How to Sell a Business Ep 385

In this comprehensive discussion, Alex Hormozi, the owner of acquisition.com and a seasoned entrepreneur with eight business sales under his belt, shares his extensive experience in selling businesses. Hormozi emphasizes the importance of being prepared to walk away during negotiations and having multiple options to secure the best deal. He outlines the process of selling a business, from ensuring the company has value and finding a banker or broker, to navigating due diligence and finalizing the sale. Hormozi's insights cover the intricacies of deal structures, non-compete clauses, and the significance of terms like net working capital and escrow. He advises sellers to be wary of speed as a negotiation tool, stresses the importance of trust, and offers guidance on avoiding common pitfalls. Hormozi's goal is to educate others on achieving successful, high-value sales, drawing from his own journey from financial struggle to managing a portfolio that exceeds $100 million in annual revenue.

• Understanding the importance of having options to strengthen your negotiation position.
• The concept of winning negotiations before they start by being prepared to walk away.
• The significance of having leverage through alternative deals or opportunities.

You have to be willing to walk away from the table in order to get the best deal, which is why you win negotiations before you start them by having options.

This quote emphasizes the strategic advantage of having alternatives when entering negotiations, as it allows one to walk away confidently if the terms are not favorable, thus often leading to better outcomes.

• Introduction to Alex Hormozi's background and experience in selling businesses.
• Overview of his success with Acquisition.com and his personal journey from necessity to choice.
• Mention of his preference for working in windowless environments.

My name is Alex Hormozi. I own acquisition.com, which is a portfolio of companies that does over $100 million a year.

Alex Hormozi introduces himself and establishes his credibility by mentioning his company and its financial success.

• Alex Hormozi's history of selling multiple businesses across various industries.
• The confidentiality involved in business sales and the strategic reasons behind non-disclosure agreements (NDAs).
• Insight into the diversity of buyers Hormozi has dealt with in his sales.

I've sold eight businesses. [...] I sold Allen, which is a software company that did 12 million in trailing twelve month sales. [...] Companies that I sold in 2021, I sold for $46.2 million.

This quote provides concrete examples of Hormozi's experience in selling businesses, highlighting his track record and the financial scale of these deals.

• Acquisition.com's specialization in service-based companies, particularly in the internet service and e-learning sectors.
• The company's strategy of purchasing minority stakes to facilitate growth.
• Hormozi's intention to share his knowledge on valuing and selling companies.

For Acquisition.com, we work with specifically service based companies, especially Internet service based businesses, guru businesses, elearning businesses, course business, et cetera.

Hormozi outlines the niche focus of Acquisition.com, indicating their expertise in a specific segment of the market and their business model of minority stake acquisition for growth.

• Outline of the three-phase process to sell a business: prerequisites, marketing, and closing the deal.
• The importance of meeting certain prerequisites to make a business valuable and sellable.
• Discussion on the role of brokers and bankers in the selling process.

So phase is the prerequisites. [...] once you have these prerequisites, which I'll go over, you have to find a banker or broker.

This quote introduces the initial phase of selling a business, emphasizing the foundational requirements that must be in place before engaging with financial intermediaries to facilitate a sale.

• Identification of common deal killers in business sales.
• The size of the business as a significant factor in attracting institutional investors.
• The risks associated with customer concentration and lack of a defined sales process.

So these are deal killers. [...] The biggest one, though, is that people are too small.

This quote highlights deal killers, with the primary issue being the size of the business, which can limit the interest of larger investors.

• Entrepreneurs often target too few potential acquirers, leading to limited offers.
• Misjudging the timing of a sale can result in missed opportunities or unsellable businesses.
• The misconception that businesses will always increase in value over time.

You talk to ten people, you got stuck to 500, right? [...] Most people sell too late, in my opinion.

Hormozi discusses common mistakes made by business owners, including not reaching out to enough potential buyers and waiting too long to sell.

• The reality that most businesses do not sell for high multiples.
• The discrepancy between owner expectations and actual business value.
• The median multiple for M&A deals and the factors that influence these figures.

The median number for m and a deals for this was. I think the median was $5 million. [...] The multiple was 6.7 times trailing twelve months.

This quote provides statistical insights into typical business sale valuations, helping to set realistic expectations for business owners.

• The importance of growth stories and potential for expansion in attracting buyers.
• The concept of "key man risk" where the business's success is too dependent on the owner.

If the business isn't growing, you're going to get a big discount on it. [...] Key man risk, as in, like, are you the one who's the rainmaker?

Hormozi explains how growth potential and the risk of the business being too reliant on the owner are critical factors in the valuation and saleability of a business.

• Alex Hormozi discusses the concept of Keyman risk and its impact on the value of a business.
• Keyman risk occurs when a business is highly dependent on one individual, making it less valuable when that individual leaves.
• Acquisition.com works with companies to mitigate Keyman risk over a three to five-year period.
• Transitioning from a guru-esque business to an enterprise-level licensing business, as done with gym launch, is part of the process to reduce Keyman risk.

"And so you're a big risk." "In acquisition.com, we work with companies that have Keyman, and we work them over the next three to five years to help them not have Keyman risk, which is how we were able to exit gym launch, which was started as kind of a more guru esque business, and then transformed into just a true licensing business at an enterprise level."

The quote emphasizes the importance of mitigating Keyman risk to increase the value of a business and enable a successful exit strategy.

• Single channel dependence is when a company relies on only one method for acquiring customers.
• This dependence is a significant risk that can devalue a business, as investors avoid businesses that could go to zero if the customer acquisition channel fails.
• Diversifying customer acquisition channels is crucial to increase a company's value and attract serious investors.

"Single channel dependence, meaning you only have one way of getting customers. You have no other way. And if tomorrow that shut off, you'd be screwed, right?"

This quote outlines the risk of relying on a single channel for customer acquisition and its potential negative impact on business value.

• Enterprise value is determined by discounting future sales based on the risk associated with the likelihood of those sales occurring.
• A business with a high probability of future sales and growth will have a high enterprise value.
• Conversely, a business with low or declining future sales has a low enterprise value.
• It's essential to demonstrate the high likelihood of future sales and growth when selling a business.

"Enterprise value is a discount applied to future sales, which means you have to take the total amount of sales that a business takes between now and the end of time, and then you apply a discount to it, which basically means risk."

The quote describes how enterprise value is calculated by discounting future sales based on risk assessment.

• When selling a business, it's important to distinguish between bankers and brokers based on the size of the deal.
• Bankers are typically used for institutional sales, while brokers are more common for deals under $5 million.
• The fee structures between bankers and brokers differ due to deal size and the frequency of transactions.

"Bankers are what you're going to need to sell to an institutional. For the most part, brokers are usually when you're selling for less than 5 million, you get a broker and they have different fee structures because the amounts are lower and they have to do more deals, all that kind of stuff."

The quote highlights the difference between bankers and brokers and the contexts in which each is used.

• Networking is a critical step in the process of selling a business.
• It involves reaching out to contacts and using various resources, including personal networks and banking institutions, to find introductions to investment banks.
• The goal is to find a bank that has experience with similar-sized deals in the same market as the business for sale.

"So I use my network, which means I just called everybody I possibly knew and said, hey, do you know anybody who knows anything about this?"

This quote underscores the importance of leveraging personal networks to find the right contacts in the investment banking sector.

• Once introductions are made, a one-page teaser document is sent to bankers to pique their interest.
• The process involves selling the business to bankers so they, in turn, can effectively sell it to potential buyers.
• It's important to negotiate fee structures and inquire about the bankers' recent experience with similar deals.

"You then basically sell them on selling your business."

This quote reflects the necessity of convincing bankers of the value of your business so they can represent it effectively to buyers.

• Bankers' fees can include upfront payments, targets, and ratchets based on the sale price.
• Breakup fees and minimums are negotiable and should be carefully considered.
• The seller should negotiate fees based on the cash they receive rather than total enterprise value to avoid disproportionate payments to bankers.
• Being prepared to walk away from negotiations can lead to better terms.

"The things that you really want to be cognizant of is the minimums and especially how they're going to get paid."

The quote advises sellers to be aware of the fee structures and terms of payment when negotiating with bankers.

• Selling a business is an emotional process that involves parting with a piece of one's identity.
• It's advised to determine an acceptable sale price before negotiations begin to avoid being swayed by inflated projections.
• Sellers should be actively involved in selling their business, as they know it best.

"This is one of the most emotional processes you can possibly go through. It's selling a part of yourself, selling part of your identity, and so you can get tied up in it."

The quote acknowledges the emotional challenges involved in selling a business and the importance of being prepared.

• Alex Hormozi encourages listeners to connect with him on LinkedIn by sending a connection request and a note.
• He suggests tagging potential connections in his or Layla's posts to facilitate networking.

"So send me a connection request, a note letting me know that you listen to the show, and I will accept it." "There's anyone you think that we should be connected with, tag them in one of my or Layla's posts, and I will give you all the love in the world."

The quote reveals the speaker's openness to networking and engaging with his audience on LinkedIn. It also suggests a proactive approach to expanding one's professional network.

• The sales process involves preparing a comprehensive information memorandum (CIM or "sim") detailing the company's financials, story, competitive analysis, marketplace, and growth trajectory.
• A teaser is sent out to potential buyers without disclosing the company's identity to protect employee concerns.
• The process includes signing NDAs, receiving indications of interest (IOIs), conducting management presentations, and receiving letters of intent (LOIs).
• Negotiation involves pitting potential acquirers against each other to secure the best deal.

"Once you've got audited financials, once you've got a sim... they will send the teaser out to all these 500 people." "From there, you'll usually get, like, 14 or so iois, 15% right. From there, about half of those, you'll do kind of like management presentations. From there, you'll get two to four. Lois?" "And then you sign the Loi, and then you go through the diligence process, and then you close."

These quotes outline the sequence of steps in the sales process of a company, from preparation to closing the deal. They highlight the importance of having detailed financial information and the stages of engaging with potential acquirers.

• Due diligence is crucial, and involves organizing financials and creating a CIM.
• The process from starting to sell to receiving payment can take 12-18 months.
• A list of potential buyers or investors is compiled, and NDAs are agreed upon.

"So you got to get your due diligence in. You got to get organized." "So now that we understand how the sales process works, now you're working with the bankers. You got to get this prep stuff done." "Then they're going to put together the list of potential buyers or investors. Then they're going to have the summary fact sheet and the NDAs agreed upon."

The importance of being organized and prepared before entering the sales process is emphasized. The quotes detail the preliminary steps and the timeline involved in selling a business.

• After preparation, marketing begins by contacting prospective buyers.
• The process involves sending teasers, signing NDAs, providing access to a data room, and conducting management presentations.
• Potential investors submit IOIs and visit the company to assess the opportunity.

"Now we market them. So now we contact those prospective buyers. We go teaser. Then NDA, which is the one to three page blind description of the business." "Potential investors will then submit their iois. That's the indication of interest that they're like, we might be interested in buying this business, and they'd give a rough range."

These quotes describe the marketing phase, where potential investors are contacted and given initial information to gauge their interest in acquiring the business.

• The negotiation phase involves evaluating final offers and LOIs.
• The terms of the deal, including price and payment structure, are critical to the seller's objectives.
• Different deal structures, such as earn-outs, seller financing, and equity rollovers, affect the actual payout to the seller.

"So you start negotiating those, you go back and forth, et cetera. Now, here's the thing. There's the price and then how it's paid." "So you want to make sure that you know why you are selling and what the most important things are for you. And you need to ruthlessly, ruthlessly communicate that to the bankers."

The quotes highlight the complexity of the negotiation phase and the importance of clear communication with bankers to ensure the seller's goals are met.

• It's important to consider not only the financial offer but also the fit within the buyer's portfolio and the potential impact on the company's team.
• Strategic buyers may offer better multiples due to synergies with existing operations.
• Personal rapport with the buyers can influence the decision-making process.

"Your business is in good hands so that you want people who have relevant experience." "Do I like these people? Will my team like these people?"

The speaker stresses the significance of selecting a buyer who is not only financially suitable but also a good fit for the company's culture and future growth.

• An exclusive LOI is signed, and due diligence is conducted to verify the quality of earnings and legal compliance.
• Negotiating power is crucial during this phase, and sellers should not be swayed by promises of a quick close.
• The closing process is often less dramatic than expected but marks the culmination of the sale.

"So at this point, you sign an exclusive loi, meaning you can't shop the business to anybody else during the period of the due diligence." "They're going to audit your quality of earnings, which is something you have to get the bankers will explain how to do that, which is to make sure that your numbers are legit, that they are what you say they are."

These quotes cover the final steps in the sales process, emphasizing the importance of a thorough due diligence and the realities of closing a deal.

• The due diligence process involves a thorough investigation by the purchasing firm, which includes interviewing the seller's customers and employees.
• It is a meticulous evaluation to understand the company's value and the risks associated with the purchase.
• The process can reveal what past customers and current employees think about the company, which might influence the buyer's decision.

"The firm that purchased us spent like $250,000... on search to see what your customers think about you."

This quote illustrates the extent and financial commitment a firm may invest in due diligence to assess customer satisfaction and the company's reputation.

• The buyer will assess the involvement of the seller in the company's daily operations and the strength of the management team.
• This scrutiny is to ensure that the business can continue to operate and grow even if the current owner leaves.

"They're going to interview them really heavily to see what's your involvement. Is he really passively involved? Like, what do you do on a daily basis?"

The quote emphasizes the buyer's interest in understanding the seller's role and the potential for the business to sustain its operations independently.

• Background checks are conducted on the seller and the management team to uncover any criminal or financial irregularities.
• Legal aspects such as employment contracts are reviewed to ensure stability post-acquisition.

"Then you've got background checks of you and your management team to make sure no one's a convicted criminal or something sketchy, which more realistically is like financial."

This quote highlights the importance of a clean legal record for the seller and their team as part of the acquisition process.

• Selling a business is a lengthy process that can take upwards of a year, with various stages including finding bankers, preparing the business, and undergoing due diligence.
• It is essential to have a strong management team to keep the business growing during this period.
• The buyer benefits from a longer process, while the seller should aim for a quicker close.

"Now if you're tracking with me, there was like three months of looking for bankers and figuring that part out and making sure that your business is ready may take much longer than that."

The quote outlines the initial stages and time commitment required before even entering the due diligence phase, indicating the lengthy nature of selling a business.

• The purchase agreement includes indemnities, which are liabilities the seller might face post-sale.
• Sellers should negotiate hard on indemnities, especially those that are out of their control, and be willing to walk away if necessary.
• Fundamental indemnities, such as ownership of the company and trademarks, are non-negotiable.

"Indemnities are the things that you are liable for... You need to go shade hard on these things."

This quote stresses the importance of carefully negotiating indemnities to protect the seller's interests.

• Non-compete agreements are critical, especially if the seller has a specific skill set or plans to continue working in a related field.
• The language and scope of non-compete clauses must be precise to avoid future conflicts.
• Honesty in negotiations can lead to better outcomes, and knowing what you plan to do next helps tailor the non-compete terms.

"If you're really good at trash compacting, then they're going to not want you to touch anything trash related for a long period of time."

This quote exemplifies how a buyer might seek to restrict the seller's future business activities to prevent competition.

• Schedules provide proof of assumptions made during the selling process and must be included in the agreement.
• Definitions within the agreement are crucial and can significantly alter the agreement's terms.
• Understanding and negotiating definitions can be more effective than arguing over clauses.

"Schedules is all the stuff that you provide. It's basically another word of, like, proof, right?"

The quote highlights the necessity of including all relevant data and assumptions as schedules in the purchase agreement to prevent future disputes.

• Net working capital negotiations determine the amount of money left in the business for operational continuity post-sale.
• Escrow amounts serve as insurance for the buyer against future liabilities and are often a percentage of the total deal value.
• It is vital to negotiate a reasonable escrow amount and be aware of the potential phased release of these funds.

"And then finally is the escrow amount... if you can keep it under 10%, you're rocking."

This quote points out the negotiation aspect of the escrow amount and its impact on the total funds received from the sale.

• The closing process is often anticlimactic, involving merely a large deposit into the seller's bank account.
• Sellers may need to hire someone to sign the multitude of closing documents due to the volume and complexity.
• Post-sale, the seller must navigate trust issues and verify all terms to ensure they are not exploited.

"And it's now payday, all right? So first off, it's very anticlimactic because it takes all this time, and then all you do see is just like a big deposit in your bank account."

This quote captures the culmination of the selling process, which, despite its complexity, results in a simple yet significant financial transaction.