Kevin Berson of Kinected: Five Things You Need To Know If You Want To Build, Scale and Prepare Your Business For a Lucrative Exit

No outside investment — The Founders bootstrapped the company from Day One and never took a penny of outside investment. This allowed them to make decisions quickly, avoid dilution of their equity, and not have to report to outside investors. We often hear and celebrate the success stories of Founders raising money, but I definitely recommend that sellers bootstrap as long as possible and avoid raising money until it is essential to scale.

As a part of our series about “Five Things You Need To Know If You Want To Build, Scale and Prepare Your Business For a Lucrative Exit, I had the pleasure of interviewing Kevin Berson.

Kevin Berson is a Mergers and Acquisitions Advisor (M&A) that helps business owners sell their businesses for maximum value and exit on their terms. As an M&A Advisor, Kevin provides an end-to-end service, beginning with an opinion of value, then creating a customized marketing strategy, finding and managing buyers through a controlled auction process, facilitating diligence, purchase agreement negotiation, through to the post-closing transition. Kevin gained his M&A experience at global firms Technicolor and Arthur Andersen and received his BA from UCLA and his MBA from the Marshall School at USC.

Thank you so much for doing this with us! Before we dive in, our readers would love to learn a bit more about you. Can you tell us a story about what brought you to this specific career path?

Like most people, my career path has been far from a straight line. But now that I have over 25 years of professional experience, my path looks much clearer in retrospect. Each experience, beginning from interning as a law clerk while I was an undergrad at UCLA, opened doors for me.

Law clerking ironically led me away from law. The attorneys I worked for were excellent lawyers, but not great business people, which opened my eyes up to the world of consulting. In turn, consulting allowed me to learn about the various challenges that business owners face, which led me to Technicolor, where I had the chance to join their Corporate Development Group (M&A). That experience gave me the skills, confidence, and professional network to go out on my own seven years ago and help business owners sell their businesses.

Can you share a story about the funniest mistake you made when you were first starting? Can you tell us what lesson you learned from that?

Yes, I made several mistakes when I was first starting out and continue to make mistakes to this day. It is a part of learning and growing. One mistake I made was obsessing over my website and marketing materials. Sure, the materials need to convey what I do and how I do it, but I literally obsessed over fonts, colors, and graphics for weeks. It would have been better for me to get out there and start talking to people, realizing that my marketing materials will evolve over time.

Another mistake I made was thinking I could run my business hopping from Starbucks to Starbucks. I soon realized that I was constantly having highly confidential calls and would need a private office to take meetings. I eventually joined a co-working space, which helped me expand my network and find projects.

Can you please give us your favorite “Life Lesson Quote”? Can you share how that was relevant to you in your life?

A quote that has always resonated with me is “90% of success in life is just showing up.” I have chosen to interpret this as trying to do your best in everything you commit to, personally or professionally. Whenever I truly have committed to giving it my best effort and having a great attitude, I have been successful, whether this involves taking on a new task at work or helping my kids learn to ride bikes. This philosophy has guided me throughout my career, whether I was a brand-new analyst showing up a client site in an industry I had zero experience in or having to work 90+ hour weeks in a Corporate M&A role while attending business school at night. In each case, having a great attitude has helped me persevere.

Ok super. Thank you for all of that. Let’s now shift to the main part of our discussion. Can you tell us a story about how you were able to build a business from scratch, scale and sell it to a bigger firm?

Well, I have yet to sell my own company, but I commonly help business owners grow and eventually sell their businesses on their terms. We just had an incredible success story with an e-commerce company I initially met in 2017. The sellers had a three-year plan to expand the business and sell in the first quarter of 2020 (what amazing timing, LOL!). After a four-year relationship that began with an initial valuation and led to business consulting and more formalized exit planning, we ultimately sold the company for more than five times the initial valuation, far exceeding the seller’s wildest expectations.

To be clear, this was a special business where the owners did many things exceptionally well, including:

• Listening to their customers — The owners were incredibly effective at building a global online community and becoming the worldwide leader in their segment.
• Creating low-cost and high-quality products — They developed very strong relationships with suppliers who could achieve the low product cost required to generate target margins.
• Online distribution model — By selling 90% of their goods online, the company owns the direct customer relationship (i.e. can market directly on an individualized basis) and generates at least double the gross profit they would have by selling through wholesale channels.
• Extremely low-cost customer acquisition — By utilizing social media influencers willing to work on trade or low fixed fees, the company was able to rapidly expand its brand globally and gain millions of followers on social media.
• Lean operational model — The company was run directly by the Founders who hand-picked the staff and never allowed themselves to invest in lavish facilities or expensive senior staff.
• No outside investment — The Founders bootstrapped the company from Day One and never took a penny of outside investment. This allowed them to make decisions quickly, avoid dilution of their equity, and not have to report to outside investors. We often hear and celebrate the success stories of Founders raising money, but I definitely recommend that sellers bootstrap as long as possible and avoid raising money until it is essential to scale.
• Self-Awareness and willingness to listen — These business owners had the self-awareness to admit that “they didn’t know what they didn’t know” and were willing to engage a team of experts to help. This is exceptionally rare and, from my experience, a very strong indicator of future success!
• Allow time for exit planning and be 100% prepared before approaching buyers — Given the fact that the company had a three-year time horizon before selling, we had time to build a great team of advisors (we served as the investment bankers), a great CFO with industry experience, a corporate attorney, and tax advice on how to best structure the deal. By the time we approached buyers, we had a very tight and compelling story and an impressive set of audited financials. We were as prepared as possible and the fact that we were able to close this global transaction in the middle of COVID was a testament to the team’s collective preparation.

Based on your experience, can you share with our readers the “Five Things You Need To Know If You Want To Build, Scale and Prepare Your Business For a Lucrative Exit”. Please give a story or example for each.

This is a question I receive often. From my perspective, buyers place the highest emphasis on the following five characteristics when considering businesses to purchase:

1. Recurring Revenue — The more revenue generated from subscriptions and other forms of automatically recurring payments, the more attractive your business will be to buyers, which will also manifest in a higher multiple.
2. Business Stability — If your company can demonstrate stable or increasing revenues and earnings over the past 3+ years, your business will likely command a premium as buyers will perceive less risk.
3. Favorable Macro Environment — Buyers take a long-term view on potential acquisitions and will therefore want to feel confident that the external environment will be favorable and pandemic-resilient.
4. Diversified Customer Base — Buyers will pay more for companies that hedge against the loss of a single customer. Ensure no client generates more than 15% of your annual revenue.
5. Clean Books — Companies that invest in reviewed/audited financials are seen as more trustworthy. Have your books professionally managed and prepared.

In your experience, is there a difference in approach for building a service based business versus a product based business when you have the intent to eventually sell the business. Can you explain?

This a great question and there are pros and cons of each. The answer heavily depends on the extent to which the owners work personally with clients. When a company produces “widgets,” it’s often easier for the sellers to make a quicker exit after closing, as well as receive more of the transaction value in cash, payable at closing, relative to service-based companies where the owners tend to be more involved in direct customer relationships.

In service businesses, especially professional services businesses (e.g. law firms, CPA firms, consulting firms, medical practices) clients often have a personal relationship with the owners. In these cases, buyers may perceive risk in clients being less likely to transition to the new owner. To counteract this potential risk, owners of service-based businesses would be well-served by removing themselves from day-to-day activities and direct client relationships through the use of key managers, repeatable business processes, and technology to automate these processes.

How does one go about the process of finding a buyer?

As M&A advisors, we develop a multi-faceted strategy depending on both the industry and size of the potential transaction. Regardless, it’s very important to have a realistic understanding of the potential buyer pool.

In regards to size, for deals under $5M transaction value, the buyer is likely to be an individual or a Private Equity (PE) firm looking for an add-on for a platform they already own. For these deals, an individual buyer can put down 10–20% in cash and arrange a low fixed-interest loan from the Small Business Administration (SBA). In these cases, we would utilize online marketing channels to present the opportunity to individual buyers and reach out directly to PE firms that have portfolio companies in the industry.

For deals between $5M-$100M, it would be more likely that the buyer is a small- to mid-size private equity firm or a strategic buyer looking to add a new region or product line. There’s a general rule of thumb that if the business owner sells the business to a strategic buyer, the buyer will be 3–10x the size of the seller.

With fewer quality companies currently available for sale, interest rates at historic lows, and well-capitalized buyers across all segments, we are seeing a very strong sellers’ market that should be expected to continue in the near-term.

How can one decide if it is better to build a business in order to exit, or if it is better to stick around for the long term and let the company bring in residual income, or if it is better to go public?

This is a very involved question and one that must be addressed individually by each entrepreneur. The answer would vary depending on what stage of life the person is in as well as what proportion of the entrepreneur’s net worth is tied up in the business.

As business owners approach retirement age, we tend to see them look for complete exits, as their most precious commodity becomes time over money. When business owners are younger (under 60), we often see them seeking to “take some chips off the table” and sell part of the business and potentially stay on with the Buyer for a potential “second bite of the apple” or secondary sale, which could even be at a substantially higher valuation down the road.

Going public is a dream of many business owners, but not every business would be a great candidate, as the company needs to have an impressive track record, audited financials, and be able to convince the market of its tremendous growth potential.

Can you share a few ways that are used to determine a good selling price for the business?

Our approach combines quantitative and qualitative approaches. In the first step, we normalize financials and adjust for one-time/non-recurring events. We then evaluate the company’s financial performance relative to comparable companies. We utilize several databases that include precedent transactions to do this. From this analysis, we get a sense of the multiple the business will sell for. Lastly, we use our judgment and experience to adjust for micro and macro trends the business is experiencing.

You are a person of great influence. If you could inspire a movement that would bring the most amount of good to the most amount of people, what would that be? You never know what your idea can trigger. :-)

We most frequently work with Baby Boomers looking to retire. Baby Boomers own 12 million businesses, collectively valued at over $10 Trillion, that will likely be sold or passed to family members in the upcoming decades. The vast majority of business owners are unprepared. I would estimate that less than 20% of them have gone through any kind of exit planning process to prepare themselves and their businesses financially and psychologically for a potential exit.

Whether the business owner speaks with me or another Mergers and Acquisitions Advisor, we recommend that business owners start the exit planning process at least a year before taking the business to market if they are seeking to maximize success and exit on their terms. Far too often, we see business owners rush into a sale process triggered by one of the 4 Ds — Death, Divorce, Disability, and Disagreement. We would prefer to work proactively with business owners to optimally structure a deal and position the business to allow the owners to exit on their terms.

How can our readers follow you on social media?

Please check me out at www.linkedin.com/kberson

Thank you so much for joining us. This was very inspirational.

Thank you. I had a great time speaking with you and appreciate you having me on.