Gerald Kong is the founder, principal, and senior advisor with Trinity Transaction Advisory, LLC (trinitytransactions.com). The firm performs sell-side representation, exit plans, business valuation, tax analysis, negotiations, deal structuring and many other things related to mergers and acquisitions. A book he mentioned, Stephen Covey’s Seven Habits of Highly Effective People can be found here: https://amzn.to/3acB57h
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#111: Preparing a business to sell with Gerald Kong
April 14, 2021 • 58:09
Aaron Spatz, Host, America’s Entrepreneur
Gerald Kong, Owner, Trinity Transaction Advisory
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Today we’re going to jump into definitely going to be a major value add discussion. And so I’m really excited to welcome to the show Gerald Kong. So Gerald comes to us from a background in sales and marketing, but for the last 20 years, he started his firm, Trinity Transaction Advisory, LLC, and so helping companies gain focus and direction and really helping folks understand the right time to sell, to buy, all the things related to mergers and acquisitions. I’m going to let him do all the explaining there. But Gerald, I’m excited to have you here. Thank you for making time to be with me this morning.
Aaron, I appreciate you having me. I’m really excited. Hopefully, there’s some valuable stories or some content I can provide your listeners that is compelling and something they can utilize as they continue the growth in their marketplace
Hundred percent. Well, I’m more than certain of it. But I always love to start the show off just to understand who you are and where you’re from. So are you DFW native? If not, where do you come from?
Well, I’m native Texan from Houston area.
I graduated in University of Houston. Studied marketing and finance. And I spent the first 12 years of my life in the public sector pensions market, went straight into sales and then started moving up into management. And when I was 28, bought a company. Small little shop, about 10 employees and it was in the public sector pensions market. These are like school, municipalities, universities. They have a special clause in the Internal Revenue Codes that provides them with pension and retirement benefits and things like that that they can utilize.
Anyway, grew that company from 10 employees to about 140 at about seven offices across the state. And we grew up to about 350 school district accounts that we were engaged in. And then in ’96, ‘97, I was approached by an insurance company. They needed our market. They knocked on my door one day, said, “ Look, here, we just bought an insurance company out of receivership and we’re looking for your market.” What can we do? And that was my first foray into the M&A field. Young guy, wasn’t even thinking about selling, but was working 70, 80 hours a week and it was kind of a godsend really to get me out of it and made a mistake that many people do, which is hire two attorneys to represent me. And I realized at an early age that most attorneys are not deal makers. They’re deal killers.
So I jumped in and I negotiated the deal and we closed it in ’97. And I took two years, I had a commitment. As part of the agreement, I had to stay on for two years in a senior capacity with the insurance company. And there, I got a chance to do corporate M&A, corporate buy-side M&A. So we were acquiring other insurance companies. And found that really intriguing. And then I completed my two years and was headhunted. And I worked for another insurance company for about four years.
But finally, in 2002, decided I had enough of the rat race and I wanted to go in a different direction. I got tired of the travel. I wanna see my kids grow up and it’s hard to do that living in a hotel room. So what was I going to do? And I said, well, you know, I really enjoyed the M&A stuff. That was a lot of fun. So in 2002, I jumped head first into it. And it’s been a crazy ride. It’s been a rewarding ride. We’ve helped hundreds of business owners in the process.
Wow. Well, I mean, what an amazing story. So let’s roll back the clock. Let’s go back. So early in your career, you mentioned that you’re doing – some of your first role was in sales. And so this is a great, great opportunity to ask kind of a question I don’t get to ask very often, which is how much of an impact on your career do you think starting off in sales had on your future? Looking back on it, do you think that was a great first move? Even if it was an accidental great first move, but do you think that really helps set you up for success long term?
Well, my degrees were in marketing and finance, so if you put the two together, it’s financial sales, right? So every entity out there needs sales. A church needs sales. And they don’t call it a sales, they call it recruitment, right? They’re trying to save souls. But every entity out there has to have sales to some capacity. So, yes, it was very helpful to have a sales background. I would say, though, in the industry that I’m in now, sales is important aspect of it, but I think in order to be successful at what we do, you have to be strong in finance and you have to have a good understanding of how financial statements work. You have to have understanding of how business works and you had to be part-time psychologists because these transactions get emotional on both sides. And so part of our role is we have to learn to pacify both parties.
Right. Yeah. I can only imagine. Because there’s a history there for the company, if they’re trying to sell it. There’s very strong feelings if you’re the buyer about what they believe the company to be worth. And so you’re there being the mediator/counselor to kind of help bring the two parties together and make it a success. But before we dive more into that, I like to then, again, kind of take a look at what – I mean, it’s not every day that you hear a story of a 28-year old buying a business. So where did that that inspiration come from? Had you been working for a couple years? And you’re like, you know what, I’d love to go into business for myself, and you just kind of saw a great opportunity and you’re able to get that funded. How were you able to make that happen at 28 years old?
Well, I come from a long line of entrepreneurs. My grandfather on both sides of the family, both of my mother and father’s side were entrepreneurs. And my parents were entrepreneurs. So it was just kind of in the blood. We grew up in family business and we we’d worked really from the time we were probably about 10 with various roles and more responsibilities as we grew up. And so, we just had an appreciation for what it took to make a business work. And we have that. You grow up with that spirit of running a business, seeing what it takes to retain customers, to service customers, to get them in the door, to keep them and that type of stuff.
So when I went into college, I went in with the full understanding at some point I was going to be a business owner. I knew I was going to have to get my feet wet. I was going to have to go work and learn in industry and pay my dues and all that. But I did very well for several years out of school in sales, I was sales leader for the company. I moved into management. I had a nice little chunk of change saved up, and I knew at some point I was going to take the jump. And I’d rather, you know, business is risky, so why not do it when I’m young and have a chance to rebound if it didn’t work out? As opposed to wait until I was in my 40s or 50s, and then at that point, if it didn’t work out, you don’t have much of a runway to catch back up. So I figured that the timing was right and opportunity was right and the economy was strong at the time. And it was just my time to do it.
Wow. That’s incredible. So you’re able to buy this business and you grew it. So tell me the story behind that. How were you able to take it from where it was and how were you able to grow it so that it was just continuing to thrive?
You know, I was really fortunate. I had a great mentor coming out of college and my first manager had some just sound business sense and I learned a lot from him. I learned what the key ingredient to operating the business. It doesn’t matter how successful or how great your product is. You always have to have a prior choir to preach to. So one of the key ingredients was you had to market, you had to get out there and cultivate a sales channel. So we put a lot of energy during those first several years after I bought the business into cultivating sales channels. We ended up creating a nice little engine that was consistently producing leads. Leads, leads, leads. We weren’t capturing one, two, three leads at a time. We were capturing hundreds of leads at a time. So you can’t sustain a sales force if you can’t provide them with leads. We understood that. And it was something that we pounded home to our managers, that they had to keep their foot on the pedal on prospecting or else your sales force was going to leave you.
Yeah. I mean, so that’s a topic I don’t know if it gets talked about quite enough, which is just the creation, the cultivation, the nurturing of whatever you want to call it – sales pipeline, sales funnel, sales journey, buyer’s journey process, whatever that may look like. But having a constant stream of leads that you’re able to work effectively is so, so critical. And in some businesses, I mean, they are dependent 1000% on the phone ringing or on a web form, lead capture kind of form or cold calling or whatever the case may be. There’s a thousand mechanisms for this. But how were you able to then establish that sales, that lead gen process? What did that look like?
Well, our industry at the time was a lot of cold calling and a lot of mailers and just traditional route. We felt there was a better way to do that. So what we did was we created a product where we would go and provide free – well, we provided to a school system some compliance products that the IRS was auditing school systems. We provided a product where we can come in and audit their pension and benefits program, identify what the problems were and then help them cure the problem. But we weren’t going to charge them a dime. In exchange, we wanted an audience, and so the audience was their employees. And so we were able to get in front of thousands of employees at a time as opposed to picking he phone, calling one at a time. Since we were administering the benefits, they had to come see us. It was part of the IRS regulations. They had to get it administered properly. So we had a captive audience.
That’s amazing. So, you trade an audit in exchange for access to their employee base, which turned into a great – that’s a great way to, I mean, it’s like shooting fish in a barrel. I mean, you’re right there. You’re right there able to talk one-on-one or one-to-many, but you’ve got that audience there. And so you’re able to address their needs. So, I mean, that’s pretty dang smart.
We almost batted a thousand. Because when it came to superintendent, you know, superintendents sign off on this because as a superintendent, you’re a public figure. And one of the things that you don’t want is liability. And the IRS came down and audited you, your school district is found incompliance, it’ll make the news and all that. So we have another piece of program where we warranted the audit. If you were ever audited, if you were found to be out of compliance, we would pay the fines.
So, it was a neat, you know, and so if you’re a superintendent, why wouldn’t you sign up for this, right? So anyway.
Well, and we’ll move on. But I just want to make the point here or just pull out this point. I think what made this – so, there’s a lot of things that made this genius. Let’s just be real about this. But one of the things I really like about what you just said is what you did is you de-risked the journey or the process for your customer. So you took as many things out of their path that could be labeled as any type of risk. And I mean, whether it was – I mean, you’re doing an audit for free. I mean, one, that’s massive value add. But then two, you’re warrantying the audit itself. So again, to your point, it’s like, why wouldn’t they sign? That’s a tremendous, tremendous deal. And it’s one less headache, one less thing that’s going to keep that superintendent up at night and so they’re able to have confidence in what they’re doing and know like, hey, well, if the audit’s bad, well, those guys are gonna own up to it. So cool.
Right. And it was a recurring revenue model because we were in back in that school system every year administering the same benefit program.
That’s pretty awesome. That’s pretty awesome. Well, thanks for kind of walking me through that a little bit. That was kind of cool. Just cool. I mean, cool in the standpoint of one, again, not every day that you meet somebody who is 28 years old, bought a business, continue to just drive a massive success from it. But then two, again, I think one of the biggest nuggets out of this is just taking as much risk out of the situation for the customer as humanly possible and so it makes it a no brainer.
Well, it’s interesting that you actually took me back to all this. It was interesting because there’s some real parallels into the M&A field. Because one is the fact that most businesses aren’t prepared to go to the market, and just out of the experience of growing up in an entrepreneurial family, I think the business model that I had in place was really suited for transfer, to be bought. But being able to come up with a concept where we could capture masses of leads at a time, I think, really came from the fact that we grew up in an entrepreneurial family and we were always thinking in those types of terms.
And that brings up an interesting point, which is when we’re dealing with business owners that are thinking about selling or even buyers that are coming to the table, not everyone can be an entrepreneur. And when we’re dealing with buy-side, sometimes there are individuals that are exiting the corporate world, thinking they want to be an entrepreneur, and they’re coming to the table with an employee mindset. They’ll never make it. They’ve been an employee for their entire career. They don’t know how the act other than being an employee, right? So they have to have an epiphany or some type of metamorphosis, or it has to be wired in them, or somehow they have to come to the table thinking like an entrepreneur. Because if they continue thinking like an employee, they’ll never make it. And entrepreneurs are unique people and you know that, you interview them all the time, that they don’t think like an employee. And that’s okay. And if you think like an employee, that’s okay. Just know your limitations and, you know, business is not right for everyone.
Sure. Well, then I’m just gonna go ahead and ask you the very obvious question, which is, so, Gerald, what do you see as being the difference between someone who is an entrepreneur versus an employee? What is firing off differently in their brain in whatever their situation may happen to look like?
You know, there’s a book out by Stephen Covey that I think most people in business school had to read and it’s called Seven Habits of Highly Effective People. And I would say a lot of those traits that are described in that book are evident in entrepreneurs. One in particular, though, is the bias for action. They don’t wait around for things to happen. Employee mentality, they’ll wait for the meeting and then they’ll get something out of the meeting then they’ll take direction from what that meeting led them. If you have a bias for action, you’re probably leading that meeting.
So that’s one of the things. A lot of people think that entrepreneurs are risk takers. And my experience is that they actually are not. The successful ones aren’t because what they’ve done is they’ve learned to manage their risk. So when we look at the businesses in the business owners that we deal with, the ones that are truly successful were the ones who built a lot of safety mechanisms along the way, so that they created an environment where the business can sustain itself. So when you look at the difference between an entrepreneur and someone who isn’t, these are typically people who don’t let grass grow between their toes. They make things happen because they can’t afford to not make things happen.
That was great. That’s great. And I love the way that you kind of drew that up in terms of bias for action and how they’re usually the ones leading the meeting. And I know exactly what you’re talking about. Because there’s a difference between – and I know this is probably not a very fair comparison, so I would take this very lightly here. But having a bias for action is like you’re being proactive versus reactive, right? So if you see a problem or you see an issue that needs to be addressed, as an entrepreneur, you’re more proactive about that. You’re like, okay, well, what decision needs to be made? Let’s figure out what to do about it like now. We don’t need to wait around on it and have 26 meetings about what to do next. Let’s just deal with it, right? Yeah, it’s a great example. I think it really is.
And most of the very successful companies, privately held companies out there, they always have a key employee or two or three, who are extremely loyal and are concerned about the growth of the business. But one thing an entrepreneur learns early on, hopefully they learn along the way, is that no one in that business – as loyal as they are, no one will have a greater concern for that business than the business owner themselves. And once they realize that, then that’s sort of emphasis creates that bias for action. People have to realize if you’re going into business, no one’s going to have a greater concern for the business than you are.
And kind of to that point also, I think, and I’m curious what you think of this too, which is not having the expectation that your employees will care about it as much as you do also because they’re not the ones writing the check. They’re not the ones taking all the risks. It’s the business owner. So it’s very difficult for people to feel that same level of ownership and pressure as you would as a business owner. So, all right. Well, let’s jump into what you’re working on right now. So you’ve founded Trinity Transaction Advisory. You’ve had the privilege of working with tons of companies. You’ve got a tremendous team of people that you work with. But take me through some of the things that you see in terms of – and I know we’ve already kind of started to brush on it but take me through the things that you feel are just incredibly important if you’re a business owner in terms of making it marketable or just even able to sell. And then we can talk a little bit later also if you’re wanting to buy a business, what things you need to be looking for?
Okay. Well, we don’t take on buy-side engagements, but we only take on sell-side engagements. But here’s a couple of takeaways, I think, is critical for your listeners to understand. First of all, the average business owner has about 80% of their entire net worth wrapped up in the equity of their business. Think about that for a second. So about 80% of your net worth is wrapped up in the equity of your business. At some point, you need to release that equity, right? I mean, you’re not going to just let that go down the drain. So you need to release that equity. And unfortunately, according to all the statistics that have been taken in our marketplace, only roughly 15% of the businesses that ever go to market actually sell.
Okay. That means 85% of the businesses that ever go to market ends up shutting their doors. They don’t sell. So they’ll end up shutting their doors and then they end up selling off the assets for pennies on the dollar. And so the question is, is that the fate that you want to have for your business? And I would say, I would gather that most people would say no. They want to be able to release that equity at some point. Unfortunately, even in business school, there’s no classes describing what it takes to get their business sold. How do I release that equity? How do I get out from under the business? Every business school will teach you that when you go into business, as an entrepreneur, the day you go into business, you need to go ahead and have an exit plan. Unfortunately, most business owners don’t have that, and they’re not even sure how to create an exit plan or what is needed.
So what we did about 15, 16 years ago, we came up with what we call feasibility analysis. We measure roughly 15 different acquisition attributes in our feasibility analysis. And these are the same attributes that a buyer, whether the private equity, whether they’re strategics, whether it’s a family office, private investment group, it could be an individual investor, regardless of who that entity is, these traits tend to run across all buyers spectrums. And so before we even agree to an engagement with our clients, we measured that. And what we found is that roughly about 80% of them aren’t ready to go to market.
So what we do is we will sit down with them and explain to them what the issues are. We have the conversation that every investment banker or M&A advisor should have with them, explaining to them where their deficiencies are. And then we have consultants that we can turn them on to that can help them rehabilitate the company. May take them a year or two or three but it’ll get the company to a position where they can be marketable. And it could be a simple as hiring a fractional CFO for a year or two. Or maybe a fractional CEO. Maybe they need sales and marketing depth, right?
So what are the things that are keeping companies from selling? I can’t get through all 15 attributes here, but some of the key ones are: Does the company have sufficient management infrastructure to transfer? I hear this all the time when I sit down with business owners. It worked for me. I built a great company. Well, but it doesn’t work for everyone. So is your talent and your knowledge transferable?
Okay. I’ll give you an example. Just more recently ran into a company, they were bought a $28 million a year company. Growing, double digits every year. On paper, they look like a terrific company, but I had to advise them that they weren’t ready to go to market. They were in the business services sector. They had five partners. Each partner had a key role. One was a CEO, one was a CFO, one was their sales and marketing vice president, one was their operations VP. I forgot what the fifth one was. But if you sell that company and you strip those five guys out of the company, you don’t have a company left. Who’s going to buy you? No one can afford to spend $30 million, $40 million on a company and lose all the talent that made this company what it is. The clientele is probably loyal to the sales and marketing vice president, right? The CEO which has the vision for the company is gone. The operations manager, the guy that’s making the efficiency of the organization run is leaving. You can’t take those guys out of there. So that’s one of the things that you have to look at. Is there sufficient management infrastructure?
Another key component would be a client concentration. If you have more than, let’s say 5% to 10% of your revenues going in one client, no one’s going to buy you. Or a strategic might. But you’re not going to get the value you want out of it. Because think of it this way. If you went to buy a company and 10% of its revenue was going to one client, and that client leaves as soon as the seller leaves, you can’t even make margin. So how are you gonna – you’re dead in water. So you have to be able to dilute your sales channels. That may take you a year or so for someone to come in and help you create some more sales channels or something like that. Do you have a negative equity on the balance sheet? So there’s a lot of different things.
I had a client, I won’t name the name of the companies who they’re working with, but we had a potential client that we went to go see a few years ago. And they were a tortilla company, $35 million a year tortilla company. Who knew that there was that kind of money in tortillas, right?
Seriously. Man, that’s great.
And we had to tell them, “Look, you’re not marketable. No one’s going to buy you because 97% of the revenue was going to one client.”
It was a national chain. And on 35 million in revenues, their profit was only about 2 million. So this national chain because of the leverage that they had in volume squeezed their product, the margins, to the point that they, you know, I mean 35 million a year, I’d be making more profit than 2 million. But not only that, they were contracted. They had this one-sided contract where if they went with another purveyor, let’s say they signed a contract with another chain, they’ll drop them. They’ll lose 97% of their revenue if you sign with another. So they didn’t have anything that they could sell. Who would buy them, right?
So anyway, these are examples of things that, as a seller, they don’t think about. They go, “Wow. I’m doing 35 million a year. Someone’s going to want 35 million a year revenue, right?” No. Not if you risk losing it. So we look at a whole host of things like that and we determine whether they’re marketable or not. And it’s important. And this is a conversation, I think, that every business owner that’s ever thinking about selling, they need to have probably a few years before they sell, they need to be prepared. Okay. So again, most investment bankers, most M&A firms, they’re not having these conversations with them. Every time they can hear that walks through the door, they look at them as a monthly retainer revenue stream and knowing that they’ll never sell and really not doing service to the client. And so this is sort of the come-to-Jesus meeting that has to happen with each business owner.
Wow. Well, I mean, I appreciate how you articulated that. And I think you’re doing that assessment on businesses, I can only imagine how eye-opening of an experience that is for people when they’re like, “Man, Gerald, I’ve got a $36 million business”, or “this has been a success” or “me and my four or five or six people, we’ve built this over the last eight years. And this is where we are.” And you’re having to sit down with them and say, “Look.”
You know what, Aaron, our approach, we’ve been doing this for 15, 16 years, this feasibility analysis, but our approach actually has been validated recently – not recently. But most business schools don’t do research in the private capital markets. And I think it’s a shame. And here’s why. Two thirds of the American workforce works for private industry. They don’t work for Fortune 500 or major corporations. Two thirds of the workforce works for private industry. Not only that, but about two thirds of our gross domestic product is generated through private industry. But when you go to college, all the data that they’re taught, and the same with me when I went to business school, all of the data that you’re given and all the textbooks and all the money you’re spending on college comes from data they’ve taken from publicly traded companies.
Well, why? because they’re lazy. That’s low hanging fruit. It’s easy to get that data because publicly traded companies are under SEC scrutiny. So they’re compelled to report. Private business is not compelled to report. Getting that information is difficult to get, right? So most universities don’t do the research. And well, Pepperdine University is one of the few that actually has gone into the private capital markets. They’ve done a lot of research. They’re functioning business research into the private capital markets, privately held businesses. And guess what they found. They found about 85% of the businesses never sell, the vast majority sell ended up closing their doors, selling off the assets. And what are the reasons that they cited for why the diseases aren’t selling? They’re the same reasons that we’ve been testing for the last 15, 16 years in our clients. So they validate what we’ve been doing all along.
You see, so when I came into the industry, I came in initially because I really thought it was such an intriguing market. And I do. I love the industry. But after a few years, I thought these businesses, they need more than just, you know, vast majorities people need to know their business is not ready to sell, that their company needs some shaping, needs some rehabilitative work. Now, in some cases, they could probably still sell, but they won’t get the value they wanted. So, why don’t we help them, give them some direction so that they know, okay, look, if I just hang on for two or three more years and add this component to the business. It could be IT infrastructure. It could be a sales and marketing platform that is self-generating or something like that. Or maybe what I need is I need to spread out my talent among different, you know, bring on someone for a succession plan, where they can take over while I’m not here or whatever. It could be a number of different things like that. We’ve gotta take the negative equity off the balance sheets.
Oh, another thing that kills deals is the amount of operational debt that’s on the books. Okay. When the buyer looks at your business, you may be overcapitalized on a business, but they can forgive that because you’re buying equipment, infrastructure and stuff. But what buyers won’t forgive you for is operational debt because you’re robbing Peter to pay Paul. Well, why would I want to buy myself into a situation where I’m robbing Peter to pay Paul? These are things that sellers don’t think about. It’s working for me. But it’s not going to work for someone else. And so these are critical things.
Yeah. I mean, these are tremendous, tremendous examples and tremendous insight into all of this. And so you started a thought and I wanted to go back to that thought, which was – I feel some of the other points that you brought up in terms of what would make a company a very difficult to sell, they’re not ready to sell just yet. Some of the examples you brought up, I could easily kind of make that connection as to, well, what the corrective action would need to look like, but then the one that I’m not as clear on and you started to talk about it, but I’m more curious about your thoughts here, which was, you know, let’s say you’ve got a company of X number of employees, 20 or 200, but there’s four or five key players, kind of to your early example, that one example earlier. How then does a company take that – take all that knowledge and all the relationships, all those sales relationships, all the operational know-how, all of these other things, how are they able to spread that out amongst a workforce and a) still remain profitable because I’m assuming you’re talking about they’re going to have to go hire more people, and then b) make sure that those relationships don’t stick with that key player, that the relationship belongs to the business as a whole, how do companies overcome that?
Well, a lot of times that person is already on their staff. They just haven’t identified them or they haven’t had the confidence yet to transfer that type of responsibility to that person. Okay. But I think what you’ll find in most of the microeconomic analysis will bear that out is that if you actually are able to transfer their knowledge. Sure, you may have to bring on another person or you may have to take one person, elevate them and then hire someone else to replace whatever the other individual was doing. But by transferring that knowledge, what you’ve actually done is you’ve actually increased not only the value of the company, but you will find that the company is going to grow at an accelerated rate because now you have a couple of people who are able to impact growth in the company, not just one.
So it’s a fear that a lot of, you know, here’s what we see a lot, particularly owner founded companies. I had this great idea and I’ve grown this company, but I’m afraid to share this knowledge with someone because they’re going to walk away and they’re going to steal my idea and they’re going to go and compete against me. Okay. Well, what’s the risk of not ever sharing it? You may not grow at the rate you want, right? You may not ever be able to sell the company.
So here’s a thought. Why don’t we take good care of this employee? Why don’t we give this employee a little equity? He won’t have to compete against you. You see, you don’t have to give him a lot. Give them enough where they take ownership of the role. So there’s ways to do it without breaking the bank, but what you’ll find is the fear of the cost associated with is unfounded. Because what you’re really doing is you’re creating an opportunity to grow your organization exponentially because now you have more talent and capable talent and you drive more value to the bottom line, to the company itself, when you decide to sell.
That’s a tremendous example. And I mean, I’m just thinking of all the different situations out there, I mean, you run into this very, very often. And so again, it’s one thing to just warehouse all that knowledge in that one person but being able to spread it out and getting over that fear. So I’m laughing here because I’m thinking, this is what you’re talking about when you say being a part-time counselor, right? Because you’re having to kind of help advice and counsel people, not just on the mechanics and the science of the business itself, but also some of the art of like, yeah, this is what you gotta do, man.
Well, and there’s so many other attributes to being able to successfully unwind out of a business, to sell, to divest, to fully divest, to sell that company other than just those attributes that we’ve measured for. And one of the key components is having the right team. Most businesses that go to market, I think this is another contributing factor as to why some companies don’t sell, is they hire the wrong person. And now I say person, because in most cases, you’re hiring a sole practitioner to sell your company. And in most cases, that sole practitioner is not versed well enough in all the areas that you need to be able to sell.
For example, when you try to sell a company, don’t you feel like you need to have valuation support? Okay. So is the guy selling the company, the representative, does he have valuation experience? Probably not. Most of them don’t. You have to go out to a third party. Well, valuation is a key component of our team. What about tax implications? I mean, why would you sell your company and have an extra 30% of it go to Uncle Sam? And when it comes to the tax issues, someone’s got to go into negotiate that with the buy-side and structure it so that there’s parity in the transaction. Guess what? As part of our engagement, we have a tax mitigation component where we lower your tax liability. Not only do we have the approach and we’re able to mitigate your taxes, but someone’s got to negotiate that with the buy-side because not buy-side may not agree. So someone’s got to negotiate. That’s a key component of what we did.
So I see a lot of times the failure is not having the right team, not having the right attorney. I’ve seen so many cases where either the buy-side or the sell-side attorney is not the right guy. We’ve actually had to go in to our sellers before and fire the attorney on the sell-side, on our side. Because functionally, he didn’t get it. Not all attorneys are created equal, right? I mean, you don’t want a family law practice attorney negotiating an M&A transaction. You need an M&A guy, right? So the team is critical. It really is. It makes a difference.
Yeah. For sure. Well, and it sounds like you’ve got the right team for it. And just a little bit I’ve got to know you, I mean, I would be incredibly comfortable putting my business into your hands in terms of walking me or anybody kind of through that process. I would regret if we didn’t have time to cover this last bit because we’ve talked about a lot of these other things. But in a very general sense, because I know it’s not going to look the same for everybody, but are there a few basic exit strategies that you think people should just kind of keep in mind or that like, hey, this is kind of the form or function of these major two, three, four, five different types of exit strategies and maybe start to kind of think about which direction you may want to take your specific business?
Well, the answer actually is no, and here’s why. Okay. Every business is different. You can have two businesses that are in the same industry at the same sales volume and they have the same profit line, but they’re actually two entirely different companies. Internal infrastructure could be different. Their technology could be different. Their capital requirements may be different. So I mean, there’s so many different things. And what the seller wants out of the deal is different too. So what I have learned along the way is there are no two deals that are alike. There just isn’t.
What I would say, though, is that if a seller’s thinking about selling, keep this in mind, though: Cash is king. Okay. Now it depends on the buyer and how the deals are structured but cash is king. Here’s what I mean by that. If you have a deal that’s structured, let’s say that you have a business that’s doing a million a year in revenues, right? And someone comes in and offers you $10 million. Would you take it? It’s 10 multiple of sales. It’s off the charts high. But if I say, I’m going to give you $10 down and you’re going to carry the note for the other 9,999,000. Would you do it? See, $10 billion doesn’t mean anything if — you got it? Cash is king. The more you can get at the closing table, the better.
Now, there’s a lot of the private equity will come in and they’ll offer you to retain some equity. They might even give you some stock in another one of their companies or something. That’s a different animal. Those are probably okay – assuming that you’re comfortable going to bed with these people, right? Because you’re going to be joined at the hip with them for a little while. That’s different. But what I’m talking about, you know, where they come in and they want you to carry a significant portion of the debt on the acquisition of the deal. So I would say there’s a big takeaway. Whoever the team is that they’re going to try that hire better understand that because a lot of these guys don’t care. They’re going to make a commission on you whether you get $10 down or $1 million dollars down. They’re still going to get paid. They could care less. Okay. We’re different. We don’t want you getting burned. Because if you have to carry a note, there’s a good chance you may have to fight to get that note paid. Okay. They may rep and warranty you to debt. And if you have to follow reps and warranties just to get paid, you may not get it. So, you know, so cash is king.
Now having said that, we’re in a very interesting time right now. Because this is a great time. The market over the last four or five years has been really ripe for sellers. I never seen the multiples higher. There’s more cash at closing than I’ve ever seen before. The estimate, here’s what you’ve got having that. We deal with the lower middle market. So these are companies that are doing 5 million to 200 million. Okay. So what’s happened in the marketplace the last decade or two, there’s nothing to trade at the upper level. So all the high-end strategics and large private equity, they’re all swimming down into the lower middle market to find deals.
We have more private equity groups today than we ever had before. Where are they all playing? Lower middle market? We have more foreign investors in the US today than ever before. Where are they all flying to? Lower middle market. We’ve got more family offices than ever before. Where are they playing? Lower middle market. So you’ve got all this downward pressure coming down onto the lower middle market. I think the latest guess was the estimate is there’s probably close to a trillion dollars of dry powder sitting on the sidelines right now. So the multiples are just off the roof.
If you’re a business owner is contemplating a sale, this might be the time to take a look at the marketplace because not only are we getting the highest offers in multiples we’ve ever seen, we’re getting more cash at closing. We’re seeing a relaxation of the reps and warranties. In other words, the traditional requirements. I’ve seen some reps and warranties as short as a year. We’re having buyers come to the table because it’s such a competitive environment where they’re saying, “Look, we don’t need indemnifications.” So the deal terms are better, you will get more cash at closing, you get higher multiples, which a lot bigger sales, reps and warranties are being relaxed. Just all across the board, it’s been a market like we’ve never seen before, at least I haven’t seen.
Wow. Wow. So, I mean, that’s great food for thought if people are considering, and again, I mean, so kind of a natural next question for you then is what’s the best way for people to learn more about you, to learn more about your business? How can people get in touch with you?
Okay. Well, our domain is trinitytransactions.com. There’s an S on the end. It’s plural. trinitytransactions.com. We have quite a few testimonials on the website. They can call our headline: (972) 238-8400. If they want to talk to me directly, extension 101. That’s probably the two best ways. Or I guess they could just fill out the form. We have some forms on the web page as well if they want to try of stick their toe in the water and not get too formal in this yet, just fill out the form. And we’ve been trying to communicate by email, if that’s what they want to do for now. We’re not a high pressure company. We never have been. There’s no need to. The way we operate, we get deals done.
Yeah. I definitely get the sense that that’s exactly what happens because one of the things that you’ve mentioned at least a couple of times has just been like, there’s so many different considerations that people needed to really think about. And there’s different types of problems and so you’ve got the team to solve any number of combination of these problems that people may not have the expertise or the experience to handle. And I think you’ve done a great job of contrasting what that looks like against firms that really just are just looking for just fresh meat, right? And they’ll take anybody and they’ll go do anything because they’re just after that dollar, right? And so you’ve done a great job contrasting how you guys operate and what you stand for and kind of how it is that you help businesses. And so yeah, I appreciate you. I appreciate the time that you’ve been generous enough to give me this morning and for sharing your knowledge with all those viewers and listeners. And it’s tremendous, tremendous, tremendous value add here in terms of things for people to consider. And so I just wanna thank you, Gerald. Thank you so much.
No, I appreciate you having me. It’s been fun. And what is the old adage? Ounce of prevention is worth a pound of cure and that’s kind of the approach we’ve always taken. Because the more we can mitigate and get out of the way, the better chance you have of getting the deal done. So, yes. Thanks for having me.
Yes, sir. Thank you.
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