Family-Owned Businesses (ft. Chris Parisi)

Chris Parisi:
What I tell all of my clients is that everyone loves to think they’ve got the shiniest object in the room. But do a real good self evaluation of your business. If you believe you’ve got an a plus business, you’ve got all the choices in the world, the private equity environment that you might be going to approach, you need to approach it from a point of strength. Our job is to educate and navigate that with you. Go into that with all the confidence in the world. Apologize for nothing. If you’ve got a great business, people should be held to realize that and give a fair value for it.

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 as a day job or running a business. Let’s get started with this episode of the Exit Plan podcast. Hey, everybody, it’s Dana Robinson coming at you with an episode of the Exit Plan podcast. Today’s guest is Chris Parisi, a partner at Karl Marx Advisors. I’m gonna let Chris talk about himself and talk about Karl Marx, and then after he’s introduced himself, talks a little bit about what he does.

Dana Robinson:
Right now, I’m going to try and pick his brain on behalf of all of our listeners and learn what we can about mergers, acquisitions, private equity, and how to optimize a business that you’re going to sell someday. His focus is family owned businesses, which I think fits very well with a lot of the listeners who are families that own a business. Chris, thanks for coming on today.

Chris Parisi:
Yeah, Dana, thank you for having me and appreciate the podcast and everything you do. So really privileged to be here.

Dana Robinson:
Well, I don’t think you need to list your resume or your bio. So how did you end up doing. What you’re doing was this. You’re a ten year old prodigy, and you just decided, I’m going to become an investment banker.

Chris Parisi:
Well, I’m going to start at around ten, maybe eleven. You know, when we were getting together, I was reading your story, and your story starts out very much the same. My story started out, I was eleven or twelve years old, and I wanted this new bmx bike. And my dad said, well, that’s a $200 bike. And I don’t have $200 to buy you a bike, so you better go get a job.

Dana Robinson:
That’s familiar.

Chris Parisi:
And I said, all right, well, I drew up some flyers and I went around the neighborhood and I stuffed flyers in the mailbox to cut their lawns. And, you know, a week later I had four or five clients in the, in the development that I lived in at $20 a pop. So I was making $80 to $100 a week mowing lawns.

Dana Robinson:
That was way better than mine, man. My racket down the, in the lawns. I don’t think I’ve ever had more than five lawns on my, on my, but I didn’t have a very big tractor. Good for you. That’s fantastic. And so did you get the bike? Did you race?

Chris Parisi:
Yeah, I got the bike. And then a couple years later, I wanted a new remote control car and my dad told me the same thing. So went over to Burger King and got my second job and I got the remote control car. So it’s been a series of carrots and then figuring out how do I go get it. So at twelve mowing lawns, I didn’t know I wanted to be an investment banker. But, you know, fast forward ten years or so later, I majored in accounting and undergrad and I did that for a couple years. And then after that I went to, at the time, a little known private equity firm called the Blackstone Group.

Dana Robinson:
Oh, wow. Yeah, they, they got you right out of college and they were in their freshman year of business.

Chris Parisi:
Yeah, yeah, it was. So I worked at eny first and then Blackstone, and I was there for a two year stint and then, but that’s sort of, you know, where my first kind of foray into finance and I’ve been in investment banking ever since. So. And most recently, you know, you mentioned Karl Marx advisors. And I do want to sort of address the elephant in the room. It’s a funky name for an investment bank. We do spell it a little bit differently than the, I’ll say the infamous socialist or communist. And we’re celebrating our hundredth anniversary next year.

Chris Parisi:
So I think he was named before the other Carl came to notoriety. So we have been around for 100 years and I run our m and a group mostly working with family owned businesses like you mentioned in the sale of their businesses. So these are folks who have all private businesses, usually, you know, 2nd, 3rd generation, very well established in their own industries and sector. It’s very important to the industries they serve and lots of times they’re either getting to the point where they don’t have an heir to pass the business on to, or the business has become so valuable that they’ve got other things they want to do with their lives. And they say, you know what? Maybe we should think about monetizing and doing some of these other things. So I’ve been doing that for the last, you know, couple of decades and wake up every morning happy to do it.

Dana Robinson:
That’s awesome. Well, in order to ask the questions I want to ask you, I have to talk about me. And since it’s my podcast, I’m going to use this. So I am currently a private equity fund manager, which means that we’ve raised the fund and we manage some funds and use those funds to buy assets. The assets right now are landscape companies. So that sounds all highfalutin. But even as a young entrepreneur and even as a lawyer, it took me the last 25 years to figure this out. And I didn’t have the benefit of, like you did, going straight out of college to work for what would later become one of the biggest private equity groups in the world.

Dana Robinson:
And so, as someone who is an entrepreneur raised by wolves, I kept trying to figure this private equity thing out. So I’ll tell you a funny story that includes the name of your firm. I owned a property management company as, I guess, my fourth business in 2002, three, four. And I had my law practice run out of the same office. My wife ran the property management business, and one of our guests came to rent a beachfront unit one year. And, you know, I had interacted with private equity, but just didn’t understand the business. And this very, you know, like, sophisticated and smart, articulate, but very kind person was staying with us. And we started chatting, and this guy’s name was Joel Jacks, and he’s one of the private equity partners there was at Karl Marx.

Dana Robinson:
And I remember just thinking, I want to go hang out with this guy because there’s so much that I want to learn that’s so elusive. It’s like, even though you would think, well, Danny went to law school, Dana, you’ve bought and sold some businesses. And when I was, you know, 20 years ago, zero three or zero four, talking to Joel Jacks, I still didn’t know. I still didn’t understand. I, you know, two year, two later, I sent him a sim on a business that I was invested in and was like, what do we do with this? Can you buy this? You know, like, I. And, you know, he’s like, well, we have a mandate. We only buy Govcon. And I was like, I don’t understand any of this.

Dana Robinson:
It’s still elusive to me. Okay, I’m going to keep going. I grew a company that I co founded, sold it to private equity, didn’t recast our financials the right way, left a million or two on the table, didn’t keep equity and rollover, and when they sold for eight times what they paid us, we left another, whatever, $10 million on the table. I feel like a child. And so I’m just being honest about it. That even though I could say I transacted multiple businesses, I had been a lawyer and helped clients transact multiple businesses, I still didn’t understand and met smart people like Joel Jacks, that were very considerate and open to sharing what they knew. I think my listeners, I’m speaking on behalf of who I think are my listeners, don’t know that much either. We probably could explain what is investment banking, what is a private equity sponsor and what’s it like to sell to them.

Dana Robinson:
What are the things that most family owned businesses don’t know that they don’t know? Because if I didn’t know that for 20 years, and I’m in those cycles as a piece of the ecosystem, how many others that own businesses, they’re just focused on running their businesses, Chris. So anyway, I’m setting all that up to say I love that 25 year seasoned veteran of advising family owned businesses on preparing to sell. I think, let’s just start with, like, where would you, if I brought you a business right now? I’m the business owner. One of my guests is, where do we start helping them understand what’s going to happen with this m and a transaction, your role, the auction process, what can you teach us?

Chris Parisi:
So the first thing I would say is how, how me and my team, how we approach the business owner. And by that, I mean I’m always incredibly humbled. Frankly, a little bit surprised when someone hires me. And I say that because they’ve worked on this business for 2030 years, maybe it’s 2nd, 3rd generation. You have decades of work that’s gone into this business, you know, maybe multiple generations, maybe there’s ten different family members working in it.

Dana Robinson:
Yeah.

Chris Parisi:
And they meet me two or three times and they’re like, yeah, you’re the guy we’re going to entrust with all of that. Wow.

Dana Robinson:
Yeah.

Chris Parisi:
So it’s a pretty humbling moment, right? And, you know, there’s a little bit of imposter syndrome, like, why me? You know, even though I’ve wanted to. I want to help them. I’m extremely confident that we’re going to help them. And we’ve done it dozens and dozens of times. I’m always trying to think of it from their vantage point. So that’s how we take a lot. We take every transaction personally because we know our clients do. And that sort of sets the tone of how do we interact, how do we treat our client.

Chris Parisi:
And because they’re entrepreneurs, family owned businesses, you know, kind of going back to what you were talking about, Daniel, with your experience, you know, I know this in working with an entrepreneur, you know, most of their career, they’ve been the smartest guy in the room or they’ve been the most informed, the most experienced guy in the room. And they get into this process and all of a sudden they’re not. And it’s my job to make sure that before any decision point is put upon them that they are, my job is to make sure that I’m taking all the time to, you know, behind closed doors, whatever it takes to make sure that they fully understand every step in this process. They fully understand what every decision point means so that they can make, I’m not making the decisions for them. They can make the decision of selling their business and what the terms might be and who the partner might be and what that might mean for the company go forward, because if they don’t feel comfortable in the decision process, they’re not going to transact. And so it’s my job to make sure that they are comfortable. So that really sets the tone of how we work with them. And so that first question going to your question about, you know, what’s the first thing you do? My first question to them is what, you know, what are you trying to accomplish professionally? What are you trying to accomplish personally? You know, we talked about me at Blackstone 30 years ago.

Chris Parisi:
That’s when private equity, as you know, was a very small world.

Dana Robinson:
Yeah.

Chris Parisi:
Now there are, you know, I don’t know, 3000 different private equity funds and there’s, you know, different structures that can be constructed for, you know, every type of transaction. So the business owner, when he’s selling, he has a lot more choices that he or she did 30 years ago. So the question to them is, what do you, what are you trying to achieve? Tell me what you’re trying to achieve. Tell me what’s the driver? And then let’s talk about how does that, what’s possible and how do we go forward.

Dana Robinson:
Yeah. And in that process. So you’re with incredibly smart people who you could assume know a lot. You’re humbled. They’ve picked you. What’s the, how do you, how do you gauge what level of, kind of education around the process they need? Do you just kind of intuit this is someone who doesn’t know what I even do? Does this person, you know, kind of understand a lot of the, you know, are they around culturally a bunch of people who’ve already taken exits and have some flacks of understanding in that?

Chris Parisi:
Yeah. So I always approach it that they don’t know anything and I tell them, likewise, I don’t know anything about your business. So I say, what I’m asking of you is when you start describing your business to me, I want you to speak to me like I’m a five year old. I want you to explain to me not what your business does at a high level. I want to know how do goods come in the door? When they come in the door, where do they go? How do they get manipulated into a inventory? And how does that, what are all the steps until they go out the door? So I want to know everything and I commit to them, and I’m going to do the same about this process on my side. So you’re going to teach me a lot, and I’m going to teach you a lot, and we’re going to walk hand in hand through this process that way, and that’s how we’re going to get to the goal wide. Now, they might say at some point, okay, Chris, I get it. You know, I don’t need you to explain this part to me, but I’m not going to take anything for granted that they know any part of the process, because most of my clients have never done this before, and most of them will never do it again.

Dana Robinson:
That’s right. Yes. Family business exits are the first and often the last, versus the transactions, where advisors are taking one sponsor group stocks and, you know, their asset and. And then a different business and a different advisor. So I guess because that’s your customer you’re dealing with, someone who’s learning from a beginner’s mind. Every new client of yours.

Chris Parisi:
Yeah. I’ll tell you, I’ll give you a good quick story. I had a guy many years ago, he told me he wanted to sell his business. I said, great. And he says, I want to sell it for $76 million. I said, okay, that’s a pretty specific number you’ve got there. How did you choose $76 million? And he said, well, the guy at my country club who has the locker next to me, that some bitch sold his business for $75 million, and he won’t stop talking about it. So I want to sell my business for 76.

Chris Parisi:
Fortunately for me, his business was worth about 90.

Dana Robinson:
Yes. Good, good.

Chris Parisi:
It was a hurdle that we could hit. But, you know, it’s a funny anecdotal story, but it happened, and it kind of gives you the mindset of they’re coming into the transaction not with a whole lot of knowledge about what the capital markets. And that’s why they’re going to hire me, and that’s why they’re going to pay me. Right. So I don’t take any of that for granted.

Dana Robinson:
Yeah, no, I love that. So price expectation is one of those things to manage. You have a lot of expectations to manage. Timing, price, what, like, again, let’s just take a hypothetical client that’s maybe listening right now. They’re thinking of selling their business. They don’t know. Is it going to take me a year to prep? Is it going to take me three months? What’s the process once we’re there? Talk me through that.

Chris Parisi:
Yeah. So for most of our clients, we would recommend a two stage auction process. And just simply that means we’re going to go out to a universe of potential buyers, and we’re going to have them submit a first round bid. And then after we narrow that list down, have them submit a second round bid. So that’s the process we take most of them through. And that process, we advise clients. You know, think about it. From the day you hire us to the day the money gets wired to you, is going to be about an eight to nine month process.

Chris Parisi:
And we say, you know, listen, we’re going to do a lot of the heavy lifting. We’re going to do as much of that heavy lifting as we can. And part of that going back to talking to me like I’m a five year old, I want to learn as much about the business as I can so that we can answer 85% of people’s questions without having to bring you back in. But there are things that we’re never going to fully understand and know or be able to grab, you know, to get a hold of. And this is going to be a second job for you and, you know, probably your CFO, if you have one. So when, you know, I advise people that when, when you do think about selling your business, this is not a kick the tires experiment. This is when you’re ready to do it, go do it. Do it once and get it done.

Dana Robinson:
Do you find maybe people have already prepped for this. Do you find that? People come in and they say, great, let’s get going. But they have, you know, six more months worth of work just to get their house in order. Do you feel like clients come to you with their house already in order, ready to kind of make the decision, lock and load and get it going?

Chris Parisi:
Yeah. So most of our clients, they don’t come fully prepped. There is a little bit of getting the house in order. You know, sometimes it’s the shoe box of receipts. You know, here’s kind of my financials. Right. So we do. And we do budget that in.

Chris Parisi:
We tell clients that part of this is we’re going to spend a couple of months upfront just getting the house in order, prepping things. I mean, you talk about working in private equity when you’re selling a private equity portfolio company out of a private equity fund. You know, those companies, they’ve spent the last five years prepping for sale.

Dana Robinson:
The entire process is prepping for sale. I mean, processes.

Chris Parisi:
My clients, they spent the last 30 years meeting payroll and getting goods out to customers. They haven’t been thinking about the sale. So, you know, in typically, the biggest financial transaction they’ve done before hiring an investment banker is having sold a house. And actually, I try to use that analogy for them, but, yeah, there’s a lot of prep work that goes into it. So typically, we’re building two to three months on the front end for that.

Dana Robinson:
Okay. Yeah. And like you say, that’s a. Can become a second job for whoever that is, because you can’t get into their ERP and just start yanking reports. Right. So you have someone that you’re asking for data from who’s got to give you things, and then you’ve got to ask questions. That seems like a short window to be able to accomplish that in prep for a sale. But is that, like, I don’t have visibility into.

Dana Robinson:
I worked for a small investment bank where there was no one but partners and a couple of associates.

Chris Parisi:
Yeah.

Dana Robinson:
You must have some analysts and some administrative support to get through that level of kind of review and understanding in a couple of months.

Chris Parisi:
Yeah, we’ve got a full team. So typically we’ve got four people on a deal team, which is usually two partners, a VP, an associate, and then an analyst. And the other thing, Dana, is that we’re also. We’re advising our clients to bring in more third party advisors. So, you know, ten years ago, you almost never saw a quality of earnings done on the sell side. And we pretty strongly suggest all our sell side clients now to engage in accounting firm to do a quality of earnings. So that’s a process that the buyers usually would do in their confirmatory diligence. Now, we’re telling our clients, the sellers, that you should really engage an accounting firm, have them do that thorough scrub of providing that quality of earnings report so that the buyers have a high degree of confidence that the earnings that you say you’re achieving, you are actually achieving.

Chris Parisi:
They’ve been vetted by a pretty well respected accounting firm. So things like. So we are using other advisors to help us get that process underway.

Dana Robinson:
Now, that’s interesting. And just for those that are, again, when we throw out technical words, I’m just going to try and call them out for the people who are where I was 20 years ago, learning how does all this work so that I could sell business and do better. Quality of earnings is a report conducted by an accounting firm that is not an audit, but a review and analysis of the financial condition of the company. That includes the validation of the bank statements to the accounting, tying the taxes to the accounting. What else would you say if you’re helping a new business owner who’s never transacted understand a Qoe?

Chris Parisi:
Yeah, I mean, essentially it’s, you know, a common phrase that, Dana, you guys, like you and I would use is, you know, EbItDA, which is, it’s not an official accounting metric, but it’s sort of that proxy for how much cash does the business generate. And, you know, when a buyer, in most businesses, when a buyer’s looking at, you know, how do I ascribe value here? How do I know what to pay? The cash flows of the business are really what are going to be the primary driver. And that quality of earnings ultimately is getting to the answer of, okay, here are the cash flows that the company is really providing. Here are the cash flows that can be expected going into the future.

Dana Robinson:
Yeah, and EBITDA earnings before interest, tax, depreciation, amortization is the, as you say, the driver for value. Everybody, you know, the market, other than maybe, I think SaaS businesses still value on multiples of revenue, but almost all, I mean, service businesses maybe as well, but almost every business you’re dealing with or that I’m dealing with, you need an EBITDA to get to a value, and then the market pays some x times that EBITDA, depending on what the reason is to buy. So we buy a landscape in the bottom of the lower middle market, buy a $2 million EBITDA landscape maintenance company for whatever, or in some cases, a little more times that EBITDA. So you can’t sell and buyers won’t buy until they get to that. And as you say, the buyers will spend the money to get the quality of earnings. But if you want to come in as a strong seller, then you’re saying, get that done first, and then you come to the market with something that is stronger, going to get more confident bids.

Chris Parisi:
That’s right. I mean, everything that, when we’re trying to, I’m always very careful. I don’t want to spend my clients money on advisors when it’s not necessary. But in something like that, where if we’re selling a business for eight times the EBITDA and the quality of earnings can substantiate an additional, even $50,000 of earnings, now, all of a sudden you have $400,000 more in purchase price, and the quality of earnings itself probably cost you $80,000. It’s a pretty useful or it’s pretty good payback, usually.

Dana Robinson:
Yeah. And what about, do you end up in that couple of months in prepping the business, evaluating whether there’s any business decisions that can be made that are accretive before transacting? So, I mean, do you look at, look, you’ve got a person on staff costing half a million dollars a year that you don’t need. We need to either eliminate that or convince the quality of earnings analyst or accounting firm that’s not part of the structure of the business. And get that off the books, because, as you say, if you’re selling at eight times EBITDA and you have a $500,000 staff person, that’s unnecessary to the go forward business, you add millions to the transaction. Right?

Chris Parisi:
Yeah. So the answer to that one is yes. In, in a certain way, by the time we get in there, it’s probably too late to, let’s say, in that case, get rid of the person and have a full year’s worth of earnings or earning savings to, you know, to realize it, what we do with the, you know, with the business owners is we go through a whole list of, you know, what are potential add backs, and an add back is simply what’s an expense that’s been incurred by the business that on a go forward basis we can substantiate is not needed. So whether it’s an employee who’s making a half million dollars a year, and then there’s the really easy ones, right? There’s the. Well, my wife is on the payroll, but she doesn’t really work here. So that’s an easy one. You know, they’ve got the country club membership or the, you know, the lux box at the local arena. All the, you know, they’ve got, you know, ten family cars going through the business.

Chris Parisi:
These are all part of the process is for decades, business owners typically are not trying to maximize the amount they paid Uncle Sam.

Dana Robinson:
Right.

Chris Parisi:
So they’re trying to decrease earnings to a certain extent. When we get involved, we want to increase earnings. Now, we don’t want to restate their financials and have them incur any more taxes, but we do want to include those as add backs to show a buyer. Okay. Once you take control the company, you’re not going to have to pay for the ten cars, you’re not going to have to pay for the sports tickets. So we’re going to add that back to the earnings and then sell the company on that adjusted EBITDA.

Dana Robinson:
Dana Robinson here. Quick plug for my book, the King’s Flyswatter. You can see it here behind me. If you’re watching this, I’ve got it in my hand. It’s a beautiful hardcover book, printed to make it giftable, something that you can share with a family member buy as a gift. So this latest book, it’s a fable about a person who has a really crappy job. Let’s just start there. This is a book that most people can relate to because we’ve all had crappy jobs.

Dana Robinson:
This is the story of Ubar, a servant in the court of a babylonian king who masters his boring, monotonous job and then learns to listen to the king, hearing him rule the kingdom while quietly swatting flies behind a cane. Eventually, Ubar becomes the wisest and most successful man in the kingdom. The story is fun, and it’s easy to read, but it’s not mythology. It’s my story. And as I shared the idea with colleagues and friends, I learned that it was their story. And guess what? It’s your story if you’re at a job of any kind, one that you love, when one that you hate, one that’s just enough to get by. This little book gives fresh perspective on how to leverage that job to get you something greater than a paycheck. The lessons in this parable are entrepreneurial lessons, but not what you might think from the current entrepreneurial zeitgeist.

Dana Robinson:
If you or someone you know are looking for a real pathway to entrepreneurship, here’s the secret. Your job is the way out of your job. It’s counterintuitive, but once you see how it works. You can’t unsee it. Learn the way of the flyswatter from the parable of Ubar and from the stories I share from my 30 year business journey. You can get a free copy of the King Sply swatter by going to danarobinson.com. Right. The business owner, for example, is listening to this, that, that sort of thinks, well, you know, someone told me that the transactions are at eight times EBITDA in my range.

Dana Robinson:
Getting to that EBITDA, obviously, you take all that depreciation for any of the equipment off. You take anything that’s being amortized off. But also if the business has purchased vehicles in our business, I feel like a lot of people, the business owns an rv. One of them we bought accidentally gave us our rv. We had to give it back. So, yeah, these things. And it’s encouraging to some sellers to go, oh, that doesn’t count, again, because it’s the cash flow that they’ve decided in their discretion to buy something in the name of the business that the business doesn’t need for the new buyer. It often includes one very expensive family member who doesn’t work much, and they’re usually doing marketing or something.

Dana Robinson:
Right, Chris.

Chris Parisi:
And sometimes that’s the whole impetus for the sale itself. Part of our job selling family owned businesses is we’re financial experts, but we’re part time psychologists, so we deal with it all and hopefully act as a fiduciary for, you know, the entire family.

Dana Robinson:
Yeah, yeah, that’s, that, that’s dicey. I mean, the, I was on a call with some tax questions on a seller that’s selling to us, and they kept having to say, well, we don’t rep, we don’t represent the shareholders. We represent the seller. And, you know, and then at some point, we’re going to have a room with five lawyers because you, at some point, get one for each shareholder. How do you straddle that when you’re becoming this kind of trusted family friend that’s going to bring this whole family, give them confidence, help them understand the process, keep them from the anxiety, literally, your job is to regulate the anxious humans that don’t understand what’s happening. Then most of yours have multiple humans and lots of voices. How do you manage that?

Chris Parisi:
Well, you have to, from the outset, always remember that when we’re getting hired to sell the business, we are getting hired by all the shareholders. So regardless of who the particular relationship might be with, it’s important for us that we are there doing the duty of all the shareholders. We’re trying to be as fair minded and down the middle as we can. There are times when we are sort of the go between between relatives because something has happened over the years where there’s distrust or people have fallen out of favor with each other. And if we can present ourselves as from day one, acting in everybody’s interest, hopefully we can bridge some of that. Right. And it’s something that we do often. And, you know, part of our job is also to bring value to all the shareholders.

Chris Parisi:
Right. We bring them a deal where the selling shareholders, they recognize this is a, you know, a crucial point, and they’ve got a bird in the hand here, and sometimes we’ve got to coach them that, you know, this is the time to look past some past perceived transgressions or whatever it is, because you’re at a point now where you’re talking about your financial future, you’re talking about your kids, your grandkids financial future. So today is the day to begin to look past all that.

Dana Robinson:
Are you the middle child in your family?

Chris Parisi:
I am.

Dana Robinson:
I am, too. And it sounds like I’ve played this role you’re talking about multiple times. And there’s a certain skill set that comes from being the middle child, so. Well, tell me what you think are some things that a family owned business needs to be thinking about. If they’re like, yeah, we know we need to sell that. They can be thinking about a year prior to coming to you. They want to know, what can we do so that when we show up, you guys lock and load. Two months of prep and eight months to auction.

Chris Parisi:
Yeah, so, I mean, a couple of things always jump to mind if I’ve got, you know, a year plus to talk to a client. You know, the easy one is, you know, just to start making sure that, you know, the financials are really recorded well, that there’s, you know, good reporting, that there’s good packages that, you know, we can digest and then, you know, start to manipulate it. On the business side, a lot of our clients, they’ve grown up and they’ve become large with the support of one major customer. And that’s great as the business is growing. But when you go to exit that customer concentration, it can be limiting. When we do have a little bit of time to talk to clients, say, listen, if you have any initiatives on bringing in other customers or expanding sales with a particular customer who’s not the number one guy, this would be the time to start to do that, because the buyer universe is going to look at you a lot more favorably and give you a much higher valuation if they don’t feel like there’s a particular customer who, if they left, could really put a dent into your earnings.

Dana Robinson:
I like that. What about, have you raised your prices sufficient to keep up with inflation? Kind of a problem. I mean, again, like, I play way down at the bottom of the lower middle market. You’re way up market. But for sure, for us, there is the fear if I raise prices, then I’ll lose customers. And so you have this frog in a kettle the owner hasn’t. And in some cases, we just can’t justify buying a business when for every dollar we generate, we lose 10%. Right.

Dana Robinson:
So do you think a year in advance is enough time to catch the, like, low gross margin problem that you might have that creeps into those businesses where the owner operator hasn’t raised prices in a very long time?

Chris Parisi:
Yeah. So, Dana, it’s a great question, and it’s a pretty timely one because there is a lot of hesitancy to do that in the past anyway. I would say because of the recent inflation, because of the supply chain constriction that we had a couple of years ago. My advice to clients is, listen, if you haven’t raised your prices, I promise you, all of your customers are wondering why not. At this point, everybody else has. So it’s a little bit of a unique point in, you know, sort of the economic history over the last 20, 30, 40 years that you’ve almost got a free pass to do it, because everybody has. Everybody. Everyone has to.

Chris Parisi:
And, you know, we have clients who are still hesitant. You know, they look at their customers as true relationships. And I asked them, I said, well, let me ask you, has your landscaper, has he raised his prices on you the past couple of years? Oh, yeah. A lot. Okay. Have you been to your favorite restaurant recently? Yeah. Oh, yeah. Prices are crazy.

Chris Parisi:
Now. You’re still going to all these places. So if you understand it on the receiving end, then I promise you, your customers are going to understand it.

Dana Robinson:
Yes. Yeah. And certainly you’re right. Yeah. We’ve had this discussion in the landscape business, and customers are, you know, homeowner association wonders why the prices going up. And when they go to bid it, they realize that everybody else is coming in at 50% higher. And so our ask of a 10% increase seems modest after that. But, yeah, it’s the fear.

Dana Robinson:
Do you think a seller gets credit toward EBITDA for adjustments that they’re making that year prior? Do you think you can sell that increase as being meaningful or are they going to blend to your average in some way that’s not as impactful?

Chris Parisi:
So we talked about sort of adjusted EBITDA with the add backs, and that’s one of the tricks that we’ve got to play as the advisor. The other card we have to play is the pro forma earnings. And in something like you’re talking about, Dana, where maybe the price increase is not reflected in the past twelve months and maybe it’s only going into effect this month, but if we can demonstrate that, well, it would have been justified for the last twelve months. So we’re going to pro forma those earnings for the last twelve months and show the buyer universe this is what the earnings would have been if they had been more proactive in those price increases. And that’s part of the quality of earnings that we talked about earlier as well. We can say it as the investment banker, but then if we can get the quality of earnings guys to also sign off on that, it’s a pretty strong case. Maybe you don’t get 100 cents on the dollar, but if you get 75 or $0.80 on the dollar, it’s 75 or $0.80 you didn’t have.

Dana Robinson:
Yeah, I’ve worked on deals where the credit is given, but an attrition calculation recoups that if it doesn’t turn out to be true. Have you seen, let’s talk a little bit about deal structure. What can sellers expect in terms of there is the I’m paying eight times EBITDA and we now have added quality of earnings, theirs and yours, and we agree on EBITDA. What are the variety of things that are going to go into an offer and deal structure?

Chris Parisi:
Well, we have a strong preference towards all cash offers or 100% of the consideration being paid upfront. So that’s a, you know, if someone says they’re going to pay $50 million for the business on the day we close, we want $50 million. Or if the idea is that they’re going to roll over 20% of the equity and rolling over simply just means to take some of the proceeds from the transaction and reinvest it in the business going forward. If they were going to roll over 20%, we would expect 40 million of cash at close and $10 million of equity issued into the business going forward. But there are certain times where we need to bridge a gap with an earnout structure. So an earn out really is nothing more than a contingent payment based on some performance metrics. And so what we’re trying to do there is, we’re trying to get a full market value and then have the earn out above and beyond that if we think they’re, you know, because some clients will come to us and say, you know, I want to sell, but boy, there’s a lot of growth here in the next couple years. I don’t want to leave that on the table.

Chris Parisi:
And we’ll say, okay, well, we can sell you and get a market price for what you have done, and then we can structure an earn out so that, you know, if you do achieve some of what you’re talking about, you’ll get paid. Now, they’re not going to get paid 100% for what they’ve promised in the future because that’s what the buyers, you know, the buyers buying future performance as well. That’s what, that’s what they’re paying for. But there usually is some median ground that we can hit where the seller, if he or she really knocks it out of the park, is going to get an additional payment.

Dana Robinson:
And in most cases, is that where the seller stays in the operator seat for the buyer? They’re going to say, I want to sell, I take some chips off the table, I sell, I get today’s value locked in and I get some increased portion of the future value, increased value. Or hit certain targets and get certain payments to earn out the additional gains that you thought were in the business. Do you see that outside of someone staying in the operator seat?

Chris Parisi:
Well, your intuition there is definitely correct. That is most often when someone’s going to sit in that seat going forward, if there’s a payout that’s contingent on performance, the business owner wants to be the one who is in control of that performance. Right. So they’re, they’re much more likely to accept that if they are staying in. And same thing with the equity rollover concept, you know, that’s, that’s really the business owner. If they’re going to stay in, you know, and have that equity piece, they want to be able to drive performance to drive the equity forward. And the owner, they want the person staying on to have some of that equity piece because who doesn’t want a partner with skin in the game? I know that there’s almost like a Hollywood notion of what a buyout looks like and everything gets stripped away and everyone gets fired. And there may have been a brief time in the eighties when that actually happened.

Chris Parisi:
Today, all the buyouts from private equity firms, they are really structured as partnerships in most cases. So that equity rollover, those earn outs, those are really ways to create a partnership that’s both in an operational partnership, but a partnership in economics. And I will tell you that when that equity gets paid out or that earn out gets paid out, it’s because there’s been tremendous performance. And a private equity firm, that’s the easiest check to scribble for them, because if the owner has made more money, they’ve made a lot more money.

Dana Robinson:
Absolutely. Yeah. So it’s funny you mentioned the negativity with sort of the buyout model. We could probably go into a long history of the leveraged buyout as a business model, but you worked for a big private equity firm. You’re connected as an advisor with a group that is in private equity from our standpoint, at the bottom of the lower middle market. Our mantra and our operator’s mantra to any target, any seller is a win for us, is that we keep every customer and every employee right. It is. We’re buying people, whether those people are customers and the goodwill in their heads and the humans that are here, we’re going to make some decisions the old owner might not have made.

Dana Robinson:
We’re not as sympathetic to an underperforming employee, maybe, that an old owner, because of friendship or whatever, there might be a position or two that end up right butts, right seats is a big mantra when you’re doing the private equity thing. But how do we end up with such a bad rap in the world? Private equity is a bad word. And I even heard there’s a book out called private equity that kind of rips into the industry. Can we do something in five minutes to write that message? How do you think we got that and what’s wrong about it? And if there’s something right about it, let’s admit it.

Chris Parisi:
Oh, boy, you get me in trouble here, Dana. Well, I think that it’s one, the private equity community, it did start at at a time where cutting costs was a major part of the formula. It also started at a much, much bigger dollar number, meaning that the buyouts were especially the ones that people know about in the billions of dollars, take privates from public companies with massive leverage on them. So, and to service the debt that was required. That’s why there was so much cost cutting. So that model is what I think a lot of people still have in their minds. I mean, as a New Yorker, it’s kind of like people still talk about how dirty New York City is. Well, it’s a 1970s mindset.

Chris Parisi:
It’s not like, when was the last time you were to New York. Like, I haven’t been there since 1982.

Dana Robinson:
All right, we got the Gordon gecko in our heads about private equity still, right? Is this part of the perception?

Chris Parisi:
So now, one, the amount of leverage, amount of debt put onto a company is much lower. So there’s not that need for cost cutting. The deal sizes are smaller. I mean, they’re still the large ones, but now there’s so many smaller private equity funds doing deals. And we’ve been in this sub 4% unemployment rate for a long time now. Good labor is really hard to find, and private equity companies are not exempt from that when purchasing businesses. So when they’re purchasing businesses now, you know, the labor that they’re getting is one of the attractions, not something to be dealt with. And so I think there’s definitely a much more of a partnership approach.

Chris Parisi:
And the other thing I think private equity has learned since zero eight and then through COVID is when I say 0808 financial crisis, you know, highly skilled management is extremely important. And, you know, that that’s not. That’s not always evident when times are going great, but when, you know, when the shit hits the fan, you see exactly how valuable highly skilled management is. So private equity has also learned that lesson. So, you know, what could they do to improve the image? I mean, you know, maybe you don’t have to drive the Porsche to work. You can, you know, have. Have a Buick to go to and from and use the Porsche on the weekends. I don’t know.

Dana Robinson:
Yeah. Thanks. Thanks. You actually just jabbed at me for what I mentioned earlier. I went to an operational training event today and someone said, I wondered who pulled up in the Porsche. I’m sorry, I don’t. I could. I guess I could get one of the work trucks, but you need to get yourself a strategically bad.

Dana Robinson:
Thanks, Chris. I appreciate that. I’m not doing very good at improving the reputation of private equity, and I’m down here at the bottom of the market, so love that. What else, as we wrap up, that you can bring to the business owner from your years of expertise? Some considerations, you know, the kind of key things that. Where you’d say, don’t if this or do if that.

Chris Parisi:
Well, I think, you know, what I tell all of my clients is that you have to look at your business object. Everyone loves to think they’ve got, you know, the shiniest object in the room. But do a real good kind of self evaluation of your business, and if you believe you’ve got an a plus business, then you’ve got all the choices in the world. So, you know, the environment out there, the private equity environment that you might be going to approach, you need to approach it from a point of strength. And when you hire your advisor, kind of like what I started with, our job is to educate and navigate that with you. But you go into that with all the confidence in the world, apologize for nothing. Because if you’ve got a great business, there are no perfect businesses. But if you’ve got a great business, people should be held to, you know, held to realize that and give you fair value for it.

Dana Robinson:
Yeah. And any big mistakes to look out for things that, you know, again, like, for those that are, like, I’m not there yet, Chris, but in a year, maybe I will be, or two years, what are the pitfalls that, the things that they should be fixing or avoiding?

Chris Parisi:
So, you know, one of the things I would say is people, when they’ve run their businesses for years and years, even decades, and it’s been successful, you know, sometimes they don’t run it as efficiently as maybe, you know, a public company would be or a private equity owned company. And when I say as efficiently, I mean, are you collecting your receivables as quickly as you can? Are you keeping inventory levels at the proper level, not just carrying excess inventory? Because I know I’ll sell it eventually. You know, payables, you know, are you, are you paying payables in a timely manner, but not necessarily too fast? Right. Because when all of those precedents that you’ve set, the buyer is going to expect those levels to be, you know, established and maintained for your transaction. So if, you know, just simply, like I went to the inventory example, if you carry $10 million of inventory and you only really need to have six, when you sell your business, the buyer is going to say, well, you need to leave $10 million of inventory in the business, not six. And you might say, well, but you only really need six. And the buyer is going to say, well, if you only really needed six, why didn’t you only keep six? There’s not a great answer for that other than, well, I never really pressed it. So if you’re thinking about selling in the next couple of years, start thinking about really operating the business as efficiently as it can be operated, because that’s the benchmark.

Dana Robinson:
I like that. And that dovetails with the other advice you gave when I asked about what to do with, with, you’ve got a year, you said, kind of get the accounting in order, be able to generate reports. Too many small businesses only have a kind of tax oriented CPA that’s trying to help them minimize their tax obligations, defer and whatnot. But the things you’re mentioning, again, to mention a technical term in the industry, target net working capital, is an adjustment made in a purchase that takes money from the seller and gives it to the buyer and either reduces the purchase price or, depending on the type of sale, leaves the cash. So that having your accounting done the right way with a target networking capital adjustment in mind, including cash and debt and your current assets, current liabilities and inventory, are all things that you could be thinking about well in advance. That could save you millions, literally millions of dollars later if you make those adjustments well enough in advance. Right, Chris?

Chris Parisi:
That’s exactly right. And I tried really hard to avoid the technical term, but thanks.

Dana Robinson:
I appreciate it. But we might as well talk about it, but also say what it is. This is the biggest surprise I’ve seen multiple deals scuttled because of misunderstanding here. So I’m just going to use it as a teaching moment. No, you go to sell your business, folks. When you sell a car, you got to leave gas in the tank, right? You can’t say, here’s a car and it’s empty. There’s no gas. You got to put something in there, and they’re not going to pay you for the gas.

Dana Robinson:
It’s part of the deal. So you’re going to put $100 in gas in the truck you sell. When you sell a business, there’s an analysis done by the accountants that creates a networking capital calculation. And in the offer, they’ll say, our target networking capital, you know, is set by the quality of earnings. That analysis comes out and says, hey, we’d like you to. The networking capital adjustment is $2 million. That’s 2 million less that you’re getting in the transaction now. There will always be one, but it’s going to be a lot less painful and a lower number if you have thought about it well enough in advance.

Dana Robinson:
So the. And if you’re your CPA who’s helping you save money on taxes, is not thinking about that number ever. It’s not their job.

Chris Parisi:
No, it’s great counsel, Dana, because you’re right. It comes up in every transaction and it comes up at the 11th hour. So it’s always a fun, tense time right there at the end.

Dana Robinson:
Yes. Yeah, yeah. I mean, again, back to my being the entrepreneur raised by wolves. We, as part of a company, as part owner. I wasn’t one of the founders, but I came in as a later a shareholder, and we were trying to sell this company to Masco, which I think is still publicly traded, but they were an aggregator, buying small businesses. Kind of operated like a holding company of sorts, private equity style. They had kind of high leverage, so I’d say publicly traded private equity style acquisition machine. And by the time we did the math, I think we got an Loi and said, yeah, let’s do it.

Dana Robinson:
And by the time we got through the first round of diligence, the partners in this business did the calculation. And with the target networking capital, the proceeds, after paying debt and brokers and lawyers, the proceeds would have been almost nothing. And so the principals were like, wait a minute, we’re not going to be splitting whatever it was, ten. Again, these are very small businesses, but we’re going to be splitting $10 million or whatever the number is. But after you pay off all the debt and then you get this, I think it was $3 million. This is a very substantial target networking capital for a small business. There was nothing. So the it, you’re right, it feels sneaky.

Dana Robinson:
But if we don’t, it’s sneaky, partly because we’re not talking about it early enough in our advisory roles and in our, like with small businesses, we buy, I raise it. You know, they say, why do deals fall apart? And I go, well, your financials don’t look like what you said they do. And then you don’t like this thing called the networking capital adjustment, and they’re like, what is that? We’re going to keep some money of yours. And that’s just how it is. The gas in the tank analogy works, but they ultimately want to get to what that number is really quick. And so we just tell, in our case, Weaver’s, our QoE firm, just get that number to them quick enough so that we don’t have a deal killer. Like, let’s get the analysis done on the quality of earnings, and we know what it is.

Chris Parisi:
Yeah.

Dana Robinson:
Well, Chris, I thank you for coming on the X Plan podcast. I dominated this. It’s my podcast, so I’m not going to apologize. But I think you brought so much insight into the process. I appreciate it. One question I got to ask is whether I missed anything that, you know, you’ve been on some podcasts and, you know, you’re an expert in your field. Hi, expert. And I took, kind of took it where I want to, which is why I do this.

Dana Robinson:
It’s only fun for me if I get my questions answered. Did I leave any of anything off the table? That seems like it’s a point that you feel like is a point you got to make.

Chris Parisi:
Well, I think the only other point that I would make, and, you know, this is going to be a bit of a shameless plug, but I’ll try to soften it up a little bit. You know, when a business owner is thinking about hiring an advisor like us, you know, 95% of our comp is only when the transaction happens. We are paid almost entirely on a contingent basis. So, you know, we’re not like lawyers or accountants who are running a meter every hour. And I would say to business owners, you know, our goal is always to pay for ourselves many, many, many times over. And I think we do. And it’s almost a risk free trade for the business owner. So I just would encourage business owners, you know, make sure you’ve, you’ve got proper representation because, you know, if you needed brain surgery, you wouldn’t try it on yourself.

Dana Robinson:
I love it. No, that’s good. That’s great advice. So you’re, you’re an advisor. You’re, you’re advocating for, for advisory roles. You’re right. Just again, to put flesh on the bones, the typically investment banker is a, like a real estate broker, and acts for a commission for a success fee in most cases. Also charges a small retainer fee each month to be sure they’re not working for someone that doesn’t take the process seriously.

Dana Robinson:
And it kind of offsets some of your overhead while you’re running the process. But that cut you’re going to get is meaningful, but you’re also taking the risk, Chris, that deals, not all deals sell. The buyers and sellers don’t always come to terms. You try to make a market, and sometimes one doesn’t exist, or a seller is unwilling to take what the market says. And despite all of that, most of the time, the advisor is worth the investment. And as you say, does a lot more work for the small retainer than they get paid. Unless the deal closes.

Chris Parisi:
That’s right.

Dana Robinson:
So if people want to connect with you, Chris, I’m going to. I’m going to spell then the name so that they don’t go, Carl with a K and marks, please.

Chris Parisi:
That’s important.

Dana Robinson:
It starts and finishes different, but in between, it’s the same car. It’s C Parisi. C for Chris. P a I r I s I. If you’re going to connect with Chris at Carl, C A R L Marks, marks.com and of course, carlmarks.com, I’m sure they can find you easily with those two things on LinkedIn as well.

Chris Parisi:
That’s it. Dana, thank you so much for having me. This was great. And again, really appreciate the education that you provide to business owners. It’s great.

Dana Robinson:
Thank you. Thanks for coming on, and we’ll see. Everybody. Reminder. Hit me up anytime, everybody. Hello@danarobinson.com with questions or comments. Thanks for joining me on this episode of the Exit Plan podcast. I’d love to hear from you.

Dana Robinson:
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.