Kevin and Michael Vann: Episode 158

Transcript

[0:00:39] Charlie Hoehn: You’re listening to Author Hour, enlightening conversations about books with the authors who wrote them. I’m Charlie Hoehn. Author Hour is about answering one question: How can you get the best ideas from great books without spending so much time reading? Every week, we take you behind the scenes with a new author, about the most important points in their book. So if you love to learn while you're on the go, you’re in the right place. All of our book summaries are 100% free and we do more than a hundred episodes every year. So please subscribe to and review Author Hour on iTunes. Today’s episode is with Michael and Kevin Vann, the co-authors of Buying Out the Boss. People often assume that buying a business is easier when you know the owner. That there’s a layer of trust and congeniality that just doesn’t exist among strangers. But, if you want to negotiate the best deal for yourself without wrecking relationships, you need to arm yourself with the right set of tools and tactics. That’s what this episode is about, Kevin and Michael are a father-son team. And their firm is helped business owners with succession planning since 1979, that’s nearly 40 years. Over that time, they’ve guided hundreds of business leaders through the transfer of ownership and they provide both buy-side and sell-side representation and helped their clients ensure the continued success of their companies. In this conversation, they’re going to reveal how you can handle common problems that arise during these transactions. Especially the problems that happen between colleagues and family members. This is important if you’re planning succession because inside transactions can go off the rails when you don’t know what to expect. But by the end of this conversation, you’ll understand the process so you can begin to move through the first steps with confidence. Now, here is our conversation with Michael and Kevin Vann.

[0:03:13] MV: You know, working with the manufacturing company right now, that was kind of after the fact but you know, the buyer who owns it today is in his, probably, mid to late 30s and he was an employee of the company, he got a call from the owner of the company, was absolute team said, I’m going to sell you the company or I’m going to shut it down, what do you want to do? The deal was done in a month, you know? He made a quick decision to do it, it was a good decision but he was at a disadvantage because he didn’t have any control over the process. He didn’t know who he should talk to, he didn’t know if he was paying the right price so he was really at a disadvantage in this. You know, if you did it today, he might look very differently at the outcome of the transaction. For us, you know, we come across those all the time and we really want to be able to educate those successors to at least have some type of foundation to fall back on as they start this journey of buying the company they work for.

[0:04:05] Kevin and Michael Vann: I think for me a little bit differences because my background has been mostly acquisitions, small in the market. I’ve always wanted to transfer the knowledge to a client or to an associate and it’s always been difficult to take all the knowledge after all those years and find an easy way or single path way to transfer that knowledge and I think buyers are the ones that are always lacking knowledge and we see succession planning today, it’s all based on the seller, the agent planning, the transition planning, it’s all driven by that for us, we felt to resist a great need to educate a buyer We’ve been buyers as much as we’ve been sellers ourselves. I think we brought a lot of value to the table on the buying side.

[0:04:44] Charlie Hoehn: Could you two sort of break down in layman’s terms, who the book is really for? What are the big benefits they’ll get from reading it?

[0:04:56] MV: The book is for anyone who is contemplating buying the company they work for and the value for them on the book is to at least start to build a foundation of what to expect and how to prepare for it. You know, most of the time, we’re dealing with an internal buyer who certainly has never bought a company before. May not have even contemplated it and now there’s this opportunity and you know, they’re inexperienced in the side of things and they don’t have the network of people to fall back on who they can rely on in most cases.

[0:05:26] Kevin and Michael Vann: It’s also for those who don’t necessarily work for a particular company but have had their sights set in owning their own business and it could be family or it could be non-family, we do as we do both at the same time but I think they take away certainly from the book as many situations and as many things we’ve been able to identify, that’s going to be important from them from the start and the history of the cases that we’ve included and so on and so forth. Anyone really wants to buy a business, whether they’re in it or not, I think they’re going to get something from the book.

[0:06:04] Charlie Hoehn: Absolutely. What is the process really look like? I mean, how intensive is this?

[0:06:12] MV: It can be very intensive. You know, I just came from a meeting at lunch today and we had a couple of perspective buyers and one of the three sellers of this company and no one at the table had any clue as to what they wanted or what the other side wanted. You’re literally starting with this concept that yeah, we’d like to do something but I couldn’t tell you from the seller standpoint, what the seller needs from the business or wants. The buyers have no idea because they’ve never done this. You start this process with this blank piece of paper and try to color it in.

[0:06:53] Kevin and Michael Vann: If you buy an automobile or you buy a piece of real estate, second home or anything that you buy today, there’s pretty much menu driven options and you check the box and you pick it and there’s a lot of mentoring and there’s that whole process. But when you’re buying a business, that’s not available, there’s not a real book for dummies buying businesses at all. It’s nothing but moving parts, it’s a business, it’s in motion, constantly it’s evolving constantly where potentially either you’re buying or the house you’re buying or whatever happens to be isn’t in motion and revolving but businesses do every day, they leave them burnt, they let them breathe life. I think there’s no particular checklist which makes it very difficult, very tense.

[0:07:34] MV: It’s highly emotional. You’re dealing with, for the buyer, you know, this is probably the biggest support and decision they’ll make in their business lives and for the seller it’s like selling off your child, you know? They most likely have founded this company or they’ve – you know, it was their father’s business or something along those lines. A lot of their identity and their wealth and everything else is tied up in this business. It’s very emotional process for both sides.

[0:08:00] Kevin and Michael Vann: In most cases, it’s life changing for both sides, you know? That can be a drastic change or a subtle change in both of the different changes that each access but no question, it’s like changing, when you become self-employed or you leave self-employment. Irrespective in the size of the company or irrespective of the dollars involved. You know, it’s life changing, it always has been for us, every time we buy one or sell one, it seems to be life changing.

[0:08:25] Charlie Hoehn: Just curious, how many have you two purchased and sold over the years?

[0:08:30] Kevin and Michael Vann: For clients, I’m going to take a wild guess, probably somewhere in the 150 range, during my career.

[0:08:35] MV: Yup, that’s probably.

[0:08:36] Kevin and Michael Vann: I think probably in for ourselves, for our own portfolio, we continue to purchase for ourselves, probably 35, 40, in the last 30 years perhaps, businesses we’ve loaned and sold at different times, we have our own family portfolio of businesses as well.

[0:08:54] Charlie Hoehn: That’s incredible. I’m curious with you tow, I’m sure you’ve seen, there’s been a rise of course in entrepreneurship, especially with the younger generation, they feel it’s a way to kind of make their mark. Do you ever get frustrated that more people don’t consider just purchasing already existing businesses rather than trying to start from the ground up?

[0:09:15] MV: Yes, I think there’s this flaw in the business culture that you need to start a business. Wouldn’t it be great to build the next Google or whatever and that it’s driven some up because well, you don’t have any money. I’ve got this great idea, I can go raise money but we know that you’re better off buying an existing business but there’s more risk to it from that entrepreneur’s standpoint because you’re going to sign your name on the line for debt. There’s real things there so it’s probably scary and it’s an unknown. Starting a company is kind of easy from that standpoint. I’ve got an idea I’ll figure it out. When you buy a company, there is lots of complexities to it that already exist.

[0:09:59] Charlie Hoehn: Let’s talk about some of those complexities and the new reality for people who are going down that path. What do they need to expect going in that most of them don’t know?

[0:10:15] Kevin and Michael Vann: Which one you want to tackle first? Go ahead and get started. There’s so many of them.

[0:10:20] MV: I think the one that always jumps up to me is the one we call legacy costs. Those are the hidden cost that exist in an established company. The former owner may have had some side deals with employees on hours or there might be someone who really hasn’t performed in a long time but they’re still there because they’ve always been there, you know, it’s a cousin or a sister or something. You’ve got these types of things that get expensive to deal with so there’s always these uncertain legacy costs that even if you’re an insider, you don’t necessarily know the full extent of them. They can get really expensive to clean up, can be very painful.

[0:10:58] Kevin and Michael Vann: I think what I’ve seen in awful lot, especially in the last probably 10 or 15 years is a lack of knowledge on the buyer and a lack of due diligence as to what’s going on the particular industry that these either in or he’s going to enter and again, we see things evolve and so today, so many disruptions in our businesses and how businesses being done. I worry sometimes that when we have a new buyer, they forget that their due diligence checklist you know, to be at the trade shows, you’re reading your materials and staying in what’s going on, that industry because you can but something based on past performance, we can buy Coca- Cola based on their earnings and past performance but what’s going to happen tomorrow when Coca-Cola gets disrupted. I’ve always worried about that risk when we’re doing our own due diligence, we always try to have a good feeling and instinctive feeling about what the industry’s going to evolve to, what it’s going to look like. I think that’s important.

[0:11:51] Charlie Hoehn: I take it that advise was acquired through hard fought lessons. I’m curious, what have been some of your guys’ hardest lessons you’ve learned? Failures? And what have been some of your biggest successes?

[0:12:08] Kevin and Michael Vann: I think both failure in success have come for us perhaps more than for our clients has been that people you do business with, I think you try to align yourself with partners or strategic people that have something in common with you as in potentially business values and life values. Sometimes the best partnership on paper doesn’t quite make the grade and I think we’ve had failures at times over that, you know, there’s always that expression if you have a partner, would you want him in the foxhole with you? It’s great to have partners when times are good but when times turn bad or it becomes challenges, you know, that’s really when you have to take a look around in your foxhole and see who is in there with you and make sure you have and be with each other. I think that’s pretty common, I don’t think it’s any different than a marriage or relationship or whatever. In the partnership level for us, I think some of the – a lot of our success, no question or success has come from our relationships with people. Some of our failures have become that way as well.

[0:13:07] Charlie Hoehn: Can you get a pretty good feel for your clients whether they’re going to do well or not pretty quickly or does it just vary so much person to person?

[0:13:19] MV: I think you kind of have a natural instinct that tells you whether or not you think this person can be successful. You know, it’s funny, we had a bakery for sale years ago and we had this couple of who came in, they were really excited about the concept of owning a bakery and ‘till you started talking to them about what exactly they have meant. You know what? You’re ‘going to be probably up at 3:00 in the morning baking and yup, payroll, it’s a little tight and you’re selling these little danishes for 75 cents, you’ve put all this work into it and it quickly turned, for the couple, from I like to bake to well, I didn’t want to really get up at 3:00 in the morning and have to deal with employees and all those things. You know, those ones you can pick out pretty quickly but there are certainly those that you can’t because they come across really well. They tell a good story because they know what you want to hear and those take a longer time to vet out.

[0:14:13] Kevin and Michael Vann: I think a lot of has to do with expectations. I think we learn a lot, we could live in bonus for so long as to what that client or what’s that partner or employee is expecting and there’s a sense of entitlement if that comes across at the table or from outside looking in they think it’s a great opportunity or they have that cockiness, not confidence but cockiness whatever happens to be. We kind of instinctively can see that those aren’t the attributes that you need to be successful. I think over the years, we kind of learned to – after someone leaves and Mike and I have met them, we kind of looking at each other and go, that’s going to happen or that’s not going to happen or this person has it or they don’t have it, they get it or they don’t’ get it. I think over the years, you kind of get a little bit of the body language and some of those first and second impressions. You also have to look for support, where their support is coming from, you know, is the support coming from spouse, is it coming from a family member. Is it coming from a potential partner because support is extremely important and we try to weed through that pretty early too. Are you are an island or do you have a spouse that’s going to be supportive of you or whatever happens to be. You can kind of weed through some of that early on.

[0:15:20] Charlie Hoehn: Yeah, you need a team. Your book lays all this out really nicely, it has the process, it has the section on setting expectations and it has a section on value assessment. What is that part of the process look like? How do you typically – how long does it take to really suss out the value of a company.

[0:15:40] MV: Value is a tricky thing because I can look at a set of numbers and call for the very different evaluation than someone else. That’s, I think, the challenge with buying and selling a business, it’s not like selling a house where I can look at what the comps down the street were because that house, similar size, square footage and you know, same neighborhood so we know he’s going to go for X. There’s so many variables in the evaluation side of things and how you measure risk that it really gets challenging. We always kind of use a sanity test which is known as justification purchase test, which means, if under conventional terms, if I needed to put you know, 10 or 20% down which is standard over standard amortization period on a loan, can I actually meet the cover on this, have enough money left for a return and to pay myself a market compensation. To me, that’s always the basis for what the value is in an arm’s length transaction because if it can’t do that realistically, then you’re not going to have a good deal there. Someone’s either going to overpay or be under compensated. You know, if you’re dealing with private equity or a strategic buyer, those are different situations but for a run of the mill type of business, the main street business that we’re dealing with, you know, it’s got to be able to make sense from a cash flow perspective. I can kind of suss out a basic valuation based on that cash flow but then, it’s what multiple should be applied to that or what discount should be applied to that based on the specific criteria of this business and that’s where it gets tricky.

[0:17:16] Charlie Hoehn: Do you two tend to work within a range of companies? Say, companies that earn between one to five million dollars, or whatever.

[0:17:29] MV: Yeah, I mean, literally the joke I made, we were meeting the other week and I said, you know what? I just got a call to facilitate a sale of the fitness training business which does about $112,000 a year and 20 minutes later, we got a call to help facilitate a private equity transaction for 30 to 40 million dollars. A complete range there of entirely different buyers, sellers, circumstances. We’re very much adaptable because you never know what the situation’s going to be.

[0:18:02] Charlie Hoehn: Right, the principle’s which you lay out in the book stay the same. You talk about the exciting part as well which is closing the deal, you talk about financing the deal. What can the buyer and the seller expect during this part?

[0:18:18] MV: Not to like each other. Pain, yeah.

[0:18:22] Kevin and Michael Vann: Typically what we see irrespective of the side of the deal and even on the 35 million dollar deal, you may see the seller have to participate in the financing and help the buyer. Certainly the smaller deals and that smaller deal can range anywhere from 100,000 to 10 million even, you can see an awful lot of seller financing. The lenders are very cautious and typically your buyers don’t have a lot of money for down payment and there’s working capital and considerations and post-closing considerations. There’s some required sometimes in the seller and it takes various forms and has various pathways and journeys to seller financing. Typically, the seller always comes in and says to us, we’re not going to participate at all, we want to get out, we want all our cash, we’re not getting out. Mike and I usually smile at each other and wait for the second meeting to try and throw the goal of reality but – Typically, the buyer will be pretty much upfront with you and tell you, this is how much I have and this is how much I can raise, what can you help me raise and how much will a seller participate? I usually start off not at square one with each other, they’re usually got some separation, we have to find a way to close that gap and financing’s not easy, I’ve been through this economic cycles several times in my career and even in good times, which are now, it’s difficult for financing and in bad times it’s worse. I can’t point to a time in the last 35 years where I can say, it’s a great time to finance an acquisition or a deal. I think it’s always difficult, especially with conventional lenders, banks and so on and so forth. It’s a lot of work to complete that deal, we get it to close.

[0:19:58] Charlie Hoehn: I believe it, yeah and so once you get them to close, what’s the transition plan for them?

[0:20:07] Kevin and Michael Vann: Yeah Mike, that’s where you’re to daily work than mine. The well transition point. -

[0:20:12] MV: Yeah, so are you looking at the transition from the seller’s perspective or the buyer’s perspective?

[0:20:17] Charlie Hoehn: I’m curious as to what is it for both, I mean I imagine the seller needs an emotional transition plan for themselves as well as just a practical –

[0:20:30] MV: Yeah, sometimes they do and other ones, I hate to say could really care less, they kind of make that break with their wealth state.

[0:20:38] Charlie Hoehn: They’re over their business, yeah.

[0:20:40] MV: Yeah and they are ready to move on and I think one of the commonalities we always see is the sellers are willing to stick around for whatever is needed for reasonable transition and the buyers usually want them to stay around for a while until they acquire it and then it quickly becomes, “All right, we need to move them out pretty quickly here,” because they can’t establish their own ownership with those sellers still sticking around. So we really try to in most cases keep that to a minimum, have a more advisory role if it’s necessary because most likely your buyers want to change things. They want to put their stamp on it and it is hard to do it if the former owner is still lurking around. So that transition from the buyer standpoint is how do I utilize the seller without having them be disruptive and then picking my spots on what changes I’m going to make because you don’t want to be too disruptive because you can blow up the whole business that you just bought. So there is a dancing act there.

[0:21:41] Kevin and Michael Vann: Well that is a major issue and we’ve had a couple acquisitions and we’ve gone where we’ve been too aggressive on going and blowing up the business because so much was wrong with it and from our perspective and those changes as wholesalers they are sometimes aren’t healthy for the company. I think people sometimes could get used to change and as a buyer, you can make that mistake that we have, who are very impatient. We need to make those changes today and so you could be very, very careful with that and for a first time buyer, he doesn’t know that you know? There is no cautionary flags for him so we Mike want to work towards the transition side of the business because that is something with closing fund. It is over and you celebrate and the next day you own this monstrous business, no matter what size it is and now you’ve got to execute. You need a lot of help executing, a lot of people just walk away after the closing. You think it is done and it’s just beginning. You know it is like giving birth, now that we gave birth now we got to bring the baby up but it is an interesting side transition that a new buyer has a really difficult time with the transition because his life is changing. They’ll have an increase in hours and change in lifestyle and maybe is going to have to deal with some domestic issues over those changes. You know everything is going to keep him up at night where before it didn’t and so the transition for the buyers in many cases is worse than it is for the seller.

[0:23:03] Charlie Hoehn: Well can you two tell me about purchase you helped with or a purchase that you made that you are really proud of, what’s been one of your favorite success stories of the 150 or so or more business acquisitions that you’ve been a part of?

[0:23:19] Kevin and Michael Vann: I think for me, we have quite a few. I had an opportunity many years ago to join forces with a partner that we didn’t know each other and so it was very unusual and we were able to acquire a neuro space company that at one time had a single customer and was struggling and my partner was in that industry, extremely talented. We were both younger, had a ton of energy and we grew it to a size we never thought we’d grow it and we sold off parts of it and bought other machine toll shops. And we’ve got a lot of real estate and we opened up divisions and so on and so forth and we remained partners through today and dear friends and we call each other brother and I think I look at that acquisition as not only successful financially which set me apart financially but it then also at an individual person basis, I've had a lifetime of enjoyment out of that particular relationship And they’re all not that way, believe me. If we were riding at work, it would be both sides but that for me has been probably one of the most successful.

[0:24:27] MV: Yeah and for me, we have one of our clients who is a good friend. We helped him acquire another family business several years ago and he’s had a lot of challenges. The family had some animosity and some of the relationships that were incorporated into the business and it really needed a fundamental change even though it was successful but the culture wasn’t where they needed it to be. The sales weren’t where they need it. Everything wasn’t where they need it to be. In the past four or five years, we’ve been able to completely implement that transition to where if you met the company five years ago and then didn’t see them again and came back today, you wouldn’t know it was the same company. I would say they’ve done everything right but their hearts is always been in the right spot. The decisions that they’ve made had been logical and sound and they’ve focused on execution in making those changes and so it’s always good as an adviser when you see your clients actually follow your advice and embrace it.

[0:25:26] Charlie Hoehn: Yeah, well those are both wonderful and I am curious if any of our listeners are hearing this episode and they’re thinking, “Man, I’d like to learn more,” and not just buy the book but actually potentially work with these guys because I want to buy my own business, what’s the best way for them to get in touch with you?

[0:25:48] MV: Well we can be reached via our website at www.vann-group.com. You can reach me by email at michael.vann@vann-group.com or you can call us at 413-543-2776 just because that is an area code 413 number it doesn’t mean that we won’t go anywhere else.

[0:26:09] Kevin and Michael Vann: Now we have been known to travel to the darkest places in the world.

[0:26:12] MV: And if someone from Napa or Sonoma wants to hire us, we’re all set.

[0:26:17] Kevin and Michael Vann: Yeah, traveling makes it fun.

[0:26:20] Charlie Hoehn: So that is Vann with two N’s and the book is Buying Out the Boss by Michael and Kevin. It’s The Successors Guide to Succession Planning. Michael and Kevin, thanks so much for being on the show.

[0:26:36] MV: Thank you.

[0:26:37] Kevin and Michael Vann: Charlie thank you so much for having us.

[0:26:40] Charlie Hoehn: Many thanks to Michael and Kevin Vann for being on the show. You can buy their book, Buying Out the Boss, on amazon.com. Thanks for tuning in on today’s show. If you liked what you heard, here is what I want you to do next. Open up the podcast app on your phone or iTunes on your computer and search for “Author Hour with Charlie Hoehn” and then click “ratings and reviews”. Take 10 seconds to rate this show or leave a review. It is a small favor but it’s really the best way to show your support and give me feedback and if you know someone else who’d love Author Hour, take another three seconds to text them a link to this episode. We’ll see you next time.