The Financial Planning Association of Canada | E133
The Financial Planning Association of Canada | E133
Join Jason Pereira and business lawyer Rachel Wasserman on this week's episode of Financial Planning for Canadian Business Owners as they delve into the intricacies of private equity. Learn about the different segments of private equity, the motivations behind selling your business to a private equity firm, and the potential long-term impacts on your business. Rachel shares her unique career journey and valuable insights on business transitions, succession planning, and the realities of private equity acquisitions. Whether you're contemplating selling your business or curious about private equity, this episode offers critical perspectives and practical advice.
Full Transcript
FPCBO 133 - The Realities of Selling to Private Equity
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Jason Pereira: [00:00:00] Hello, and thank you for joining me for this week's Financial Planning for Canadian Business Owners. I'm Jason Pereira, and today I have Rachel Wasserman, business lawyer and economic policy fellow who is starting a new law firm called Wasserman Law, and I brought her on today to specifically talk about the realities of private equity, what it means to sell your business to a private equity firm, and what that can mean long term for the business, both the good and the bad.
So Rachel, thanks for joining me today. Thanks for having me. So, Rachel Wasserman, tell us a little about yourself.
Rachel Wasserman: Yeah, so, uh, not a usual career path for a lawyer. I started my career in, in business at Unilever, uh, understanding how the consumer packaged goods industry worked. Uh, got a little bored and wanted to change, and my parents had always told me I'd be a good lawyer, but I had to figure that out for myself.
Uh, and I ended up, uh, going to law school and became a lawyer and practiced at two of Canada's, uh, most prestigious institutions in corporate law. I. My practice specialized in mergers and acquisitions, corporate finance, corporate [00:01:00] governance. Um, and then I actually took a bit of a turn and got into sell-side investment banking.
So working with the selling business owners and helping them sell their business. And then we would hand the file over to the lawyers, which was my previous job, um, and really got a full understanding of how the M&A process works. Um, after some personal time to reflect, I decided that I missed
practicing law and, and wanted to get back into it. And so I'm starting up my own firm so that I can provide the, the help and support that I wanna provide on the terms that I want to, which is supporting entrepreneurs and the people who are actually contributing to our economy and investing in it. Um, and so, yeah, thanks for having me here.
Jason Pereira: My pleasure. So we got connected, um, I think originally online? No, it was, uh, I think it was Sam Litchman who connected us. And it was specifically around, I think it was, um, the work on, uh. Oh God. [00:02:00] Uh, employee ownership. It was
Rachel Wasserman: Zale Moranski who connected us. Yeah. Moranski. He didn't want Zale to be mad at us. Okay. It was S
Jason Pereira: Zale, sorry.
Zale was, uh, Zale. So Zale connected us around the work you, that, that had been done in, in, uh, employee ownership trust. And I've covered that in a couple of, uh, episodes episodes prior to this Mm-hmm. but today we're gonna talk about a different topic that you've had a bunch of experience around, and that
sounds very sexy to many, but has good and bad trade offs too. And that's the constant of private equity, okay? Mm-hmm. So private equity, what is it? It's these large pools of as, of, of capital, whether they're sourced in small through small investors or through large institutions that go out and basically make large investments or buy out firms entirely in order to turn a private business involved, to basically take that private business business and unlock value somehow.
So let's talk about that. Let's talk about, uh, what the motivations are. And then we'll get into the good and the bad and the realities of it.
Rachel Wasserman: Sure. Um, so, you know, first and foremost there's different segments of private equity. Mm-hmm. So for someone that doesn't know what private equity is, private equity is actually a sweeping term.
[00:03:00] Um, and there are different segments that operate in different ways. So it's important to understand where the company is on the company lifecycle. So there's private equity firms that are, you know, venture investors that have a really good idea and they put money into the business to get that idea flushed out and, um, you know, ready to take to market.
Then there's growth investors that see a really good business, say operating in Canada and they wanna take it to other markets and, and really grow that business. Um, and then there's buyout, private equity, um, which is the one I'm the least fan of, um, where they find mature businesses that are really doing well, but really require a big investment to take that growth to the next level.
The business is mature, um, and really is in need of reinvigoration, uh, reinvigoration. um, But often a lot of that investment is not to [00:04:00] grow these companies, but to take the value that they have and extract from it. Um, and these are the predominant buyers of Canadian businesses in Canada. They're called buyout because they buy out the entire company.
Whereas the earlier stages of private equity, they're typically finding a co-founder or founder sorry, that they love and they love the passion and spirit behind them and injecting money into them to follow their vision. The buyout firms try and find retiring business owners or frankly, businesses that have already been owned by private equity firms, um, and take the assets that they have, the cash flow that they have, and redistribute it back to investors.
Um, yeah.
Jason Pereira: I mean, just to, just to interject here, I mean, like you're, you're basically, you know, you're talking about the lifecycle and you just described effectively, like private, you're talking about venture capital early on, right? Mm-hmm. So venture capital [00:05:00] seeds, things early on. I've had episodes on, on venture capital in the past.
And you know, here's the thing. All of these companies, whether it's venture capital or mezzanine financing in the middle, or whether it be the buyouts at the end, they're all looking for the same thing, a return. They're just doing it in different ways, right? And that's fair. But you know, there's, there's, you know, the extraction, I, I think I'm gonna correct you a little bit.
The extraction of return is not a bad thing. What you do to the underlying company might be a bad thing in, in light of that. Mm-hmm. I mean, we've seen, you know, unfortunately recent failures of the likes of, uh, The Bay. Right. Which was, you know, bought out by private equity, restructured, saddled a bunch of debt, and then just could not maintain anymore.
Yeah. Uh, and we've seen this happen over and over again with a lot of storied franchises across North America where, you know, they'll. Private equity firm will go in, see a lot of value in the real estate, carve that off, leave a business that's basically maybe struggling to pay those rents now, load them up with debt and then spin them off while we maintaining the crown jewels.
Uh mm-hmm. It can happen unfortunately.
Rachel Wasserman: Yeah. So there's, we're seeing a lot of this in the, [00:06:00] in the market and pri and the buyout funds are the majority of the sector. Mm-hmm. So over 50, I think it's, you know, I don't wanna be quoted on this stat, but it's, I think around 55% of the sector is buyout versus the more investment oriented.
Jason Pereira: Yeah. But that also makes sense because they're going to mature businesses which have higher values, so you need bigger checks to cut. Right. So it makes sense that that's where most money would be.
Rachel Wasserman: Well, I want bigger checks to cut is a great. Part to interrupt you because when people think, okay, a business is for sale for a hundred million dollars, what's that check you're gonna cut?
And you know, a normal person would think a hundred million dollars. And that's not true. So the leveraged buyout is a... integral part of the private equity playbook where the asset that they're buying, the business, is actually the one paying for that purchase price. So the private equity firm will put down, let's say 10, 20% [00:07:00] of their investors money, and the balance is actually paid through the operating business that they're acquiring.
So when we would do acquisition financings for deals like this, you would have the lender. Working with the buyer and the seller to get all the loan docs in place, that everything would happen simultaneously in one tra, in one phone call where the money would flow, and the company that's being bought immediately after it's bought is sending
80% of the purchase, like price back to the seller. And so that money isn't even touching the hands of the buyer. It's going straight out of the, from a loan in the name of the purchase company back to the sellers.
Jason Pereira: And so. In corporate finance classes, I remember this in particular, we were talking about optimal funding, like optimal leverage ratios within businesses.
Yeah. Publicly traded otherwise. And part of the reasoning around the publicly traded one was like, look, [00:08:00] you know, if you can achieve, I mean, don't get me wrong, if you can borrow cheap capital and you can invest and earn a greater return on behalf of shareholders as a. As a, as a business operator, as a CEO, you have an obligation to do what's right to scale up the business mm-hmm.
In a certain way. Mm-hmm. And if you're under leveraged, then frankly, you're opening up the door for potential takeouts using your own ability to effectively borrow off of your assets. Right. So, if you don't, you know, in, in a, in a cutthroat publicly traded world, you know, it is possible for PE firms to come in, see that opportunity, buy them out and, and just basically use their own assets to, to effectively buy them out.
Whereas, you know, in the, in the private world, you don't get, you don't get hand forced that way. No. But effectively, in a lot of ways, the same thing in a lot of small, let's call it more traditional business thinking, usually you see, you know, a lot of business owners try to avoid that right there. There's this, this, this, the denial that they wanna, they, they don't wanna leverage up the business.
They hate that, whatever purpose, just, it's ingrained in us. So oftentimes the funny thing about this to me is that they could have extracted that wealth themselves over time. [00:09:00] By way of borrowing it, but they've chosen not to right now, of course there's tax plays involved here and other issues. Mm-hmm.
Other aspects of it. But it's like you, you realize this money could have been yours in the first place without you having to sell.
Rachel Wasserman: Yeah. And debt's not a bad thing when it can be serviced. Absolutely. It is not, it's not a bad thing at all. We all, you know, people have mortgages and you look at some of the biggest
companies on Bay Street, private or public, they're all using debt. Debt everyone knows is cheaper than equity. Um, but the problem lies in encumbering cash flow to subsidize the shareholders. And so what does that mean? That means that when a business is acquired, they're financially modeling to figure out how much of an interest payment and a principal repayment can this business
withstand. Mm-hmm. Um, and what that does is that opportunity cost of that debt is an investment in [00:10:00] the economy. So if that business doesn't, is like, let's pull a number outta thin air here. If a business is paying $10,000 a month in debt repayment, if the business has a shock to its system like a trade war.
Hmm. That's $10,000 a month that that business doesn't have to protect itself. Yeah. That's $10,000 a month that that business doesn't have to raise wages or buy CapEx. Um, and that money is going to shareholders. So that means that the business has the burden but not the benefit of that loan. Yeah. So if that loan were to be used to buy machinery,
that would translate into increased productivity. Um, and now owner debt isn't a bad thing in and of itself. You said it dividends recapitalizations are a great thing that, um, in the past that have now been abused [00:11:00] by the finance class. So a dividend recapitalization is when a business takes out debt and directs it immediately back to the shareholders.
Hmm. So a dividend we're used to coming out of profit. But this is a dividend from debt. And so where this is useful is if you have a family business and you need a bit of liquidity or you wanna frankly treat yourself 'cause you've earned it. You've got a great company, but you don't wanna have to sell shares in your business to enjoy some of the fruits of your labour.
For sure. It's not meant to be used on mass to extract value to return returns to shareholders. It's meant...
Jason Pereira: Well. In fairness, though, the tax code does reflect this difference. So it doesn't qualify for lifetime capital gains exemption. It doesn't qualify, uh, for capital gains treatment is taxed at a higher rate, fully integrated.
So, you know, it's not like it's a free ride.
Rachel Wasserman: No, but it's a ride that's [00:12:00] being used when transactions are down and liquidity for investors. The liquidity demands are still there. So you've got pension funds that are invested in these bio firms then, and they need to pay the teachers. They need to pay the pensioners.
But if you're not flipping companies... Yeah. you don't have that cash to return back to investors. Yeah. And so your only alternative is to load on more debt. And that makes these companies... I think there's a huge
Jason Pereira: differentiation here. There's there's, there's a difference between the owner who created and runs the company on his own behalf.
And then there's the investor class who has to get their pound of flesh, which is not a bad thing. They're putting the money in. But it's how you get that net result. And yes, the entire manipulation of, of, you know, debt to pay dividends as opposed to actual operations. If that debt, hey, that's okay. If you're, if you are recapitalizing to a point you should be at, it's not a good thing
if you're recapitalizing to a point where you're inhi, you're inhibiting the ability of the company's ability to continue to earn free cash flows in the [00:13:00] future. Right? So like every, exactly. Too much debt is too bad, is bad. And, and famously these leveraged buyout firms for, you know, use, like you said, upwards of like 80% debt.
In these cases, I mean, anyone who wants to read, uh, Barbarians at the Gate, it was a great read that gave you a pretty transparent view into how this works. But, you know, and part of the argument they'll often say is the debt creates discipline, right? It creates discipline around the need to, to cut costs and create cashless mm-hmm.
And all that other stuff. And there is some truth, but you don't have to be here, you don't have to be up to your nose in it to basically get discipline from debt. Right. The, there is too much of a, of a thing before you start endangering yourself.
Rachel Wasserman: I think that's the exact difference between an entrepreneur and an investor operator.
An entrepreneur doesn't run their business to maximum optimization. You know, some do. Um, but I. there are certain things that maybe don't have an ROI that are worth paying for. Yeah. Like a really nice Christmas party [00:14:00] or, um, you know, sponsoring, uh, a baseball team in the community. These are things that by virtue of owning a business, you have the pleasure to contribute to your community, but when you have to optimize your capital, it doesn't distinguish between
you know, something that's beneficial to humanity. Um, and it just, you have to do what pays back the best regardless of what opportunities you're turning away and what the harms of the decisions you're making. And so that's why I love working with entrepreneurs because they have that flexibility. They have the ability to contribute to the communities that they're operating in.
Jason Pereira: Yeah. But again, again, varying degrees of this, right? Like, don't get me wrong, there's also, you know, businesses that are highly profitable that pri private equity can go into and use some discipline to get rid of some of this, the, the obvious fat or things that were just not working well, right? And [00:15:00] absolutely.
So lots of opportunities, like some people just don't, some business owners don't wanna go beyond a certain level of complexity. I know one local business here who's done a really great job in one segment of the economy, typically, typically based around distribution of certain things for one cultural community.
And they've resisted the urge to move outside their culture community, and they're, they're, I know of their suppliers who are frustrated with this because they can't, you know, they got contracts with these guys, but they're just out of their comfort zone. Or, or of course, the old problem of, you know, nepotistic practices like, oh, I, I employ 12 members of the family who really don't actually do any work or whatever else it is.
Or they just don't have the competence or the understanding to take that business to the next level. Right. That a private equity firm with a professional who understands the landscape and what the proper professional criteria and support can come in, put in proper management, clean the place up, you know, make the thing basically be a better version of it, what it was, and continue to grow.
Absolutely. That is a possibility. Mm-hmm. But there is a law of diminishing returns to everything. Right. And as I said, on stage at Edge, uh, [00:16:00] 2024 in, in, uh, in Florida. It was, look, it's not the first PE firm that worries me. It's the second and third one. Right? Because first one gets the one, the fifth one.
Yeah. Yeah. The first one gets the obvious savings. Right. They go in there and they fix the obvious things. The second one maybe sees the opportunity that was missed, right? And wants to do something strategic and say, we're gonna take it into this jurisdiction. Fine. It's, it's the later ones where it's like, okay.
Or going back to kind of going back in a lot of ways to, um. To Barbarians of the Gate with, with Nabisco being the, the objective or the, the, yeah. one that we're going after. I mean, there was a lot of waste in that company that had their own private fleet and everything else. But beyond that, it's like you look at that and say like, where else was Nabisco gonna go in terms of like, distribution for its product worldwide.
Right. It's like there were, it's like, there was like, oh, we need to open up new markets. Sooner or later get to a point where it's just about cash flow, extract extraction. It's, can we borrow this? 'cause it can carry all this debt, we can strip it to the bone, we can increase cash flows. And just worry. I'm not paying out that debt and then we'll flip it somewhere else after it looks [00:17:00] clean again.
And yeah, there is a problem there because you can't get blood from a stone. Sooner or later you lose, you know, there's no easy wins left anymore. I.
Rachel Wasserman: Like Red Lobster was a great example. Oh, oh my god.
Jason Pereira: Terrible. Yes.
Rachel Wasserman: And, and you know, I hope to dispel all the, the myths that it wasn't the all you can eat shrimp that bankrupted Red Lobster.
That may have been the straw that broke the camel's back, but it was the sale lease back and that heavy debt loads. You see a lot of these retail businesses going bankrupt. Is the business model past its prime? Absolutely. But without, or you know, not absolutely. But yeah. You know, there are a lot of struggling retail businesses out there, but if they didn't have these obscenely high debt loads, perhaps they would have the cash flow to be able to innovate to make some changes.
But when you've got these [00:18:00] high debt burdens, I think Toys R Us in the, in the US when they went bankrupt, their interest payments were upwards of 90% of their cash flow. What business, no business can sustain that.
Jason Pereira: Well, remember hearing about how Sax Fifth Avenue actually couldn't afford if, if they didn't own the building
they couldn't afford the rent on their Fifth Avenue location. Like Saks would be off Fifth Avenue. Right. And you know, you can argue that from a business standpoint, like, okay, they should probably move. Right?
Rachel Wasserman: Like, I actually actually read that lease. I was part of that transaction team.
Jason Pereira: Absolutely.
Rachel Wasserman: And I got to read that original lease on Saks Fifth Avenue, which was, which was really cool.
Um, but agreed. And actually what a lot of people also don't know is that, um. These leases can be capitalized, the losses as, as marketing expenses. Hmm. Um, but you know, the real estate plays a huge role in this. I live in Little Italy in Toronto where, [00:19:00] um, you know, the immigrant mentality of, and they all invested in their real estate and that's why it's such a vibrant community because there isn't a REIT
maximizing the rent payments and, you know, kicking out small business in favor of, of corporate tenants that are gonna be far more reliable tenants. But a lot of people also forget that commerce is community. Um, I got my hair cut today and, uh my hairdresser and I were talking about how I love coming to her because we talk about things.
There's a, there's a relationship there. My butcher knows who I am, you know, all the dry good shops along College that adds to my life. And, and, and when we financialize businesses, we correspondingly dehumanize them. Um, and that's not meant to be like that they're robotic, but there isn't that balance [00:20:00] of, hey, let's do something because it's fun and it, and it adds value, but it might not pay back
perfectly. Might be pretty good payback. It might be an okay payback, but I'm doing this because I believe in it, and so in my experience, we're seeing a lot of people put their businesses up for sale and frankly, private equity is one of the only buyers, and I can't fault people for cashing out on something that they have worked so hard on and built something so big and so great, and someone's willing to pay them a lot of money for it.
Jason Pereira: Yeah.
Rachel Wasserman: Nobody can be faulted for doing that.
Jason Pereira: Well, let's take a step back to some degree, being in an industry with a succession crisis forever. Okay? The reality is there is some fault, and that's not worrying about your exit. As a business owner, you're, you're so busy worrying about totally the business that you don't think about your succession, right?
Or you hope that maybe one day the kids are gonna want it and the kids grow up and they don't want it. But were the kids even the right option in the first place, right? [00:21:00] Mm-hmm. Very successful business owners who very much think smart about this, and we, we got, we got options for their exit. But they've also got internal management to the point where they're just basically slowly stepping back and eventually just gonna sit on a board.
And you know what? We're gonna look at how they can sell this. And it may be an employee ownership trust. It may be a buyout from the senior leadership team who's been groomed to be in a position to do this encompass. But the idea that you're gonna build a business that is gonna pay you, you know, like we can go, we can have this small business on a corner farm, let's just see, say a place that employs 50 people and you know, a good size medium business that probably has a multimillion dollar top line revenue number and pays, you know, very good lifestyle, if not better than a lifestyle to the, to the owner.
To think that you're gonna go at the 11th hour and say, you know, I'm thinking getting out in the next three to five years, you know, would you guys be interested in buying it? And just throw that, that question out when you know, is that, are the people you're asking... Oh, first off, are they, have they been empowered to understand how the business works?
Do they basically, do they, do they basically have an entrepreneurial, like [00:22:00] bone in their body? Sometimes you're just gonna be scared by that. Uh, do they, you know, where are they gonna come up with the money? You haven't helped 'em answer that question, right? Like, yeah. Like, and, and you look at these scenarios and the funny thing is, is more often than not, a lot of these, these businesses, small business buyouts have to take some form of, do some for, uh, some form of vendor takeback, right?
Mm-hmm. The seller is the, is the lender. And the lender, it's, it's funny 'cause they'll be like, well, I don't get it. Why am I, why am I selling this? To just buy it back with my own money, right. For them to buy with my money, right? Mm-hmm. Business is gonna pay off this loan. Wait a minute, it's my business.
Wow. So I'm paying myself. Yeah. The same thing happens with private equity, just that there's a demarcation point where suddenly you don't, you know, you're getting it all in front, but there's the sitting on the debt, right? Like, so technically it's the same thing. It's just that you're not the bank. But the, the business is still paying off that, that loan.
So if you have a problem with the business being leveraged up, then you shouldn't have a problem with, with the, you should never, if you don't have a problem with leveraging up, you shouldn't have a problem with the vendor takeback.
Rachel Wasserman: Um, well, private equity's gonna take a vendor takeback, if not [00:23:00] probably an earn out in a lot of...
Jason Pereira: Yeah.
Rachel Wasserman: is, is fee for performance. So they don't wanna make, they wanna make sure they're not overpaying and so your final payments are gonna be contingent on company performance post closing, but I think you hit the nail on the head. Succession planning is everything, and us as lawyers, as brokers, as business advisors have not been doing enough, um, to communicate to owners.
How to succession plan, because this is something you don't do in the 11th hour. You do it 10 years before you're willing to what? Like ready to think about this stuff? Because what happens is you get to a broker and a broker's just gonna ship you off to whoever's gonna max the payout as fast as possible.
They want security of the deal, making sure that we can actually close this. And that you're gonna get paid as much as possible. Yeah, that's their interest. But that doesn't always align with the [00:24:00] motivations of the seller. You know... What... what got me to where I am today was a deal I was doing as a broker, and this was a company that a union loved management, employees, loved management.
This was a culture most businesses would be extremely jealous of. Um, and we were gonna sell it to, you know, a pretty ruthless PE firm that was cold with us. So they're gonna be cold with us. Imagine what they're gonna be like when they take over. Um, and. I just wanted to say to them, this is not it. This is not what you want for your family legacy.
Um, and that's what got me here today because there's so much education required. Um, and also too, from a legal perspective, you can protect the interests that you want to protect. Now, that might be that certain buyers might [00:25:00] not wanna do a deal with you, but you can protect the interests of your employees post-closing, if that's important to you.
Yeah, you can sell to your employees if that's important to you. Um, but the key is, is understanding what options are available to you and doing the necessary planning. Getting people on side, because if you wanna do an employee ownership trust, there's nothing worse than telling people, hey, we wanna do an employee ownership trust.
And then realizing this business is not right for an employee ownership trust, or they can't secure the financing because the business is not right for an employee ownership trust. So making informed decisions and knowing what are your lines, you will not cross cause in the succession tsunami report done by the CFIB, business owners actually care more about the preservation of their legacy and their [00:26:00] employees than maximizing the purchase price, like to get the most dollar.
Yeah. So it's really important to know what your lines are and what's important to you before you go down the sale process.
Jason Pereira: And I've seen it and lived that to some degree. I remember I bought out the practice years ago, and at one point of the partners was like, well, I pretty sure I can get more, you know, from the guys down the street.
I'm like, okay, great. And, and here's what that's gonna mean for your clients. They're gonna turn the book over to generate as much commission as possible in or to pay you off as fast as possible. And he kinda stopped for a second. I go that what you want all your friends who are members of this, who are members of this working here, or sorry, clients here to, to, to have happen to them.
So the reality is, is that, yeah, I can pay you more, but I would have to do unethical things in my mind in order to basically finance that. And I'm not gonna do that. So, yeah, exactly. And, and the second piece of this is that I've also been, have known several people who have sold their business to either private equity or various private interests only to see the business destroyed over time.
Mm-hmm. [00:27:00] Shatters or just shelved entirely. And you talk to these people, it's like their children got just killed in front of them. It is...
Rachel Wasserman: Exactly like I, when I sell a business, it's like you, you're putting your child up for adoption. Like, that's, that's the, the seriousness I take this, because this is their life's work that you know, it, it's like a child.
Um, and so we wanna make sure that. It's not put in the hands of someone you don't approve of, um, and that they're just telling you what you wanna hear to get the deal done. It's important that you work with advisors that know how to ask the right questions and protect your interests so that when you're no longer in charge, you perhaps have the legal recourse through agreements to ensure your people are protected. Now
that can't exist in perpetuity. Um, I worked on one transaction, a very notable one where, uh, the [00:28:00] seller said to the buyer, you know, you gotta maintain the factory and keep everyone employed. And the day that that agreement ceased, the factory was shut down. So, um, you can't get everything. Um, but it's important to prioritize
what's important to you and know what you're looking for in a buyer, um, because people will tell you what they want to hear, and it's very easy to get impressed with the razzle dazzle of a big private equity firm. And you know what? Some of them are great and some of them are gonna, you know, put a lot of money into your business and grow it.
But it's understanding who's in charge, what their previous portfolio companies have looked like, get references. I'd like to speak with some of your previous, um, sellers and understand how happy they were with, with your business. That is a great thing to do, to understand previous past experience, [00:29:00] um, of those same portfolio managers and asking them how they've run their, their portfolio companies in the past.
Jason Pereira: But even with the good ones, it's a good idea to do that. I mean, like, even if you're like, wow, this company's got a great reputation, you still wanna do that. 'cause here's one thing that I've also seen is that, um, you know, 'cause they'll typically maintain the, the owner has to stay on for a period of time afterwards.
Mm-hmm. And they have to make sure the transition happens. And I've seen many of 'em get frustrated at the fact that they've lost control. Right. They've lost control. It's not the big things. Maybe they're okay with the big things, but they're not, they're not used to answering to someone. Right. Or for the life of them reporting in
on a monthly basis and having all the financials done every month to basically to to, to just answer questions about things that were, to their discretion, but weren't part of the agreement. So like, having an understanding for what the other side of that looks like, even for them while they're there, is an important conversation to have because yeah, you, you're going absolutely, youre going to, you're gonna have a boss now, right?
And you need to accept that, right? And that's just fair. That's what comes with the terms. So, so, yeah. So I mean, I think, you know, going back to it, what I said [00:30:00] earlier about succession. One piece of advice I always give is, I remember hearing the statistic in my industry where it's the average successful succession takes about seven years, five to seven years on average.
Rachel Wasserman: Mm. Wow.
Jason Pereira: Make the joke that failure happens a lot faster.
Rachel Wasserman: Mm-hmm.
Jason Pereira: And it makes perfect sense, right. For someone to come in and actually understand the business fully, the the way that you need them to start to finish, you know? Right, right down to the studs. For you to work out the deal and for you to do the transition period.
Right. You know, that's not just a cold handoff in most cases. I always say to people like, I just wanna sell this thing and get outta here. I'm like, okay. If you really feel that way, you might not love your business, but also don't expect to get the top dollar for it because this is all, every deal, as I've done a couple episodes before this on this, is about basically the buyer and the seller
not only negotiating price, but negotiating what risk gets kept by each of them. Right.
Rachel Wasserman: That's exactly it. That's exactly it.
Jason Pereira: You're right. And that's gonna take time, right? That's gonna take, you know, I don't know. What's the, what's a reasonable amount of time you think people need to negotiate the sale of a business?[00:31:00]
Rachel Wasserman: Oh, um...
Jason Pereira: Loaded question.
Rachel Wasserman: That's a great question. Um. Starting from like engage or I would say from finding a buyer that you wanna partner with and diligencing them all the way to legal. Six months. Yeah.
Jason Pereira: So six months.
Rachel Wasserman: Four to four to six months. Yeah. Um, 'cause it can get rushed. Yeah. And I think it's important to have time to think, you know, I've been in crazy deals where I've gotten stuff done in record amounts of time, but
you don't have time to sit and think and process, and this is arguably one of the biggest decisions you are going to make. I think you need that time to, to marinate with your thoughts and is this the right partner? Um, and also getting the right legal advice. Um, you know, you talked about how you know people stay on post-closing as advisors.
[00:32:00] This is all highly negotiated stuff if you know what you're doing. So ensuring you have minimum or maximum commitments of time, um, when there's an earnout. You know, I would never let a client have no control over the business and an earnout because it would just be so easy for them to tank the business to not pay the earnout.
Um, so there's all these different elements that come into play. Um, but you know, coming from big firms on Bay Street where it's go, go, go, go, go get the deal done, get the deal done. I think that works more for buyers than for sellers.
Jason Pereira: Yeah. But, but first, let's go back the six months. You know, you're probably talking about the point where buyer's been identified, preliminary negotiations around price have happened, and now you're getting serious time to lawyer up, right?
Yeah, yeah. Like, so that's six months. The, the, the pursuit of the potential buyer, right? Like, even if it's a, you know, even negotiations...
Rachel Wasserman: That's another six months.
Jason Pereira: That's another, six months. You're talking a year and negotiate and get to [00:33:00] signing realistically as like a realistic conservative number. Right? Let's, let's tack at least a year on for the transition period.
Right now you're at two. Right then, you know, especially if it's internal, you're not getting internal, you gotta basically pitch this years in advance or something like, yes, we can talk about this, but you gotta, or you gotta groom the person to the point that they can get there. So you're talking years prior, but like, let's just say minimum three years to get someone to a position like that.
Now we're at, we just got to five pretty quickly. Right, and you throw on an extra year for, for another, for making it a 24-month transition period. Now you're at six. So the entire number of, you know, yes, we can get a, you, a lawyer can get a deal done in a heck of a lot less than seven years, but start to fish, uh, finish in terms of intent, ideation, and completion, and walkaway.
Yeah, we're talking, we're talking a lot longer than that. We're talking.
Rachel Wasserman: Absolutely. And there's some businesses that aren't ready for sale. So you're, you know, you can come to the decision and you say, okay, I am ready to sell. And then you realize everyone on the management team [00:34:00] is 65 and retiring. Um, that's not a sellable business.
Or at least you're not gonna get good value for that business because the, the distinction, especially with private equity, is... they're, they're above the operating company, so they don't run the business. They need your team to run the business. And so I love working with exit planners. It's a new distinction.
Not a lot of people know about it, but these are, are certified professionals that are, um. there to help you prepare your business for sale. They're not gonna help you sell your business, but they're gonna help you figure out what your weak points are so that you can close your gap so that when you are ready to sell, people are gonna take you more seriously.
Um, because there's, you know, for every business we take to market, you know, you think about it as, you know, you throw a hundred, two-hundred leads out, you get ten expressions of interest. You get maybe one [00:35:00] or two LOI's and you pick one suitor. So you know, you start from this huge pool of people and you whittle your way down and you may not even be able to get a deal done going to that many people.
There are a lot of times where, um, the deal just doesn't happen because there's some gating item that's too much risk for these buyers to, uh, to assume. So it's really important to know what your weaknesses are. So if you have a contract with, say, one of your biggest customers that's coming due, get it redone before you take your business to market.
I had an amazing company that I was trying to sell that was getting kicked out of their lease, um, and they had nowhere to go. These are things that you need to, to shore up if you're at the end of your lease. Get a new facility before we put you up for sale. 'Cause that's a big thing that's going to heavily discount your price and frankly, even if [00:36:00] you're paying a little bit more rent in a new facility
you're gonna normalize out all your moving costs, so that's not gonna factor into your purchase price. Um, but the risk of not having a business is going to impact or not having a, a facility, especially a manufacturing business mm-hmm. That is going to impact your purchase price far more than paying a little bit more rent than you would in your older facility.
Jason Pereira: Yeah. And uh, that's the one thing about this process that everybody has to come to terms with is that guess what your baby isn't as pretty as you thought it was. Everyone thinks their baby's beautiful, but when it comes under scrutiny, there's all kinds of things that have to be adjusted and fixed before you do it.
And you know, again, I think we spent a lot of time in particular talking about investor buyers, right? Mm-hmm. That's effectively, yeah. There's another category that I coach people on all the time that you kind of touched upon, which is a strategic buyer. Well, someone who comes in 'cause they're in the same sector or an adjacent one and they can operate your business.
They already know they have that expertise. They basically could just technically buy out your client list in your [00:37:00] inventory and just add it to their own and mm-hmm. And not skip a beat. Right? So those ones, you know, I always say like, if you're looking to sell and you wanna get top dollar, those are the ones that often can pay top dollar because to them
especially if, depending on how much capacity they have, if they have capacity to just take on your clients and do your work with next to no friction, that's the most valuable asset. That, you know, they're, they're the most valuable buyers out there. Unfortunately, of course, that often means selling to the competition, which people don't necessarily like, or it means mm-hmm.
letting competition know that you're potentially, you know, up for sale, which, you know, blood, water, and people start going through clients. So there's a bunch of strategic issues to worry about there in terms of, in terms of how you handle that. And sometimes it's just not an option. Sometimes you're the only game in town in that area, right?
So maybe there's an adjacent strategic buyer, but there, you know, the bottom line is, is there are options. So we've covered a lot.
Rachel Wasserman: There's one more option I, I just wanna interject, which is a new one, um, that doesn't get talked enough about. And I am a huge champion [00:38:00] for which is entrepreneurship through acquisition.
And so you're seeing influencers like Cody Sanchez talking about, you know, going out and buying a regular business. You know, I had someone reach out to me from the United States. He bought a porta potty business. Not very glamorous, but you know what? It's making him good money. It's making them good money and there are existing sources of capital through BDC and banks and business advisors that can help you do that if you have, if you've run somebody else's business for them.
And you know that you can do it, go do it. You will be amazed at how much more control and capital you have in your pocket when you own your own business. Look at me and starting up my own law firm. When I did the math to figure out how much more money I could make by doing it myself, it wasn't even a question, of course I'm [00:39:00] gonna do it.
Um, and so, you know, getting people to know that if you wanna own your own business, you don't have to start from scratch. You can go find something out there that's up for sale. The issue is finding the sellers. And so this is something connecting the, these buyers and sellers, 'cause these networks don't exist and it's very hard to connect these parties.
And so I'm working on creating these networks so that there are more conversations because I am a firm believer that owner operators and entrepreneurs are the ones who contribute the most to our economy. And so if we are selling businesses from retired owners to new aspiring entrepreneurs, I honestly think that this is the best thing we can be doing for the Canadian economy.
Jason Pereira: I'm with you. So before we wrap up, uh, where can people find you?
Rachel Wasserman: Um, people can find me on LinkedIn. I like to [00:40:00] post my thoughts on LinkedIn, so please give me a follow there. And I will be launching my website pretty soon. WassermanBusinessLaw.ca.
Jason Pereira: Excellent. Rachel, thank you for taking the time.
Rachel Wasserman: Thanks for having me.
Jason Pereira: So that was this week's episode of Financial Plan for Canadian Business Owners. If you enjoyed that, please leave a review wherever you get your podcast or if you're watching on YouTube, like and subscribe. Thanks. Take care.