Adam Webb is the Owner and Managing Partner of Quazar, a boutique investment banking firm specializing in M&A services. In his role, he helps privately held businesses in the lower-middle market sell or grow through acquisitions. Adam has led deal teams and negotiated favorable outcomes for clients in dozens of transactions with an aggregate value of hundreds of millions of dollars. Before Quazar, he was the Senior Associate of Risk Management at RSM, where he specialized in helping clients perform internal audits and implement internal controls to maintain compliance.
Here’s a glimpse of what you’ll learn:
- [4:14] What is an investment banker?
- [6:28] Market trends in the M&A space
- [11:52] Adam Webb shares his perspective on the economy’s trajectory
- [16:03] How business owners begin preparing for an exit
- [20:51] Adam’s method for determining business value during M&A transactions
- [26:50] Why deals can collapse during due diligence
- [31:26] The importance of a strategic M&A advisor — and how to reduce M&A taxes
- [35:32] What was the worst transaction Adam experienced?
- [40:00] Advice for selling your business
In this episode…
Most entrepreneurs generating $10-20 million in yearly revenue are so involved in the daily grind of their business that they haven’t even considered an exit. When it’s time to retire, they often discover their company’s value is lower than their targeted range. How can you prepare for an exit while ensuring an ideal sale valuation?
With experience securing M&A deals for lower-middle market companies, Adam Webb often has to break the harsh news that most business owners won’t walk away with $20 million from their transactions. You must consider transaction expenses and deal structures like escrows, equity rolls, where you retain some ownership in the business, and SBA finance deals, where the seller finances the buyer. These structures take time and understanding, so it’s crucial to begin planning your exit at least five years in advance and disclose any outstanding company information to avoid value decreases or deal collapses during due diligence.
Tune in to the latest episode of Destination Business Freedom as Pat Mancuso hosts Adam Webb, the Owner and Managing Partner of Quazar, to talk about optimizing your business for an exit. Adam shares how he determines business value during a transaction, the worst transaction he has ever witnessed, and how to reduce M&A taxes.
Resources Mentioned in this episode
- Pat Mancuso on LinkedIn | Website
- Recover My Tax Credits
- Mancuso Consulting Group
- The Mancuso Method
- Adam Webb on LinkedIn
- Adam Webb’s email: adamw@quazarinc.com | Phone number: 763-550-9000
- Quazar
- Tax-Free Wealth: How to Build Massive Wealth by Permanently Lowering Your Taxes by Tom Wheelwright
- Roland Frasier on LinkedIn
- EPIC Network
Quotable Moments:
- "You have to start the process of considering the exit long before somebody taps you on the shoulder."
- "Low interest rates, better for M&A activity; high interest rates, worse for M&A activity."
- "If there's skeletons, I mean, it's better to go ugly early."
- "Having the right tax adviser is critical. It's about strategically reducing your tax bill ethically."
- "Selling your business can be extremely rewarding; it's also a lot of work."
Action Steps:
- Begin planning your business exit at least five years in advance to align with your personal and financial goals: Early planning gives owners time to increase business value and prepare for smooth transitions, reducing last-minute pressures and rushed decisions.
- Reduce customer concentration to mitigate risks and enhance appeal to potential buyers: Diversifying your customer base reduces dependency on key accounts, making your business a more attractive and secure investment.
- Ensure your business can operate without you by building a strong management team: Buyers prefer businesses that won't suffer in the owner's absence, making a solid team a critical aspect of business continuity and value.
- Engage with professional M&A advisors to receive personalized consultation on your business’ valuation and the sale process: Expert advice tailored to your business helps you understand its market worth and outlines actionable strategies for maximizing sale outcomes.
- Organize and maintain thorough business records to ease the due diligence process during a sale: Detailed and accurate documentation facilitates smoother negotiations, helping retain business value and withstand scrutiny from buyers.
Sponsor for this episode...
This episode is brought to you by the Mancuso Consulting Group, a go-to resource for entrepreneurs, CEOs, and business owners dedicated to personal and business growth.
Our team of experts has coached, consulted, and trained over 15,000 entrepreneurs, C-suite leaders, and business owners in areas of sales, leadership, organizational development, and personal growth. Additionally, Pat Mancuso has launched multiple multimillion-dollar business ventures, giving him a firsthand understanding of entrepreneurs' daily challenges.
At the Mancuso Consulting Group, we are committed to exploring innovative ways to help businesses and leaders grow their people and improve their bottom lines.
To learn how the Mancuso Consulting Group can help you unlock your full potential, visit www.themancusomethod.com, email us at pat@themancusomethod.com, or call 651-503-7355.
Episode Transcript
Intro: 00:01
Welcome to Destination Business Freedom, hosted by Pat Mancuso. Join us as we explore success strategies and hacks from leading entrepreneurs, helping you bridge the gap between financial success and personal freedom. Your journey starts here.
Pat Mancuso: 00:23
Pat Mancuso here. I'm the host of the Destination Business Freedom podcast and we are excited that you're here. I interviewed thought leaders, entrepreneurs and business owners who have either exited their business or are on that journey. And I also interviewed business owners who are helping people on that journey. My goal is to help small to medium sized business owners close the gap between their finances and their freedom by utilizing tools and advisors so they can ultimately define and arrive at their destination, whatever that looks like.
Today, I'm going to introduce you to an amazing guest here in just a second, but I want to introduce our sponsor for today. This episode is brought to you by the Mancuso Consulting Group, which uses this proprietary Mancuso Method process to help entrepreneurs and business owners dedicated to closing that gap between their finances and their freedom. When you go to theMancusoMethod.com and take our short assessment, you will receive a powerful report with a personalized roadmap to your destination. I will meet with you and review that roadmap and offer valuable insights. Based upon my over 30,000 hours of experience in working with business owners, I believe in the power of the process so much that I will guarantee you at least $10,000 of value to you in that 30 minute call, or write you a check for $500 on the spot, no questions asked.
If you're ready to move forward towards your finances and away from your frustrations, go to theMancusoMethod.com to take our assessment and schedule your call with me. Well, I am very excited. Ladies and gentlemen, today about our guest. I'm going to introduce you to just a second to someone who, if you are in the journey of exiting, you need to talk to him before you get too far. If you haven't even thought about it yet, you may need to talk to him before you get too far.
Because one of the things I've learned in my journey is that you have to start the process of even onsidering the exit long before somebody taps you on the shoulder and brings you an amazing offer to the table. So I want to introduce you to Adam Webb. Adam has over a decade of experience with Quazar in representing privately held businesses in the lower middle market and guiding them through the sale and acquisition process. Adam's primary focus is leading the sale acquisition process with clients, and he also focuses extensively on managing prospect relationships and general business development. Prior to joining Quazar, Adam was part of the Risk Management Consulting group of RSM in Minneapolis.
Before that time with RSM, Adam was an internal auditor at Cedar Fair LP. Adam. We'll kind of push that aside on that internal auditor thing. I did a great experience. No, I'm just kidding.
Adam graduated summa cum laude from the Carlson School of Management, University of Minnesota, and our backyard with a Bachelor of science and business degree majoring in finance. It's no wonder why you are doing what you're doing today. I was introduced to Adam being a part of a panel that Adam and I were on through Ryan Hansen, so I want to give a shout out to Ryan and that invitation that we both received for that. So I am excited for you today. To Adam, share your experiences.
So welcome to the show.
Adam Webb: 03:34
Yeah, thanks for having me on, Pat. I, I'm very excited for this discussion. And it's always fun to kind of talk about what we do at Quazar and how we help people. And I'm I'm very much looking forward to diving in.
Pat Mancuso: 03:46
Well, I mean, what an exciting time, right? I mean, I don't have to share with you the demographics of business owners right now, baby boomers who own businesses and who are going to be exiting those businesses over the next 10 to 15 years. And so it's such an exciting time. But before we jump into that, Adam, I want to just ask because, you know, people sometimes, you know, hear a term or a phrase and they've got a predetermined idea of what that is. What the heck is an investment banker?
Adam Webb: 04:14
That is a great question. I'm really glad you asked that, because I think it's a confusing term. And I think it's confusing because because it's a broad term that can mean a lot of things, right? So I think a lot of the people listening to this are probably familiar with the term business broker. Right. And it's kind of self defined. It's a broker of businesses, right. Match buyer and seller. Well what we do at Quazar is very similar. The way we go about it might look a little different than a business broker, but ultimately we're helping people buy and sell companies. Why we say investment banking it just kind of the market we serve is a little bit upmarket. So we're working with a little bit larger businesses than a business broker. But the term investment banking, it can mean a lot of things. I mean, it's a blanket term for a financial services company that may offer. They may offer equity raises. They may offer debt placement. They may offer IPO services. They may offer merger and acquisition advisory. And at Quazar, we just specialize in a really kind of narrow band within investment banking. And that is merger and acquisition advisory. And we we offer what we call bull sell side and buy side advisory. So we will represent sellers of businesses as well as businesses looking to grow through acquisition. And as you mentioned in your incredible introduction, I don't think I've ever gotten such, such a great introduction that we serve the lower middle market. So generally, we're working with businesses with 10 to $100 million of revenue. That can vary a little bit depending on industry and typically privately held businesses. So oftentimes we're working with founder owned businesses or second or third gen businesses, and our typical client wants to do something else. Be it retirement or a different adventure in life. And and they don't quite know how to monetize this great investment, this great asset that they have. So we help with that process.
Pat Mancuso: 06:11
So let's I want to start with let's just lay some kind of market conditions right now. Like if I'm a business owner and let's say I haven't even considered selling or I'm a business owner that's thinking about selling. I mean, talk about the market a little bit right now.
Adam Webb: 06:28
Yeah, it's been an interesting ride kind of the last five years. I'll, I'll maybe give a brief overview of what we've seen over the last few years and then get into what we're seeing right now. So. Great. In, let's say right before Covid 2019, getting into 2020, it was a good market. You know there's a lot of deal activity. Valuations were at or near all time highs again kind of depending on individual business situation in the industry it's in. And then Covid hit and call it March 2020 and all deal activity shut down. I mean, I think at the time we were working on six transactions and over the course of a week that everything paused. In fact, I remember I walked into my my partner Nicole. I walked into her office and I said, Nicole, I don't have anything to do. Like. And I never said I never said that before. I'm like, I don't think I have anything to do. And it was a pretty scary time. I mean, not just for our business, for most business owners and for kind of our country and the world and our economy. No one really knew what was going to happen. And fortunately, what what ended up happening was the fed took very aggressive actions to keep the economy flowing and liquidity flowing in the economy. And some of those actions were aggressively lowering interest rates. They also did a bunch of things in the background which encouraged banks to lend so low interest rates. Banks are cash rich and they want to lend. And what that led to was call it in maybe June or July of 2020. So only a few months after Covid really shut things down, deal activity roared back. I mean, we saw unprecedented interest from buyers. Valuations were silly. Buyers were willing to close over kind of major issues just to get deals done. And and I mean, it was a, you know, it was a crazy time. And we ended up having a record year in 2020. And that that that spilled over into 2021. And the good times were flowing. And then 2022 things started to slow down a little bit, but not a lot. I'd say 2023 when the fed really said we got this big inflation problem. Now we need to raise interest rates. And what that does in our market when when the cost of borrowing goes up, the amount a buyer can pay for a business in order to achieve a desired return goes down. So, you know, low interest rates, better for M&A activity, high interest rates, worse for M&A activity. And we really saw things start to slow down significantly in 2023. So 2023 for us and for kind of the market more broadly, my colleagues in investment banking and the business broker world, it was a harder year. It was harder to get deals done. The thing I just mentioned where buyers were willing to close over issues. It swung completely the other way. Like, I'll give you an example when we're when we're under a letter of intent. So when we're under an offer for a deal, but we haven't yet closed on the deal, typically every month we're we're giving the buyer updates on how the business is doing. So we put together a package of financials. We send it to the buyer in 2021. But I don't think buyers looked at them. They didn't even care in 2023. Any any kind of friction or bad news in the financials? Buyers were having calls or having calls with their diligence providers. We had to explain, you know, why did revenue drop 1.8% month over month. And and buyers were just really nervous because that cost of capital is much higher. And the the debt levels they could get for an acquisition were significantly lower. Right. So it's kind of a double whammy. Now we've started to see things loosen up over the last couple of months as the fed signaled interest rate cuts. And we saw that yesterday with a 50 basis point cut. And that's really spurred more buyer interest. It spurred private equity that owns businesses to really finally they I think in general they think it's finally the time to sell businesses. And that helps with overall activity. So the state of the market is better than it was. I'd say it's it's pretty good. It's not quite what we saw in 2021. But again, it really is deal dependent, right. So there's certain industries which we're seeing, you know, blow out valuations and record valuations. Other industries are more challenged right now. So that's a very kind of individualized answer. But overall the market's in a pretty good spot.
Pat Mancuso: 11:17
So let me ask you a question in terms of because you're talking you know you talk with a lot of businesses. You're part of a lot of groups. You know, when you look at the economy and I mean, I read a lot and I hear a lot, and I talk with business owners on a, you know, daily basis as well. And I think you hit it in some markets, the the economy is really good, and in other markets it's really challenged. So just give me your just real quick thoughts on overall perspective on the economy and where we're going, because I have some thoughts, but I'm curious what your thoughts are.
Adam Webb: 11:52
Yeah, there's a lot to unpack there. I'll. I'll get into both. Kind of a perspective from size as a perspective by industry. So what we've seen over the last few years is and if you read like the Wall Street Journal, you'll see large investment banks have done layoffs and their deal activity is way down. And that's because those large deals are much more leveraged or debt driven than smaller transactions. So like let's say a company is going to trade. Yeah, let's well, so if banks are larger, deals are generally seen as less risky to buy. Right. So if you take the extreme of like Microsoft or Google or any of these, you know, Johnson and Johnson, any of these big publicly traded companies, those are generally seen by the market as the risk of those significantly declining in value is much less than the risk of a small business significantly declining in value. And there's there's reasons for that, right? If you have a small business and you lose just a few key people or a few key customers or a few key vendors, that can significantly impact your business. Whereas if you're huge and you're much more diversified on that front, the risk is just more spread out. Right. So banks are willing to lend more to buyers of large, more stable businesses. And it's a continuum, right? So on one side, you have those massive publicly traded companies. On the other side you have a smoothie stand in a mall, right. Like a lot of smalls of businesses, they come and then kind of everything in between. So what happened when debt became more expensive and harder to come by was those large deals. They're putting more debt, which we measure as turns of EBITDA. So, you know, if you take earnings before taxes, depreciation and amortization. And I think that's the whole EBITDA and make adjustments and then take take the debt of buyer is going to put into the deal as a multiple of EBITDA on large transactions. It's much, much more than on smaller transactions. Yeah. So on those smaller transactions, the debt levels that have been kind of normal have generally still been available. So, you know, putting two times EBITDA in debt on a on a business that's been available, you know, over the last few years, putting eight times EBITDA debt on a business has not been available. Okay. So you know, kind of those big investment banks have really been hit. And then you have the middle market banks have been impacted, but not as much as the bulge bracket. And then you have us sitting in the lower middle market. We've been impacted but not significantly. And then you have business brokers down market of us who have really not been impacted much at all. Right. Banks are continuing to do SBA deals and they're very comfortable with those. So That's how I would answer your question. Yes. Oh, no.
Pat Mancuso: 14:51
It makes perfect sense. It makes perfect sense. So let me I want to I want to kind of shift the conversation a little bit. And you know, our goal on on our podcast and, you know, the work that we do is, you know, in, in Ryan actually describes this in such a great way, it's that most business owners, small to medium, let's say, and that might be your lower end of your middle market. It might even be middle, you know, the middle part of your middle market. They get into business. They started, you know, maybe they were the, you know, landscaper with the lawn mower in the back of the truck. And now they have 100 employees. And, you know, they're doing ten, 15, 20 million a year. But in many cases, they've never looked at the exit. They've never even, you know, in a lot of aspects, even kind of thought about it because they're either still in the business day to day as an owner operator or they're so far removed from the business on a day to day that they just, you know, they haven't really thought about it. So let's take that business owner, your your market, the business owner that comes to you. Let's start with first. Typically, how do they come to you? I mean, do they come to you earlier than they should? Later than they should? You know, let's talk about how they come to you.
Adam Webb: 16:03
Yeah. Great question. Generally later than is ideal. Right. So and I, I get it right. Like they are extremely busy people. They're usually active within their business. So they're heads down every day kind of managing the business and taking care of everything that falls on the shoulders of a business owner. I'm a business owner, I get it. It's it's difficult to step out of that and take that time to work on the business or think about the business. So I understand why. But yeah, it's typically they want to retire pretty soon, you know, within the next year or two. And they want to sell the business and they come to us. They're almost always referred to us. So, you know, we're in kind of a referral business. So think other people with clients like attorneys or accountants or financial advisors, consultants will refer US business owners. And then yeah, so that's usually how they get to us. And, you know, ideally we'd start having conversations well in advance of an exit, just in case, you know, the value isn't what they need it to be, to live the life they want to live. Then they have some time to build that value. Sometimes we don't have that luxury. You know, we've had clients with significant health issues where their hand was kind of forced to sell, and we can usually make it work. Right. We'll we'll work with what we have. But in an ideal situation, we're talking to someone maybe five years in advance of a, of a transaction.
Pat Mancuso: 17:37
You know. You know, and the reason that the reason I wanted to pull that out of you. And I kind of anticipated your answer on that is. I was reading that book. In fact, I just finished it. It's an amazing book. And the title of it is The Wealth. Building wealth, Building Your Wealth Through tax. And basically. And I don't even have the title. Right. Because I just got done reading it. But what caught me in the book is that we think as business owners, and this really struck me like, and I'd be interested in your thoughts on it. We think as business owners that when we retire, we're going to need less income to retire. And what struck me from this conversation as it related to wealth and tax is that's actually flawed because as a business owner, I had certain benefits or incentives to be building that business along the way. And now those go away, which means my income is not going to go down if I still want to live the lifestyle in some aspects that I'm living right now, you see where I'm going with that?
Adam Webb: 18:44
Really well said. Yeah, I agree that can be a faulty assumption. Also folks, when they're super active in their business and they're working every day, they may be spending less money on other things than they would in retirement. Right. So it's kind of that, yeah, they lose the the tax shelter of a business. And then they also, you know, just have more time and with more time for some people means more spending.
Pat Mancuso: 19:09
Well that's the whole idea right. Of building a business so and then retiring if you may, so that you could maybe do some of those other things and travel and in the in the premise is those expenses aren't going to go down 5 to 10 years from now. So it just, you know, it's it's a super passionate topic for me because if I don't define what that destination is with, you know, the help of advisors like you and, you know, all the people involved in the transaction, I'm likely not going to experience what I want to experience. And by the time that I'm ready to retire, it's too late because I've lost all those years of opportunity.
Adam Webb: 19:44
Totally agree. Yeah, I think it was.
Pat Mancuso: 19:46
It was amazing book. We'll post it at the in the website notes. I'll make sure that we get that to the.
Adam Webb: 19:51
That's fantastic.
Pat Mancuso: 19:52
Yeah. It just it just like struck. There were so many things in the book that struck me. Trust me, there were so many things.
Adam Webb: 19:58
Yeah, I, I. Go ahead. Sorry. No.
Pat Mancuso: 20:02
Go ahead.
Adam Webb: 20:02
Oh, I was just going to say. Yeah, I totally agree. Kind of like where we get people come to us, like, oftentimes they don't know what their company is worth, right? And we're working with business owners with companies worth 20, 30, $40 million. Right. I mean, these are significant assets. And again, I understand why. But if you don't know what the business is worth, you can't kind of plan for the life you want because, you know, working with someone like you, you can help with that planning process, but you got to plug in the value of this huge asset and timing and all that. So yeah, people are much better served by starting early.
Pat Mancuso: 20:43
Okay, so I'm going to have a little fun in the middle. Do people come to you where their values are more or less than what they think they're worth?
Adam Webb: 20:51
You probably know the answer. You know, I'd say 95% of the time the value is less than they're either hoping, right? I mean, they're usually understanding because we the way we go about our process is we put a lot of thought in the front end on on how we're coming up with that feedback around value. We use several methodologies and explain all the details so we can explain the whys. But yeah, I usually end that conversation with how does this compare with what you're thinking? And the answer is usually I was hoping it was worth a little bit more.
Pat Mancuso: 21:27
Okay, true or false? They think 20 million is what they're going to take out at closing.
Adam Webb: 21:33
Yeah, that's that's a great question.
Pat Mancuso: 21:37
I'm not getting the whole 20 million.
Adam Webb: 21:39
Yeah I mean it's it's a yeah it's I think people generally understand there's taxes and there's transaction fees, right. They have to pay us and there's usually some other diligence providers involved, like like lawyers and maybe a quality of earnings firm. And then you have to pay taxes. And then sometimes I mean we're generally pushing for as much cash as possible. But sometimes there's structure involved in the transaction. So when you stack all that up, I mean, someone may walk away at closing with 60% of the headline value. Right, right. That that can be a surprise. So I'm just.
Pat Mancuso: 22:20
I'm just texting my, my director of operations because I want her to bring this book in the book because I want to I do want to give it to you. But one of the things that you just said was, is that the the deal. Right. So when somebody because I want you to expand on that further. When somebody companies worth 20 million like true or false, the majority of the time they think they're going to get 20,000,000in cash at the table. And very rarely does that happen.
Adam Webb: 22:52
You know, it's interesting. So yeah, I mean, they're not going to walk away with 20 million after tax. Right. Again, there's all those transaction expenses and then tax. Outside of that. Oftentimes deals have what we call structure.
Pat Mancuso: 23:05
So they go into detail a little bit on structure because I think that's important for people to understand.
Adam Webb: 23:10
Yeah. So what structure is it's basically anything that's not cash or close but is still additional consideration to the seller. So structure can take different forms. Sometimes it's escrows. And in our transactions there are typically escrows for we call them indemnity escrows. And then often a working capital escrow. And that might shave, you know, 10 to 15% off the top. And the good news is seller usually gets those back right. But it's not cash they get at closing. If private equity is the buyer, they often want to. They often would like to see an equity roll, what we call an equity roll.
Pat Mancuso: 23:48
And that's where some of your money back for a period of time and have you stay in the business maybe for a period of time.
Adam Webb: 23:54
Exactly. It's it's, you know, you're going to retain some ownership in this new company. And then when we eventually sell that new company, you'll get paid out on that. And again, we've had good outcomes for our clients with equity rolls. But it is not cash to close. And there's a level of uncertainty associated with it. And then mostly down market of what we work on. But there's oftentimes seller notes and SBA finance deals. And that's where as the seller you're helping finance the buyer. So the buyer is going to owe you money. And they're usually making monthly payments over a period of time. And then the final form of structure is what's called an earnout. So earnouts are usually a risk sharing mechanism where, you know, let's say that you have a business and and you think it's going to the moon in two years. And I as buyer can't really see how you're getting there. Right. So though a good mechanism in that scenario would be an earnout where, hey Pat, I'm going to I'm going to pay you a fair value for where the business is today. You're going to get that in cash. But for this kind of growth that you're convinced is going to happen, if that does happen, we're going to put together a structure where you get paid more over time. But if it doesn't happen, you're not going to get paid more over time. So we're going to share in the risk of that of that future unknown and earnouts again, for really steady businesses, we usually don't see them. But for businesses with varied financials coming out of Covid, there is a lot of uncertainty in certain industries with kind of what's the new level of normal? And buyer and seller sometimes weren't on the same page. And earnouts can be a helpful mechanism in that scenario. Yeah.
Pat Mancuso: 25:34
You know, one of the things that I've learned in my journey, and again, it's like, you know, I work with businesses, but I also, you know, own businesses is there's so many things that impact value that we don't necessarily see when we're right into it. So, you know, like we're into a day to day that, that again go into that value. So just even like a customer list, like if I've got a business and, you know, 70% of my revenue is in 2 or 3 customers, that impacts the value both positively, potentially, but then negatively, if those if, if those clients go away. So so here's what I've heard you say so far. Somebody should talk to you if they're thinking about selling their business earlier than later, correct. Their they may have a difference of opinion on value, but you're going to put together an amazing process to to actually give them the information that they need to come to the conclusion that, that, you know, maybe it's not where they thought it was, but here's what it could potentially be. And then, you know, the process to get to that closing is going to vary a little bit, but you're going to help them in that process. And so where do most deals fall apart?
Adam Webb: 26:50
That's a great question. It's it's usually when there's an unexpected change and that and that in.
Pat Mancuso: 26:57
The due diligence. You mean.
Adam Webb: 26:59
It. Yeah. In due diligence. So yeah. So typically if a deal falls apart it's, it's it's after we've marketed the business, we've talked to buyers, we've signed an offer in the form of a letter of intent. Right. And, and at that point the deal is very much not done. Right. So the buyer is going to do their due diligence. And depending on the type of buyer, due diligence is somewhere between painful and extremely painful. And but I mean, buyers ask for a lot of stuff and and and rightfully so. They're buying this complicated asset. Businesses are complicated. They have a lot of moving pieces and they want to verify what they think they're buying is indeed what they're buying. And if there's a finding in due diligence or a change in the business during the due diligence period, oftentimes the buyer will either walk away or more often propose a different valuation or structure.
Pat Mancuso: 27:56
Yeah. And so so so I was I think we shared with you before we started today was in San Diego the last couple of days as part of a mastermind group called the Epic Network, founded and created by Roland Frazier. And one of the things is each session they bring in an M&A attorney who's part of this group, Grant steeple. And he talked this week about the due diligence process. And one of the things that struck me in that conversation that I don't think most sellers know or understand, is that is that each time there's a surprise or each time that there's information that should have been shared or wasn't shared, or maybe wasn't as clean as it needed to be. You just said it. The buyer is going to potentially reduce the value of the of the business, or they're going to walk away with. Neither of which benefits, you know, that seller. So that that really struck me like it is to get the business in order in, you know, before you actually start marketing it because those things are going to come up. It's it's only a matter of time, right?
Adam Webb: 29:00
100%. Yeah. We we have a saying, I think, which is used in investment banking but go ugly early. So, you know, like if there's skeletons, I mean, there's certain ways to tell.
Pat Mancuso: 29:12
There's always skeletons, right? Like, yeah, there's.
Adam Webb: 29:14
Skeletons and there's, there's hair on deals. And that's almost always the case. But but if you can position it correctly and have the right conversation with buyers on the front end, it's way better off than saying, I hope they never find this because. Because they will. I mean, due diligence is it's unbelievably involved when we ask US clients after closing. What was the biggest surprise of the process? The answer is almost always how much work due diligence was. Yeah, it it is. It is involved. Buyers are going to figure things out. So certainly fix what you can. And if there's some words left like putting those out front is better than holding them back for due diligence.
Pat Mancuso: 29:57
What was the phrase again?
Adam Webb: 29:59
Go ugly early.
Pat Mancuso: 30:01
Ugly early I love that, I love that I can't wait to see how that shows up in the in the notes. So I wanted to I wanted to just share the book that the tax Free Wealth written by Tom Wheelwright and this book for our listeners. And my goal is to get Tom on the podcast. It was amazing. There were so many things in here that I took away from as a business consultant, tax consultant, and as a business owner. And it and it, it it just in the thing that I love that he said was tax. The tax law is actually there as an incentive. And, you know, you been around a long time, Adam. I come into contact with business owners who have advisors around them who look at the tax law, tax code, tax credits, and they range from them. And what was really empowering to me about the book is it's actually the opposite. His premise is that the tax law is there as an incentive for the from the government to help business owners build businesses, because when they build businesses, they hire people. And when they hire people, they pay wages and they pay taxes. Now, you know, they're going to want that money back at some point when you sell the business. But the point is, is that having those right advisors around is so, so important. And obviously you guys are doing great work in what you're doing. So go ahead.
Adam Webb: 31:26
Oh, I just had a quick story and sorry for jumping in again. No I love it on that point. So you hit the nail on the head having the right tax adviser is critical, and that that shouldn't just be someone who takes the transaction numbers and runs them in a spreadsheet and says, here's your tax bill. Right. Like kind of any most people can do that. But the at least most kind of accountants can do that. That's what the.
Pat Mancuso: 31:50
Average people do, to be honest with you, after reading the book, that's what I think. Correct. And people do that.
Adam Webb: 31:56
And sometimes that's just is what it is. Right. But there often are strategies to significantly reduce tax bills or.
Pat Mancuso: 32:07
Ethically.
Adam Webb: 32:08
At the ethically. I mean, there's there's deferred sales trusts. There's these, you know, trust mechanisms to defer taxes. We had a transaction. I like telling the story because I think it hammers home the point. We had a transaction where our client was a was structured as a C corporation, which means if you sell an assets from C Corporation it's double taxed. So the corporation pays a tax. Then when you pull the money out of the C Corporation, you have to pay tax as well.
Pat Mancuso: 32:36
Double tax makes a lot of sense, right? Yeah.
Adam Webb: 32:39
Yeah it's super fun. So our so our clients looking at this I think the deal is like $7 million something like that. And they're looking at this as like I have to pay. It was like a 55% tax bill. It was over 50%. And they had a they had an accounting firm and they just said, yeah, that's too bad.
Pat Mancuso: 32:59
It's what it.
Adam Webb: 32:59
Is. And the buyer had an accounting firm and looked at it and said, yeah, it's too bad. And there was I won't get into all the details, but there's different entities in the buyer group. And one of the entities had an accounting firm, and one of the partners at the accounting firm goes, you know what? This qualifies, I think, for something called personal goodwill due due to the seller's personal involvement in creating this asset within the C Corp. So he goes you should look into that. So our client looked into it and it did like 80% of the transaction was allocated to personal goodwill, which was taxed at capital gains rate and avoided the double tax. And there's a bunch of accountants involved in this transaction. Only one of them kind of was aware of this thing and thought of this thing, and it's completely legitimate. And this, you know, you have to it has to qualify. And there's all these things you have to do and you have to get a valuation. But this situation qualified perfectly for it. And he saved seven figures on taxes just because that one accountant said one thing on a phone call. And I think about that a lot, like, jeez, it's one of those things you almost don't know what you're missing if you don't have the right tax advisor at the table.
Pat Mancuso: 34:11
Well, and Tom talked about that in the book, where and again, he's a CPA. So this isn't an indictment on CPAs who are listening. Please understand. However, what he said is that many times they're just reading the summary of a of a code. They're not actually understanding what the law is behind the code, what the findings are behind the code. What the challenge is to the code are what the court results to the code are. And I also found that very interesting. And it makes sense because you know what? We've lost 400 and some thousand accountants, according to a lot of estimates since Covid, and people struggle to find that great resource. And that's a passion for us, as well as aligning ourselves with the people that are business owners can actually trust as part of the process. So I love you sharing that story. And I do remember you sharing that story at the. Yeah, I love telling that because it's a great story. I mean, that's that's real money.
Adam Webb: 35:05
It's I mean, it's like life changing money to a lot of people. Right? And it's just like, he would have just paid the tax bill and not knowing any difference. And yeah, not with his life. Instead he has, you know, 2 million more dollars to do what he wants to in retirement.
Pat Mancuso: 35:19
So let's shift gears a little bit without naming names. Talk about the like just real quick, the absolute worst transaction that you experienced and why without giving details.
Adam Webb: 35:32
That's a great that's a great question.
Pat Mancuso: 35:37
One that might be painful to relive.
Adam Webb: 35:40
Oh, there's a there's a few. You know, like the really painful transactions tend to be when we don't have the right advisors working with us in our clients on the transaction. So, for example, I can think of a transaction we worked on where our client had a trusted attorney that they worked with for decades, who was primarily a bankruptcy litigator and did their corporate general corporate work. And we got involved and strongly recommended that they continue to work with that person, just not for the transaction. Right. A sale of a business commands a very specific area of legal expertise, right? And there are many lawyers who only or primarily work do. Mergers and acquisitions work, and it's important to get someone like that for the sale, because they know all the market terms and the nuances and what's what's market, what's not market. They understand there's usually a dance that happens between legal counsel where there's some level of back and forth, but it's not an absurd level. And they there's just this nuance to it, which if you moonlight in it, you're just not going to be dialed in and be able to do a good job on behalf of your client. So back to the situation. Our client decided they wanted to use the bankruptcy litigator for the transaction. So we got we got the Loi signed, which was painful. He had some some interesting ideas and it puts us in an awkward role. We're not attorneys. Our clients need to rely on their legal counsel's legal advice, right? At the same time, we do a lot of deals and we're on all these calls, so we have a pretty good feel for what's market and what's not. So we can kind of say our $0.02, but ultimately we're going to defer to the lawyer on the transaction. Even when in my heart of hearts, I think they're wrong. So we got through the letter of intent, we got a copy of the purchase agreement, and it was it was a little buyer friendly like they usually are and we get them for. But it was fairly market and things in there like representations and warranties. Right. So if you sell your business in the purchase agreement, which is the governing document of the transaction, you're going to have to say certain things are true, right? And that gives the buyer protection, because no matter how much diligence they do, they're never going to know what you know as a seller. Right. So those are always in a purchase agreement. And he struck all of them. And he just said our client's not going to take the risk. And and you know, my position was, well, as long as everything's true, there's really no risk. Right. And and the deal fell apart because we could not convince the lawyer that certain things were typical in an M&A transaction. I was even like googling from. And big law firms often put kind of articles on their website about topics in an M&A transaction and sending those to them. And I think he got insulted, but like, he wasn't doing a good job for for our clients and for his clients by, by stubbornly taking a position which no buyer and this buyer included was ever going to accept. So, you know, and I've run across a few situations like that, but that's that's probably the the most painful deal. There was probably.
Pat Mancuso: 39:13
Some skeletons in the closet that he knew about, and that's why he was striking it.
Adam Webb: 39:16
It very well could have been the case, you know?
Pat Mancuso: 39:19
I mean, it just like even even with that type of language, they're still remedy for the buyer if some, you know. Right. I mean, with the right language in an agreement. I mean, there's still some liability there, right? I mean, in so. Yeah. That's crazy. Okay, so here's what I want to do now in the last part of our conversation here. So if you're talking, you know, people will hear this podcast and they're thinking about selling their business. They're thinking about maybe five years from now. Like what? Just talk to them about, okay. What's your next step? I mean, obviously it would be to call you. I get that part. But like 2 or 3 things that they should be doing right now before they call you.
Adam Webb: 40:02
Yeah. So there's some general advice we often give when we talk to people that that far in advance. For, for one kind of working yourself out of an active role within the business as much as is possible. Right. But for example, if you're owning your business and you're the key point of contact for 80% of your customers, but buyers don't want to see that, right? Right. Or like you brought up earlier, Pat, if you have two customers which are 70% of your business, that's probably been great for you as a business owner, you're not going to turn down good customers. However, when it comes time to sell, it will have a valuation impact and it will likely have a structural impact to the deal. So a buyer is probably going to want a lower value, and they're probably going to want an earnout tied to future revenue or future EBITDA or future gross profit, so that they know if those if those buyers go or if those customers go away, they they see a reduction in purchase price basically. So those are, you know, kind of a couple pieces of pieces of advice outside of that lining up a transaction team, which is something I think people should do years in advance. It's it's free, you know, like talking to an attorney and getting comfortable with them and making sure, like, you kind of have the right rapport with them and you trust them. That's free. Right? An attorney will be happy to do that. Same with a tax advisor if you don't have a good one already. Same with an investment banker or a business broker. I mean, we will spend significant time on the front end putting together a market analysis, giving a view on value. Keeping in touch with folks and making sure we're getting the timing right. It's at least our philosophy is we don't charge like we want to help people, and we think of it as kind of a marketing expense. We're proving somewhat our value on the front end before people have to start paying us. So and I, I believe in that. So that's those are some pieces of advice kind of generically. But if someone does talk to us on the front end and they're years away, we're usually able to give them some specific advice relative to their business on things to do and give them different. You know, let's say we meet with someone and they need $20 million and it's only worth $10 million dollars today. Well, how do they get to 20 million? Right. And outside of get more sales. Right. Which isn't very good advice. So it's like we will kind of give that level of detail on the front end and try to be a resource to people. Yeah.
Pat Mancuso: 42:39
And I you know what? What impressed me a lot when we were on that panel together was just that approach. Right. It's you know, you may not be a client today. You may not be a client tomorrow, but at some point you're going to sell your business. And we want to be that resource for you when you do it. And we're going to help you to get there. And, you know, that's a philosophy that A doesn't exist a lot in the marketplace out there because everybody wants to do the deal today. But B it also that, you know, lends itself to, you know, what you guys do in the relationship that you have and then the referral base that you have. So I just love that. So if somebody wants to reach out to you, Adam, what is the best way for them to do that?
Adam Webb: 43:21
Yeah, they can either call into my office or send me an email. My, my, I'll just say my email. It's it's Adam w at Quazar Inc.com. So Quazar Inc.com. Otherwise my office number is 763550 9000. And you know, our processes we generally just get a time to get together. We ask a lot of questions because our goal initially is to understand why. Why are they talking to us. Right. What's the seller's goal. And then we want to understand their business a lot. And then we usually follow that up with some financial statement requests and dig into those and then put together a mark. We call it a market analysis and educate the seller about what we think the value looks like, the types of buyers that we think are out there, what a what a sale process timeline looks like, and kind of what they're in store for because, you know, selling your business, it can be extremely rewarding, right? I mean, you get to you get a big liquidity event at the end of it. It's also a lot of work. It's a lot of work. And, you know, I'm probably not being a good salesman by saying that. But it's very true in that, you know, if people think, you know, they work 9 to 5 today and they're just going to kind of squeeze this in to their 9 to 5, that's going to be very difficult. It's going to involve kind of an extra layer of time on top of their normal commitments. So not only does the valuation need to work for their life goals, but they also need to look in the mirror and say, is this am I in for this? You know, I'm ready for what's in front of me because it's it's a process. It's a lot of work. It can be very emotional. You're going to have a lot of buyers looking at your business and saying, I'm not interested. And that can be, you know, defeating and challenging. And but there's almost always a pool of buyers that say, I am interested. And that's where the real work begins. Yeah.
Pat Mancuso: 45:18
No. Yeah, I love it. I mean, all great advice and you know, we haven't even talked about, you know, there's many ways to exit the business, right? We talk about that, you know, in, in, you know, esops and such where people that haven't even considered that. And I'm assuming those are things you all can help them with as well.
Adam Webb: 45:35
Yes. Some yes, some no. So if you have.
Pat Mancuso: 45:38
Resources.
Adam Webb: 45:38
If not yeah. Yeah. We can put them in touch. Like we won't help people convert to an Esop. But the path that we think is right for them and they want to go, we can certainly put them in touch with the right people.
Pat Mancuso: 45:48
Now, you said Quazar Inc.com. Correct? Yeah.
Adam Webb: 45:52
Inc.com I if we have another minute, I'll tell you a story on why they don't. So for forever, our website was Quazar Capital.com. And the reason it's not just Quazar Comm is because there's a band named Quazar, which, weirdly enough, is based out of Minneapolis, where we're based out of. Sure. And they own the domain. So a few years ago, we rebranded and having the name capital and the domain was a little confusing to people. They thought we were a bank or. Yeah. So I've reached out and got Ahold of the owner of Quazar Inc.com or Quazar.Com excuse me and try to negotiate a buyout of the domain, which they're not really using anymore. And it just didn't go anywhere. So we just added ink to the end. And so if the if the owner of Quazar. Com's listening to this, please contact me. We're still in. Oh my gosh.
Pat Mancuso: 46:52
That would be a whole podcast on understanding, you know, value and business and opportunity. And oh my gosh it's so true. Oh my gosh. Oh my gosh. Well Adam, you know, first of all thank you so much for spending the time. You have been a wealth of information. And I so love the approach that you guys take to the business to a business owner. And, you know, it, it just folds right into To what I'm so passionate about. And that is, you know, many business owners work their entire life. They don't walk away at the exit with what they expected, what they wanted to, or what's going to provide them that future opportunity. And so, you know, folks like you that actually contribute to that happening are just like, it's just amazing. And I'm so grateful that you took the time today. And so we thank you for all the great information that you've delivered today. Well, thank.
Adam Webb: 47:48
You for having me on, Pat. I really enjoyed the discussion and thank you for doing what you do as well. I think anyone with a philosophy to educate and help business owners meet their goals, whatever those are, I just have a lot of respect for, and I think that's just the right way to do business and that's the right way to help people.
Pat Mancuso: 48:06
Well, you know, small and medium sized business owners are what make the economy grow and go and employ so many thousands of people. And there should be a reward at the end for what the what they've done. So I thanks again, Adam, to our listeners, thank you so much for supporting our podcast, and we appreciate any time you can share with fellow business owners or anybody who you think can benefit from the podcast. You can do that at all your favorite podcast sources. And again, if you have any interest in having a conversation with us at the Mancuso method, is that free assessment for you? We'd love to connect with you, Adam. Have an amazing day! It looks like it's going to get a little crazy for the weather here in Minneapolis this afternoon, so stay safe.
Adam Webb: 48:55
Thank you Pat. You too. Thanks again for having me.
Pat Mancuso: 48:57
Thank you. We'll talk to you soon. Take care
Outro: 48:59
Everybody take care. Thank you for joining Destination Business Freedom with Pat Mancuso. May the insights and strategies shared guide you towards financial prosperity and personal freedom. Continue to navigate boldly. Until next time, keep transforming challenges into achievements. Farewell and stay the course.
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