WES S04E09: Exiting Your Portfolio

Justin Cooke

January 10, 2019

Subscribe to our VIP LISTIn the third season of the Web Equity Show, we talked all about selling your online business. This episode of Season 4 is about exiting a portfolio of businesses and should really be listened to as an “addendum” to Season 3 instead of as a stand-alone episode.

Since there are differences between selling a single business and selling a portfolio, we cover 5 additional points of interest or unique challenges you may be faced with. We offer our advice and reveal what you can expect going into the sales process.

If you’re a portfolio owner considering a sale in the near future, add these points to your list for discussion with your attorney and accountant.

Digging the show? Please do stop by iTunes and give us a review when you get a chance – we’d really appreciate it!

Alright, let’s dig in…

Listen To The Full Interview:

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What You’ll Learn From This Episode:

  • Sell as a package or break them up?
  • Expecting a much longer sales cycle
  • Forcing a competitive offer
  • Distracting from regular business
  • Retained equity as an option

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Justin Cooke:                     Nine Times out of 10 you’re going to come out a lot better. Just putting them all together and selling the deals.

Speaker 2:                           Buying and selling businesses just got a lot easier. Welcome to the Web Equity Show where thousands of successful entrepreneurs go to learn about buying, growing and selling online businesses. Your hosts, Justin Cooke and Ace Chapman share their real life advice examples and expert interviews to help you build and grow your own online portfolio. Now to your hosts, Justin and Ace.

Justin Cooke:                     Welcome to the Web Equity Show. And today we are talking season four, episode nine, exiting your portfolio. Good to be back with you buddy.

Ace Chapman:                   Yeah, it’s great to be here. This is one of those things that not a lot of people are going to end up having a portfolio of deals, but I think for those folks that have that vision, we want to talk about how you’re going to exit that portfolio.

Justin Cooke:                     Yeah, and really this should be considered an addendum to season three and we talked pretty heavily in season three of the web equity show all about selling your online business from beginning to end. So this isn’t necessarily gonna replace that. I’d view this more as an addendum and it’s definitely not a standalone episode. It’s not gonna have everything you need to know. It just has a few thoughts we’ve kind of put together.

Ace Chapman:                   Yeah, we wanted to kind of point out five additional points to that episode. So review that episode come out to this and then you’ve got kind of five additional point of interest and some new unique challenges when it comes to trying to sell and exit a big portfolio of deals.

Justin Cooke:                     You’re also going to want to cover like a lot of these points and even others with your attorney and your accountant as you gear up for a sale, they’re likely going to have some advice because they know your business really well and know what’s going on with you. Can give you some advice as you head into it. As we’ve talked about it many times before, attorneys can be deal killers, but as long as you have a good attorney that’s on your side and that’s your business, they’re going to be there to help you. All right, buddy let’s do some listener love. We’ve got a five star iTunes review says top knocks business buying knowledge from JWB. If you want a master level course and all the ins and outs of buying and selling online businesses. This is it. JWB really appreciate the review event.

Ace Chapman:                   Excellent. We appreciate those five stars for sure.

Justin Cooke:                     I don’t know why I call him a man either. I have no idea, it’s JWB like I dunno. I just assume I assume with the guy, there’s nothing there about guy, but yeah [inaudible 00:02:23]. All right man. Let’s give him the episode.

                                                We’ve got five main points you want to talk about staying in. The first is the question is to whether you should sell your portfolio as a package or we should break the businesses up. And I have to tell you our default here is to keep them together. They’re likely going to be worth more as a group, as a portfolio, and if you have the kind of businesses like Hub and Spoke model where you have one large businesses connected or interconnected to a lots of other websites or online businesses, you’re not going to be able to kind of piece them off anyway. So it’s likely that they’re going to have to be sold as a package. So that’s ideal is keeping them together. Here are some situations where you may want to break up your portfolio if you just have like kind of non interconnected businesses.

                                                One of the reasons you might want to do this is you need to buy out one of your investors. Let’s say that one or more of your investors want to leave and you can’t bring in outside money, some funds to allow that or you just can’t find someone to bring in the outside money or none of the other investors want to take over a piece of the portfolio. Then you might want to sell off one, two or more of those businesses to buy out that original investor. It also might make sense if you know you need to raise the additional funds to grow one of the other businesses in the portfolio. Again, this is traditionally in like a closed fund. If you’re not able to bring new money into the portfolio, whether that’s from other investors or outside investors, and you need some cash for like let’s say an E-commerce business is very cash heavy, you may want to sell off one, two or more of the property so that you can fuel the growth of the other.

Ace Chapman:                   Yeah. One of the things that I love about putting deals together is that you get that benefit of increasing the multiple that you’re going to sell it. So it’s one of the big reasons you want to be able to package these things together is you’re going to attract a bigger buyer. They’re going to be willing to pay a higher multiple that turns into incredible returns. You know, even if you haven’t been able to grow the business. The one thing that I have seen is you may have that one buyer that is a strategic buyer for one part portion of the portfolio. Especially if you’ve got a portfolio of deals that aren’t necessarily interconnected, and you’re going to get a high multiple for that deal, and then it could make sense to take that one out or take a couple out and start to split them up a bit. But nine times out of 10 you’re going to come out a lot better just putting them all together and selling the deals.

Justin Cooke:                     That’s interesting with this strategic, they’ll generally find you too, so it’s not like you’re out shopping the businesses. Some will come to you, find that particular business and they’ve got some strategic interest in that business and want to offer you a fat multiple. And for something like that it may be worth it for sure.

Ace Chapman:                   Yeah. All right. Let’s go to point number two. One of the things that surprises people here is you are going to have to expect a much longer sales cycle. It takes a long time to close these deals. A lot of times you get them under contract. I’ve had so many people that we make an offer on the deal. They end up getting a better offer than ours and three months, four months later, they’re coming back to me saying, “Hey, we’re willing to kind of re enter negotiations. This person that beat you didn’t end up closing.” A lot of these deals end up falling through. So not only does it take a long time to attract that right buyer, but sometimes you get it under contract and it still doesn’t close. So one of the keys here is limiting the exclusivity period in the deals. Whenever you do the LOI, every buyer I always wanted, we want exclusivity to do our due diligence. Figure out if we want to buy the deal or not. And guess what? You’re wasting time with giving me all the information. And then you get to the end of that process and the buyer decides, well, this isn’t the right deal for us.

                                                Now if you’ve got somebody that has a reputation and they’re doing a lot of deals. Some of that risk goes away. If you’ve got somebody who’s a professional buyer, like a private equity fund, then a lot of that risk goes away as well because they know what they’re doing. And at least pretty early in the due diligence process, they’re going to look at the deal and say, “Hey, this isn’t the right deal and not waste your time there and kind of hurt their brand as a business buyer.” But one of the things you want to do to protect yourself and make sure you’ve at least got a serious buyer that’s capable of closing the deal is get proof of funds, when you’re kind of closing on the LOI, that’s a good time to say, “Hey, before I sign on the dotted line here and give you any amount of exclusivity, let me make sure that you really have the money.”

                                                And this gets really dangerous in a time where there are a lot of people that are buying with SBA loans and that kind of thing. And the honest truth is it could not even be up to them getting into due diligence. And not like in the deal. The bank could come up with a reason not to like the deal and now you’ve wasted that time, and so personally when I’m selling a business, I’m going to go with a person that has cash. Even if it means a discount, even if it means that I may get 10% less, I can always go back to that person that has to go to the bank.

                                                When you’ve got somebody where you’ve only got one person that is the decision maker and they can write a check that is worth a premium to you as a business seller, especially on these larger deals and portfolio deals. The last thing I’ll mention here is you’ve got to keep hustling and keep around the business as is because of everything that we talked about, like it can take a long time, deals can fall through. If you’ve taken your foot off the pedal and you’re no longer pushing the business, then if the numbers have gone down, it becomes really, really tough. Buyers do not like to see a business that’s hit a hiccup even when you go to them with the excuse that, “Hey, we were trying to sell the business. I’m not as focused on it.” They don’t care. They don’t know if that’s real or not. And so you’ve got to keep pushing the business the same way you would if you were going to own it for the next 10 years.

Justin Cooke:                     Yeah. There’s two things here. I’m not going to exactly call them newbies, but if they’re newer to buying portfolios, this isn’t something they do on a regular basis, which is likely to not be, you want to look out for them not actually having the funds available. I love your point about SBA, they’re kind of counting on an SBA loan. Or they’re counting on raising the investment during the exclusive due diligence period. They haven’t actually put that together yet. You want to ask for proof of funds or source the funds and make sure that they have a place to do that. And I would do that as a part of the LOI process for me to do that at all. But on the other side you have the much more experienced, your savvy buyers who are scrupulous buyers too on the other hand, but they’ll use that exclusivity period to wear you down, right? And they’ll get in there, they’ll start kicking the tires, they’ll extend the exclusion period, exclusivity period. And then start working you down on the price and start doing negotiation tactics at that point.

                                                And the problem with that is you’ve been off the market so you haven’t been fielding other potential buyers. You haven’t even been available for other people to review. So they kind of got you. And if you haven’t kind of like expected a longer sales cycle at this point, they’re much more likely to work at kind of wearing you down and getting you in a position to where you may just sell for much less money than you intended.

Ace Chapman:                   Yeah, I feel like it’s all about kind of doing your due diligence as a seller. Everybody talks about the buyer due diligence, but you need to do due diligence on that buyer and kind of feel them out and see what kind of buyer they’re going to be.

Justin Cooke:                     Yeah, absolutely true. Particularly for these larger businesses and portfolios. All right, man. Point number three, force a competitive offer. So it sort of depends on how you’re doing this deal and how you’re selling it. If you’re selling it direct, you really need to shop around to other potential buyers, to others potential strategics, to brokers, et cetera. Now I say this, but just know that whatever they say, you have to take with a fat grain of salt. When you take this to another broker, they’re likely to want you to do business with them, so they have an incentive to kind of lay it out to you and say, “Look, you know, I’d love for you to do business with me. Come sell with me. I’m sure you got some buyers.” So just know that when you talk to them, like you want to get a sense for kind of what the deal is and whether it’s real.

                                                I still think it’s worth it though. I still think it’s worth having that conversation. I had a friend of mine that I know that sold the business privately, and we didn’t talk about it. He didn’t bring the deal to me. We didn’t discuss it because the buyer didn’t want him to do that of course. I think it was a really bad idea. And talking to him, I think he left the money on the table for sure. Which is what the buyer wanted, and we were friends. So like he should have done that, I think he would have made more money. Now if you’re working with a broker, I think as a seller it’s really important for you to push them to at least get another offer on the table. So not just to kind of verbal mention like someone that’s actually interested and wanting to make an offer.

                                                Now to be perfectly transparent about this, that may or may not be of interest to your broker because from their perspective look, if they’ve got a bird in the hand then trying to introduce another party to it may just be a little rough. So you may need to push your broker a little bit to get you a second offer. I think it’s just good to have another buyer take a look at the business and see if it makes sense. Particularly before you go into exclusives due diligence, I think it’s a really good move. So right before you do that, if you can make a push with your broker to have someone else take a look and get a sense for it. I think it’s a good idea.

Ace Chapman:                   Yeah. You know we’re talking about a deal before we started the recording today, and I have a friend that is selling an offline business in this fitness industry. He was going to be happy to get 15 to 20 million for that business and started talking to an investment bank, and it’s going to cost a lot of money, but guess what? They’re giving him 30 million and their fee is going to be one point five. So that sudden net of eight and a half million dollars that is worth that fee. Now in fun end if he didn’t have his price and he was like, Okay, no, I don’t want to pay somebody one point five million dollars to sell my business, that sounds like way too much money.” But when you’re netting an additional eight and a half million dollars because of that relationship of dealing with that person that that’s what they do all day long, is find buyers for businesses and they’ve got a database of people that may be interested in the deal. That’s a really powerful thing. So definitely agree with you there.

Justin Cooke:                     That’s interesting Ace, and like I’ve heard this, it isn’t from everyone, but it’s from some people and kind of their view on it is like, well all a broker does is kind of match you up with potential buyers. Like how much value is that really? Right? That you’re just going to throw me a list of people and maybe they’ll do business with me. And maybe that was the case back in the day for some brokers. But I mean it’s not the case for us, it’s not the case for other brokers I know that are doing well in this space. So there’s a lot more to it than just putting list at them, and they actually help you sell the deal. They’re going to help you structure the deal. They generally help with migration and transfer of the business. I mean there’s a lot that goes into that.

                                                Not to mention the fact that they can get you more money for the business. Now I sound like I’m selling a broker idea here, but I really am, like if I’m talking to my brother, my mother, my cousin, close friends, I mean I really recommend having a conversation with a broker. I think that’s probably your better bet.

Ace Chapman:                   Yeah. So this is something that I mentioned a little bit and I want to talk about more for point four. And it’s the fact that this whole process is work. So I say, Oh don’t take your foot off the pedal and focus on your business. And it’s like, okay, but how am I going to work with these buyers, get them all the information they’re looking for, be able to answer questions, have conference calls put together, packets as they come up with all the things that they’re looking into, even getting details on employees. The list is really long, especially when like we talk about you’re dealing with a portfolio of different businesses. So it’s one thing to say don’t take your pedal off the business, but what does that look like? One of the things that is really great is if you have a partner in the business, being able to assign one person to focus on that process of selling the business, working with the brokers, working with the potential buyers and kind of guiding everything through that process where that’s their top priority because, hey, this is a big deal. You know you’re selling the business. You want to maximize the value that you’re going to get out of that transaction.

                                                The other thing that you can do if you’re a solo operator is assign someone on the team. So either you’re assigning that person on the team. If they have the capabilities and the talent and you trust them to be able to run the business and not end up with a dip in revenue sales or net profit, then you can assign that person to do that. Otherwise you can assign a team member to work with your team that you’re hiring or your brokers that you’ve hired to sell the business. It’s another reason that if you’re that solo entrepreneur, you probably want to have a broker that you’re outsourcing a lot of the heavy lifting to, because you know if you’re trying to sell yourself, it is a lot of work.

                                                You know, Justin, in order to get at deal closed, you’ve got to figure out, okay, who are the people that are serious, who are the people that are time wasters? How do we know that this person’s really going to close the deal? There’s a lot that you gonna figure out, and you’re talking to a ton of people to filter down into those two or three offers. And the last thing is you can hire somebody. So outside of brokers, I’ve sold a lot of deals through by accountants, and getting an accountant on board can be a way to sell the business. One of the quickest ways and easiest ways. If you’ve got an accountant that works with a lot of light businesses, because they know everybody’s money situation. So it’s been really interesting. Most of the deals I’ve sold through accounts have been offline businesses, but they’ve been incredible offers. They’ve been really fair. He knows what the buyer has and what’s going on with them financially. He knows how to structure the deal so that both people can win, and it just becomes this really nice situations.

                                                But you can find someone outside to hire to help manage you through that process as well. And maybe it is somebody that’s already working inside of your business. Maybe it’s somebody that is outside like an advisor, an investor or an accountant and you throw them a little bit of money just to help you through that process.

Justin Cooke:                     Yeah, I mean the fact of the matter is that it’s going to take some of your time, right? And so clearing your plate or clearing your business partners plate, clearing someone on your teams plate to where they’re going to have the time to do that makes a lot of sense. And even if you’re working with a broker, there are some details about your business you’re going to have to put together. Obviously the accountant can help on the financials, but you may have someone on your operations team, your operations manager or whatever, put together a lot of the SOPs and all the things to be acquired both to kind of like [inaudible 00:17:42] the business, but also to get the business listed for marketing materials. And then you know all the due diligence that’s going to be required. And generally people are going to dig, they’re going to ask for a lot of information. And so having someone who can provide that information and put it in a nice pretty package makes a lot of sense.

                                                All right man. Let’s talk about our fifth and final point here is that retained equity is a real option. So what we mean by retaining equity, we’ve talked about this in previous episodes, but it’s basically where you’re going to keep a piece of the business and they’re going to be offered a discount. So let’s say for example, you keep 20% of the business and they’re going to pay 20% less for the business, and you keep it long term. Now the thing here is that you’re going to effectively be marrying yourself to whoever’s buying the portfolio businesses from you. So you’re going to have to be able to buy in to their plan or their goal of the business. Now maybe it’s to turn it and sell it in two to three years, three to five years. Maybe it’s just cashflow it for the next five to 10 years, but whatever their plan is and their approach it’s going to have to be something you’re comfortable with.

                                                Another thing is that a lot of times this can make the buyers comfortable having you as consultant longer term. So a lot of times you know there are complexities to the business or the portfolio of businesses that you’ve been working with day in day out. You and your team and they want someone there who can kind of, particularly for the first year or so kind of hold their hand. The only thing is if you’re going to do this and you’re making them comfortable by sticking around longer, you just need to make sure that you spell out what your responsibilities are going to be. It doesn’t make a lot sense too, they keep 10% equity and then ultimately you end up working full time for them as a consultant. That would not be a good plan. So just spell out kind of what your requirement would be as a consultant or as someone, as an advisor they can talk to you about the portfolio.

                                                The other thing you can do which is a sneaky little thing is to make it their idea. So talk about how you’ve seen other deals in the past and when they present that as an option or they want to offer less to the business, help you keep some equity, that’s a good way for you to get a little bit extra. So I have seen this happen where the buyer is paying 10% less for the business, and the seller’s retaining 12% equity or they’re paying 20% less and the seller’s retaining 25% equity, for example. So you can keep a little more equity in the business than they’re actually discounting, which definitely works to your advantage. Again, all this only works though if you have buy in to their plan or goal, and you kind of see what they’re doing with it and are onboard with that.

Ace Chapman:                   You know, one of the interesting things about this is it’s smart to do it even if you don’t care if they could give you equity or not. I’ll tell you even when I’m doing a deal and I have a seller that tells me like, I really want to keep some equity in this deal, I’d love to stay a part of it and I’m willing to do some consulting. It bodes well for the deal and it gives you a lot of comfort knowing that if you can come up with the right deal structure, that person not only is willing, I mean you’ve got a certain amount of expectation that okay, you’re going to help me once I buy this business. But the fact that the person doesn’t just want to help, they want to be financially tied to the future of the business is like that vote of confidence for the plan that you have for the business. So it’s a smart thing to do. If you’re a seller

Justin Cooke:                     Ace, I know you have a bunch of equity, like little pieces of equity in a whole bunch of different businesses, are most of those for you or it’s just a nice little cashflow play or are you hoping for some of them to 10X, 20X and think they have opportunity to do that? Like in general what your piece there?

Ace Chapman:                   Yeah, yeah. It’s definitely a cashflow play. I don’t do these deals from the BC perspective of all right, this thing is going to really explode. We’ve seen some deals this year that have four X, which is really, really great and we want that as much as possible. But at the end of the day, I don’t want to sell any of these, just the way I got to do the depreciation and just all those things. It’s in my best interest just to keep snowballing is what I call it. But snowballing that income into more and more deals, and so it’s definitely getting a diversified portfolio of cashflow that’s coming into the conference.

Justin Cooke:                     I can see at times where it makes sense to sell that at a smaller piece, whatever, 10 20% to the main equity holder, the main owner. Have you ever sold it to an outside third party? Maybe there was a dispute with you and the owner or there was something funky going on and you had to sell it to a third party.

Ace Chapman:                   We bought a lot of deals that way. I say a lot. We’ve probably done four or five deals that have just been amazing, amazing deals. There’s nothing better than having two partners. There’s a dispute they want a third partner and they’re willing to really either 100% finance it in some cases if you’re bringing something to the table, or just give me some equity. It’s been very, very interesting. I’ve had some clients do some absolutely killer deals that were taking advantage of the fact that they need a third person in that business, whether it’s a skill set, but often there may be a skill set, but also some kind of dispute that’s going on between the two partners.

Justin Cooke:                     Yeah, there are opportunities when business partners have disputes and they’re having issues and one of them needs to buy the other one out, but that can be an absolute nightmare to deal with too, because all the pettiness that comes with that, all of the vindictiveness, it can get really ugly, and you have to be a pretty smooth operator to make it happen sometimes. For sure.

Ace Chapman:                   I’ll tell you one quick thing on one of those deals. One guy got so petty and so vindictive that he gave all of his 33% of the business for free to one of my clients just so the other guy would be the minority-

Justin Cooke:                     Oh my God.

Ace Chapman:                   … and this guy would have control and he wouldn’t have any control. So those kinds of things happen in real life. As crazy as it is.

Justin Cooke:                     That’s ridiculous. All right man, on that positive note, let’s wrap up the episode. You know, first point is just to try to keep the portfolio together where possible, not all portfolios can be split up, but for the ones that can be split up, it’s obviously better to keep it together and mix it up with the certain instances we mentioned. Just remember that you’re likely looking at a much longer sale cycle, and if your portfolio sells in under a year, just be pleasantly surprised by that. But expect one year or even more and make sure you set aside plenty of time to work on this directly. Whether it’s your time, your partner’s time, [inaudible 00:24:17], maybe your operation manager’s time. And just know that there’s going to be some time and some money spent on your team and your accountant and your lawyer to get this deal done, and just know that retained equity can be used as a compromise.

                                                Sometimes it’s helpful for them to have a consultant and keep the consultant around or the advisor. I mean sometimes it can be a nice little bonus for you if you can work on a deal where you keep a little more equity than they’re actually saving. All right, Ace. That’s it for this episode. If you dig it, please head over to webequityshow.com and leave us a comment to let us know what you think. You can also drop us a review on iTunes and we’ll really appreciate it. We’ll be back with our final episode of season four where we run through some of your questions. See you next week,.

Ace Chapman:                   See you guys next week.

Speaker 2:                           Thanks for listening to the Web Equity Show. Now is your chance to be a part of the action. Go to www.webequityshow.com/gift and send us your business acquisition or exit question and have it answered on the show.

 

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