Business Valuation – Phillip Cooper

Phillip Cooper:
I think I wrote something on this pretty recently. The different reasons that you can hire an investment banker. At the end of the day, you got to do your research, plenty of resources out there, plenty of people that’ll be happy to come talk to you about it. And if you do all that stuff and just really do your homework and approach this like you are running your business and are realistic about your expectations, I think you’re going to probably have a pretty good outcome at the end of the day, barring sudden changes in market conditions. Because, you know, there’s an old saying in our industry, time kills all deals. So the longer something drags out, the greater the chance it’s not going to happen. And the best way you can prevent something like that happening is just to do your homework work and get a deal done.

Dana Robinson:
Exit Plan is a podcast for business owners and those who want to be business owners. I’m always in search of the lesser known stories of entrepreneurship. In the exit Plan podcast, you’ll hear stories from startup to sale and hear from the professionals who helped business owners achieve their exit. Hosted by me, author, and private equity manager Dana Robinson, along with my co hosts and guests, you’ll hear real stories, tips, and tools that will help you plan for the exit you want, whether you are still working at a day.

Dana Robinson:
Job or running a business.

Dana Robinson:
Let’s get started with this episode of the Exit Plan podcast.

Dana Robinson:
Hey, everybody, it’s Dana Robinson with the Exit Plan podcast coming to you today with Philip Cooper. Phil. Philip, Coop. Anything you want to call him? Bill, thanks for coming on today.

Phillip Cooper:
Not much. Just enjoying the lovely rainy weather we’re having in Dallas, Texas today.

Dana Robinson:
Oh, coming. I didn’t. I didn’t even ask where you were calling in from. Dallas, Texas. I ran an air conditioning company in Austin for a period of time for ghetto air conditioning during their roll up. Did you grow up there?

Phillip Cooper:
Yeah, I grew up in Austin. I spent the first 31 years of my life in Austin and Houston.

Dana Robinson:
I liked it. I thought, you know, that was a beautiful town, river running through it, you know, fantastic downtown and sort of the hill country spreading in all directions. It’s beautiful.

Phillip Cooper:
It’s a good place to grow, for sure.

Dana Robinson:
All right, so I try not to introduce people, as most people have listened to the podcast, because I don’t want to try and write some elaborate tale about somebody based on their resumes. So, Phil, what do you do? And then let’s talk about how you ended up doing that.

Phillip Cooper:
Sure. No problem. So, really simple story here. You know, I’ve got about 34 years of work history dating back to when I graduated undergrad at University of Texas in 1990. My career span a bunch of different opportunities and jobs, the first of which was a bank examiner. Started as a bank examiner with the OCC, performing safety and soundness exams with banks across Texas, and then went back to grad school. Had a bunch of friends that told me I should get out of government job and go back and get into investment banking. So I went back to got my MBA at University of Colorado in Boulder, and then had my first job at Jefferies in Houston’s energy group.

Phillip Cooper:
I was there back in 96, and then was there for about ten years. Got tired of working 90 hours a week and wanted to try the private sector for a little while, so I got hired. A former buddy of mine, Ed Jeffries, was working as a CFO of a telecom company and went to head up mergers and acquisitions for them, and negotiated about three deals, took the company public, and then we left together and started our own telecom company and ran that for about seven years, built that up, sold out to a larger strategic, and then I got back into investment banking again, but at the boutique level about eleven years ago, and that’s what I’ve been doing ever since. And then joined Palmtree, where I currently work today, just under three years ago. So the, the aspect of it is that when I talk to my investment banking or clients is that, you know, I’ve been on the buy side, I’ve been on the sell side as a principal, and then I’ve also been an intermediary as a banker for buy side, sell side m and a deals, and also capital raising deals. So I, and I started my own business in my living room, you know, bootstrap myself up, got the initial financing. So I understand a lot of the challenges that owners go through in starting their business and then running it into that they’re making. So I try to bring all of that to my focus and my conversations with business owners that I deal with.

Phillip Cooper:
But my practice today is almost entirely family owned businesses and it’s 30 million and above kind of deals. Occasionally smaller and companies are doing three to 5 million in EBITDA and higher.

Dana Robinson:
Awesome. For the sake of people who hear us sling around terms, let’s just, I’ve had a couple of bankers on, and I don’t know if I’ve ever dissected what is an investment banker. You want to take a shot at it?

Phillip Cooper:
For me, yeah, I mean, it’s just, for me, it’s just an intermediary between parties and a transaction, in the case of what we’re talking about and what I do, we match buyers and sellers and sell side and buy side transactions. And sell side just means when I get hired, I’m representing the seller. A buy side transaction means I get hired by the buyer to go find them acquisitions of companies to buy and help them through the process. And then there’s, you know, we go out and help companies raise debt capital, or if they want to raise minority equity for growth, we’ll go do that. And then we also do restructurings. Restructurings. When companies get into trouble, maybe they have too much leverage or the business has fallen off and they need to do something to kind of survive. We’ll come in and help them figure that out and kind of take them to the next level.

Phillip Cooper:
But really, when you talk about investment banking, you first start the career. It is confusing even when you start, because there’s, you know, people ask me where they should invest their, their money in stocks and bonds, and I’m like, that’s not what I do. So you kind of have to be a little bit careful. So we’re in a section of it that’s really on the corporate finance side for investment banking.

Dana Robinson:
Yeah. I actually never looked up the origin of the word, but for everybody listening, investment bankers don’t do banking and don’t do investing. So the word is a little bit of a, feels like it’s a bad fit. But I think there’s some origins in the advising around investing because there is a, all of us, I had a series 79. We all have to take these securities licenses that investment advisors and brokers in the investment world take, but we end up as the coaches and brokers, basically. This is probably a better word, like real estate brokers, you make a market for somebody’s business by finding potential buyers and then helping them negotiate that and getting it across the finish line. That’s a good summary, but also a broad word because people who have their money at, you know, at some advisor, that guy’s probably calling themselves, or girl, an investment banker, right?

Phillip Cooper:
That’s confusing. Like as your business owner, if you start looking around for help raising capital or looking to sell your business, there’s some guys out there that just call themselves m and a advisors and not investment bankers. And then you have business brokers, which are typically guys doing what I do, but for deals that are typically like small, like $10 million or so. So you got to be a little bit careful in terms of, you know, kind of where you go. But as a business owner, trying to find, like, somebody to help you. If you don’t have some, someone in the know that can refer to you, someone, it can be a bit challenging because go to some of these websites, and I go to some of them and I read them. I still don’t know after I read them what these guys do at the end of the day.

Dana Robinson:
So, yeah, yeah, I, you know, we have, you know, have been two years in the, I guess four years when I started working for private equity backed roll up. But in the last two years, I’ve been at the conferences around where capital meets sponsors and I get business cards. I come back and then I go look and I know the business, and I still have to figure out, what does this person do? Sometimes it takes a phone call to say, I still don’t understand. What do you do? We met at a conference. I have a fund. Do you invest in funds? And they throw around obscure technical terms, and it’s sometimes a challenge for people. So if you’re listening, this is why you’re listening to podcast. You want to learn about how to use people like Philip Cooper for your business when you hit that point, and that point might be, I want to sell this business.

Dana Robinson:
That’s probably the most common inflection point for you, is I think I’m ready to exit. But are they ready when they come to you, Philip, when someone, family comes to you and says, we got a business, it’s $50 million, your business, we’re keeping 1214 15%, they come up with an EBITDA. They have a number in their head. Talk to me about, like, the typical client. When they come to you, are they ready?

Phillip Cooper:
Generally speaking, I would say no. I’d say it’s probably getting a little bit better. You threw out the word EBITDA. I mean, I’ve had clients that have come to me that don’t know what that phrase is. And that’s obviously a common metric in the industry that, to your point earlier, we just throw around. Look, I go around and I’ve given presentations to CPA firms and wealth management firms on the M and A industry, like the state of the industry, what’s going on in it today, and how the process works. When you hire a banker from start to finish, like, everything that you’re going to go through, everything that I’ll potentially help you with through the process from start to finish. And one of the slides that’s really interesting from that is there are some materials put together by the alliance of mergers and acquisitions.

Phillip Cooper:
I think back in 2000, 2016, and they had this slide and it showed this inverted pyramid. Right at the top of the pyramid, it had 250,000 companies that will try to exit by 2030. And then right below it, it says 50,000 will be market ready. So of the 250, 80% of them are not going to be market ready to go have their transaction taken out to market. Of the 50,000, 30,000 will actually transact, and then 16,000 will sell with concessions, and then 14,000 will sell at the desired value. So 6%, that’s the 14 over whatever, sell with the buyer’s expectations. And, you know, a decade ago, maybe even less than that, I would say today you can go online and you can find a bunch of stuff about seller preparedness, exit planning, wealth advisors, attorneys, cpas, you know, business coaches, investment bankers. There’s a tons of resources out there in terms of materials and whatnot to learn about it.

Phillip Cooper:
And that wasn’t the case, I think, decade ago. So, you know, owners have the ability at their, you know, the resources at their fingertips to go learn about it and then also check out any of those guys in those groups to kind of go learn about it. But by the time I’m called, it’s usually when an owner has basically said, I’m ready to do something, but they haven’t necessarily spent the time ahead to plan for.

Dana Robinson:
Right. And so how, how long would it, how long before they want to transact? Do you think most owners should be talking to somebody like you?

Phillip Cooper:
Well, I think it really depends, business specific, number one and number two, and it’s really, the planning is in the research that goes involved. And I like to tell owners to look at it this way. You’ve built, you’ve spent 2030 years, however long you built your business, right. Most owners entire net worth of the great majority of their network is tied up in their businesses, right? So this is a very important transaction, probably the most important transaction of their life. And you should treat it like you have anything else. I had one mentor at a previous company that said, you know, you should run your business from day one, like, you’re going to sell it the next day, right? So that’s one way to look at it. But I tell a lot of owners that, look, the thing that you got to do and whether they’re ready or how long it takes is really like how you’ve run your company all along and you got to look at it kind of what you got to do to get ready for a sale, what you need to be doing during the sale and then what your plans are post the sale. And that covers a lot of territory.

Phillip Cooper:
But in a short version of your answer, I would say at least for most companies, it’s one to two years out because you want to make sure that your financials are in shape and your information reporting systems are in shape and all the other things that a buyer is going to come in and look at. You want to make sure you have prepared. And then from a wealth planning perspective, I talk to a lot of wealth management people and they tell you to start making those plans far in advance so that you can start getting things set up, whether it’s trusts where you want to invest your money once the transaction is done, all those types of things. So it’s really kind of all the way from the beginning up and through the end. You got a plan on different aspects of the transaction.

Dana Robinson:
Can they engage you two years in advance? Is that the right time? Or is there a different role where they really just need a CPA focused on preparing well in advance? Because they’re, they’re writing off everything they can and they’re not really keeping track of how they’ve expensed owners discretionary use of funds for vehicles, travel junkets. The list of what we call add backs could be quite extensive. Is it smart for them to engage somebody and actually revamp all of that? Or do you think they’re better off to just focus on being smart about the business and just get the ad backs as part of a function of the to due diligence?

Phillip Cooper:
Well, I think it comes down to what shape is their business in. Like if the business is not that profitable, like if you go out there and compare it to other businesses in the space or just other businesses in general, it’s like, can I be more profitable? Can I be on a better growth trajectory? Can I reduce my customer concentrations? Can I expand my geographical reach? Do I need to add services to my platform? So an owner needs to do all this stuff and start thinking about it if they need to do some of those things. There’s various different types of consultants that can help along the way to do that type of stuff if it’s financial oriented. Even my firm, Palm Tree, we’re kind of a hybrid investment bank consulting firm. And on the consulting side, we go in and do quality of earnings reports, financial due diligence, all the things to help seller preparedness for a sale, you know, in advance. And you can find a lot of guys that can help you with any one of those things. There’s operational coaches out there that can come in and review your businesses and say, you can hire me to come work with you to increase your EBITDA or increase your processes, and you can hire guys like us to help with your financial reporting and getting prepped so that when a buyer comes in, you’ve got all the KPI’s and the 13 week cash flows and financial reporting packages every month. You’re closing your books at a certain time and doing all that type of stuff.

Phillip Cooper:
So that’s a big right.

Dana Robinson:
So there’s, the piece that a firm like yours is focused on in that case is more of the preparation and packaging so that everybody understands what they’re looking at well in advance and you’re validating. So would you actually get a quality of earnings done the year before and help an owner understand what that looks like and how to improve that? Or how do you analyze somebody’s business when you’re trying to figure out, is this, this thing broke and can we get it unbroken before we sell it?

Phillip Cooper:
Well, if they’re, if they look, if their business has got kind of the gym look, and it’s part of what I do. Like, I have conversations like this with business owners all the time. I’ll get on there and I’ll have these conversations and I’ll give them a quick, I say quick. You know, I usually have an intro conversation to learn about their business and what their goals are. And then after that conversation, usually sign an NDA, have them send me some materials, and I’ll go through them and then we’ll come back and have another conversation. I’ll say, yes, you’re ready to go to market. Or hey, you could probably go to market today, but you might want to take care of these two or three things before you go do it. Maybe some of those we can help you with.

Phillip Cooper:
Maybe some of those things are just things that you can do to improve your business. And we can have that conversation. And I do that stuff. I mean, that’s just kind of something that we do as part of our business on the banking side, just to kind of help vet deals. We do that both for the owner’s benefit and for our own, too, because we’re based primarily success based fees. So if I work on a deal for eight months and it doesn’t close, then I don’t get paid anything. So we try to vet our deals and try to make, you know, good decisions upfront before we get engaged with something. So as part of that, we kind of take a general view of what the company’s business is what the valuation would be.

Phillip Cooper:
Make sure that the valuation expectations of the owner is in line with what the market is potentially willing to pay. And if all those things kind of line, then, yeah, then we typically like to get signed up and take them out to market.

Dana Robinson:
All right, let’s talk about owner expectations that you just raised. Your upside down pyramid says 6% of owners are going to get what they expect.

Phillip Cooper:
Yeah.

Dana Robinson:
So the pattern is an owner walks in the door and says, I want to sell the business and that 94% of them have over inflated expectations.

Phillip Cooper:
Well, it’s not that the 94 is overinflated. The 200,000 just not ready to exit for whatever the reasons are. They haven’t done work. They just haven’t done the thing that you can communicate. Here’s what my business does to the buyer. And so they’re not going to get a deal done. Look, I think there’s really kind of three top reasons that businesses, the transaction sales fail. And I think the top one is valuation differences between a buyer and a seller.

Phillip Cooper:
And I think if you saw the market like before, the second half of 2022, markets were great, right? There’s tons of deals getting done. Valuations were very high. The environment was great for deals happening day in and day out. And then as we kind of saw inflation ramp up, which then drove interest rates up to kind of control it. And that’s the market that we’re in today. Deal volume valuations fell down and as a result, you had owners not wanting to sell because they weren’t going to get the valuations they were hoping to get. And you had guys that needed to put money to work, like private equity groups, independent sponsors, family offices that were saying, hey, we can’t, you know, we can’t pay you what we could have paid you a while back in order for us to make the return that we want. So there’s just a disconnect and there’s a way to kind of solve for that through structural issues and various other things.

Phillip Cooper:
But it just leads to less deal flow and, you know, lower valuations just overall.

Dana Robinson:
And when do these fall? Like, do you get most of the owners across some finish line where you say, all right, we’ve managed your expectations, we’re willing to take this to market. You can get most owners to believe that their value expectation is high and they’re willing to look at, reasonably look at the offers that you’re going to bring in.

Phillip Cooper:
Yeah. And there’s ways as a banker to check that. I mean, again, I’ve been on the side where it has hired bankers in the past. One of the ways you make sure your interests are aligned is I’m taking a big risk. Right. I’m assigning a lot of my time and my team’s time to getting a deal done. I want to make sure that I know that the owner is committed to doing it. And we usually charge like a small retainer fee up front, and I guarantee the owner.

Phillip Cooper:
It’s like, look, I’m going to put a lot more time and effort and money into this than I’m asking you to put up as far as retainer goes. But once they’ve done that and you know, your interest will line and they’re serious about doing a deal. Right. Because you’re talking about a company doing 5 million of EBITDA and their company’s probably worth probably $25 to $50 million or so. Then it’s like, okay, putting up a little bit of money to go run an auction process is worth it for them to kind of go run the deal. So at that point, you kind of know that they’re heads in the game and they’re going to be working with you and they’re going to be open to it. It’s not an easy process, though. It takes, normally it takes six to eight months in a normal market, I would say last year, deals were taking a lot longer.

Phillip Cooper:
Like, I just closed one within the last couple of weeks. It took twelve months to get done and was hoping to get it done much sooner than that. But I had a mentor of mine at Jeffrey’s that told me one time, he said he used to like to tell clients, we’ll get your deal done. We’ll drag you kicking and screaming across the finish line, but get your deal done. So, you know, you get a feel for the client. And I think you touched on something, Dana, which is trust. Yeah. When you first meet somebody, unless you got a warm referral with someone that knows you well and knows them well, there’s a trust factor that you have to build with the client over time, and then you’re not going to start off that way day one.

Phillip Cooper:
So you got to kind of work your way into that and do all the right things in terms of client management and relations with your client, in terms of being transparent about the process and what you’re doing and why you’re negotiating, the things that you’re doing, why you’re writing the story of his company, to market people the way you are with his buy in. At the end of the day, everything you’re doing is his materials and his story. So you want the owner to sign off and everything. If you take that approach with it, you’re usually, you know, get good working relationships with your clients.

Dana Robinson:
So I want, I want to get the other two common problems besides the disproportion of price, but on the disproportionate price, you get them across finish line, the initial entree that you manage expectations, you go to market and as you say, that’s six to twelve months. And I’m sure you could describe what it, what it takes for you to make a market because there’s no MLS for, you know, for businesses, but then you get the offers, you conduct what we call an auction, you basically shop, you get a bunch of offers. All the offers suck and they probably have for the last 18 months. What does that feel like? How do you manage that? What’s there, is there a point where the owner just says that, wow, you know, didn’t really expect it to be this bad, and you send them off to go retrench and try again in a couple of years, like what’s an owner to do? And they’ve lowered expectations and then the market says, still not low enough.

Phillip Cooper:
Yeah, I had one of those happen last year. And any banker will tell you they’ve had failed deals if they’re being honest with you themselves. Right. I think last year you probably saw a spike in some of those just because expectations moved from the time that you went out to market or you’re getting ready to go out to market and then you went and then inflation popped and interest rates popped very, very quickly, right. All throughout 2023. And then you found, hey, you know, for instance, you know, I had a deal that was an AI company. Recurring revenue, you know, 30 plus million, 30 40 million of ARR. So great, great business.

Phillip Cooper:
You know, everybody’s interested in AI today and we thought this one’s going to be a slam dunk. And businesses back then, prior to the inflation hitting, were going for eight to ten times revenue at the time. Not even die, but revenue, which is a huge valuation. This company was basically break even. And at the end of the day, the deal didnt happen. We got offers in, but the offers were at a level and the owners mindset was still where the market had been previously. So the offers were coming in maybe like 60% of that. So there was a deal to be had there.

Phillip Cooper:
The owner just didn’t want to take it. And so there’s really not much you can do about that. And look, as an investment banker. If you’re not good with rejection, you’re probably in the wrong line of work because you get that several times a day. You know, I call when I run a process, and private equity guys like yourself don’t like to hear this when you’re trying to bid on a deal. But most of the time I try to tailor how I do a broad auction process to how many who the most likely buyers are going to be. Right. And as you and I were talking about earlier, landscaping, you know, commercial landscaping companies or H Vac companies or plumbing companies or whatever, they have these recurring maintenance streams.

Phillip Cooper:
Those are really hot in the market right now. Right. And you can go after, you know, you can go after some of those guys, and those are good deals that are getting done in the market right now. So I kind of bail on the question there for a second.

Dana Robinson:
No, no. I think that was a great explanation. Not every deal is going to happen. And from the professional standpoint, you’ve got to be ready for deals not to happen. And a seller, you’re going to have plenty that don’t get the offer that they expect. And you lick your wounds as a professional with your retainer and don’t get your success fee. And the owner has taken some time and effort to take it through the process and doesn’t get what they want. And sometimes that’s frustrating, I’m sure, because, I mean, look, the.

Dana Robinson:
I know. I mean, I talked to some VC’s in the sort of capital markets when I’m networking, and I’m shocked to hear that they still are interested in paying eight to ten times ARR, which is crazy because a company then losing money, but having $30 million could be worth $240 to $300 million. So if you have that expectation in your head and somebody comes in and offers you 150 million, it sounds like an insult.

Phillip Cooper:
But yeah, I mean, that type of stuff happens. And there’s all kinds of different reasons that deals don’t happen. I had a client, it’s almost been nine years ago now that I was the owner had unexpectedly passed away, which is a whole other story about succession planning. The reason for it, but left no succession plan in place, had 25 beneficiaries, and it ended up, you know, I got hired to sell the company and ended up being, you know, kind of a big fight. And I took them out to market. And, you know, the day that we signed the Loi, this is a company that had like maybe eight products, but they had a proprietary ingredient. It’s a supplement company. They had a proprietary ingredient.

Phillip Cooper:
The day we signed the Loi with the ultimate buyer, which ended up being a japanese conglomerate, they lost the ability to produce their main product because it was used a substance that was controlled by the federal government.

Dana Robinson:
Wow.

Phillip Cooper:
So it took 21 months to get that deal done, and the buyer came back numerous times in the process and said, we got to lower the purchase price. And I just told him, no, we’re not going to do that because we have guy behind you will gladly pay that price to buy this and that ingredient and everything else. So we kept the price where it was despite the EBITDA dropping to about half of what it was when we signed the Loi. But there’s all kinds of reasons for deals not happening. And yes, as a banker, it’s, you know, it’s never fun. It’s frustrating because you just spent six to eight plus months of your life working on something that didn’t happen. But the hope is I had that happen on a deal a few years back, and ultimately it failed because of something that the buyer did with the owner and worked on it for nine months. But then the owner came back to me about a year later and said, hey, I’m ready to sell again.

Phillip Cooper:
We actually looked at raising some more capital and said, I’m back, ready to sell again. And we ultimately end up sold, selling it, and got very favorable price, like twelve to 13 times of EBITDA for a business service company. So it worked out pretty well.

Dana Robinson:
Dana Robinson here.

Dana Robinson:
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Dana Robinson:
So back to the what are the other things that are causes of failure? The first one is the mismatch between expectation and the market.

Phillip Cooper:
Yeah. The second one is just due diligence challenges. A lot of companies are great companies in terms of what they’re generating in terms of cash flow. But I think if a buyer comes in, they’re going to want to see a data room with all the documents and the files and everything tells them about the business. They’re going to want to look at financials and reporting like how profitable are you by customer, by vendor? What are the key ratios or metrics that you run your business by and manage your business by? And if you don’t have that stuff, then it’s really difficult to get the deal done. We got hired a few years ago, both the consulting side of our house and the investment banking side of the house to fix the financials of the company before we took them to market and we had gone in and their inventory systems didn’t talk to each other. They had an accounting system that was separate from the inventory system, and we were looking back, trying to make heads or tails of it, and we were just having a very, very difficult time. When it came time to sell it, we did the best that we could.

Phillip Cooper:
We came time to sell it. It was just difficult. There’s a question mark from the buyer when they bought it, and we kind of had to put some guardrails around that aspect of it and then have to figure some of it out after it closed. But normal situations where the buyer can’t get the information they need to make a good investment decision. It’s usually going to be one of two results. One is either the deal’s not going to happen because they’re just going to back out of it because they’re just not comfortable. Or two, it’s going to result in the owner taking a ding in terms of the purchase price being offered for their business.

Dana Robinson:
Okay. All right. So second, cost failure, the due diligence. You fail in due diligence over one or more, and usually an aggregate of a lot of failures within due diligence. Right.

Phillip Cooper:
And that one, that one is very much in the owner’s control to fix. Right. That’s the type of stuff that just about any attorney or anybody can send them a due diligence list. They can prepare a data room and put all that stuff together and make sure they’ve got all this stuff at their fingertips. Back to your question of quality of earnings, too. That would be part of it, but I would wait to do a quality of earnings report until maybe six months ahead of when you wanted to do it or less because you don’t want the numbers really to be stale when you’re going to market. But at the same time, maybe at the time that you’re starting to talk to investment banks, you run a sell side qv so that when you are talking to them, you can give them numbers that they can rely on as part of the process and say, look, I know my number. I know my EBITDA number is $6 million because I just had this third party Q and e do the work.

Phillip Cooper:
And the numbers are good because it’s harsh to get hired, hire an investment banker, start going through a process, and then find out, you know, a month or so later that the numbers you thought you had are not really the numbers that a buyer is going to look at it the same way.

Dana Robinson:
Right? Yeah, absolutely. I’ll interject an anecdote. I practice corporate and intellectual property law throughout my entrepreneurial career. So I’ve been involved with business since I was 19 years old. I started a landscape business of all things. But as a practice, Mike, I had hundreds, I don’t know, 1000 clients in my 20 years. Only two ever had a due diligence folder as part of their normal practice. I mean, I raised it with as many as I could.

Dana Robinson:
Well, you know, you should take a due diligence request list if you were to sell the company, create digital folders for every one of those, and then just keep all your contracts, customer contracts, even your end user licenses for software and sasses, all your corporate documents, anything that’s legal, all your HR, all of these things. That’s a pretty low average in your experience, have you had clients that show up and they’re like, yeah, I have a due diligence data room already.

Dana Robinson:
Here it is.

Phillip Cooper:
A few times. It’s usually because they’ve tried to go to market previously or they’ve done some stuff or been looked at previously and it didn’t work out. So they’ve usually got a data room set up for us or if they have really good, like, general counsel on. On retainer or something, and they say, hey, these are things you’re going to do. Let me go ahead and start setting this stuff up for you. That’s usually the case, but, you know, go back to the example. It’s a very small percentage, I think, that are really kind of ready to go when we show up. So it is a little bit more work, and that just adds time to the deal.

Phillip Cooper:
Right. You get signed up and you got to do a little bit more work to pull everything together when you’re done going to market.

Dana Robinson:
Yeah, yeah. For anyone listening that runs a small business, medium business, large business, create a due diligence folder with a bunch of subfolders and an index and keep it up to date. And that’s where everything lives.

Phillip Cooper:
Right?

Dana Robinson:
Did we get to the third? The third.

Phillip Cooper:
Yeah. The third one is, for me, is probably going to be different than probably what you see from other groups online. To me, it’s a trust. Right. And you can talk about. I gave you a couple of examples because I think it’s better to give some examples as opposed to just talking about stuff in the abstract. But I had a client that I did a deal for a number of years ago. It was their first debt raise, institutional debt raise.

Phillip Cooper:
They’d never gone out to the market, done anything. They’d only done some small bank deals in the past. I did a $20 million raise for him, and I walked into the meeting, and this owner was the most distrusting person I probably ever seen running a company. And he’s a great guy. I got to know him over several years. He’s a great guy. But he walked in the door and then had the meeting or whatever. We ended up getting hired and went, come back for the very first meeting in person, and my boss was actually on a phone call with him.

Phillip Cooper:
He dialed in to do the call on conference, and the owner said, hey, we’re going to hang up. We don’t know who’s listing on their line. We’re just going to talk to Philip, who’s here in the room. So I think from a banker standpoint, building trust with your client is a difficult aspect of it. And I did. I got four deals for him over six years. And so after that first deal got done, I built a lot of trust with him. And that’s one example, I think that’s important on the banking side.

Phillip Cooper:
And I think between a buyer and a seller, same type of deal that I alluded to earlier. I worked on a deal for about nine months, and the buyer, at the end of the day, had told the seller something that turned out to be a lot, and it killed the deal after nine months worth of work, you know, and it just killed the deal. And, you know, I think that that’s an issue. And one of the things that I try to do when I bring people together, when an owner goes to sell, it’s not always about getting the highest price. Right? There’s a, the first thing I ask an owner when I get on a call with them is like, tell me what your goals are. Is your goal to sell and get the highest price? That’s fine. Is your, is your goal to, you know, sell part of the company and partner up with someone that’s going to help you grow and get to the next level? Well, then now I got to bring the right partner on for you, not just the one that’s going to give you the highest amount of money. And so you kind of have to know that.

Phillip Cooper:
And if it’s the second, if that one of the options is the second one, then there’s a whole lot more work you have to do, and you have to build trust between the buyer and the seller throughout the process. And if you structure a deal that’s going to benefit one to the detriment of the other, then you’re probably not going to have as good an outcome. At the end of the day, I try to make it so that both sides are happy with the deal at the end of the.

Dana Robinson:
Yeah, which is tough. And then for you that you’re inserting yourself in, you have to build trust, and then you become the cop for trust with the, with the seller. I mean, with the, with the buyer. Right. Because now you’re, you’re saying to the seller, trust me, I got this. You’re running your process, and now you actually have to be the credibility police to your, to your coat, you know, the broker on the other side, the buyer. And there’s not always a reason for trust. And sometimes there’s distrust.

Dana Robinson:
And you have to be the one that holds that together, don’t you? When you see sneaky maneuvers, you smell a retrade.

Phillip Cooper:
Yeah, I mean, you have to have, you know, I think as a banker, you have to deal jack of all trades to some degree. Right? You got to be a little bit of a finance, you have a little accounting, a little bit of marketing, salesperson. You know, you got to be a little bit, little bit of a psychologist over here. So because you do, to your point, I think you mentioned at the very beginning, is you got to do, you do a lot of handholding, and I don’t mean that in a negative way to any business owners out there. It’s just they know their business very well, but they don’t do what I do every day. So it’s usually a new area for them. And they’re looking, if they don’t have somebody that they can rely on to give them good advice, you know, then they’re kind of relying on you to do that. And so you just try to make sure that you’re very transparent.

Phillip Cooper:
And I have, you know, we try to set up calls every week with the clients and kind of give them updates and make sure all the work is getting done. But, you know, I have multiple calls with the client during the week, and a lot of those are one on one calls where I say, hey, here’s the last conversation I had with the buyer. Here’s some questions that they asked me. Here’s how I think you should respond, or you tell me how you want to respond, and I’ll tell you, yes, I think they’re really asking this question. And it’s really, you know, a lot of times you get asked by the buyer or the seller, you know, hey, are they going to do this deal, you know, are they going to be fair, you know, in the transaction? Because one of the things that comes out of your negotiating purchase agreements, you can’t, you can’t negotiate everything in a document, right? You negotiate everything that you think you can catch. That’s going to be important with the help of the attorneys. But the end of the day, you know, you get asked by the buyer. You get asked by the sellers.

Phillip Cooper:
Like, the seller’s like, hey, you know, are they, there’s an opportunity for them to mess with me here, right? And it’s like, well, I don’t think that they want to do that. Let’s get you on the phone with them. Let’s let you have a conversation because especially if the owner is going to keep a piece of the business or have an earn out going forward, you guys need to develop this relationship amongst yourself. And after this deal closes, I’m not going to be here every day. So you guys have to start developing this relationship now.

Dana Robinson:
Yeah, there’s a lot of fear on the part of sellers. So for our audience, you got a company, you’re going to sell it someday. I encounter the certain, maybe it’s rational fear of private equity buyers that they’ve heard stories from people that are around. You’re never going to get your hold back is one narrative. You’re going to get retraded really aggressively in a pinch, in a time when it’s going to be really hard for you to say no, they’re going to take a pound of flesh. There’s probably four or five private equity buyer narratives that sellers have in their heads. And for me, in our business, they’re sort of monsters. We have to try to settle early on because they create distrust.

Dana Robinson:
Do you see that in your practice? Does private equity deserve the bad rap for retrades and trying to keep holdbacks?

Phillip Cooper:
Well, that’s a whole, that opens up a whole other conversation with the difference between a proposal proprietary sale in an auction process, too. Right? And yes, there are stories out there about that. I think one of the other reasons that you want to hire a banker to kind of help you with the process is, as I mentioned it earlier, if somebody isn’t being genuine with you as you’re going through the process, the hope is that you’ve gone out and run a process. You have multiple bidders, so that they know that if they really want this asset and they bid for it, if they try to retrade it, there’s somebody behind them. If they don’t want to do the deal and they retrade it, at the end of the day, they know I’m going to pull it and take it to somebody else. Right. And we’re just going to finish up the process with someone else. I think where you hear those stories more often, and I was thinking about writing an article about this one, the difference between a proprietary and an option.

Phillip Cooper:
But I hear stories from cpas and from wealth managers, whatever, talk to business owners all the time. It’s great. Look, I’m not saying negative things about proprietary deals or one way or the other. Each proprietary and auction all have their places in m and a transactions. But a lot of the horror stories do come from people that are approached by one buyer and say, like, hey, we want to do this. And look, it’s not always the buyer’s fault, right? It’s not just them retrading at the 11th hour because they know they have an owner that’s been doing this for six months now, spent a bunch of money and doesn’t want to back out. They think they can retrade it and get a better deal. Sometimes it has to do with the buyer just not providing the diligence materials or the buyer saying they’ll do something in the early on stages that they’re not doing now.

Phillip Cooper:
Or the business performance as you go along in the process is not living up to the expectations. So there are kind of horror stories on both sides of it. Right. One of the things I tell my clients is the best thing you can do once we’re in the process, for me, is just to keep running your company and keep report putting up good numbers every month until this deal is done. Right.

Dana Robinson:
Right. Yeah. Which is true. The, the owners tend to get their eye off the ball when they’re in a transaction, and it’s not easy because they’re doing things for you that require their time. They don’t want their, their key people to know they’re running a process. They’re digging around their diligence themselves, and then they’re forgetting that they need to go schmooze and do biz dev and keep that business revenue up.

Phillip Cooper:
Yeah, definitely an issue when they’re, when you’re trying to get stuff done. And there’s a limited number of people at the firm that know what’s going on. And so you’re kind of putting infinite information load through, you know, a garden hose that’s, you know, it’s just coming through slowly, and you need to get the deal done.

Dana Robinson:
So, so I’ll tell you about, you know, the speaking. I’ll say, for listener’s sake, when Philip says proprietary deal, it means there’s no investment banker involved. It means that a buyer has found, a seller or seller has self listed. And this is really common in the small medium business market and the lower part of the lower middle market, where an owner just says, I don’t have the money to pay the retainer fee. I’m just going to put my market, my business out there on biz, buy, sell or something and see what happens. Or they get approached by a private equity group like ours, and that group says, we like you. We like your business. We don’t like bankers getting in the way.

Dana Robinson:
We’re just going to run this as a proprietary deal or an auction where you have an investment banker who’s run a process before they put the business on the market, and then they make a market, find a bunch of buyers, isolate the ones that are most likely to close and then help the seller choose a buyer. In the proprietary deal space, I found that it’s really important to be sure that you know what is the most important thing to the seller. And the reason is because you need to know what’s the thing that’s an absolute that you have to honor, that you can’t retrade, that you can’t deal structure around that you. That’s the thing. That’s their holy cow. And it’s not always the most rational thing, right? Giving an owner an earnout might give them some tax advantages and spread their gains over time. But if their absolute is I must have x dollars on closing, then you have to find a way to honor that or you lose credibility with them. And then once you’ve lost that credibility and a proprietary deal is very difficult to have them feel like they’re getting retraded, even if you explain, hey, there’s some outcome that we need to insure against, that has come from the diligence.

Dana Robinson:
How do you feel about that? I’m just making a statement of fact from proprietary experience. How does that land from the investment banker deal structure?

Phillip Cooper:
That’s very similar to my approach to it. So I think you’re talking about it doing it from the buyer standpoint and making sure you understand what the seller’s goals are. That’s what I do at the very beginning of it, before I take on assignments, we’re talking about doing the same thing. And hopefully the hope is that the owner actually knows what it is that all the different options available to them and what it is that they truly want. At the end of the day, it goes back to that research that they’ve done. I think it works the opposite way too. Dana is having the owner. I think it comes down to three things for the owners.

Phillip Cooper:
You know, researching everything is great, but you have to know what your goals are by talking to a bunch of people and doing your own research. And by that I include your family in that too. I mean, you should be sitting down with your family and saying, this is what we’re going to go through. And at the end of the day, this is what I think we’re going to have and what we’re going to do and what we want to do with the money and what our lifestyle is going to be at the end of the day. But once you’ve done all that, then the owner needs to think about, well, what’s a buyer going to want? You know, who’s the buyer going to be for my business is a strategic buyer. Is it a financial buyer? What are the things they’re going to look for in my business that, you know, I need to make sure that I have? And then once you’ve answered those two questions, then you got to go back and examine your business and say, is my business going to deliver the goals for both myself and the buyer? If the answer to that is yes, you’re ready to go. If the answer that’s no, you got to go back and fix whatever you think is deficient if you want to get the best possible out.

Dana Robinson:
Yeah. Let’s talk about deal structure. You know, getting a deal done, especially when money’s not free anymore. Increasingly, I’m hearing and seeing the deal structure. When I first learned a little bit about m and a as a young lawyer in the early two thousands, you know, we dealt with a group that functioned like a private equity fund. It was called Masco. They, they were aggregating brands and sold into a big box. And I realized just how structured deals were at the time and probably was similar in terms of interest rate and economic climate at the time.

Dana Robinson:
And then, of course, we had the surge of many years of all cash when funds could borrow against their portfolios and against their LP commitments and whatnot. Without needing to say whether I’m right or not. Let’s just talk about what does deal structure mean and how do you set expectations and teach owners about what’s going to be presented to them so they’re prepared for the variety of offers and structure.

Phillip Cooper:
So in a typical deal, and let’s just set everything equal for a second. Let’s say somebody’s going to go sell their business for $50 million or whatever the number is. Deal structure usually comes up when there is a difference in valuation. That’s a very common example, and it’s very topical, given where the market is today. Right. So ways that you can structure around that, if somebody doesn’t want to, you want to get $50 million for your business, someone wants to pay you $30 million for your business. And how do you get around that? Well, a couple different ways. You can do it like you can, and maybe it’s because the owner’s like, look, you know, my business is doing 10 million today.

Phillip Cooper:
I think it’s going to be doing 15 or 20 million in the next couple of years because all the things that I’ve been doing, buyers typically don’t want to pay for future events. They want to pay for what you built today. And so to bridge that gap between the two. A lot of times you put deal structure into it. And maybe what that means is, okay, you may get 50 million for business, but maybe you’ll sell 25 million of your business today, some portion of your business. And let me give you one example. Maybe you’ll sell 25 of your business today, maintain some ownership, and if you sold it to a private equity group, they’re going to sell it three to five years down the road, typically, and they’re going to try to triple their money on it. And if they do, then your ownership percentage is going to go up and the hope is that maybe you sold it for 25 today, the next piece that you sell, maybe you get 50 for that.

Phillip Cooper:
So you’re getting 75 all in between a sale, partial sale today and a partial sale down the road. I actually had that happen on a deal a couple of years ago, a very large transaction that we sold two thirds of the company and we got one price and then we sold the rest of it. We had to put a formula in there for agreement for the rest of it. And that formula basically was hit and they got as much money the second time around despite it only having a third of the company. So it worked out very well. Those are the types of things in terms of structure. Other things that you can do is obviously, you know, somebody gives you a, you know, you get 25 million cash up front, you get maybe five or 10 million of a seller note, you know, so that you earn that and get paid that over time. Sometimes it’s based on just maintaining performance.

Phillip Cooper:
It could just be a straight up, you’re just going to get your money out over time. Earnouts are another way to get there where you can get an additional, maybe another 10 million. In the example I gave, if you’re meet certain metrics, like in the example I gave, if the owner says great, my business is going to go to 15, well that’s great. If your goes to 15 for the next two years, maybe we’ll give you another $10 million as part of the purchase price or some percentage of the upside of that purchase price. That gets you start moving from what they want to pay, what the buyer wants to pay, what you want to do. You can have other things in there too. Such stock carries. I’ve mentioned that a little bit before.

Phillip Cooper:
You could have that and be another component of it where, you know, get cash, you get a seller note, you get an earn out, and maybe you keep some of the ownership of the company and that’s especially ownership of the company’s common. If the owner is not riding off into the sunset, is going to continue to manage part of the business. Right. They’re going to be the helm and running the business, then they should participate in the upside.

Dana Robinson:
Absolutely. Yeah. So the. If someone’s selling and sticking around, they can get paid for the value they create. If they’re. If they get their earn out and they can get the equity for the value they create by keeping some equity rolled into the. Into the. The new business.

Dana Robinson:
And you’re right, the seller notes were uncommon for the period where interest was so low. But Mez debt’s at 14, 15% right now. So a seller who’s willing to take ten or 12% on a note might be ecstatic to have the income from a promissory note with some reasonable security on a business that they used to own and get that income, spread their taxes as well across the income period, they’re taking the note over.

Phillip Cooper:
You know, there’s another structure that’s pretty common, I’ve done a few times in the last few years, which is. And sometimes it’s not entirely in a sale of the company, but let’s. Let’s say the owner keeps a piece of it, that’s fine. But they. They get some portion of whatever, and maybe they’re taking an equity investment, but they put money into it. The investor or the buyer is going to put money into the company, or give the owner money in a partial sale. And then let’s say they put $40 million up, right? And then they get. They get.

Phillip Cooper:
Their plan is to sell it within the next five years. So they get a return off their 40 million, say it’s 10% per year, or maybe they get a two times liquidation preference. They get double their money back, and then after that, on the sale. And then after that, they split, you know, a pro rata split of the waterfall of the proceeds beyond that. Does that make sense? So, let’s say you get. They put $40 million in today, and then they sell the company for $150 million down the road, they get $80 million back, and then the rest of the 70, they split some way, either in the owner’s benefit or their benefit or whatever. So that works out to be a fair deal, and the owner will do the deal today, and that way you take valuation of what the value of the company is today a little bit out of the equation. It’s really about what the owner’s taken off the table today, and then what they think they’re going to get five years down the road.

Dana Robinson:
Yeah, and for those, you know, there are obviously, there are horror stories where someone’s rolled equity and tried to get an earn out and things go south. But, you know, I have personal knowledge of people that have sold two thirds of their business and cashed out 30 million, and then the third that they kept is worth 150 million at its exit, you know, where they get a dazzling return and then they keep 10% of that and then that recaps and they get another $100 million down the road. So the, you know, especially if you’re playing with a group that you believe knows what they’re doing with your industry and in your industry, there’s an opportunity for you to, you’re becoming a private equity lp, in essence, but they, you know, you put your rolled equity into.

Phillip Cooper:
The hold company earnouts are tough. Earnouts to me are the risk. And earnouts is in the question that comes up is, okay, great, I got to meet up. You know, the company’s got to meet a certain metric or milestone, whether it’s growth or revenue or profitability or adding customers or whatever the metric is. And then it’s like, who’s going to be making sure that that metric is hit? I mean, technically that metric, if it’s structured correctly, the earn out structured correctly, everybody wins at the end of the day. But that goes back to the trust thing with the owner saying, well, look, if they’re going to be cramming down a bunch of costs and expenses on this thing, so I don’t get my earn out, you know, I don’t know if I want to structure an earn out in this. So I try to typically tell owners is like, look, get a number at close that you’re happy with and you can live with, and then the earn out is gravy. On top of that is basically the way I would do an earn out because I’m just not a big fan of just for a lot of those reasons, because there’s really got to be a lot of trust and uncertainty over the next year or two.

Dana Robinson:
Yeah, yeah. We’ve taken to an interesting model ourselves, where instead of an earn out, we’re using an attrition calculation on gross revenue based on the accounts that we that are acquired. And, you know, it’s a little risky for us, but it means that EBITDA is our problem and the revenue we’re buying is still theirs for that earnout period. And, you know, it’s, they’re getting the value upfront that they want, but we claw it back based on an attrition calculation so that if we’ve lost business at the top and they, in most of those cases, we try and empower them to maintain those relationships for us so that they could backfill. For example, I did this with a personal roll up I did in property management with some of the acquisitions. The, you know, just. And I actually had a, when I sold that, I had a clawback, I lost 30 or $40,000. It wasn’t huge, but I lost some money on, on that.

Dana Robinson:
But it was fair. The business lost a couple of key accounts and I couldn’t backfill. And, and so my, my claw back out of the, out of my holdback was, you know, was held by the seller to offset the risk that they took about holding the accounts together for a year.

Phillip Cooper:
Yeah, I mean, the best ones are where it works for both, both sides. Right. Like, if you’re worried about them doing something to hurt EBITDA, it’s like it’s not in anybody’s best interest to hurt EBITDA and structure the deal so that maybe the owner gets 20% of the upside or whatever, or 25%, but the other side is the buyer’s going to get 75% of the. So why wouldn’t they want to grow it and maybe pay out a little bit if you can negotiate it?

Dana Robinson:
Right. Well, as we come up to the end of the podcast, I have steered you here and there and bounced you around all things m and a and investment banking. There’s any nugget you can think of that something Phil Cooper knows well, that you want to throw out there a piece of knowledge that the audience might benefit from.

Phillip Cooper:
You know, I think I wrote something on this pretty recently. You know, the different reasons that you can hire an investment banker, but at the end of the end of the day, you got to do your research. There’s plenty of resources out there, plenty of people that will be happy to come talk to you about it. And if you do all that stuff and just really do your homework and approach this like you are running your business, you know, you’re probably going to have realistic about your expectations. I think you’re going to probably have a pretty good outcome at the end of the day, barring sudden changes in market conditions, because there’s an old saying in our industry, Dana, which I’m sure you know well, which is time kills all deals. So, you know, the longer something drags out, you know, the greater the chances it’s not going to happen. And the best way you can prevent something like that happening is just to do your homework and make sure you’re prepared in shorten the amount of time that you’re, you know, once you’re ready to go, you’re out in the market and getting a deal done.

Dana Robinson:
Love it. Good sage advice if people want to connect with you. Philip with two l’s, Cooper with two o’s, you’re on. You’ve got to be on LinkedIn because everybody is.

Phillip Cooper:
Yes. Company I work for is called palm tree.

Dana Robinson:
Palm tree. And what’s the URL for palmtree?

Phillip Cooper:
Palmtreellc.com.

Dana Robinson:
Awesome. Palmtreelllllllllc.com. dot any, any special, like what’s your, let’s just be sure you don’t get a bunch of people calling to sell $5 million businesses. What’s your sectors and your size?

Phillip Cooper:
Yeah, so look, I mean, I would say that we’re probably in the sell side m and a front. We’re probably in the 25, 30 million and above range up to a few hundred million dollars. I did one $250 million a couple years ago. So we’re capable of doing all sizes. On the debt side, we can go a little bit lower. I’ll probably say we’re probably in the 10 million plus range on the debt side up to, you know, 100 million, $200 million. You know, we’ve done a lot of those, too. I’ve done a lot of couple hundred million dollar deals in my career on the debt side as well.

Dana Robinson:
Good for you. And any specialty sectors and industries that or is your firm a generalist? That covers everything.

Phillip Cooper:
We’re agnostic right. At this point in time. And a lot of my referral network is people that, you know, wealth managers and other people that represent families. So I don’t control what they send across my desk. And if I feel like we can do a good job getting it done, we’ll take it on. But we do have some specialties like healthcare, a specialty of ours with our group out of Chicago, industrials. We’ll do business services and tech consumer products. I’m focused on industrial manufacturing and maybe some aerospace and defense just because I’ve had some experiences than those in the past.

Phillip Cooper:
But I mean, my career, if you look at it, I’ve done a little bit of everything, and I think a lot of the other guys at the firm are pretty much the same.

Dana Robinson:
Awesome.

Phillip Cooper:
Good.

Dana Robinson:
Well, thanks for coming on the Exit Plan podcast. Anyone listening? Don’t forget, bug me, email me. Stay connected. Hello@danarobinson.com. thanks for coming on, Phil.

Phillip Cooper:
Thanks, Dan.

Dana Robinson:
Thanks for joining me on this episode. Of the exit Plan podcast, I’d love to hear from you. Feel free to hit me up with questions or comments by emailing me at hello@danarobinson.com or leave comments and questions by calling 858-252-7785 call 858-252-7785 and leave a message.