Sept. 8, 2020

Ep 15: M&A in 2020: A Legal Perspective

Ep 15: M&A in 2020: A Legal Perspective

Legal due diligence can sound scary to anyone selling their business – and quite frankly, the reality can be daunting. On today’s episode, we are joined by Mike Mercurio of Offit Kurman to talk about how he helps sellers navigate this critical part of any transaction, ways to most effectively leverage the attorney on your deal team, and what you should do now if you are thinking about selling your business in the next few years.

We'd love to hear your feedback! Email us at podcast@gaffingroup.com.

You can learn more about Mike Mercurio and Offit Kurman at https://www.offitkurman.com/attorney/michael-mercurio.

Looking for more episodes or playlists? Find them on our Right In the Middle Market website, https://www.rightinthemiddlemarket.com. For more information about us, or to inquire whether we could help you and your business, go to the website SLS Capital Advisors and The Gaffin Group, https://slscapitaladvisors.com.


Transcript

{"version":"1.0.0","segments":[{"speaker":"Stephanie Chambliss Gaffin ","startTime":0.0,"body":"Legal due diligence is a phrase that just sounds scary to anyone selling their business. And quite frankly, the reality can be daunting. On today's episode, we're joined by Mike Mercurio at Offit Kurman, an experienced M\u0026A attorney to talk about how he helps sellers navigate this critical part of any transaction, ways to most effectively leverage the attorney on your deal team and what you should do now, if you were thinking about selling your business anytime in the next few years.\n\nWelcome to Right in the Middle Market, a podcast about pragmatic perspectives on running, growing and selling your business. We talk about the challenges decisions and most importantly the actions business owners can take to create long term value in their companies. \n\nWe are so excited to be here today with Mike Mercurio. Mike is a Principal with Offit Kurman and serves as general counsel to clients on all kinds of different matters related to corporate and business law, he does government transactions, government contracting, healthcare, construction, you name it. But really what Mike does really well, is he is a true strategic partner to clients of his and of their firm, and regularly counsels both entrepreneurs and their entities on all aspects of Business and Commerce. Now, Mike's core specialty practice area is Mergers and Acquisitions, both from sell side and buy side and that's one of the reasons we're really excited to talk to Mike today. He also specializes in ownership planning, helping business owners prepare and then optimally transition their businesses to third parties, whether that's management family or an outside investor. And just in case you think we're the only ones that think Mike is fantastic, he's repeatedly been listed in smart CEOs best lawyers, and has received a number of national and international awards relating to his M\u0026A practice, as well as receiving lawyers monthly legal awards for mergers and acquisitions in 2019. So, Mike, we are so excited to have you with us today. Thank you for joining us. \n"},{"speaker":"Mike Mercurio ","startTime":126.0,"body":"Well, thank you for having me and some very kind words, thank you again. \n"},{"speaker":"Stephanie Chambliss Gaffin ","startTime":129.0,"body":"So, Mike, I think to get us started today, one of the first things that I'd love to ask you is most of the firms that are in business, whether they're thinking about a capital raise, a sale, whatever, they have an attorney that they work with. And so maybe a good place to start is around the question of if they already have an attorney, somebody who's known to them, somebody that they trust, who knows the firm, do they really need a different attorney if they're thinking about going through a transaction?\n"},{"speaker":"Mike Mercurio ","startTime":158.0,"body":"Well, I would say, perhaps, and I'll explain why. So our world is very specialized. And there's a lot of information out there. I think one of the things you know, wheather with law or medicine or otherwise, is that there's the strength of Google, and the weakness of Google. Meaning you can find out pretty much everything you need to know in life by doing a Google search, including M\u0026A. You could search M\u0026A., and you might be able to add lip your way through, but, what you can't do, is you can't gain the wisdom of practicing for 25 years by googling for example an asset purchase agreement, and you know what should be in an asset purchase agreement. So, you'll all likewise specialized. I do a lot of things for my clients; I serve as General Counsel, but I don't actually implement all those things. So I can triage those things, but only implement you know, whether it's estate planning matter, whether it's an M\u0026A matter, whether it's the financing matter or real estate law specialist. So it's really hard to be a general counsel to a client and be able to be good at all those various areas, including M\u0026A. M\u0026A is a complicated area of law. It's one in which you need to be immersed in to really understand various positions, what's currently market, what's not market And how to navigate through, you know, the leverage points between buyers and sellers. So the reason I say perhaps is, you know, a lot of times or sometimes, we'll come in and we'll just be specialized M\u0026A counsel. We'll do the deal for a client. But sometimes we work as co counsel. So we can be good partners with other lawyers, and if the lawyer has an institutional history with a client, and as you guys well know, if it's the sell side deal, and I presume that might be what we're talking about here, then having that historical basis for diligence purposes is really important. Because when you have to do seller disclosure schedules, and when you have to disclose diligence, having somebody that has an institutional knowledge and historical knowledge, is really important. So that's where maybe historical counsel can have a role. Obviously, you know, you don't want to have your first M\u0026A deal, writing the M\u0026A documents if you don't do it. And most lawyers realize that they're in over their head. I'm not very good at writing trust and estate documents. So I don't try. Even though I know what it is, and I'm sure if you're not a M\u0026A lawyer, you probably won't try to write an M\u0026A document or negotiate one.\n"},{"speaker":"Mark Gaffin ","startTime":316.0,"body":"And I would think that Mike, even on the sell side due diligence, let's use a sell side example, that even a fresh set of eyes to kind of go back and what are the areas that will be a highlight in the data room that are going to be part of the process. So I'm always about trying to not slow down momentum of a deal, if I can get people into a deal, I don't want to get tripped up in Corp docs. I don't want to have a bunch of holes that we got to start, stop, start, stop, start stop. Are there areas there that you see where you work with corporate to help them get that data room? It's very important, right, and there's a reason for it to be.\n"},{"speaker":"Mike Mercurio ","startTime":351.0,"body":"Yes. So you're right Mark. He said a couple things. One is momentum. Momentum is key for any sophisticated transaction. Having momentum so that you don't run into deal fatigue and, you know, in our shows is really important. But in terms of diligence and having the data room populated, I say this with a wink that I have yet to run into a seller that's really prepared adequately prepared to sell. They may be mentally prepared, they might have financial metrics that say they could sell. But when you dig in, and you start going through, what is the diligence, you know, and diligence, as you guys know, falls into financial diligence, legal and operation when you get into it, and you find out that there's just gaps because most clients when they're operating their business, that's one realm of how you approach legal. When you sell your business, it's completely different realm. So most times they don't- corporate governance, big area. Most times many clients don't follow up on governance, because during their flow, they don't do minutes. They don't always even issue stock. I have clients that say, \"Well, I own the company, so I don't need stock certificates\", \"well, we don't have stock certificates\". Well, we need those, right, the minutiae becomes really important in diligence. And if you're a seller, disclosure is your friend. It's not intuitive, necessarily, but you have to put yourself out there. So the buyers can see, the good, the bad, and the ugly,\n"},{"speaker":"Stephanie Chambliss Gaffin ","startTime":442.0,"body":"Mike, a lot of our listeners are business owners that may not have sold a business before. And so we love to make sure that we're explaining some of the terms that we use. So that, you know, that's really what we love to do in this podcast is to be very educational. So can you take just a step back and talk about what is legal due diligence? \n"},{"speaker":"Mike Mercurio ","startTime":461.0,"body":"Sure. So if you're selling your business, a buyer is going to want to essentially research your business by doing its quote unquote, \"diligence\". And diligence means and I alluded to it or referenced it earlier, there's generally three categories that the buyers going to ask you to answer questions. And I've prepared a lot of diligence questionnaires. And those questionnaires are basically a gigantic outline asking you, the seller, to detail all your documentation around a number of core areas- corporate employment, real estate, intellectual property, and a whole host of others, depending on the subject matter. And, you know, during the course of business, you don't typically focus deeply on the mechanics of the legal documents while you're operating your business, because it's just not relevant at that point in time. But if you're a buyer that's going to pay you money, you have to understand from a seller's viewpoint, where buyers are coming from, which is I'm trying to figure out what your worth, I'm trying to figure out how to manage my risk, I'm trying to figure all this out without knowing you. And therefore I got to ask questions. And so the first round of questions comes in the form of, you know, document production. And that's what Mark said, a data room. Typically, you'll set up an electronic space. And you'll take the questionnaire that a buyer gives you. And they'll say, for example, upload or give us access to your Articles of Incorporation if you're a corporation. Or your Articles of Organization, and let us see your shareholder agreement if you're a corporation. Let us see your minutes. And we want to see all your leases. Give us copies of your current customer contracts, and your employment and the list goes on and on. And now buyer can get a sense as to what the substance is behind your business. And, again, for a seller, a lot of times, a seller has to come to terms with that because you feel very strange about uploading all of your most personal documentation. And there are timing issues with this. It's always a very sensitive subject to upload customer contracts and employee information perhaps because have, you know the notion of competition and confidentiality. But ultimately, it's for your benefit as a seller, because you never want a buyer- and in fact, I have a scenario right now with a buyer, who, and we represented the buyer who, you know, I don't want to say we're alleging fraud yet, but we didn't get all the documentation. The seller threw in competence or fraud withheld documentation. And, you know, we overpaid frankly, for this business. And now there's likely to be a lawsuit. You don't want to be a seller in that position. You want to be able to put out all of your documentation and answer all the questions fully and completely. And there are a few businesses out there that don't have any skeletons or don't have any dents in their armor, so to speak. So you put it out there and you let the buyer evaluate.\n"},{"speaker":"Mark Gaffin ","startTime":652.0,"body":"Right and Mike, the one of the things we're almost always asked by a seller or potential seller is how long does this take? How long does the process take? You always have to be very, you're not being evasive, but you say look, it really depends. If the shop is ready to go, you're ready for primetime, the process can roll relatively quickly but it's almost invariably the people that are pushing really, really hard have the most work to do on legal, financial and operational due diligence. And I want to touch on one point you made on the on the VDR, the virtual data room, those for our listeners, are set up so that we can download information and protect information to various parts of where we are the deal so we're being efficient. But we're also trying that as Mike mentioned, measure when we disclose what we disclose, so you can use customer A customer B customer C in a disguised fashion. At some point you're going to have to down the road potentially after LOI, it's one of those reasons why it's part of the deal up front where we're involved. Where usually I ask Stephanie to do this because I'm not brave enough, it's when you actually go out with that data request. And it's the long list of things that we need from legal to start to load the data room. It's usually that first time like, wow, this can be a lot of work.\n"},{"speaker":"Mike Mercurio ","startTime":731.0,"body":"Yeah, that's a good question, Mark. You know, you have to remember that for most sellers, and I think you or Stephanie alluded to this, it's their first time doing this. And for most buyers, or many buyers, it's something they've done, maybe more than once. And so you have this sort of knowledge gap and sophistication gap. And for sellers, they are working their business robustly, they have to work their business, they have to keep it strong, and they have to also sell and sometimes clean up their business, which maybe we'll get to down the road. So they have at least two jobs. So I always say that you work your business nine to five, sell your business five to midnight. That's not an easy task. Buyers are very sophisticated. They're going to tell you, You know, it's easy, we're going to get this deal done very quickly in 30 days. We don't need that much information, don't let your attorneys and advisors kind of skew things. And, you know, we have a few questions we want to ask you, but just upload the information. So what happens is a seller typically get this, you know, robust diligence checklist, and they're, frankly, overwhelmed. And rightly so, because of how large a business is, you know, they might say, well upload your customer contracts. And we might have hundreds of customer contracts, you know, or your employee lists, or you're leasing and, you know, and many times, for many sellers, they don't have these documents at their fingertips. So what you don't want to do to your point Mark is, you want to upload documentation as quickly as completely as possible. Because until a buyer gets the documentation as requested, it's not really going to be able to advance things well. You don't want to upload things in, you know, fits and start. You don't want to upload things halfway so that you create appearances to a buyer that maybe there's a problem where there isn't a problem. You know, you really need to in a perfect world, if this is something that you go out with intention to a marketplace, you work with someone like you guys, and you're going to have your data room and some of your ducks in order so that when in a perfect world, a buyer gives you the data list, you can turn on that virtual data room and allow the buyer to access these various components with a snap of a finger. That's your perfect world. Unfortunately, doesn't always happen that way. But in a perfect world, that's how we like to have it happen.\n"},{"speaker":"Stephanie Chambliss Gaffin ","startTime":886.0,"body":"So Mike, I think that's a great lead in to something you referenced earlier. What are some of the key things that business owners should be doing ahead of time if they're thinking about selling their business? Are there some key things so that you know, if you start to think forward to that data room, to what a buyer is going to look for, what are some of the things that you see that your clients on the on the sell side say, Oh my gosh, I wish I had done that earlier.\n"},{"speaker":"Mike Mercurio ","startTime":911.0,"body":"This is something we haven't yet talked about, but I'll just open up the issue. Taxation is a big, big item. Too many clients come once they have the LOI and they say, you know what, I need to do some tax planning. And frankly, it's way too late. I had a client come to me within the last few weeks, and she was right on, she wants to sell within 24 months, 18 months to 24 months, she says let's talk tax planning, estate planning. So if you want to do any pre transactional planning at all, it might be tax planning, it might be estate planning, they might be together. You got to do that in advance. You can't do that once you have an LOI in place. There's a few things you can do. One thing you do want to do that kind of rolls into this though, before you go out there, and this can be done, when I say clean up your business, I alluded to that a little earlier. A lot of times, depending who your buyer is, buyers don't want to buy as corporations, for example, depending on the scenario, they like to buy LLC's, if it's private equity. So you might have to do some restructuring. A lot of times sellers say, you know, I meant to put into place some incentive programs for my employees, if I ever sold, there's a liquidity event that they would share in the upside, but we just never got around to it. Those are places that you really want to look at beforehand, because, you know, aside from you as the owner or the ownership, your employees are going to be the next level of really key pieces to the puzzle and for most sellers, they're going to be vital and buyers are going to want these people to stay on. You want them to be incentive to stay on, you want them to be happy to stay on. You don't want to create unnecessary leverage in what is already stressful scenario with your deal. So, I would say that you know, in a perfect world, you'd look at your corporate governance in advance, you look at your tax, both corporate tax and personal tax positions, your state positions, you look at your employment. And you'd also look at making certain that at least whatever you identify as your value drivers, if you're working with someone like yourselves, that those things are explained and protected. So if you're a tech company, and you have a piece of software, make sure it's protected. Make sure you own it, make sure you know you own it. Too many clients run into scenarios. This is where we go to the diligence discussion, right? They're going to ask you the questions every which way. Do you own it? How is it developed? Do you have the proper licenses in place? When you're operating your business, you may not think to that level of detail, but a buyer is going to think to that level and it becomes increasingly difficult when you're trying to one, run your business, keep it strong, two, sell your business and respond to all the questions a buyer has, and then three, clean up your business at the same time. It becomes a very, very difficult scenario for seller. And one in which, you know, you really don't want to be in, but many sellers find themselves in.\n"},{"speaker":"Mark Gaffin ","startTime":1094.0,"body":"One of the things I think that's interesting is if you talk to a company that has been on the buy side, meaning they've actually gone out and bought companies as part of their M\u0026A practice, they tend to understand the sell side process an awful lot better. Because all the things that someone's going to ask of you when you're selling your business, you're certainly going to want to see if you're buying another business as part of your development program. And one of the things, Mike I know we've had a chance to do this on a couple opportunities is, you're working on a deal team, right, when that's put together well it just provides so much value to the client and that's the legal, that's the tax, that's the finance guys, its accounting folks. What do you think your best practice is of using an attorney? Legal versus business items are very seldom so distinct, right, that that Venn diagram tends to overlap and my experience is when you get that attorney that can say you know, this is legal legal, this is up to a business decision now, I can give you my thoughts on that. Now the finance guys talk about that, I do the same thing, I'm very careful. I mean, it's bold on my engagement letters, I don't do legal or tax, but I can give you some thoughts up to a point and then how do we work together? What's your ideas of best practice there?\n"},{"speaker":"Mike Mercurio ","startTime":1177.0,"body":"Well, I could tell you to put a plug in for what you guys do, you know transactions struggle immensely if there's not a financial/ investment banker type in the deal, because some clients try to cut cut corners, on fees and costs because there are fees and cost with M\u0026A. M\u0026A is not an inexpensive proposition, your audience should know that. But your advisors should bring you value such that you may get additional value, or increased value, or they might save you value. Tax discussions or other things so that you are mitigating your risk. So to your point, Mark, you know, lawyers work on legal issues, right. And when we're engaged, and you know, if there's another party, they almost always have a lawyer engaged as well. So we have to deal with lawyer to lawyer, right. I mean, we cannot deal with principles. And so if there's not someone like you guys on the team, you have what is a principal trying to negotiate. If it's a seller, who hasn't sold the business before with really savvy people, and that's a bad place to be when they're responding to business points. Really bad place. And we always pride ourselves that we bring a lot of practical knowledge, we bring that wisdom, so we've seen lots and lots of deal flow. So we can weigh in on the business issues. We can say we think this is market. We don't think this is market. But in the end, and this is one of the things, I think that distinguishes how I practice law and how maybe others practice law. In the end, I think what a lawyer brings to the table is risk management and risk mitigation, in the end. And what a client brings to the table is the ability, hopefully, to clearly tell us what their objectives are, and tell us what their risk tolerances are, so that we understand where your pressure points are, what are you trying to accomplish? And for every person it's different. You just can't Google this and say, Well, you know, they asked for this type of indemnification, so therefore, conventional wisdom says that. You have to understand what's driving your client. And for entrepreneurs and lawyers, typically, there's a chasm there. Entrepreneurs take risks, more so than most service providers are willing to tolerate. And you have to be very careful when you're talking to a client. And they're talking about their business issues, and what they want to do, to not to take on the deal to make it your own. And a lot of lawyers, some lawyers, get it and fall into that trap, and even some of my own firm, Junior people have had to coach them and say, This is not your deal. Okay, it may be a deal that you wouldn't do. It may be risk that you wouldn't accept, but it's not you. It's not your deal. You have to advise your client based upon their parameters and their objectives. And so, Mark, there always becomes sort of that, that dividing line, there's legal, and there's business, but lawyers can deliver bad news to the other side, and I always say, Listen, if you want another million dollars in cash upfront, that's a business term. It's not a legal term, right? I want another million dollars. We can deliver that news to the buyer. So that, you know, in the end, buyers and sellers need to work together, principals need to work together, they need to negotiate tough and need to get their deals. But they have to work together. You don't want hard feelings. Lawyers can be the one to deliver tough business points at times, so that the flack, if there's flack, flies back to the lawyer, not necessarily to the principal. Even though the principal is driving that business decision. But I say with all sincerity, you have to have an investment banker or financial person, like you guys, on a deal. Deals flounder without it, and the sellers get manipulated too often. And we can't be involved in those discussions when principals want to get on the line and just talk, turkey. If their lawyers aren't on the line, we have to be behind the scenes. So I say that in earnest. Business terms should be handled by the principal and the investment bankers, with consultation from the lawyers and lawyers are to handle the legal matters.\n"},{"speaker":"Stephanie Chambliss Gaffin ","startTime":1236.0,"body":"Mike, I think that's so helpful. I think a couple of things, I love how you really emphasize understanding your client, what their objectives are, what they're driving towards, which I think is, again, ultimately what really matters. I want to come back to starting to dive into some of the deal terms specifically, right after we take just a moment from a word from our sponsor. \n\nRight in the Middle Market is brought to you by SLS Capital Advisors. SLS Capital Advisors is a boutique financial advisory firm working directly with middle market leadership to tackle critical growth opportunities, including exits, mergers and acquisitions and access to capital. The principles of SLS Capital Advisors bring deep industry financial and consulting experience to firms seeking tailored, strategic opportunities, including capital for major growth initiatives and alternatives for those evaluating corporate transitions and exits. SLS Capital Advisors services include managing effective exits and sales processes involving sophisticated buyers such as strategic purchasers, financial buyers and operator to operator transactions and raising capital to fund our clients growth including debt and equity elements. They also assist companies and capture growth opportunities through focused and effective organic growth and M\u0026A programs and unlocking profit potential through business portfolio rationalization and divestiture. SLS Capital Advisors focused on delivering consultative executions for clients seeking strategic growth and capital. Find us at SLSCapitalAdvisors.com to learn more about how we can help you. \n\nWelcome back. We're here with Mike Mercurio of Offit Kurman and talking about the legal side of M\u0026A. And so, Mike, you've given us I think some really helpful perspectives on how to think about the role of the attorney on the deal team, how you think about the legal points versus the business points. I'd love to start to dive in a little bit more to deal structure. And one of the things we've talked about on some previous episodes is obviously there's a ton of uncertainty in the market right now. So much that's happening. And we've talked at a high level about that deal structure is one way to address the uncertainty in the current environment. I'd love to hear what are you seeing how are you helping use deal structure to get deals done even in 2020?\n"},{"speaker":"Mike Mercurio ","startTime":1592.0,"body":"Well, it's a good question and 2020 is a tough year. You know, before COVID hit, as you guys know, in the marketplace was very hot. There were a lot of deals, all different industries. And then COVID hit and the marketplace still has appetite for deals, the challenge that we're running into, there's a lot of volume, a lot of sellers and a lot of buyers and I get inquiries all the time. The challenge you're running into is valuation and funding. So, you know, buyers come in and they're and they're doing their diligence, and, they see, of course, that every sellers business, almost to the T is off, right? I mean, unless you're just in one of these COVID related businesses, Zoom type business or, I actually have a client that has a clinical lab that does COVID testing that we're in the middle of the sale on. But unless you're in that type of industry, you run into this scenario where I had a good business, have a good business, very strong. And now a buyers coming back to me and saying, Well, can we get creative? Can we take a discount? In fact, I have a client now in healthcare, very strong business, very large system, that private equity wanted to buy. And then my client said to me, Hey, Mike, I'm not taking the COVID discount. There's no reason for me to take a discount. My business is a little off. My business will be back. Every business is off. I'm not taking In a discount. I'm not working with a buyer to take a sell light. And I understand where he's coming from. So what I'm seeing is that there's a lot more use of not cash up front. So first you start with the valuation, can you get to a valuation? Most times you know, buyers want to come in light on valuation and the funding mechanism is a little screwy because banks are really conservative. So if they don't have money, so that's a point for a seller, when a buyers coming to you, you got to figure out they have money behind. Okay, don't waste your time it's been a bunch of time putting your business on the shelf if you don't think they can even get the funding. They're deferring or delaying payments if they can so that they can get some normalcy and figuring it out. I'm seeing buyers still doing qualities of earnings, qualities of revenue analysis. What they're doing, what I'm finding is, they're just painfully doing diligence longer and deeper than ever. And, and they're also using, you know, the things that you told you would think earn out, but earnouts are really tricky for sellers, and maybe for buyers too. I have a client that sold right before COVID. And of course, the, COVID hit and there's an earn out. And there's a potential dispute. And earnouts, as you guys know, are a big source of dispute for buyers and sellers. In terms of structure, otherwise, always at the inflection point we run into is going to be an equity sales, stock sale, is this going to be an asset sale? Are there going to be any other tax considerations? So it's a stock sale, but then a buyer says, You know what, and we just had this stock sale, buyer and seller didn't talk about the tax elections. Buyer now wants to do, it's a technical term 338 H 10 election, where you treat a stock sale like an asset sale. And so there's a lot of these types of nuances that are starting to come up as things play out and people are trying to get their best bang for their buck. So to be frank, most of my deals are dragging on forever. They're not closing. They're not off. So people have not said, well, we're done, but they're not fully on. They're just stuck in deep, deep diligence. I guess waiting for something to happen in the marketplace that gives people confidence. I think what happened was three months of COVID when it first came out, the world was ending. None of us really knew if our businesses would survive, or if this was a, you know, the world ending event. It obviously was not, but nonetheless, very serious. Now we're into the summer months where I thought things would free up. They have a bit, but with the fall coming, I think everybody's predicting the potential shutdowns again. So it really makes it hard for buyers and sellers to come to terms on valuation and for a buyer to say, Hey, here's a check for a whole bunch of millions of dollars. Really hard to do. So long winded way of saying the deals are dragging and the diligence is becoming very pronounced.\n"},{"speaker":"Mark Gaffin ","startTime":1887.0,"body":"One of the interesting things I've seen is your people will sometimes get a valuation for it may be a partnership, buyout or something last year. And then what relevance is that I have today? I've been doing valuations for all sides of M\u0026A for 30 some years now at this point. What we actually try and do with folks to say let's build that from the ground up. Stephanie is always challenging us to tell the right story, at the right time, to the right people. So starting now and saying Okay, forget what multiples might have been, if we look up on some website for last fall, let's start from where we are today. Where are we, with our visibility in the robustness of cash flow? You know, this is kind of corporate finance 101, but the value of any asset, be it a stock be it a company, is the cash flows of that asset discounted back at a rate that's appropriate to the risk of that asset. So, two things, if we have visibility into the cash flow, and we can forecast that out, where are we now, to your point, still a little bit in flux here in the summer/ fall, but if we have good visibility, we've retained our clients, we don't have a supply chain problem, we've been able to deal with with people in upfront, we don't have payables boiling up on our balance sheet. We can build that model, now. I'm doing that as we speak and in the other office. We build that model now and say look, this is a reasonable valuation range at which you could probably go out and you reduce the risk factor here by all the things we've talked about before, right? You've got a clean shop, you've worked on your shop, you know, your customers, you know, you're not 44% of one customer. And then 28% is the next customer. So there you've got a huge concentration issue that's going to be heavily discounted now, whereas in a more frothy market, you can maybe weave through that. But we've talked to private equity firms, you know, we talked to them all day long. And there are a bunch of them that are doing add on after add on after add on right now, getting these deals done, even if they have to over equitize, because I think a lot of people realize that the banks are going to come back, right, they're dealing with their second quarter covenant issues and things like that, but the banks are relatively healthy. And not only is their bank financing but there's not bank financing. Are you let me switch for a second to a capital raise scenario. Are you seeing people trying to do anything from a growth capital standpoint, either debt or equity?\n"},{"speaker":"Mike Mercurio ","startTime":2035.0,"body":"Yeah, I mean, I, I think that I'm seeing more inquiries from private equity, okay, that are looking to do roll ups. I want to answer your question, but I also want to back up for for a second, when you're thinking about your why, Why are you in the market now? I think for some, they've been pushed into the market because the COVID and the pandemic and the uncertainty says to them, you know what, I'm 63 years old, I was gonna sell 65, I don't need this anymore, so I'm in. But I mean, if you have a growing business, and you're not being pushed in, then maybe, this is not the year. We are seeing people trying to raise capital, Mark, and, you know, it's a case by case. The market is just really uncertain from what I've seen, and we haven't had a lot of people raise it too successful, we've had some people go down, down far down deep with some folks but not too much success, as I've seen. I have seen a lot of diligence. I've seen a lot of top tires being kicked. I've seen a lot of discussions. I've seen a lot of, basically new forms being formed. I've evaluated some of those where people maybe have sold businesses and they put together a form and they want to, you know, put some capital out there, and they're there in play. But I haven't seen a lot of deals close.\n"},{"speaker":"Mark Gaffin ","startTime":2127.0,"body":"I think I took away from the last the global financial crisis is that people I think tend to overcall what will be the permanent structural changes to the marketplace. I think people thought that leveraged lending, private equity, etc. were going to die or go away after the last financial crisis. Clearly, that was not the case. Right? Record amounts of monies were raised up through last year. We've got a lot of people with cash on the sidelines. So to me it's a question of when the underlying economy if you look at some of the jobs creation, if you look at the stock market, if you're looking to think and not to say everything's rosie, but there is actually an economy here. We always talk about, Warren Buffett saying, You'll go broke under betting against the American economy. There's some health there. Even with all the headwinds, even with a massive shutdown that we had, so I think there's a lot of reason to have cheer. If you're a company that made it through the global financial crisis, if you made it through COVID, and you're still hanging on, we're working with people, we call it small turnarounds. Yes, people that are getting ready to sell maybe it's later this year, maybe it's the first part of next year. But I think it's still good time to not just stop, not to pause. Even if you're operating your company, we talked about running, growing and selling your business, if selling is not the right time, to your points are some headwinds, What can you do now to grow it, to run it, so that when you are ready, you actually get that growth multiple, right you get the growth premium. Not we've just stood still for six months.\n"},{"speaker":"Mike Mercurio ","startTime":2225.0,"body":"That's one takeaway that we are counseling clients listening. There's a ton of M\u0026A out there,a lot of discussion, which tells me that the market will be there soon enough. If this is a throwaway year for most companies, meaning you know, you're not really going to advance and grow, get yourself positioned so that 2021 and 2022 when things do resolve a bit. You're ahead of the game, you're ready to go out there, get your house in order now. Use this as a year to take care of the things that you've been meaning to do, but could never. This is a perfect time to do that. I'm optimistic like you are, Mark. And I think there's a ton of pent up demand, there's a lot of money out there. I just know about all the inquiries I get. It's just right now nobody has figured out how exactly to get the deals close yet and manage all the risks, they will.\n"},{"speaker":"Stephanie Chambliss Gaffin ","startTime":2280.0,"body":"So Mike here on Right in the Middle Market, we have a strong emphasis towards being very pragmatic, which I know is part of your bent as well. So, to wrap up our discussion today, and you've talked about, you've had so many great tips and great ideas for business owners, but I think to that point, what would you say if you were to give two very tangible concrete tips? Something that a business owner could do today to prepare for a future sale? What would be those two things?\n"},{"speaker":"Mike Mercurio ","startTime":2307.0,"body":"Well, one, I would get a handle on what the true value drivers are for the business. And that might start with evaluation, but understand what drives your business. What are the value drivers that a buyer will want? And once you know what those are, protect them, enhance them and grow them. To many people, you know, have their value drivers not fully maximized and they don't really understand what is driving the business. I would also say that if you're looking to go into the market, do the pre planning that we talked about. Too many people don't look at their tax positions. They don't look at their corporate structuring. They don't look at their estate planning until it's too late. And then they say, Well, I really wanted to do some gifting I really wanted to mitigate or, minimize my income tax. And it's too late. You can't do those things once you have an LOI or an LOI is coming. You have to do things in advance. Now's a good time, if you think you're going to go into the market in the next year or two, why not look at those things. Look at your structuring, look at your your employees and your customers. Make sure those things are protected. So your value drivers, which are your minimum, your employees and your customers, make sure those things are protected, and your personal position and you know, meaning tax and estate planning.\n"},{"speaker":"Stephanie Chambliss Gaffin ","startTime":2397.0,"body":"Mike, thank you so much for joining us today. It's been so fun talking with you.\n"},{"speaker":"Mark Gaffin ","startTime":2401.0,"body":"Thanks, Mike. \n"},{"speaker":"Mike Mercurio ","startTime":2402.0,"body":"Yeah, my pleasure. Thank you very much for the opportunity and I really appreciate your time and questions and interest. \n"},{"speaker":"Stephanie Chambliss Gaffin ","startTime":2409.0,"body":"I'm Stephanie Chambliss Gaffin, and you've been listening to Right in the Middle Market, a podcast about running, growing and selling your middle market business. We'd love to hear your comments about today's episode with Mike Mercurio, or ideas for topics you'd most like to hear in the future. Send us a message on LinkedIn or drop me a line at podcast@gaffingroup.com. Don't forget to subscribe to make sure that you hear more pragmatic tips about running your middle market business. Until next time, be well and be informed.\n\n"}]}