very different dynamic than, it's always been trading, let's say at seven times, it's now 12 and the question is how long will it remain? Because on the back end of that, when you do have a major failure or whatnot,

It's not uncommon to see valuations decline by over 50%, sometimes 75%. So keeping an eye on where the industry is in the cycle is something that I think is also important because just to say I'm blindly going to get to this size and sell at that point may not make sense if the multiple is just really high.

multiples do go lower, you may need to grow the business 2 or 3x just to get to the same spot in terms of your net proceeds.

Nick Berry (36:40)
So what kind of lead time, like if someone, if an owner is thinking about exiting, like when do they need to get serious about preparing and probably like talking to an expert like yourself?

David McCombie (36:52)
I personally think there's no time too early because even if you're not planning to sell, understanding how to improve the value of your business is always a good move. But let's say you say, I want to be retired in five years, right? And totally out and I'm going to go to the Bahamas and check out. I personally think that you should be starting the process of minimum five years in events. Why? Let's just work backwards from your retirement day. Well, most of the time,

a buyer and in order to get the most interest from the largest universe of buyers is going to want some type of consulting or transition period where you continue to stay with the business, right? To reduce the risk in the transition. So that's already two years that are accounted for. Then there's the sales process. And on average, the sales process takes about nine months, but you can have some that take a little bit less and some that can take

you actually, you know, a lot more. I've had, I've had deals that have stretched on for two years for different, you different reasons. and then finally that, that, that then accounts for three years. You ideally want to have the luxury of, being able to hold back going to market if it's not the best time. And you want the ability to try to optimize your business as intentionally as possible ahead of the transaction.

So when you do that, say, okay, an extra two year buffer gives you that ability to implement a lot of the changes that can help improve the value of your business. And at the same time, gives you the ability to say, you know what, the market's really, really hot. Now's the time to go. Or, you know, actually we need to wait a year because internally we're having some issues. The market, you know, right now is frozen, whatever it might be. But it gives you the flexibility so that you can sell

on your terms from a position of strength. Because otherwise, either you're not going to get the best outcome, or you're going to have to delay that timeline and may have to retire a couple years after your intended date.

Nick Berry (38:49)
a plan to peak at the right time, right?

David McCombie (38:51)
Yeah. And even early in the process, you can build that in. So I know people that started a business from the get-go and try to think about what are the things that are going to make it the most marketable and valuable in the end. that's similar to private equity. Private equity, before they even buy it, pretty much knows the game plan of to whom they want to sell it more or less, for how much, what's the size that they want to get to, and kind of a general game plan to get from point A to point B.

You can do that the same with your business, which is okay, five years I want to be here. What are the milestones that take me from today to there? And how do I hold myself and my team accountable to getting there? And that is basically strategic planning and is probably one of the most important skills or assets that private equity brings to the table in their portfolio companies.

Nick Berry (39:41)
Is the guidance like helping you go through the strategic planning processes and execute the plan?

David McCombie (39:47)
Yeah, and the discipline, know, creating the plan is the easy part. The hard part is, you know, are you sticking to it when things are slipping? Are you holding yourself accountable to it? That's, know, that's really the most challenging part, you know, where, you know, it's it's you can come up with a great, you know, gym plan at the New Year's, but are you still doing it religiously and even at a higher level six months in? That's that's ultimately

you know, a critical component.

Nick Berry (40:13)
Yeah. This is great. David, I appreciate you jumping on and sharing with us. Congratulations on the book also. So I appreciate you coming on. Thanks.

David McCombie (40:19)
Yeah, thank you.

I appreciate