Don Bielen: 10:06
Absolutely. And that’s where the mistake that many individuals make. They think, well, I have this big tax liability if I sell my business. So they’re therefore one way to defer taxes is to take a deferred installment sale on my business while they’re the seller is taking on significant risk because they’re now dependent upon that new operator to run and operate the business, to both pay for the operations as well as fund the purchase of the ownership. And that was the problem, fortunately.
And also, the other thing that I learned from that is that my mom and dad undersold it. They didn’t really realize how to value a business. And looking at the, you know, the different types of valuation methods, you know, what it is to a strategic versus a financial. This is a pure financial buyer. So the value that you’re going to realize is significantly less than a strategy.
John Corcoran: 11:00
So after this experience you actually go into strategic advisory services I guess is what it’s called M&A advisory. And is that right?
Don Bielen: 11:10
It’s called M&A advisory. There’s a small distinction between investment banking and M&A advisory. Investment banking typically is doing everything from larger sell side or buy side transaction capital raises, mergers and acquisitions, corporate restructuring, those things where M&A advisory is going to be focused on the market of enterprise value from roughly 5 million to 50 million. And then you’re helping to position the business for the sale to determine the valuation. Determine the business owner’s financial requirements.
Determine the potential buyers pool. Look at the potential offers that come in on the table. Evaluate the buyers relative to the sellers. Look at the match and the ability for the individuals to finance the deal. So we’re going to be more, I guess, comprehensive but more focused on these middle market businesses.
John Corcoran: 12:06
Okay. And tell us about this specialty raw pet food company that you witnessed.
Don Bielen: 12:14
Yeah, that was several years ago, John, when in my earlier days, we were approached to help sell this pet food company. So of course, the first step is to understand the history. Well, this company had previously taken the company to market by using a broker out of the Seattle marketplace. And I was very skeptical about that broker because the individual was more concerned about cost. And they wanted to try to maximize the enterprise value, but they had little knowledge about the difference between a business broker and an M&A advisor. So they chose to take the shortcut approach and hired this business broker. Well, the business broker was not very sophisticated.
John Corcoran: 12:58
And so when you say cost from the seller’s perspective, is an M&A advisor charging you as you’re ongoing, like as a fee for services kind of thing, and the business broker is more of a contingency model where they get paid on success. And is that how it affects the seller’s cost?
Don Bielen: 13:16
Yeah. I guess the market comparison is almost in no disrespect to business brokers, but business brokers oftentimes are very similar to a real estate agent.
John Corcoran: 13:26
They get a commission if the transaction is based on the transaction.
Don Bielen: 13:30
And so they’re going to be marketing this as a commodity where there’s not a lot of work and diligence is done to really discover the potential of the business based on its history. What are the potential revenues? What are the strengths and weaknesses of the products and the services of the people? There’s always people, products and prices. So you look at those things.
And so an M&A advisor is going to be a more sophisticated representation. And we will typically charge more. Typically we’ll have a retainer because we’re going to work with the business owner.
John Corcoran: 14:08
Yeah.
Don Bielen: 14:08
As we prepare the business and realize that it’s really analogous to taking a house to the marketplace.
John Corcoran: 14:15
Yeah. Yeah.
Don Bielen: 14:17
Maybe the business broker or the real estate agent. They’re going to be more inclined to get that commission. And the more transactions they can close in a shorter period of time, the more money they make.
John Corcoran: 14:28
So this for this. For this pet food company, they hire this business broker. But a bunch of things went wrong in the process. Can you take us through those?
Don Bielen: 14:35
Yeah. The couple made a couple of critical errors because they didn’t do their homework. Number one is there’s basically two types of buyers in the market. There’s a financial buyer and a strategic buyer. And there’s a whole bunch of subcategories under each of those buying types.
So they found a strategic buyer out of Florida. This company was based in the northwest. And the company was expanding and doing extremely well. Profits were growing 1,020% per year, etc. so they got involved. And then when they get into the due diligence process, of course, the first step that you need to take is signing a non-disclosure agreement.
Well, the purchaser and their legal counsel changed the NDA to eliminate any sort of restrictions on copyrights and patents. And the seller, the business broker, did not pick up the fact that the NDA was changed.
John Corcoran: 15:30
Oh, so.
Don Bielen: 15:30
They got further into the deal and they couldn’t come to terms on price and deal structure. So I’m actually advising the client tangentially on the side from their personal financial because they didn’t engage us. So I was helping them. They were I knew them relatively well and I knew the business. And so subsequently, after the deal went sideways, the acquirer took the brand, took a lot of the copyright materials, took the recipes and was even using their logo with their products. And this company was completely decimated.
John Corcoran: 16:06
Wow.
Don Bielen: 16:07
And so they went from making their EBITDA was right around $2 million shortly thereafter. And the FDA came in and they did a sample on the pet food. And the pet food had a small amount of E.coli in it and wound up shutting down the company. So the company went from one day anticipating it, probably a $20 million payoff, to looking at a house on the Oregon coast.
Don Bielen: 16:31
To completely Near bankruptcy and their liquidation.
John Corcoran: 16:35
Are brutal.
Don Bielen: 16:36
Brutal. Bad day.
John Corcoran: 16:38
Yeah. So your experience of going through and kind of witnessing this, while you’re their personal financial planner but not involved in the business transaction, was what inspired you. And you said, there’s got to be a better, better way to do this.
Don Bielen: 16:53
Absolutely. And I’d seen several other businesses that were very poorly represented. Where I look at the background and the pedigree and the experience of the business broker. I mean, they’re not coming to the table with MBAs. They’re not coming to the table with M&A certifications.
They don’t necessarily have deep finance backgrounds. They haven’t been running and operating and been in operating businesses for an extended period of time. Oftentimes you say, well, they’ve been a business broker, but they also previously were maybe a business owner or a teacher or something that was now.
John Corcoran: 17:27
A.
Don Bielen: 17:27
Default career. So I had started working with a firm out of Seattle, and I sort of took a close look at their process. And I thought, you’re basically taking an investment banking process and plugging it into a business broker model. So you’re good. And so I said, okay, there’s an opportunity in this marketplace where so many of these small businesses, let’s say 1 million of 5 to $5 million of earnings are so underrepresented, they’re not getting the level of sophistication and representation in the marketing capacity that they need to truly maximize value, because when and I and I struggle with that term, even maximize value because anybody that’s sold their business, they they realize that it’s not they’re not going to get a big check.
Price is only one tenth of the equation. What we need to look at, we need to look at deal structure, what’s called cap structure. So that can include bank financing and seller financing. It might include what you call equity rollover, which is rolling some of your company value into the new company that’s acquiring you. We could look at Earnouts.
We can look at Holdbacks. All of that is kind of added up to get the total enterprise value. But there’s allocation between all of those categories of the business value. So I was dealing with a large equipment manufacturer out of Austin, Texas. They wanted to be acquired by one of their major competitors.
So they came to me initially and said, “Well, what do you think this business is worth? What is your target? They said, well, we think it’s worth about 20, maybe 22 million. So we did the analysis and I think I know I said, I think you’re in the low $30 million range. Well, so when we got involved with them, the acquirer wanted to do a significant portion of their sale proceeds and earnout.
What it means is that if a company has high growth, Oath, then you get a percentage of that of that future growth. So an individual says, well, I’m willing to take 20 million, but if I can participate in the future growth of this business and maybe take another 20 million and even do better. Total total net sale proceeds, I’ll do that. But we need to understand both businesses. We need to understand the selling business.
We need to understand the buying business, and the likelihood of the probability that we’re going to realize those revenues. So we were very careful in structuring those kinds of things. So the key takeaway is that price is not everything. Price is only one tenth of the component.
John Corcoran: 20:07
So you make a compelling argument for that. But I’m curious when you’re working with a client that is a seller and there’s a lot of emotions involved, and maybe they’ve been running this business for 20 or 30 years, and they’ve never done an M&A transaction before or rarely been involved in them. Is that hard to to convey that and to get the clients to understand that that price is just one tenth of the formula. When we all understand the price of eggs, we all understand the price of milk. It’s just the thing that people, most, most people look at.
Don Bielen: 20:39
That’s where we are going to spend some time on the front end, John, with the individual to help them understand what a typical transaction looks like. Because the other key component you touch on a little bit is the emotion. Many business owners, this is well understood by most individuals, but many business owners have a strong emotional tie because in essence, they’ve started this from scratch. So it’s almost like raising a child. So they’ve moved it from infancy into maturity, into late maturity, and they have a lot of vested interest.
It’s an expression of their identity. It’s a reflection of their relationships. It’s very near and dear to them. So part of it, in order for an individual to go someplace, to leave one destination, to go someplace, you need to know what that destination looked like. So we will often spend time and do the financial analysis and determine the proceeds.
What do you want to do with the next chapter of your life? What’s that look like? And it’s going to be much easier for the individual. I had another company. It was a big fuel distribution company.
Sale was about $40 million. We transitioned it down to the son. Well, the son is looking at it, he said, this is a third generation family business and I don’t know if I sell this Don, what am I going to do? And I said, well, if you sell this, you’re going to have about $30 million net sale proceeds. You have all this commercial real estate, and you can do all the hunting and fishing that you’ve always wanted to do all your life that you’ve never done.
You could completely travel the world. You want to invest in commercial real estate. So basically what we do is create a very clear vision and purpose for the individuals and redefine their purpose, and something that’s gratifying and something that’s motivating, something that really is enriching. So that’s where we have to deal with the mental component.
John Corcoran: 22:28
Yeah. And another part is. There is a way to assess how much of the puzzle, so to speak, is the emotional or psychological component versus deal structure and making sure that that works. And it probably varies for every deal.
Don Bielen: 22:44
It’s interesting because you’ve heard this before when individuals say, well, my, my business is not for sale, but there’s always a price. So depending on the price. So maybe to your question, in terms of maybe delineating between the emotional component and the financial is really looking at all the related components. What does this transaction mean to my employees? What does this transaction mean to my family?
What does it mean to my spouse? What does it mean to my community? And looking at it very holistically, but then also if in what is the future of the business, this particular business it’s in with a fuel distribution business and global warming or climate change and then local regulations. They thought this might be the peak of the business. And so if we wait and continue to do this, then the net sale proceeds, no matter what you do downstream, if you have a declining business or not, even near that, and you have to work extra hard to get through that.
John Corcoran: 23:47
Period.
Don Bielen: 23:47
Of decline. So it’s really having a lot of very soulful, in-depth, relationship based conversations. Yeah. To understand what motivates them.
John Corcoran: 23:59
Yeah.
Don Bielen: 23:59
Sometimes what we’ll even do is what you call a cultural index. A cultural index is about a ten x modification of a Myers-Briggs personality profile. So it’s going to give you an idea of their strengths, their tendencies, their dominant characteristics, their decision.
John Corcoran: 24:18
The seller. Here are talking about the buyer who.
Don Bielen: 24:20
You I’m typically. Talking about the seller.
John Corcoran: 24:21
Okay.
Don Bielen: 24:22
So I’m trying to understand both personal and financial and relationships.
John Corcoran: 24:28
Yeah.
Don Bielen: 24:28
Is what’s going to drive this individual. Because what we don’t want to do let’s say for instance, one individual says I want $20 million from this transition from this transaction cash. I never want to work a day in my life. That’s a very different deal than if I’m going to a strategic buyer and say, okay, what I want to do, I want to sell my business. I’m going to participate in the future.
But also I want to work in the business. I want to continue to run this division of the company. And I’m going to have a meaningful experience now because I have strategic partners with a much bigger bank account.
John Corcoran: 25:00
Yeah.
Don Bielen: 25:00
So it really you have to customize the transaction to fit the individuals.
John Corcoran: 25:05
Tell us about a mental health drug treatment company that had five different locations that you also worked on. Tell us that story.
Don Bielen: 25:15
Yeah. That had actually been actually been introduced through a close friend of mine for this company, and they’d recently reached out to a valuation company and the valuation company. Typically, a lot of valuations are done for estate tax planning purposes. They might be done to get an idea for bank leveraging or bank lending, etc., but they typically don’t represent what’s done in the market. So that’s a common mistake that business owners think. If I’m going to take my business to market, I need to go to a business appraiser to give me an idea.
Well, that doesn’t take into consideration current transactions in the industry. It doesn’t really take into consideration consideration the inherent risk in the business. Tell me about your infrastructure. Tell me about your management team. Tell me about your customer base.
Tell me about your growth rate, all those things. So they had a business valuation. Business valuation came in at about $4 million. And the individual says, well I can’t exist for that. So therefore I’m not going to go to the market.
So our approach is to say, let’s take a look at the market. What’s happening in the market? Well, we found that there’s significant roll ups. So a roll up is really an aggregation of companies that are very similar, similar market, similar territory, similar service, similar operating process procedures. So we saw that this roll up was happening in Southern California. So we contacted them.
And rather than pay a 2 or 3 times earnings multiple, they’re paying like a 6 to 8 times earnings multiple. And all of a sudden we’re looking at rather than a $4 million company, we’re looking at a $12 million company. Now the seller is interested. He’s tired of the operations. He’s tired of working long hours.
And he also just kind of burned out its second generation. So all of a sudden now we have a completely different dynamic. So we’re now talking with Strategics and we know how Strategics think they bought and sold 5 or 6 of these operations already. So they’re skilled. They already have an investment banking team.
They have the valuation model down. They have the finance, they have the deal structure. And that’s where the seller is at a huge disadvantage if they don’t have representation, because it’s the amateurs playing with the pros and they’re destined to be taken advantage of.
John Corcoran: 27:29
Of.
Don Bielen: 27:30
Which is so common, which happened right now with private equity. Private equity oftentimes are coming in because they need a return on investment of 2,530%. And so in order to do that, you have to change the business in many cases dynamically or dramatically to get to that result. But anyway, back to this mental health company. So we were able to structure the deal.
But one of the biggest challenges is the role of it because there’s always finite capital. So they originally proposed 30% of the sale price would be the equity in the acquiring company. And we felt that was just too much because there’s too much risk. I evaluated and we spent a lot of time evaluating their management team, evaluating their history, evaluating their success records, looking at their financials, etc. so we had to take a hard look at this acquisition and say, do we want to be part of this team going forward?
John Corcoran: 28:25
Because you’re placing a bet? Yeah.
Don Bielen: 28:25
For the seller, you’re placing a bet on whether this.
John Corcoran: 28:27
Is it going to pay off or not.
Don Bielen: 28:31
This is about $4 million. Yeah. And so we said, okay, we’re going to have these conditions because we need to have an employment agreement. We need to have influence over the business going forward. We need to get financial reports. We need to give you an idea of what the other acquirers have, the other companies that you acquired, what their experiences have been, etc.. So we need to make sure we know what’s going into what kind of, you know, basically, for lack of better words, who are getting in bed with.
John Corcoran: 28:55
Yeah.
Don Bielen: 28:56
And so we finally determined that we’re going to do a 20% rollover in equity. And the business owner wanted to stay involved and fortunately can handle all the headaches and the stuff that he didn’t like and, and stayed and kept doing the things that he did like. And so we’re continuing to monitor the performance of that business, because there will be this proverbial second bite of the apple because they’re anticipating a liquidity event, selling off the entire franchise of probably 40 different operations in about four years. So we think that we’re going to have probably a 10 to 12 earnings multiple. And we sold for roughly seven of earnings multiple.
John Corcoran: 29:35
So do they often make more on the second bite or equivalent amount? I guess it depends on how much they hold back.
Don Bielen: 29:44
Oftentimes it’s what we did, I’ll give another example. But in this particular case since we will only roll 20%, we’re probably still going to double our money on that $4 million. Over those four years. Another one, we did this. It was more of a vendor vetting monitoring system.
They did vendor vetting for Google, for Amazon, for Facebook, etc. So the initial deal was 80 million. We did a 30% rollover equity. They had a subsequent deal where they took it private. The original 80 million. He made 120 million on the subsequent 30% rollover.
John Corcoran: 30:31
So so all right. Am I doing my math correctly? So 30% of 80 million. So 24 million. And he made 100.
Don Bielen: 30:39
Well no. Of the 80 million is the cash he took off the table.
John Corcoran: 30:42
Okay.
Don Bielen: 30:42
So that was for 70% of the company.
John Corcoran: 30:45
Okay. So he held back then.
Don Bielen: 30:47
20 million or something? 30 held back.
John Corcoran: 30:49
Okay.
Don Bielen: 30:50
At that time, it was roughly about. Yeah, almost 30 million.
John Corcoran: 30:53
And that 30 went to 120. Amazing. Wow. And it was.
Don Bielen: 30:57
Taken in a public company. So he had public company stock and he had.
John Corcoran: 31:01
Complete.
Don Bielen: 31:01
Diversification. It was a huge home run.
John Corcoran: 31:04
Wow. That’s amazing. That’s amazing. I want to know, and maybe this is the secret sauce that you can’t reveal, but and maybe it’s because I’m a little bit ignorant to this industry, but, you know, is, you know, we gave the comparison of real estate and real estate. You have the MLS, the multiple listing service where all the homes are listed.
But then there’s pocket listings, there’s secret listings, is there. How do you find out about all this stuff? Like is there a public database or is it just having your ear to the ground about what’s going on in the industry, and if so, how do you know about all these different industries and what roll ups are happening?
Don Bielen: 31:39
There are a tremendous amount of resources. A classic is PitchBook. It’s an expensive service. You pay about $30,000. There’s 3 or 4 others that are very similar to PitchBook. I think it is one of the best in the marketplace.
So you have to buy these subscriptions to all these data services. Of course, there’s, you know, Dun and Bradstreet etc. but also it is being knowledgeable about what’s happening in that marketplace, in that industry. And so I have relationships with a number of investment bankers across the country that have specialized what’s called verticals.
John Corcoran: 32:12
Got it. Specialization.
Don Bielen: 32:13
The one I just spoke with earlier today. They are going to be specializing in manufacturing. Then you get even deeper about what kind of manufacturing. Another one is specialized in aerospace. We’ll be representing an aerospace company at some point in the future.
But then that’s where sometimes I will partner with those individuals that have very deep penetration into a particular vertical. Like for one other example, I have a modular home manufacturing company. Well, we find out they were approached by a large strategy that owns about 20 other companies that were approaching them to be purchased. Well, we find out they’re going to be doing the roll up. So oftentimes clients that have well oiled operating businesses that are very profitable and very even public.
They’re well known, and are going to be approached by these organizations, by these companies that are looking to continue to expand. But that’s another classic example where they’re pros. They have the model, they have the valuation, they have the operating procedures, everything. And they’re coming in and swooping up these little businesses and the businesses. Then they’re so they’re so excited because, oh, somebody loves my business and I’ve been approached.
It must be so valuable, etc.. What they don’t realize is that that same acquirer spoke with all of their competitors. They’re trying to find the best deal out there. So it’s then you have to take a step back and say, how ready is this business for sale. Do they have GAAP financials?
Have they potentially done a quality of earnings review. Do they have audited financial statements? What do they have for customer contract concentration? What do they have? What?
What’s their supply chain look like? Tell me about the age of your workforce. Tell me about the age of your operating equipment. What are future capital expenditure requirements? So you have to really dissect the business and break it down into well over 100 components to get an idea of what is the health and welfare of this business.
What is its potential? What are its vulnerabilities? And then what is this truly worth to that acquirer? Because usually it’s strategic. One reason why they pay more is because you have a lot of synergies.
You’re going to cut out accounting. You’re going to cut out human resources. You’re going to cut out some C-suite level individuals. You’re going to maybe have improved training. You’re going to have better processes, better software systems, better distribution channels, better marketing or bidding power within buying power within the marketplace, better pricing for their products, etc..
John Corcoran: 34:58
So yeah, it’s.
Don Bielen: 34:59
It’s definitely not apples and oranges.
John Corcoran: 35:02
I’m mindful of the clock here and I want to ask about it. You are actually moving into a new chapter. You are joining a VC firm based out of Boise, which I don’t hear about very often. Usually VC and PE, venture capital and private equity are very different types of entities. So tell me a little bit about this interesting structure.
Don Bielen: 35:25
Yeah, it’s a true success story. Two individuals that are born and raised in the Boise Marketplace, second generation, one’s a second generation business owner. They’re extremely well connected in the marketplace, very highly respected, very professional, very knowledgeable. So they found an opportunity to raise capital from just pure private equity and invest in some of these smaller startups and had some big home runs. So being able to be extremely knowledgeable and evaluating the potential inherent potential within a business for its future.
Then that’s also part of it is the venture capital component. So believe it or not, they do go relatively well. A similar mindset in terms of evaluating the business model, evaluating, evaluating the potential for growth and opportunity. Maybe what the public market looks like. I attended a couple of what’s called founders events.
So the company is called capital 11. Capital 11 owns well over interest in about 60 some companies. They just closed a private equity fund of about $27 million, which is relatively small compared to the marketplace, but just showing a great track record and being able to have enough just strength and foundational principles within the business to continue to grow that well. Understanding that if you own interest in 60 companies, there’s going to be going to be a number of transactions in the future. So we all looked at each other and said, let’s, let’s kind of formalize our merger and acquisition advisory services. And so we can take these businesses to their full life cycle from beginning financing growth to maturity to liquidity event. So it completes the business cycle for these business owners.
John Corcoran: 37:20
Well, Don, this has been great. Let me wrap up with my last question, which is my gratitude question. I’m a big fan of practicing gratitude and also giving our guests a little bit of space at the end here to acknowledge and thank anyone who, especially peers or contemporaries who’ve been there with them in their journey. Anyone in particular you’d like to shout out and thank?
Don Bielen: 37:41
Well, I mentioned my dad and mother. I really was influenced by their entrepreneurial spirit and propensity for risk. So that’s one big one. But another individual that owns a company out of Southern California, it’s a plumbing distribution company. Probably several hundred million dollars.
This individual, when I got to know him, told me his story that he started in Sudan as a very poor traveling individual that was trying to basically sell produce in his, in his, like 15, you know, in his early teens. Well, it turns out that he was very generous and very giving to other individuals and always cared more for other individuals than he did for himself. So I admired his kind of investment in the future. I admired the fact that he understood karma, that he was always more focused on even taking care of individuals that are less fortunate than himself. And he grew a multi hundred million dollar empire.
So sitting in his $15 million house in Southern California, telling me his story, how he started completely nothing, and how he is able to create something that’s just amazing. Amazing company, amazing people. And actually, about 80% of his estate is going to go to his church.
John Corcoran: 39:07
Wow.
Don Bielen: 39:08
And where so many instances where at one point he mentioned that he was in a hospital bed a couple of years ago and he was given his last rites, and just because of one individual that he helped previously, they identified a treatment down in South America, brought that treatment up and saved his life and completely gave him a second lease on life. Wow. And I look at that and I’m thinking, this is an inspiration of what really good people are and what they can do. So it’s just focus. It’s hard work and being very altruistic with yourself. A lot of self actualization. You know, himself very, very well. And he’s one of the most admired people I’ve ever met. And a complete inspiration.
John Corcoran: 39:51
What a story, Don, it’s such a pleasure here. Where can people go to learn more about you and Capital Eleven and your next chapter?
Don Bielen: 39:59
Well, go to the https://capitaleleven.com website. We’re in the process because we’re formalizing this service offering of standing up that additional web page. But there’s a lot of information about Capital Eleven. Of course, my LinkedIn is available. Don Bielen B i e l e n and look me up at LinkedIn.
There will be announcements. And you can find a lot more about my background and the last 30 years of working with wholesale businesses across the United States has been extremely gratifying and has helped shape me and position me to where I am today to take it to the next level.
John Corcoran: 40:34
Don, thanks so much for your time.
Don Bielen: 40:36
Okay. Thanks, John.
Outro: 40:40
Thanks for listening to the Smart Business Revolution Podcast. We’ll see you again next time and be sure to click subscribe to get future episodes.