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.
Michael Vann and Kevin Vann, the co-authors of Buying Out the Boss, are a father-son team. And their firm has 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.
Michael Vann: You know, working with the manufacturing company right now, the buyer who owns it today is in his mid to late 30s, and he was an employee of the company. He got a call from the owner of the company: “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. 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. If you did it today, he might look very differently at the outcome of the transaction.
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.
Kevin Vann: My background has been mostly acquisitions. 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.
“I think buyers are the ones that are always lacking knowledge.”
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 there is 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.
Who Needs Buying Out the Boss
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?
Michael Vann: 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. 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 they’re inexperienced in this side of things, and they don’t have the network of people to fall back on who they can rely on in most cases.
Kevin Vann: It’s also for those who don’t necessarily work for a particular company but have had their sights set on owning their own business. It could be family or it could be non-family, we do both at the same time.
Anyone who really wants to buy a business, whether they’re in it or not, I think they’re going to get something from the book.
How to Buy Out a Business
Charlie Hoehn: How intensive is this process?
Michael Vann: It can be very intensive. I just came from a meeting at lunch today. 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 a blank piece of paper and try to color it in.”
Kevin 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. 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, it’s evolving constantly. Where potentially the house you’re buying or whatever happens to be isn’t in motion and revolving.
I think there’s no particular checklist, which makes it very difficult, very tense.
Michael Vann: It’s highly emotional. For the buyer, this is probably the biggest 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 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 a very emotional process for both sides.
Kevin 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. No question, it’s life-changing when you become self-employed or you leave self-employment.
Irrespective of the size of the company or irrespective of the dollars involved, it’s life changing. It always has been for us.
Every time we buy one or sell one, it seems to be life changing.
Working with Michael Vann and Kevin Vann
Charlie Hoehn: Just curious, how many have you two purchased and sold over the years?
Kevin Vann: For clients, I’m going to take a wild guess, probably somewhere in the 150 range, during my career.
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.
Charlie Hoehn: 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?
Michael Vann: 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? You don’t have any money, I’ve got this great idea, I can go raise money.
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 are 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 are lots of complexities to it that already exist.
What You Need to Know
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?
Kevin Vann: Which one you want to tackle first? There’s so many of them.
Michael Vann: 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.
Kevin 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 he’s either in or he’s going to enter.
Again, we see things evolve today, so many disruptions in our businesses and how business is being done. I worry sometimes that when we have a new buyer, they forget that their due diligence checklist.
“Be at the trade shows, read your materials, and stay in what’s going on in that industry.”
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.
What They’ve Learned
Charlie Hoehn: 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?
Kevin Vann: 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. I think we’ve had failures at times over that.
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 challenging, 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 are with each other.
I think that’s pretty common. I don’t think it’s any different than a marriage or relationship or whatever.
A lot of our success has come from our relationships with people. Some of our failures have become that way as well.
Knowing Who’s Serious
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?
Michael Vann: 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 that meant.
You know what? You’re ‘going to be probably up at 3:00 in the morning baking, and yup, payroll is a little tight, and you’re selling these little danishes for 75 cents, you put all this work into it.
It quickly turned 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.”
Those take a longer time to vet out.
Kevin Vann: I think a lot of has to do with expectations. There’s a sense of entitlement 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.
We kind of instinctively can see that those aren’t the attributes that you need to be successful.
After someone leaves and Mike and I have met them, we kind of look 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? 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 an island or do you have a spouse that’s going to be supportive of you? Or whatever that happens to be. You can kind of weed through some of that early on.
Valuing a Company
Charlie Hoehn: How long does it take to really suss out the value of a company?
Michael Vann: 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 because that house, similar size, square footage and same neighborhood is going to go for X.
There are so many variables in the evaluation side of things and how you measure risk that it really gets challenging.
We always use a sanity test which is known as justification purchase test, which means, if under conventional terms, if I needed to put 10 or 20% down—which is standard on a loan—can I actually meet the cover on this, have enough money left for a return, and pay myself a market compensation?
To me, that’s always the basis for what the value is in an arm’s length transaction. 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.”
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, 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, what multiple should be applied to that or what discount should be applied to that based on the specific criteria of this business? That’s where it gets tricky.
The Pains of a Purchase
Charlie Hoehn: What can the buyer and the seller expect during this part?
Kevin Vann: Not to like each other.
Michael Vann: Pain, yeah.
Kevin Vann: Typically what we see irrespective, of the side of the deal and even on the $35 million dollar deals, you may see the seller have to participate in the financing to 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 buyers don’t have a lot of money for down payment.”
There’s working capital and considerations and post-closing considerations.
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.
Typically, the buyer will be pretty much upfront with you and tells 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?”
They usually start off not at square one with each other. They’ve usually got some separation. We have to find a way to close that gap, and financing’s not easy.
I’ve been through 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.
Charlie Hoehn: Once you get them to close, what’s the transition plan?
Michael Vann: 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 buyers usually want them to stay around for a while until they acquire it.
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.
“You can blow up the whole business that you just bought.”
So there is a dancing act there.
Kevin Vann: We’ve had a couple acquisitions where we’ve been too aggressive on going and blowing up the business because so much was wrong with it from our perspective.
Those changes 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.
Be very, very careful with that. For a first time buyer, he doesn’t know that you know? There are no cautionary flags for him. So we want to work towards the transition side of the business. When 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. It is like giving birth: now that we gave birth we got to bring the baby up.
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 have to deal with some domestic issues over those changes. Everything is going to keep him up at night, where before it didn’t.
So the transition for the buyers in many cases is worse than it is for the seller.
Success with Michael and Kevin
Charlie Hoehn: What’s been one of your favorite success stories of the 150 or so or more business acquisitions that you’ve been part of?
Kevin 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, so it was very unusual.
We were able to acquire a neuro space company that at one time had a single customer and was struggling. 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.
We sold off parts of it and bought other shops. And we’ve got a lot of real estate and we opened up divisions and so on and so forth. We’ve remained partners through today and dear friends. We call each other brother.
I think I look at that acquisition as not only successful financially, which set me apart financially, but it then also at an individual basis. I’ve had a lifetime of enjoyment out of that particular relationship.
And they’re all not that way, believe me. That for me has been probably one of the most successful.
Michael Vann: 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.
The culture wasn’t where they needed it to be. The sales weren’t where they need it.
“Nothing was where they needed 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.
Their hearts have 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. It’s always good as an adviser when you see your clients actually follow your advice and embrace it.
Charlie Hoehn: What’s the best way for listeners to get in touch with you?
Just because that is an area code 413 number it doesn’t mean that we won’t go anywhere else.
Kevin Vann: We have been known to travel to the darkest places in the world.
Michael Vann: And if someone from Napa or Sonoma wants to hire us, we’re all set.
Kevin Vann: Yeah, traveling makes it fun.